Workmen v. Associated Rubber Industries Ltd. (1985)
| Citation | AIR 1986 SC 1, 1985 (51) FLR 478, 1986 157 ITR 77 SC, (1986) ILLJ 142 SC, 1985 (2) SCALE 321, (1985) 4 SCC 114, 1986 (1) SLJ 218 SC, 1986 (1) UJ 235 SC |
| Date of Judgement | 19 August 1985 |
| Court | Supreme Court of India |
| Case Type | Industrial Dispute |
| Appellant | Workmen of the Associated Rubber Industry Ltd. |
| Respondent | Associated Rubber Industry Ltd. |
| Bench | OC Reddy, V Khalid |
| Referred | Industrial Disputes Act, 1947Previous Cases Referred:McDowell and Company Limited v. Commercial Tax OfficerCIT v. Meenakshi MillsApthorpe v. Schoenhofen Brewing CoFirestone Tyre and Rubber Co. v. Llewellin |
FACTS OF THE CASE:
The case revolves around Associated Rubber Industries Ltd., which had initially invested in shares of INARCO Ltd., generating annual dividends. These dividends were included in the company’s profit and loss account for years and used to calculate the bonus payable to the company’s workmen.
In 1968, the shares of INARCO Ltd. were transferred to a wholly-owned subsidiary, Aril Bhavnagar Ltd., which had no independent business but relied solely on the dividends from the transferred shares as its income. However, the dividend income was not transferred back to Associated Rubber Industries Ltd., resulting in reduced profits shown in the company’s accounts and subsequently affecting the bonus payable to the workmen.
The workmen filed an industrial dispute claiming their rightful bonus entitlement, arguing that the two companies, Associated Rubber Industries Ltd. and Aril Bhavnagar Ltd., were the same entity. However, both the Industrial Tribunal and the High Court of Gujarat ruled that the two companies were separate legal entities and the profits made by Aril Bhavnagar Ltd. could not be considered as profits of Associated Rubber Industries Ltd. for calculating the bonus payable.
Aggrieved by the lower court decisions, the workmen appealed to the Supreme Court of India under Article 133(1) of the Indian Constitution seeking a resolution to the dispute and a fair determination of their bonus entitlement.
ISSUES RAISED:
- Is the transfer of shares of INARCO Ltd. by Associated Rubber Industry Ltd to Aril Holdings Ltd a device to avoid payment of a higher bonus to the company’s workmen?
- Whether the companies, Associated Rubber Industry Ltd and Aril Holdings Ltd were two separate legal entities?
ARGUMENTS
Arguments from the Workmen’s Side:
- Unity of Control and Purpose: The workmen argued that both Associated Rubber Industries Ltd. and Aril Bhavnagar Ltd. were effectively under the same management and control. The transfer of shares from the parent company to the subsidiary was merely a paper transaction and a scheme to avoid payment of the rightful bonus to the workmen. They contended that the transfer was a deliberate attempt to reduce the profits available for bonus calculation, resulting in an unfair reduction of their entitled bonus.
- Single Economic Entity: The workmen asserted that Associated Rubber Industries Ltd. and Aril Bhavnagar Ltd. were part of a single economic entity, operating as one unit for practical purposes. The subsidiary was wholly owned by the parent company, and its sole source of income was the dividends from the transferred shares. They argued that Aril Bhavnagar Ltd. was merely an extension of the parent company and should not be treated as a separate legal entity for the purpose of calculating the bonus.
- Corporate Veil Lifting: The workmen contended that the court should lift the corporate veil and look beyond the separate legal personalities of the two companies to establish the economic reality of their relationship. They urged the court to consider the overall business operation and control exercised by Associated Rubber Industries Ltd. over the subsidiary to determine that the two entities were essentially one and the same.
Arguments from Associated Rubber Industries Ltd.’s Side:
- Separate Legal Entities: Associated Rubber Industries Ltd. argued that it and Aril Bhavnagar Ltd. were two distinct legal entities, each having its own separate legal existence. The transfer of shares to the subsidiary was a legitimate business decision, and both companies operated independently with their own management, assets, and liabilities.
- No Profit Transfer: The parent company asserted that it did not receive any income from the dividend generated by the transferred shares in Aril Bhavnagar Ltd. The subsidiary retained the dividend income as its revenue, and there was no obligation for Aril Bhavnagar Ltd. to transfer the profits back to Associated Rubber Industries Ltd. The reduced profits in the parent company’s profit and loss account were solely due to the transfer of shares and the absence of dividend income.
- Legitimate Business Arrangement: Associated Rubber Industries Ltd. argued that the transfer of shares was part of a bona fide corporate restructuring strategy, aimed at optimizing its business operations and creating a subsidiary with specific business objectives. The dividend income was retained by the subsidiary to fund its activities and not to avoid payment of the bonus to the parent company’s workmen.
In conclusion, the case hinged on the determination of whether Associated Rubber Industries Ltd. and Aril Bhavnagar Ltd. were indeed separate legal entities with independent operations or whether they formed part of a single economic entity controlled by the parent company. The court’s decision to uphold or reject the workmen’s arguments would have significant implications for the legal concept of “lifting the corporate veil” and the protection of workers’ rights in corporate structures.
JUDGEMENT
In the case of “Workmen of The Associated Rubber Industry Ltd v. Associated Rubber Industry Ltd (1985),” the Supreme Court made several important observations regarding the corporate veil and its potential misuse to evade tax and welfare legislation. While acknowledging that Associated Rubber Industry Ltd and Aril Holdings Ltd were two separate legal entities with distinct existences, the court emphasized its authority to look beyond the corporate facade and discover the true state of affairs if such entities were being used to avoid tax obligations.
The court referred to precedent cases like McDowell and Company Limited v. Commercial Tax Officer, where it was established that the court could determine whether legal devices were being used to evade taxes. Similarly, in CIT v. Meenakshi Mills, it was noted that while companies are considered separate legal entities, there are exceptional circumstances where the corporate veil can be lifted to expose the economic realities behind legal arrangements, especially if they involve tax evasion or circumventing tax obligations.
The court also cited the case of Apthorpe v. Schoenhofen Brewing Co, where the court disregarded the corporate veil and held the English company liable for taxes on the business conducted by its subsidiary in New York, as it was evident that the subsidiary was merely acting as an agent for the English company.
Furthermore, the case of Firestone Tyre and Rubber Co. v. Llewellin was referenced, where an American company used its wholly-owned subsidiary in England to conduct European business. The court upheld the separate legal identity of the subsidiary but recognized that the subsidiary’s activities were an extension of the American company’s business in Europe.
In the judgment of the present case, the Supreme Court noted that a subsidiary company, Aril Holdings Ltd, was created by Associated Rubber Industry Ltd, with no assets of its own, solely to hold the shares transferred by the parent company and receive dividends from them. Although direct evidence of the subsidiary’s creation to reduce the parent company’s profits was not established, the court recognized that the workmen’s bonus had indeed been reduced as a result of this arrangement.
The court considered the dividend amount received by Aril Holdings Ltd from the transferred shares to calculate the rightful bonus payable to the workmen of Associated Rubber Industry Ltd. Additionally, it was pointed out that in 1971, Aril Holdings Ltd was wound up and amalgamated with Associated Rubber Industry Ltd, further confirming the subsidiary’s creation to manipulate profits.
Ultimately, the Supreme Court held that the workmen were entitled to receive their rightful bonus at the rate of 16% for the year 1969. The case sets a precedent for the court’s ability to lift the corporate veil when necessary to protect workers’ rights and prevent the misuse of corporate structures for tax avoidance or other evasive purposes.
REFERENCES
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This article was written by Chehak Gandhi of Dr BR Ambedkar National Law Unversity, Sonepat.
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