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Mumbai University · FY LLB · Sem II
Mr. Ram, Mr. Shyam, Mr. Madhav and Mr. Shri are friends were owning an Amusement Park together which they transferred to
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Mr. Ram, Mr. Shyam, Mr. Madhav and Mr. Shri are friends were owning an Amusement Park together which they transferred to ABC Exciting Park Ltd. Co. and claimed exemptions from ad valorem duty on transfer of property to the Company. (i) Can they claim exemption since transfer of property is in the company which belongs to them only? (ii) Explain the principle applicable to decide the matter. (iii) State the case law for the same.
Q3Answer the following by giving reasonAttempt Any Two • 6 marks each • Total: 12 marks2023
(a)Mr. Ram, Mr. Shyam, Mr. Madhav and Mr. Shri are friends were owning an Amusement Park together which they transferred to ABC Exciting Park Ltd. Co. and claimed exemptions from ad valorem duty on transfer of property to the Company. (i) Can they claim exemption since transfer of property is in the company which belongs to them only? (ii) Explain the principle applicable to decide the matter. (iii) State the case law for the same.
Facts

Four friends transfer their jointly-owned amusement park to ABC Exciting Park Ltd., a company they together incorporated and wholly own, and claim that since the company belongs to them, no stamp duty (ad valorem) should apply on the transfer.

(i) Answer — Can They Claim the Exemption?

No, they cannot claim the exemption. Once a company is duly incorporated, it becomes a separate legal entity distinct from its members, regardless of who owns all its shares. The four friends and ABC Exciting Park Ltd. Co. are two different legal persons in the eyes of the law. The transfer of the amusement park is a genuine transfer of ownership from four individuals to a company — the fact that they own all shares in the company does not make the company their alter ego for the purpose of stamp duty or any other legal obligation.

(ii) Applicable Legal Principle — Separate Legal Entity

The principle of Separate Legal Personality (Corporate Personality) holds that upon incorporation, a company acquires an independent legal existence entirely distinct from its shareholders and promoters. Consequences include:

  • The company can own property, enter contracts, sue and be sued in its own name.
  • The members have no direct interest in the company's property — they hold shares, not co-ownership of assets.
  • The company's liabilities are not the liabilities of the members, and conversely, property transferred to the company genuinely vests in the company, not the members.
  • Therefore, the transfer from the four friends to their company is a transfer between two distinct legal entities — stamp duty is applicable on such transfers.

The Doctrine of Corporate Veil (lifting the veil) does not apply here because there is no fraud, evasion of tax, or misuse of the corporate structure — the company was lawfully incorporated for a genuine business purpose. The courts will not lift the veil merely because the shareholders and the company happen to be the same group of people.

Salomon v. Salomon & Co. Ltd. [1897] AC 22 (House of Lords) — Mr. Aron Salomon incorporated a leather boot company and transferred his sole-trader business to it. On liquidation, the House of Lords held that the company was a separate legal person entirely distinct from Salomon, even though he held almost all the shares. The company's debts were the company's alone; Salomon (as a secured debenture holder) had priority over unsecured creditors. This case is the foundational authority for corporate separate legal personality.
RE Kondoli Tea Co. Ltd. (1886) — An Indian court applied the principle of separate legal personality and held that a company has an independent legal existence, capable of suing and being sued, holding property, and entering contracts in its own name, separate from its members.
Lee v. Lee's Air Farming Co. Ltd. [1961] AC 12 (Privy Council) — Lee owned 2,999 of 3,000 shares in the company and was also its sole governing director and chief pilot. After his death in a plane crash, the Privy Council held that Lee (as employee/pilot) and the company (as employer) were distinct legal entities — his widow was entitled to workers' compensation. A person can simultaneously be the controlling shareholder and an employee of a company.

(iii) Conclusion

Applying Salomon's principle, the transfer of the amusement park from the four friends to ABC Exciting Park Ltd. is a genuine inter-party transfer between distinct legal persons. The claim for exemption from ad valorem stamp duty fails; the appropriate duty is payable on the market value of the property transferred.