Shareholders can’t be taxed for income from properties owned by the company – HC

Shareholders are only owners of the shares of the company therefore, income from properties earned by the company cannot be treated to be an income of the shareholders.

In a recent judgment, Hon’ble High Court has held that shareholders of the company are only owners of the shares of the company and not the owners of the property owned by the company and therefore the income from properties earned by the company cannot ipso-facto be treated to be an income of the shareholders.

ABCAUS Case Law Citation:
5129 (2026) (04) abacus.in HC

Important Case Laws relied upon by Parties:
Vodafone International Holdings BV v. Union of India & Anr

In the instant case, the PCIT had challenged the order passed by the ITAT in holding that the Assessing Officer (AO) was legally unjustified in taxing the rental income and capital gain arising out of properties owned by the company in the hands of respondent shareholders.

A search was conducted at the residence of the respondent husband and wife. During the course of search, certain papers were found which contained details of expenditure incurred for upkeep, sale, purchase, renovation, maintenance furnishing and leasing of the house properties abroad by a company incorporated in foreign jurisdiction.

Since all the shares of said company were held by the respondents and their children having 20% shareholding each, the Assessing Officer added not only the income from house property but also the income from capital gains arising out of sale of the property in the hands of the respondent shareholders.

The AO invoked Explanation 4 to Section 139(1) of the Act of 1961 and took into account the information received from the competent authorities of Singapore. He took a view that there was no difference in ownership of the company and the ownership of properties of the company, having been proved by the data seized during the search. He further observed that the properties were owned by the respondent assessees using the company only as a cover.

Before the Hon’ble High Court, the Revenue contended that the AO had pierced the veil and found that the respondents were the true and real owners and beneficiaries of the income and assets of the said company and the doctrine of „substance over form‟ should be applied in order to demolish the device adopted by the respondents to avoid tax in India.

It was contended that the expression “beneficial owner”, as given in Explanation 4 to Section 139(1) of the Act of 1961 clearly brings within its fold the transactions carried out by the respondents.

On the other hand, the respondents contended that the AO has introduced his own concept „substance over form‟ and has made addition in the hands of the respondents, without there being any basis.

The Hon’ble High Court observed that the AO had portrayed an impression as if, the respondents had adopted a ploy to avoid, if not evade, the tax under the Act of 1961. But the factual matrix is examined in its entirety and from the lens of a common man or investor, it transpires that the respondents had invested in shares of the company namely registered under the provisions of law in the British Virgin Islands. The said company having obtained loan from the banks subsequently purchased properties and having earned rental income for three-four years, had sold the properties at a higher value. Hence, it is the company which earned rental income and generated gain for itself on account of appreciation in the value of the property it had purchased. 

The Hon’ble High Court observed that the consistent view of Hon‟ble Supreme Court had been that the Revenue cannot tax a subject without a statute to support and that every tax payer is entitled to arrange his affairs so that his taxes are as low as possible and he cannot be compelled to choose that pattern which will replenish the treasury. The Hon’ble High Court further observed that what is tax evasion, tax avoidance and when the corporate veil can be lifted has been elucidated by Hon‟ble Apex Court and subsequently introduced provisions of GAAR nor any other provisions introduced in Section 9 of the Act of 1961 were enough to sustain the tax which has been levied in the instant case. 

The Hon’ble High Court noted that a Company is a juristic person and a separate legal entity from its members and when facts of the case are tested on above legal position, the Tribunal had dealt with the facts, law and evidence in their correct perspective.

The Hon’ble High Court opined that the respondents being shareholders of the company, even if holding all the shares (100%), were only owners of the shares of the company and not the owners of the property as such and similarly the income which that company had earned cannot ipso-facto be treated to be an income of the assessees, who were residents of India. It could be a different matter that as and when dividend is received by the respondents (in India or in the United Kingdom), such dividend may be exigible to tax. Hence, it is only the dividend income qua the shares of the company, which can be taxed and not the income of the company itself.

The Hon’ble High Court further held that the AO’s endeavour to bring in doctrine of “substance over form‟ was merely an attempt in anxiety of enriching the exchequer, which is not backed by the statutory framework – it is apparently unknown to the Income Tax Act.

Accordingly, the appeal was dismissed.

Download Full Judgment Click Here >>

• Shareholders can’t be taxed for income from properties owned by the company – HC
• Jurisdictional error in reassessment approval can’t be shielded by the law of limitation
• ITAT ought to remanded whole matter of bogus purchases instead of profit determination
• Where proceedings u/s 153C barred by limitation, AO can’t invoke section 148 & 148A
• Corporate guarantees executed by corporate debtor constitute “financial debt” under IBC