Separate corporate personality bars taxing foreign company income in shareholders' hands absent sham or statutory charge.

Foreign company income generally cannot be assessed in resident shareholders' hands merely because they hold all or substantially all of the shares. The analysis notes that where the company is a separate juristic entity, owns the assets, earns the rental income and capital gains outside India, and there is no statutory charging provision or material to show that the structure is a sham or tax-avoidant device, the corporate veil cannot be pierced on a substance-over-form theory. In that situation, only dividend, if any, may be taxed in the shareholders' hands, and additions based on alleged beneficial ownership are unsustainable.

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Issues: Whether rental income, capital gains, bank interest and other income arising from assets held by the foreign company could be assessed in the hands of the resident shareholders on the footing that they were the beneficial owners of the company's assets.

Analysis: The shares were acquired through banking channels under the permitted remittance framework, the company was a distinct juristic entity incorporated in the British Virgin Islands, and the properties as well as the income arose outside India. The company itself, not the shareholders, owned the properties, borrowed funds in the United Kingdom, earned rental income, and realised capital gains on sale. In the absence of any statutory provision enabling taxation of the company's income in the hands of the shareholders, and in the absence of material showing that the corporate structure was a sham or a device lacking commercial substance, the doctrine of substance over form or piercing the corporate veil could not be invoked. The company's separate legal personality remained intact, and only dividend, if any, could be taxed in the shareholders' hands.

Conclusion: The income of the foreign company was not taxable in the hands of the assessees, and the additions made on the premise of beneficial ownership were unsustainable.

Ratio Decidendi: In the absence of a statutory charging provision and proof that a corporate structure is a sham or tax-avoidant device, the income of a company cannot be assessed in the hands of its shareholders merely because they hold all or substantially all of its shares.

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