Corporate veil and clubbing of clearances fail without proof of sham, fraud, or tax evasion; small scale exemption stands.

Two separately incorporated companies could not have their clearances clubbed merely because they shared directors, shareholders, business dealings, or some managerial overlap. The Tribunal held that each company remains a separate juristic person, and lifting the corporate veil requires clear proof of fraud, tax evasion, dummy operations, or comparable exceptional circumstances. On the material relied upon, the department failed to establish that the second unit was a sham or that there was sufficient flowback or control to justify treating the units as one. The small scale industry exemption therefore could not be denied on a clubbing theory, and the demand for differential duty, confiscation, and penalty was unsustainable.

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Issues: Whether the clearances of two separately incorporated companies could be clubbed so as to deny small scale industry exemption and sustain the demand for differential duty, confiscation, and penalty.

Analysis: The department sought to deny the exemption by treating one company as a split-up or related unit of the other on the basis of common directors, shareholding pattern, project report references, shared business dealings, and alleged financial and managerial overlap. The Tribunal held that a company is a separate juristic person and that mere commonality of shareholders or directors does not, by itself, justify treating two companies as one. The doctrine of lifting the corporate veil applies only in exceptional cases where there is clear evidence of fraud, tax evasion, or a dummy arrangement, and such evidence was not established here. The exemption notification had to be construed strictly, but not in a manner that would make it ineffective by disregarding separate legal existence without sufficient proof. The grounds relied upon by the department were found inadequate to establish that the second unit was a sham or that there was flowback or control sufficient to justify clubbing.

Conclusion: The clearances could not be clubbed, the small scale exemption could not be denied on that basis, and the demand and connected consequences were unsustainable.

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