The Delhi High Court^[1] (‘Delhi HC’) recently reaffirmed the settled legal principle that, in the absence of a specific statutory provision under the IT Act 1961, the income of a company cannot be taxed in the hands of its shareholders merely owing to their exercising control over such company. The dispute arose following a search conducted at the residences of certain taxpayers, during which the Income Tax Department recovered documents concerning the upkeep, renovation, leasing and sale of properties situated in the United Kingdom and owned by Carmichael Capital Limited (‘CCL’), a company incorporated in the British Virgin Islands. The taxpayers collectively held shares in CCL, which earned rental income and capital gains from the UK properties, which income already stood taxed in the United Kingdom.

The Assessing Officer (‘AO’) alleged that the taxpayers being “beneficial owners” of the underlying overseas assets, CCL and its subsidiary entities being shell structures pierced the corporate veil and sought to tax the rental income and capital gains earned by CCL directly in the hands of the taxpayers. The Commissioner of Income-tax (Appeals) (‘CIT(A)’) affirmed such findings, observing that the overseas entities lacked commercial substance and relied upon the ruling of the SC in McDowell & Co. Ltd^[2].

On appeal, the Tribunal reversed the orders of the lower authorities whilst holding that there was no basis to lift the corporate veil of CCL or treat the taxpayers as beneficial owners of the UK properties, as the investments were made from disclosed and tax-paid funds and the seized documents merely reflected shareholder oversight. The Tribunal reiterated that shareholders own only shares in a company and not its underlying assets or income. Affirming the Tribunal’s ruling, the Delhi HC, relying on Vodafone International Holdings BV v. Union of India^[3], held that the burden for establishing tax avoidance lies with the Income Tax Department and rejected the AO’s reliance on the doctrine of “substance over form”. The Court categorically held that even shareholders holding 100% shareholding in a company cannot be treated as owners of the company’s underlying assets or income. Accordingly, in the absence of any express statutory provision permitting such taxation, the rental income and capital gains earned by CCL could not be assessed directly in the hands of the taxpayers. The decision thus reinforces the fundamental principle of separate legal entity and reiterates that, under the IT Act 1961, a company and its shareholders are distinct taxable entities.

[1] ITA No. 681/2025 & other connected matters (Delhi High Court) judgment dated 24.04.2026.

[2] [1985] 154 ITR 148 (SC).

[3] (2012) 6 SCC 613.