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CIT V. MEENAKSHI MILLS LTD., AIR 1967 SC 819

CIT V. MEENAKSHI MILLS LTD., AIR 1967 SC 819

 

FACTS

  • There were three companies that make and sell yarn in Madurai. All the three respondents (“the assessee companies”) were public limited companies. The sale-proceeds of the branches were periodically deposited in the branch of Madurai Bank Ltd. (the “Bank”) at Pudukottai, a former native State either in the current accounts or fixed deposits which earned interest for the various assessment years.
  • All the three assessee companies borrowed money from the Madurai branch of the bank and on the security of the fixed deposits made by their branches with the Pudukottai branch of the Bank. The loans granted to the assessee companies were far in excess of the available profits at Pudukottai.
  • The bank was established in 1943, with Thyagaraja Chettiar as the founder director. Thyagaraja Chettiar, his two sons, and the three assessee companies together held the majority of shares in the bank.
  • However, the loans given to the assessee companies were much more than the profits generated in Pudukottai. The companies appealed to the Appellate Assistant Commissioner of Income-tax. After reviewing the structure of the companies and the bank, as well as the deposit and overdraft figures, the Commissioner found that the deposits from the assessee companies and closely related companies make up a significant portion of the bank's total deposits.
  • The Commissioner also noted that the Pudukottai branch of the bank mainly deals with fund collection and doesn't have many other significant transactions. The Appellate Assistant Commissioner also considered that the Pudukottai branch of the Bank had no other appreciable transactions except the collection of funds and on the facts found Section 42(1) of the IT Act applied to the case.
  • The assessee Companies took the matter in appeal to the Appellate Tribunal which took note of the position that the head office and the branch.
  • After detailed consideration of the deposits and overdrafts and the inter-branch transactions of the Bank the Appellate Tribunal held that Section 42(1) of the Act was applicable to the facts of the case and that the assessee companies must be attributed with the knowledge of the activity of their branches at Pudukottai and of the remittances made by the Pudukottai branch of the Bank to Madurai head office, and that the entire transactions formed part of an arrangement or scheme.

                                   

ISSUE

  • Whether on the facts and in the circumstances of the case, the taxing of the entire interest earned on the fixed deposits made out of the profits earned in Pudukottai by the assessee’s branches in the Pudukottai branch of the Bank of Madurai is correct?

 

HELD

The above mentioned question was referred to the High Court by the Appellate Tribunal , the court held must be answered in favour of the Income Tax Department and against the respective assessee companies and these appeals must be allowed with costs.

  • The Court discussed Section 42(1) of the IT Act and observed that this section accordingly requires,
    • In the first place, any money should have been lent at interest outside the taxable territory.
    • In the second place, income, profits or gains should accrue or arise directly or indirectly from such money so lent at interest, and,
    • In the third place, the money should be brought into the taxable territories in cash or in kind.
  • If all these conditions are fulfilled, then the section lays it down that the interest shall be deemed to be income accruing or arising within the taxable territories.
  • The court held that the Appellate Tribunal was right in its conclusion that there was a basic arrangement or scheme between the assessee Companies and the Bank that the money should be brought into British India after it was taken by the borrower outside the taxable territory.
  • It is true that from the juristic point of view the company is a legal personality entirely distinct from its members and the company is capable of enjoying rights and being subjected to duties which are not the same as those enjoyed or borne by its members. But in certain exceptional cases the Court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade.

 

COMMENTARY

“Similarly in CIT v. Sri Meenakshi Mills Ltd. AIR 1967 SC 819, where the veil had been used for evasion of taxes and duties, the court upheld the piercing of the veil to look at the real transaction.”