Case: The Commissioner Of Income-Tax, Madras Vs. Sri Meenakshi Mills Ltd. &amp; Ors

the money should be brought to British India after it was taken by the borrower outside the taxable territory. The appellate Tribunal has pointed out that the assessee-companies had a preponderant, if not the whole, voice in the creation, running and management of the Bank and that Pudukottai was neither a cotton producing area nor had it a market for cotton and except that it was a non-taxable territory there was nothing else to recommend the carrying on of the cotton spinning or weaving business there. The Tribunal further remarked that having regard to the special position of Thyagaraja Chettiar and the balance sheets of the Bank and lack of investments in Pudukottai, it was reasonable to conclude that the Bank itself was started at Madurai and a branch was opened at Pudukottai only with a view to helping the financial operations of Thyagaraja Chettiar and the mills in which he was vitally interested. The Tribunal found that Pudukottai branch of the Bank had transmitted funds deposited by the assessee-companies for enabling the Madurai branch to advance loans at interest to the assessee-companies and the transmission of the funds was made with the knowledge of the assessee-companies who were the major shareholders of the Bank.In the context of these facts it must be held that the entire transactions formed part of a basic arrangement or scheme between the creditor and the debtor that the money should be brought into British India after it was taken by the borrower outside the taxable territory. We are accordingly of the opinion that the principle laid down in Wadias case, 17 ITR 63: (AIR 1949 FC 18) is satisfied in this case and that the Income-tax authorities were right in holding that the entire interest earned on fixed deposits was taxable.8. In the course of argument Mr. Venkataraman contended that even if Thyagaraja Chettiar, a Director of the assessee-companies knew in his capacity as Director of the Madurai Bank that money placed in fixed deposit by the assessee-companies would be transferred to the taxable territory, that knowledge cannot be imputed to the assessee-companies and so it cannot be said that the transfer was part of an integral arrangement of the loan transaction. In support of this argument learned Counsel referred to the decision of the Court of Appeal in David Payne and Co. Ltd. In re, Young v. David Payne and Co. Ltd., (1904) 2 Ch 608. We are unable to accept the argument of the respondents as correct. The decision in David Payne and Cos case supra, has no bearing on the question presented for determination in the present case. In David Payne and Co.s case, 1904-2 Ch. 608 supra, the question at issue related to the powers and duties of Directors and it was held that because the same person is a common director of two companies, the one company has not necessarily notice of everything that is within the knowledge of the common director, which knowledge he has acquired as director of the other company. In the present case the question at issue is entirely different. The appellate Tribunal has upon examination of the evidence, found that the transference of funds from Pudukottai to Madurai was made as part of the basic arrangement between the Bank and the assessee-companies and that Thyagaraja Chettiar who was the moving figure both in the Bank and in each of the assessee-companies had knowledge of this arrangement. It is well established that in a matter of this description the Income-tax authorities are entitled to pierce the veil of corporate entity and to look at the reality of the transaction. 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. For example, the Court has power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation. For instance, in Apthorpe v. Peter Schoenhofen Brewing Co., Ltd., (1899) 4 Tax Cas 41 the Income-tax Commissioners had found as a fact that all the property of the New York company, except its land, had been transferred to an English company, and that the New York company had only been kept in being to hold the land, since aliens were not allowed to do so under New York law. All but three of the New York companys shares were held by the English company, and, as the Commissioners also found, if the business was technically that of the New York company, the latter was merely the agent of the English company. In the light of these findings the Court of Appeal, despite the argument based on Salomons case, 1897 AC 22 held that the New York business was that of the English company which was liable for English income-tax accordingly. In another case - Firestone Tyre and Rubber Co. v. Llewellin. 1957-1 WLR 464-an American company had an arrangement with its distributors on the Continent of Europe whereby they obtained supplies from the English manufacturers, its wholly owned subsidiary. The English company credited the American with the price received after deducting the costs plus 5 per cent. It was conceded that the subsidiary was a separate legal entity and not a mere emanation of the American parent, and that it was selling its own goods as principal and not its parents goods as agent. Nevertheless, these sales were a means whereby the American company carried on its European business, and it was held that the substance of the arrangement was that the American company traded in England through the agency of its subsidiary. We, therefore reject the argument of Mr. Venkataraman on this aspect of the case.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]5. On behalf of the appellant Mr. Sen submitted at the outset that the High Court was not legally justified in interfering with the findings of fact reached by the appellate Tribunal and in concluding that there was no arrangement or scheme between the lender and the borrower for the transference of funds from Pudukottai to Madurai.In our opinion, there is justification for the argument put forward on behalf of the appellant and the High Court erred in law in interfering with the finding of the appellate Tribunal in this case.Having examined the findings of the appellate Tribunal in the present case we are satisfied that the test prescribed by the Federa1 Court in Wadias case, is fulfilled and the appellate Tribunal was right in its conclusion that there was a basic arrangement or scheme between theand the Bank that the money should be brought to British India after it was taken by the borrower outside the taxable territory. The appellate Tribunal has pointed out that thehad a preponderant, if not the whole, voice in the creation, running and management of the Bank and that Pudukottai was neither a cotton producing area nor had it a market for cotton and except that it was aterritory there was nothing else to recommend the carrying on of the cotton spinning or weaving business there. The Tribunal further remarked that having regard to the special position of Thyagaraja Chettiar and the balance sheets of the Bank and lack of investments in Pudukottai, it was reasonable to conclude that the Bank itself was started at Madurai and a branch was opened at Pudukottai only with a view to helping the financial operations of Thyagaraja Chettiar and the mills in which he was vitally interested. The Tribunal found that Pudukottai branch of the Bank had transmitted funds deposited by thefor enabling the Madurai branch to advance loans at interest to theand the transmission of the funds was made with the knowledge of thewho were the majorshareholders of thethe context of these facts it must be held that the entire transactions formed part of a basic arrangement or scheme between the creditor and the debtor that the money should be brought into British India after it was taken by the borrower outside the taxable territory. We are accordingly of the opinion that the principle laid down in Wadias case, 17 ITR 63: (AIR 1949 FC 18) is satisfied in this case and that theauthorities were right in holding that the entire interest earned on fixed deposits wasthe present case the question at issue is entirely different. The appellate Tribunal has upon examination of the evidence, found that the transference of funds from Pudukottai to Madurai was made as part of the basic arrangement between the Bank and theand that Thyagaraja Chettiar who was the moving figure both in the Bank and in each of thehad knowledge of this arrangement. It is well established that in a matter of this description theauthorities are entitled to pierce the veil of corporate entity and to look at the reality of the transaction. 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. For example, the Court has power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation. For instance, in Apthorpe v. Peter Schoenhofen Brewing Co., Ltd., (1899) 4 Tax Cas 41 theCommissioners had found as a fact that all the property of the New York company, except its land, had been transferred to an English company, and that the New York company had only been kept in being to hold the land, since aliens were not allowed to do so under New York law. All but three of the New York companys shares were held by the English company, and, as the Commissioners also found, if the business was technically that of the New York company, the latter was merely the agent of the English company. In the light of these findings the Court of Appeal, despite the argument based on Salomons case, 1897 AC 22   held that the New York business was that of the English company which was liable for Englishaccordingly. In another caseFirestone Tyre and Rubber Co. v. Llewellin.an American company had an arrangement with its distributors on the Continent of Europe whereby they obtained supplies from the English manufacturers, its wholly owned subsidiary. The English company credited the American with the price received after deducting the costs plus 5 per cent. It was conceded that the subsidiary was a separate legal entity and not a mere emanation of the American parent, and that it was selling its own goods as principal and not its parents goods as agent. Nevertheless, these sales were a means whereby the American company carried on its European business, and it was held that the substance of the arrangement was that the American company traded in England through the agency of its subsidiary. We, therefore reject the argument of Mr. Venkataraman on this aspect of the case.