This case analysis is done by Monal Verma (5th-year BA. LL.B. student from Pt. Ravishankar Shukla University, Raipur, Chhattisgarh and Editor at legalonus)
The Commissioner of Income-Tax, Madras
Vs.
Sri Meenakshi Mills Ltd. Madurai,
Sri Rajendra Mills Ltd. Salem&
Sri Saroja Mills Ltd. Singanllur
Table of Contents
Appellant –
The Commissioner of Income-Tax, Madras
Vs.
Respondent –
1. Sri Meenakshi Mills Ltd. Madurai.
2. Sri Rajendra Mills Ltd. Salem.
3. Sri Saroja Mills Ltd. Singanllur.
Reference—A. 1. R. 1969. S. C. S19.
Subject—This is a case based on Section 66 (I) (S), Section 42 (1) of Income-Tax Act (1922)
Facts of the case—
There are three Respondents (hereinafter called the Assessee-Companies).
- The three respondents operate as Public Limited Companies, which manufacture and sell yarn in Madurai. The assessee-companies each had a branch in Pudukottai producing and selling cotton yarn.
- Branches periodically deposited their sales proceeds in a branch of Madurai Bank Ltd.All the three assessee-companiesborrowed 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 far exceeded theavailable profits at Pudukottai.
- During the assessment proceedings of the assessee-companies for the various years in dispute, the Income Tax officer considered that the borrowings in British India on the securityof the fixed deposits made at Pudukottai amounted to constructive remittances of the profits by the branches of the assessee-companiesto their Head Offices in India.
- The assessee-companiesappealed to the Appellate Assistant Commissioner of the Income-Tax. It was found by the appellate Assistant Commission that the deposits made by the assessee-companies and their closest allied companies constituted a substantial portion of the total deposits received.
Views of the Appellate Tribunal—
The matter in the appeal was taken to the Appellate Tribunal by the assessee companies.
Appellate Tribunal observed that “we cannot escape the fact that the three mills had preponderant and management of the Bank. Moreover, we cannot ignore the fact that Pudukottai is not a cotton-producing area nor did it have a cotton market, other than its status as a non-taxable territory.”
Views of the High Court—
Then the matter reached the High Court.
It was stated in the High Court’s answer that there was no evidence indicating that the assessees and the Bank had no arrangement. The High Court further took the view that the transactions represented ordinary banking transactions and there was nothing to show that the amounts placed in fixed deposits in the branch were intended to and were, in fact, transferred to head office for the purpose of lending them out to the depositor himself.
Views of the Supreme Court—
Then the Appellant filed an appeal to Supreme Court against the judgement of the High Court.
In this case, the Supreme Court concluded that the findings of the Appellate Tribunal fit into the test set by the Federal Court in Wadia’s case and that the Appellate Tribunal was correct in finding that there was a basic agreement between the assessee companies and the bank that the money should be brought to British India after the borrower had taken it outside the taxable territory.
Decision—Appeal allowed.
Principles of Law laid down—
(1) 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.
(2) Section 42 of the Income-Tax act was the subject matter of interpretation by the Federal Court in A. H. Wadia v/s Commissioner of Income-Tax, Bombay. (AIR 1949 F. B. 18)
(3) If the party concerned has failed to file an application under S. 66 (I) expressly raising the question about the validity of the findings of fact, he is not entitled to urge before the High Court that the findings are vitiated for any reason.