TaxTMI 
TaxTMI 
2017 (9) TMI 1230
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....llowance out of interest / commission paid by Assessee to depositors, to the extent it has less charged from Promoters and their relatives and their sister concerns? 2. Whether on the facts and circumstances of case, Tribunal is justified in ignoring ratio of decision laid down by Jurisdictional High Court in H.R. Sugar Factory P. Ltd. 187 ITR 363? 4. M/s Sahu Investment Mutual Benefit Co. Ltd. (hereinafter referred to as the "Assessee") is a Mutual Benefit Company. As per Memorandum of Association, main objectives of Assessee are, (i) to receive deposits from shareholders and (ii) to lend money to shareholders. A Mutual Benefit Company is supposed to take deposits/ give advances only to its members or shareholders. 5. During the A.Y. 1993-94, Rs. 1,12,14,665.30 was paid as interest on deposits. Interest on deposit scheme is calculated on product basis. Further interest is calculated on quarterly compounding basis in F.D.R. Schemes and half yearly basis in other schemes. Further a sum of Rs. 38,13,119.10 was debited in profit and loss account towards commission to agents, for procuring these deposits. Against this, total receipt from interest was Rs. 1,27,50,047.20 and Rs. 7,87,....
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.... including commission charges on various deposit schemes at higher rate. Interest has been charged on unsecured loans, from above persons, at simple interest at 16% per annum, thus resulting in interest received/ receivable of Rs. 1,24,41,611.51 as against Rs. 1,51,91,943.03 paid by Assessee as interest and commission to obtain these deposits under various schemes. There is thus a difference of loss, which varies from Rs. 27 lacs and odd. 9. By this system, Assessee has received funds from public in the form of various types of deposits, by paying a high rate of interest, and commission to agents, and advanced these funds in the form of unsecured loans mainly to sister concerns at a very low rate of interest. It is pertinent to mention that in cases of loans, other than to sister concerns, Assessee has charged interest upto 28% p.a. also. 10. It was also noticed from the books of accounts produced, that, interest has been paid to depositors under various schemes on product basis with quarterly/ half yearly compounding of interest but interest charged from Authorized Signatories or their related business concerns has been calculated on simple interest basis and that too without qu....
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....direct that any of the provisions of this Act specified in the notification- (a) shall not apply to any Nidhi or Mutual Benefit Society, or (b) shall apply to any Nidhi or Mutual Benefit Society with such exceptions, modifications and adaptations as may be specified in the notification. (3) A copy of every notification issued under sub- section (1) shall be laid as soon as may be after it is issued, before each House of Parliament." 16. The nature of "Mutual Benefit Company" was explained by observing that their objects inter alia are to enable members to save money or invest their savings and secure loans at favourable rates. They inculcate idea of thrift and compulsory savings in the minds of poor and middle class people. It was pointed out that A.O. wrongly held that "Mutual Benefit Company" cannot admit, as member, any body corporate or trust, since this amendment came into force by notification dated 04.12.1995 and not applicable in A.Y. 1993-94, in question in this appeal. With regard to advancement of loan to certain individuals, CIT(A) held that A.O. forgot that Assessee is a Company which is authorized to advance loans and accept deposits. CIT(A) held that Assessee is ....
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....atus, would be much more. Hence on this fact also there is no under recovery of interest as alleged by Assessee. 18. Against this part of the order of CIT(A), dated 10.01.2000, Revenue preferred appeal before Tribunal which has been rejected. Tribunal has recorded findings, relevant for our purposes, in paras 10 and 11, as under: "10. We have carefully considered the submissions of the ld. Representatives of the parties and have perused the orders of the authorities below. There is no dispute to the fact that the assessee is a company, which is recognized as a "Nidhi" or a Mutual Benefit Society in terms of provisions of Section 620A of the Companies Act, 1956. A statutorily recognized Mutual Benefit Society or Nidhi can enter into transaction of accepting the deposit and lending only amongst its members. We observe that the assessee from time to time launched the various schemes to mobilize deposits. In the assessment year under appeal, we observe that the assessee received under various schemes as on 31st March, 1993, the deposit of aggregate amount of Rs. 10,96,57,299=15 on different rate of interest, the details of which are given by the Assessing Officer in para 3 at page 2 ....
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....oney. Hon'ble Supreme Court of India had held that the income tax is levied on the income earned by the assessee and not on the income that could have been earned by and assessee. It was further held by their Lordships in the case of Calcutta Discount Co. Ltd., 91 ITR 8 and in the case of A. Raman & Co., 67 ITR 11, that if the assessee had, in fact, not earned any income, there could not be any levy of income and further the law casts no obligation upon any assessee to earn income. The Hon'ble Calcutta High Court has also held in the case of Kewalchand Bagdi vs. CIT, 183 ITR 207, that no hypothetical income can be assessed, which cannot be realized. The Hon'ble Guahati High Court has also held in the case of B & A Plantations and Industries Limited vs. CIT, 242 ITR 22, that if the assessee had not bargained for interest or had not collected interest it was not open to income tax authorities to fix a notional interest and assessed it. In view of the above, we agree with the ld. CIT(A) that there is no question of diversion of borrowings and/ or diversion of profits by the assessee. Hence, neither there was an accrual of income, which could be added on a notional basis to....
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..... Objective of Assessee is to receive, deposit and advance loans to its members. A.O. did not find that advancement of loan was not to the members of Assessee Company, but what it has observed, that a corporate body could not have been member of Assessee Company ignoring the fact that this prohibition came into force in 1995, hence was not applicable in A.Y. 1993-94. 22. If this finding of A.O. is excluded, then what facts remained as recorded by A.O. are that loans were advanced to the members of Assessee Company. No evidence also has come on record before A.O. that the rate of interest claimed by Assessee in respect of advance of loans to members was incorrect or there existed any otherwise agreement which was not disclosed. Entire observations of A.O. are based on assumptions and presumptions. 23. Higher rates of commission paid to agents was not without any fruits inasmuch as in para 4, A.O. himself has observed that paid up share capital of Assessee Company during the year in question remained at Rs. 3,00,000/-, like last year, but deposits have gone up substantially. That was the objective of paying commission to agents so that larger deposits may be collected and it was ac....
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....9.01.2017 and in paras 5 and 6, both judgments have been distinguished by referring to relevant distinguishing features in the aforesaid judgments as under: 5. So far as Question-2 is concerned, we find that both the decisions are not applicable to the case in hand and do not help Revenue in respect to its claim with regard to the amount involved in Question-1. The judgment in CIT Vs. Saraya Sugar Mill Pvt. Ltd. (supra) was decided on its own peculiar facts as is evident from following: "The Income-tax Officer was of the opinion that the interest relatable to the amount lent to the directors and to the said firm cannot be granted deduction, because it cannot be said that money to that extent was borrowed for the purpose of the said company. We find from the statement of the facts and the order of the Tribunal that the amounts advanced to the directors and their firm, free of interest, are quite substantial and that it was a continuing course of conduct and not and isolated transaction. In such circumstances, the principle of the said decision clearly applies." 6. Similarly, in CIT Vs. H.R. Sugar Factory P. Ltd. (supra) also the matter was decided on the facts of that case as is ....
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....ct, 1961 is applicable in respect of interest of loan raised for business purpose. Section 36 is a residual Section in respect of certain deductions which are to be made from income of Assessee while arriving at taxable income and that is why it is nomenclatured as "other deductions". Any amount on account of interest paid becomes an admissible deduction under Section 36, if interest was paid on capital borrowed by Assessee and this borrowing was for the purpose of business or profession. This is very clear from Section 36(1)(iii) of Act, 1961. 29. In the present case, deposits were received from members and loans and advances were given on interest to members which is the business of Assessee Company. Thus all transactions were for the purpose of business. In such a scenario, when interest was actually paid by Assessee or accrued, who followed mercantile system of accounting, on application of this statutory provision, on incurring of such interest, Assessee would be entitled to deduction of full amount in assessment year in which it is paid. 30. We have found, genuineness of business borrowing and further the fact that borrowing was for the purpose of business, has not been fou....
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....erest on advances was disallowed and department's appeal was allowed. Assessee in the said case was a different personality and person for the purpose of Act, 1961. Sahu Theater was being run by Sri S.N. Sahu in his proprietorship. During his life time there was heavy losses as Sri S.N. Sahu made heavy withdrawals from his business. On his death, debit balance in his capital amount was distributed amongst his legal heirs. The business was taken over by partnership firm, namely, "M/s. Sahu Enterprises". Debit balances were reflected in the name of legal heirs and family members in balance-sheet. In 1991-92, business was taken over by M/s Sahu Enterprises Pvt. Ltd. with all assets and liabilities. Therein interest-free advances were given to Directors and relatives who used said amount for personal purposes. Some constructed houses, which were never used for the purpose of Company. Further, Company borrowed from market, funds at the rate of 20% interest. Moreover, Directors and relatives made no attempt to repay loan to Assessee Company and still loan was never treated/shown as bad debt. This Court held that interest-free loan not advanced for the purpose of business will not jus....
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....ce, hence it is duty of Court to expose and refrain Assessee from taking advantage of colourable device, it has planned. It is a Constitution Bench judgement. Majority judgment was delivered by Hon'ble Ranganath Misra, J. on behalf of Himself and Hon'ble Y.V. Chandrachud, C.J., Hon'ble D.A. Desai, J. and Hon'ble E.S. Venkataramiah, J, while a concurring but separate judgment was delivered by Hon'ble Chinnappa Reddy, J. Real dispute was, whether excise duty paid on liquor, sold by Company to wholesellars would be part of return for the purpose of assessment of sales tax. This question earlier came up before Court in Mcdowell and Co. Ltd. Vs. CTO, 1977(1) SCR 914. It was held that sales tax authorities were not competent to include any turn over of Assessee for excise duty which was not charged by it but paid directly to Excise authorities by buyers of liquor. Issue was decided in favour of Company. Thereafter rules were amended. Doubting correctness of earlier judgment, matter was referred to Larger Bench. In view of subsequent amendment in rules and considering the concept of excise duty, Court said: "...payment of excise duty is a legal liability of the manufa....
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.... to take stock to determine nature of new and sophisticated legal devices to avoid tax and consider whether situation created by devices could be related to the existing legislation with aid of 'emerging' techniques of interpretation, to expose the devices for what they really are and to refuse to give judicial benediction. 37. Aforesaid authority, in our view, has no application in the case in hand considering the facts as already discussed above and findings of fact recorded concurrently by CIT(A) as well as Tribunal which nowhere shows a case of an attempt to evade tax or to discover a device for the said purpose. 38. Learned counsel for Revenue then heavily pressed on the point that here is a fit case where doctrine of "lifting of veil" must be applied and for that purpose, referred to the authorities noted above. 39. Though, as we have already discussed, neither aforesaid doctrine is applicable in the case nor there is any fraudulent activity or creation of artificial bodies for evasion of tax etc. so as to justify application of doctrine of "lifting of veil" but even otherwise, we find that aforesaid doctrine is not at all attracted in the case in hand particularly....
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....ted to the form of company having transferable shares. The Bubble Act, 1720 thus was repealed in 1825. At that time, following three types of companies were known: (1) Companies incorporated by Royal Charter, (2) Companies incorporated by Special Act of Parliament; and (3) Deed of Settlement Companies. 42. British Parliament passed "Joint Stock Companies Act, 1844" which prohibited large unincorporated companies and admitted creation of Joint Stock Companies by registration. This Act, however, did not provide immunity to the members of incorporated company from direct liability and on the contrary expressly imposed on the members, liability for the debts of company, akin to the partnerships. 43. For the first time by virtue of Limited Liability Act, 1855, the company was allowed to secure limited liability of its members to the nominal amount of shares held by them but it depended on certain conditions, and, some of those were (1) the company should have atleast 25 members holding at least 3/4 of the nominal capital, each member having paid upto atleast 20% (2) the word 'limited' should be the last component of the company's name; (3) the auditor of company should be ....
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....ual succession and a common seal capable of borrowing, suing and being sued and holding property in its own name i.e. has its own legal personality; while in an unincorporated association, the individual members alone have right and duties; and the association has no legal entity. 49. For the purpose of the present case, however, we are concerned with a company incorporated under the Act with limited liability. In respect to such companies, the memorandum is required to be submitted at the time of incorporation. It shall specifically state that the liability of its members is limited by shares or guarantee, as the case may be. The persons who subscribe the memorandum of the company are "members" of the company and their names are required to be registered in the register of members. 50. The subscribers, therefore, are deemed to be the first "members" of company. The word 'shareholder' is synonymous to the term 'member' since there can be no membership except through the medium of shareholding. (see Hawrah Trading Co. Ltd. Vs. C.I.T., AIR 1959 SC 775; Balkrishan Gupta and others Vs. Swadeshi Polytex Ltd. and another, AIR 1985 SC 520). The position of shareholder in....
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....ctors and other Officers of the company is provided in the various provisions of the Act and it is not necessary for us to go in further details of those provisions for the purpose of present case. 56. From the above discussion the position as culled out is that the word "Company" imports an association of number of individuals formed for a common purpose. When such an association is incorporated, it becomes a body corporate, a legal entity, separate and distinct from such individuals. Such incorporation must owe its existence to a statutory authority. The corporation/Company, in law, is equal to a natural person and has a separate legal entity of its own. Once incorporated, the entity of Corporation is entirely separate from that of the its share holders. It bears its own name; has a seal of its own; its assets are separate and distinct from those of its members; it can sue and be sued exclusively for its own purpose; liability of members or share holders is limited to the capital invested by them; creditors of Company cannot obtain satisfaction from the assets of share holders/members of company and similarly creditors of members/share holders have no right to the assets of Comp....
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....r by government, it would not constitute as taking over of management of the company. 59. The juristic personality of company is recognised for approaching Courts under the Constitution of India also for protection of fundamental rights which are guaranteed to 'persons'. However, they may not seek protection in respect to fundamental rights which are guaranteed to a 'citizen' for the reason that the company is a person but not a citizen (State State Trading Corporation of India Ltd. Vs. The Commercial Tax Officer and others, AIR 1963 SC 1811). Whenever, there is an infringement of fundamental right under Article 19 which are guaranteed to a 'citizen', causing a grievance to a shareholder of the company, it was held in Bennett Coleman and Co. Ltd. and others Vs. Union of India and others, AIR 1973 SC 106 that a shareholder may approach Court for protection of such right, though company itself cannot claim protection of such right. 60. It also leads to the conclusion that a company incorporated under the Act is not created by the Act but comes into existence in accordance with the provisions of the Act. Thus it is not a statutory body nor is created by the s....
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....he corporate veil" to find out who is the real person, beneficiary or in controlling position of the Company. The doctrine of "lifting the veil" has marked a change in the attitude, the law had originally adopted, towards the concept of separate entity or personality of the corporation, but the same has not been applied in general or routine manner. It has been adopted exceptionally whenever and wherever situation has warranted. The circumstances in which said doctrine has been invoked, vary from case to case. 65. Lord Denning M.R. in Littlewoods Stores Vs. I.R.C., (1969) 1 W.L.R. 1241 said: "The doctrine laid down in Salomon's case has to be watched very carefully. It has often been supposed to cast a veil over the personality of a limited company through which the courts cannot see. But that is not true. The courts can, and often do, draw aside the veil. They can, and often do, pull off the mask. They look to see what really lies behind. The legislature has shown the way with group accounts and the rest. And the courts should follow suit...." 66. One of the most important circumstance in which veil has been lifted is the case of fraud or improper conduct of Promoters. Wher....
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....se evident from the entire action was to reduce amount to be paid by way of bonus to workmen. In the circumstances, Court lifted veil and held principal company responsible for payment of bonus on the entire amount without making any distinction between new company and principal company. It upheld application of lifting of veil to prevent device to avoid welfare legislation and said that it may be lifted where a statute itself contemplates lifting the veil, or fraud or improper conduct is intended to be prevented, or a taxing statute or a beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be, in reality, part of one concern. Court said that the list cannot be given exhaustively but lifting of veil must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of the public interest, the effect on parties who may be affected etc. 72. In L.I.C. of India Vs. Escorts Ltd. and others, AIR 1986 SC 1370, it was held: "Generally and broadly speaking, it may be said that the corporate veil may be lifted where a statute itself contemplates lif....
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..... Court in the aforesaid facts and noticing that the device was sought to be relied to avoid liability of electricity duty, ignored distinct juristic personality of the companies, lift the veil of subsidiary and held that both companies are one and the same for the purpose of liability of electricity duty. Court further held that in modern company jurisprudence, the veil on corporate personality even though not lifted, sometimes is becoming more and more transparent. It was thus held that consumption of electricity by Hindalco was taxable under Section 3(1)(c) of U.P. Electricity Duty Act, 1952. The Court said: "It is high time to reiterate that in the expanding of horizon of modern jurisprudence, lifting of corporate veil is permissible. Its frontiers are unlimited. It must, however, depend primarily on the realities of the situation. The aim of the legislation is to do justice to all the parties. The veil on corporate personality even though not lifted sometimes, is becoming more and more transparent in modern company jurisprudence. The concept of lifting the corporate veil is a changing concept and is of expanding horizons." (Para 66) (emphasis added) 76. In New Horizons Ltd. ....
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....w the real state of affairs behind the facade of the principle of the corporate personality, the Court would pierce the veil of incorporation. In the said case some immovable property was alleged to be sold in favour of the wives of the Directors of the Company which is alleged to be collusive and, therefore, Court applied doctrine of piercing the veil to ascertain true nature of the transaction, as to who were the real parties to the sale and whether it was a genuine or bona fide transaction or not. 80. In Kapila Hingorani Vs. State of Bihar, JT 2003 (4) SC 1, Court said that a corporate veil can be pierced when corporate personality is found to oppose justice, convenience and interest of revenue or workman or is against public interest. Therein Court considered liability of State Government for payment of dues of employees of Government Companies in which it has 100% share holding but due to financial scarcity salary, wages and other dues of the employees could not have been paid. It was held that State Government being sole share holder is responsible for protection of life and liberty of employees of those companies which include their unpaid wages. Observing that liability ca....
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....e recovery of road tax, this court recorded a finding of fact that Sri Vishnu Bhagwan Agrawal is really controlling both namely, the petitioner as well as M/s Nav Instalments, invoked doctrine of piercing the veil. 84. In Naresh Chander Gupta (Supra) the dues of trade tax were sought to be recovered from M/s Shiv Sewa Samiti, a society registered under Societies Registration Act of which petitioner, Naresh Chander Gupta was the secretary. Though recovery certificate was issued against society but it was alleged by petitioner that the Revenue Recovering Authorities were proceeding against assets of petitioner himself. On the pleadings, Court found that petitioner has neither shown whether there are other office bearers of society or not and as to who actually is running and controlling the society. Further Court recorded a finding that petitioner was really managing the entire society and had control over its operations and has created society for evading tax or for other extraneous reasons as is evident from the following: "18. On the facts of the present case we are of the opinion that the petitioner was really managing the entire society and had control over its operations. He ....
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....etionary remedy. Thus the aforesaid judgment also does not lay down any legal proposition that whenever dues are to be recovered from a company, the Directors would be personally responsible. 88. In Reflex Industries (Supra) one Smt. Poonam Suri purchased an industrial plot from its owner M/s Wazid Sons Exports Ltd., New Delhi vide sale deed dated 23.06.1987. The said premises was in tenancy of M/s Krisons Electronics System Pvt. Ltd. Sri R.K. Suri, Managing Director of M/s Krisons Electronics System Pvt. Ltd. was the husband of Smt. Poonam Suri. On purchase of land by Smt. Poonam Suri, it is said that M/s Krisons Electronics System Pvt. Ltd. company became tenant of Smt. Poonam Suri. A fresh lease deed was executed between M/s Krisons Electronics System Pvt. Ltd. and Smt. Poonam Suri on 17.07.1987. However, the possession of the said property was handed over by M/s Krisons Electronics System Pvt. Ltd. to Smt. Poonam Suri on 10th April/July 1997. Smt. Poonam Suri executed a transfer cum sale deed of the plot in question in favour of M/s Reflex Industries, a proprietorship firm on 31.03.1998. For recovery of tax dues to the tune of Rs. 2,35,90,606/- the authorities sealed the premi....
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....gs can be initiated against their personal assets. 89. In Sanjay Kumar Gupta (Supra) also this Court in para 8 of the judgement proceeded by observing: "In our view, even if that is so it is not fit case for interference under Article 226 of the Constitution." 90. Therefore, in the facts of that case the Court declined to interfere under Article 226 of the Constitution as is also evident from para 19 of the judgment. In para 16 and 17 of judgment Court observed that the doctrine of piercing the veil of corporate personality must be adopted by our Courts in the matter of electricity dues as this has assumed mammoth dimensions of hundreds or thousands of crores of rupees which unscrupulous businessmen are not paying under cover of the doctrine of corporate personality and the Court should not give shelter to the businessmen under the doctrine of corporate personality. We have no doubt, at all, in application of doctrine of piercing the veil even in respect of electricity dues whenever the circumstances and the facts so warrant. However, the said observations cannot be treated to be an exposition of law that whenever electricity dues are to be recovered from a company, the same can....
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....n an overriding effect over the various provisions of the Act and makes Director of a Private Company responsible for payment of tax dues outstanding, of the period, he was Director, provided he proves that non recovery is not attributed to any gross neglect, misfeasance or breach of duty on his part. The said provision, therefore, while making Director of the private company responsible for payment of tax dues jointly and severally, makes an exception that in case he proves that the assets of the company are not sufficient to meet tax dues and have reduced for reasons not attributable to him on account of any gross neglect, misfeasance or breach of duty, then such person would not be responsible. The legislature thus has also recognised even in the said statute the principle that the doctrine of lifting of veil in the matter of tax dues is to be applied to prevent fraud etc. and not where the company has suffered despite its normal bona fide function. The persons responsible for its management are not to be made responsible for normal depreciation of capital or assets merely because the dues are of Tax. Further even the said provision is applicable only to private companies and no....
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....t judicial approach in cracking upon the corporate shell is somewhat cautious and circumspect. It is only when the statute justifies adoption of such a course or in exceptional cases, where Courts have felt themselves satisfied to ignore the corporate entity and to treat the individual shareholder(s) liable for its acts, such a course has been adopted. Broadly, where fraud is intended to be prevented, or trading with enemy is sought to be defeated, the veil of corporation is lifted by judicial decision and the shareholders are held to be "persons who actually work for corporation". 98. In brief, we can categorize cases in which corporate personality of the incorporate body can be ignored and it would be better to refer the renowned author Palmer's Company Law 23rd Edition where he has categorised the cases, in which the principle of separate entity of the Company has been discarded by adopting the doctrine of lifting the veil, in 15 categories and some of which are as under: "(1) where companies are in relationship of holding and subsidiary (or sub-subsidiary) companies; (2) where a shareholder has lost the privilege of limited liability and has become directly liable to cert....
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.... of Veil": 101. Whether in respect to tax dues or other public revenue or in other cases, if one has to discard the corporate personality, then the initial burden would lie upon it to place on record relevant material and facts to justify invocation of doctrine of lifting of veil and to plead that the corporate shell be not made a ground of defence. A personality conferred by the statute cannot be overlooked or ignored lightly and in a routine manner or on a mere asking. In fact whenever the veil is to be pierced, it would mean that somebody, individual or group of individuals, have obtained the shell of corporate personality as a pretext or mask to cover up a transaction or intention of those individual/individuals is neither legal nor otherwise in public interest. In effect the attempt of those individuals have to be shown akin to fraud or misrepresentation. The legal personality of the corporate body thus can be ignored in such cases since it is well settled that fraud vitiates everything and, therefore, the benefit of legal personality obtained by someone for purposes other than those which are lawful or even if lawful but not otherwise permissible, the corporate personality b....