2002 (9) TMI 39

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....eceipt assessable as income of the applicants. The assessees were partners in the firm, viz., K. Damodaraswamy Naidu and Brothers, which firm was carrying on business of running a chain of hotels under the name Annapoorna and Gowrishankar in the city of Coimbatore. On July 5, 1984, the brothers formed a new company, viz., Sri Annapoorna Gowrishankar Hotels P. Limited. The business of the hotel was leased to the newly formed company on July 16, 1984, for a yearly rent exceeding Rs. 40 lakhs. On the same day, the company also entered into an agreement with the four brothers and it was styled as a deed of compensation under which the company agreed to pay a further sum of Rs. 20 lakhs payable in five equal instalments to the four brothers a....

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....s were. Counsel submitted that the company had entered into that agreement with a view to protect itself from possible future competition from one or more of the brothers who had run these hotels earlier as partners of the firm, and that the payment so made was a payment warranted by genuine business considerations. The assessees in these cases are partners in the firm which owned the buildings, equipment and also ran the hotels Annapoorna and Gowrishankar. Those same brothers floated a new company in which all of them were shareholders and all of whom together controlled the company and all of whom as directors also managed the company. Consequent to the lease entered into between the firm and the company, the company became entitled to....

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..... The true character of the payment made by it to these brothers who are shareholders and directors and who as partners of the firm own the buildings and the equipment used by the company for running the hotel, has to be judged by looking at the reality after removing or piercing the veil of the company, as the circumstances of the case justify such an exercise. The purpose of the deed of compensation in reality was only to screen the payment made under that deed from liability to income-tax in the hands of the assessee. The Supreme Court in the case of Juggilal Kamlapat v. CIT [1969] 73 ITR 702 held that in cases where the same persons entered into transactions though by introducing a corporate personality into some of those transaction....