1966 (10) TMI 45 - SC - Income Tax

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 that - The Income-tax authorities were right in holding that the entire interest earned on fixed deposits was taxable. The question referred to the High Court by the appellate Tribunal must be answered in favour of the Income-tax Department and against the respective assessee-companies and these appeals must be allowed

Summary

Issues Involved:
1. Constructive remittance of profits.
2. Applicability of Section 42(1) of the Indian Income-tax Act, 1922.
3. Interference with findings of fact by the High Court.
4. Lifting the corporate veil for tax evasion.

Issue-wise Detailed Analysis:

1. Constructive Remittance of Profits:
The primary issue was whether the borrowings by the assessee-companies from the Madurai branch of the bank, secured by fixed deposits in the Pudukottai branch, amounted to constructive remittance of profits. The Income-tax Officer included the entire profits, including interest receipts from the Pudukottai branches, in the assessments, arguing that the overdrafts in British India exceeded the profits available at Pudukottai.

2. Applicability of Section 42(1) of the Indian Income-tax Act, 1922:
The Appellate Assistant Commissioner and the Appellate Tribunal upheld the application of Section 42(1), which deems income accruing or arising from money lent at interest and brought into taxable territories as taxable. The Tribunal noted that the head office and branches constituted a single unit and that the establishment of the Pudukottai branch was intended to facilitate financial operations. The Tribunal found an arrangement or scheme for transmitting funds from Pudukottai to Madurai, satisfying the conditions under Section 42(1).

3. Interference with Findings of Fact by the High Court:
The High Court ruled in favor of the assessee-companies, stating that there was no established arrangement for transferring funds from Pudukottai to Madurai. However, the Supreme Court found that the High Court erred in law by interfering with the Tribunal's findings of fact. The Supreme Court emphasized that the High Court must accept the Tribunal's findings unless challenged under Section 66(1).

4. Lifting the Corporate Veil for Tax Evasion:
The Supreme Court supported the Tribunal's view that the transactions were part of a basic arrangement or scheme between the creditor (bank) and debtor (assessee-companies). The Court highlighted that the income-tax authorities are entitled to pierce the corporate veil to look at the reality of the transactions, especially if used for tax evasion. The Court cited cases like Apthorpe v. Peter Schoenhofen Brewing Co. and Firestone Tyre & Rubber Co. v. Lewellin to justify disregarding the corporate entity when used to circumvent tax obligations.

Conclusion:
The Supreme Court concluded that the Appellate Tribunal's findings were correct and that the entire interest earned on fixed deposits was taxable under Section 42(1). The Court rejected the argument that knowledge of the director (Thyagaraja Chettiar) could not be imputed to the assessee-companies. The appeals were allowed, and the question referred to the High Court was answered in favor of the income-tax department.