2002 (9) TMI 39 - HC - Income Tax

Revenue or capital expenditure - payment made by the company to brothers - The finding that the payment made by the company to these brothers is in the nature of revenue receipt in the hands of the brothers, would not negate the separate juristic existence of the company. The company continues to remain a legal entity with a right to hold property, to contract, etc. 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.

Summary

Issues:
1. Whether the compensation received by the assesses constitutes a revenue receipt assessable as income.
2. Whether the payment made to the brothers under the deed of compensation is a capital or revenue receipt.
3. Whether piercing the veil of the company to ascertain the true character of the payment is permissible.
4. Whether the company's legal entity should be disregarded to judge the true character of the payment.

Analysis:

1. The assesses received compensation from a company they owned and controlled, which continued the same business they previously operated as partners. The Assessing Officer, Commissioner, and Tribunal considered the payment as additional payment to the brothers, assessable as income. The Tribunal found the company and transactions genuine, but still assessed the payment as income.

2. The brothers argued that the payment was a capital receipt, emphasizing the genuine nature of the company, lease, and compensation agreement. They contended that the company aimed to protect itself from potential competition. However, the Tribunal disregarded these arguments and assessed the payment as a revenue receipt.

3. The Tribunal justified piercing the company's veil to determine the payment's true character, considering the brothers' continued involvement in the business despite the company formation. The Tribunal's decision aligned with the principle that the veil of a company can be lifted in taxation matters if warranted by the circumstances.

4. The High Court, following the Supreme Court precedent in Juggilal Kamlapat v. CIT, upheld the Revenue's position, emphasizing that in cases where the same individuals conduct transactions through a corporate entity, the veil can be lifted to discern the economic reality behind the legal structure. The Court concluded in favor of the Revenue, emphasizing the need to look beyond the company's legal existence to assess the true nature of the payment made to the brothers.