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TMI Blog1966 (10) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... limited companies engaged in the manufacture and sale of yarn at Madurai. Each of the assessee-companies had a branch at Pudukottai engaged in the production and sale of cotton yarn. The sale proceeds of the branches were periodically deposited in the branch of the Madurai Bank Ltd. (hereinafter referred to as the Bank ) at Pudukottai, a former native State, either in the current accounts or fixed deposits which earned interest for the various assessment years as follows : Assessment Meenakshi Rajendra Saroja years Mills Mills Mills Rs. Rs. Rs. 1946-47 1,08,902 ... 25,511 1947-48 1,18,791 24,953 30,620 1948-49 1,50,017 33,632 36,890 1949-50 ... 42,369 41,393 1950-51 1,27,314 41,957 42,092 The bank aforesaid was incorporated on February 8, 1943, with Thyagaraja Chettiar as founder director, the head office being at Madurai. Out of 15,000 shares of this bank issued, 14,766 were held by Thyagaraja Chettiar, his two sons and the three assesssee-companies as shown below : Shareholding 1. Thyagaraja Chettiar 1,008 2. Manickavasagam 250 3. Sundaram 250 4. Meenakshi Mills 5,972 5. Rajendra Mills 3,009 6. Saroja Mills 4,177 All the three ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncial operations of Thyagaraja Chettiar in the concerns in which he was interested. After detailed consideration of the deposits and overdrafts and the inter-branch transactions of the bank, the Appellate Tribunal held that section 42(1) of the Act was applicable to the facts of the case and that the assessee-companies must be attributed with the knowledge of the activity of their branches at Pudukottai and of the remittances made by the Pudukottai branch of the bank to Madurai head office, and that the entire transactions formed part of an arrangement or scheme. In the course of its judgment, the Appellate Tribunal observed as follows : Even so, it seems to us, we cannot escape that fact that Thyagaraja Chettiar, his two sons and the three mills had a preponderant, if not the whole, voice in the creation, running and management of the bank. We cannot also forget that Pudukottai is neither a cotton producing area nor has a market for cotton; except that it was a non-taxable territory, there was nothing else to recommend the carrying on of the business in cotton spinning or weaving there. There is yet another aspect to which our attention was drawn by the learned counsel for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not legally justified in interfering with the findings of fact reached by the Appellate Tribunal and in concluding that there was no arrangement or scheme between the lender and the borrower for the transference of funds from Pudukottai to Madurai. In our opinion, there is justification for the argument put forward on behalf of the appellant and the High Court erred in law in interfering with the findings of the Appellate Tribunal in this case. In India Cements Ltd. v. Commissioner of Income-tax it was pointed out by this court that in a reference the High Court must accept the findings of fact reached by the Appellate Tribunal and it is for the party who applied for a reference to challenge those findings of fact first by an application under section 66(1). If the party concerned has failed to file an application under section 66(1) 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. We, therefore, proceed to decide the question of law raised in these appeals upon the findings of fact reached by the Appellate Tribunal. Section 42 of the Act states as follows ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. Having examined the findings of the Appellate Tribunal in the present case, are satisfied that the test prescribed by the Federal Court in Wadia's case is fulfilled and the Appellate Tribunal was right in its conclusion that there was a basic arrangement or scheme between the assessee-companies and the bank that the money should be brought to British India after it was taken by the borrower outside the taxable territory. The Appellate Tribunal has pointed out that the assessee-companies had a preponderant, if not the whole, voice in the creation, running and management of the bank and that Pudukottai was neither a cotton producing area nor had it a market for cotton and, except that it was a non-taxable territory, there was nothing else to recommend the carrying on of the cotton spinning or weaving business there. The Tribunal further remarked that having regard to the special position of Thyagaraja Chettiar and the balance-sheets of the bank and lack of investments in Pudukottai, it was reasonable to conclude that the bank itself was started at Madurai and a branch was opened at Pudukottai only with a view to helping the financial operations of Thyagaraja Chettiar an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk and in each of the assessee-companies had knowledge of this arrangement. 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. It is true that from the juristic point of view the company is a legal personality entirely distinct from its members and the company is capable of enjoying rights and being subjected to duties which are not the same as those enjoyed or borne by its members. But in certain exceptional cases the court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade. For example, the court has power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation. For instance, in Apthorpe v. Peter Schoenhofen Brewing Co. the Income-tax Commissioners had found as a fact that all the property of the New York company, except its land, had been transferred to an English company, and that the New York company had only been kept in being to hold the land, since aliens were not allowed to do so under New York law. All but three of the New York company ..... X X X X Extracts X X X X X X X X Extracts X X X X
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