CIT V. MEENAKSHI MILLS LTD. & ORS, AIR1967 SCR (1) 934  

FACTS OF THE CASE

Each of the assessed enterprises maintained a branch in Pudukottai, an ex-native State, and conducted business in Madurai. They own the majority of a bank with its headquarters in Madurai and a branch in Pudukottai. The main character in the assesses-companies was T, a shareholder of the Bank. On the power of fixed deposits, the assesses’ branches had placed with the Bank’s Pudukottai branch the assesses borrowed money from the Bank’s Madurai headquarters.  

The loans were much more than Pudukottai’s available profits. The Appellate Assistant Commissioner agreed with the income-tax Officer’s conclusion that the borrowings in British India secured by the fixed deposits made at Pudukottai amounted to a constructive remittance of the profits by the assesses-companies’ branches to their Head Office in India within the meaning of section-4 of the Income-tax Act. The assesses appealed to the Tribunal, which noted that the branch of the Bank’s assessee only comprised one unit and that the establishment of the branch there was meant to aid T’s financial operation with regard to the matters in which he was interested. And the Pudukottai branch of the Bank had transferred funds that the assesses had deposited in order for the Madurai branch to extend loans to assesses at interest, and the transmission of the funds was done with the assessees’knowledge. The assesses were properly assessed, according to the Tribunal. According to High Court’s decision in the case, there was no evidence of an agreement between the assesses and the Bank, either in Pudukottai or Madurai, for transfer of funds from the both of the branches, and the facts in the case did not support such a transfer of funds between Pudukottai and Madurai. Nothing indicated that the funds placed in fixed deposits in the branch were intended to or were actually transferred to head office with the intention of lending them to the depositor himself. Instead, the transaction for the purpose of advancing money to the assesses. The court ruled that the commissioner’s appeals must be accepted. The High Court committed a legal error by challenging the appeal Tribunal’s conclusions. The party who requested the reference has the first opportunity to challenge the factual conclusions reached by the appellate Tribunal by filling an application under Section. 66(1), which the High Court must consider in a reference.

The party is not permitted to argue before the High Court that the findings are void for whatever reason if he fails to make an application under Section.66(1) explicitly addressing the issue of the validity of the findings of fact.

ISSUES

1. Is the right to retrench its workers an integral part of the employer’s right to operate his business guaranteed under Art.19(1)(g)of the Constitution ?
2. Is the restriction imposed by Section.25-N on the employer to save by Art.19(6) as reasonable restriction in public interest?   

ARGUMENTS

India Cements Ltd V. Commissioner of Income- tax, Madras,

In the context of the facts as found by the Tribunal, the entire transactions formed part of a basic arrangement or scheme between the creditor and the debtor that the money should be brought into British India after it was taken by the borrower outside the taxable territory. Section 42 requires, in the first place, that money should have been lent at interest outside the taxable territory, in the second place, 

Income, profits or gains should accrue or arise directly or indirectly from such money so lent at interest, and in third place, that the money should be brought into the taxable territories in cash or in kind. If all these conditions are fulfilled, then the section lays down that the interest shall be deemed to be interest accruing or arising within the taxable territories. The provisions in Section.42 (1), which brings within the scope of the charging section interest earned out of money lent outside, but brought into British India, was not ultra vires the Indian Legislature on the ground that it was extra-territorial in operation. The section contemplates the bringing of money into British India with the knowledge of the lender and borrower and this gives rise to a real territorial connection. This knowledge must be an integral part of the transaction.

1. H. Wadia V. Commissioner of Income-tax, Bombay17

I.T.R  63 , approved.

In certain exceptional cases the court is entitled to lift the veil of corporate entity and pay regard to the economic realities behind the legal façade for example, the court has power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation.             

JUDGMENT

Ramaswami, J, gave the court’s judgment. These appeals have been filed with special permission in response  to the High Court of Madras’ decision in Tax Case No. of 108 of 1960, which was rendered on January 8, 1963. The three responders are all public limited firms based in Madurai that are involved in the production and marketing of yam. At Pudukottai, each of the assessee-companies had a branch that produced and sold cotton yarn. The Madurai Bank Limited. branch in Pudukottai, a former home state, received periodic deposits of the sale earnings from the branches in either current accounts or fixed deposits that earned interest for the several assessment years as follows :

Assessment years MeenakshiRajendra Saroj Mills 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 42,36941,393 1950-51 1,27,314 41,957 42,092 Thyagaraja Chettiar served as the founding director of the aforementioned bank when it was established on February 8, 1943, with its head office located in Madurai. Thyagaraja Chettiar, his two sons and the three assessee-companies held 14, 766 of the 15,000 shares of this bank issued, as indicated below: 

Share holding

1.Thyagaraja Chettiar

2.Manickavasagam 250

3.Sundaram 250

4.Meenakshi Mills 5,972

5.Rajendra Mills 3,009

6.Saroja Mills 4,177

The bank’s Madurai branch loaned money to all three of the assessed companies in exchange for fixed deposits their branches had placed with the Pudukottai branch of the bank.it is well known fact that the loans given to the assessee-companies substantially exceeded the profits that were available in Pudukottai. The Income-tax Officer was of the opinion that the borrowings in British India on the security of the fixed deposits made at Pudukottai amounted to constructive remittances of the profits by the branches of the assessee-companies to their Head Offices in India within the meaning of Section of the Income-tax Act,1922 in the assessment proceeding of the assessee-companies for the various years under dispute.

Since the overdrafts used by the assessee-companies in British India greatly outweighed the available profits in their assessment, including the received from their Pudukottai branches. The Appellate Assistant Commissioner of Income-tax received an appeal from the assessee corporations. The Appellate Assistant Commissioner discovered that the deposits made by the assessee-companies and other businesses closely associated with them made up a significant portion of the total deposits received by the Bank after looking at the makeup of the assessee-companies and the Bank as well as the numbers of deposits and overdrafts. He also believed that the Bank’s Pudukottai branch had transferred the funds that had been deposits in order for the Madurai branch to offer interest-bearing loans to the assessee-companies, and that the transfers had been done with the knowledge of the assessee-companies, which were significant shareholders in the Bank. The Appellate Assistant Commissioner also took into account the fact that Section.42(1) of the Act applied in this matter because the Pudukottai branch of the bank had engaged in no other material activities aside from the collection of payments. The assessee-companies appealed the case to the appellate Tribunal, which noted that the head office and the branch, whether they belonged to the assessee-companies or the Bank, only made up one unit.         

REFERENCES

1.https://taxguru.in/income-tax/shree-meenakshi-mills-commissioner-incometax-supreme-court.html

2.https://www.casemine.com/search/in/CIT%2BV%2Bmeenakshi%2Bmills

Written by Simran Shaw an intern under legal vidhiya.

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