HIGH COURT OF MADRAS
Commissioner of Income-tax, Chennai
Tax Case (Appeal) Nos. 48 to 71 of 2007
FEBRUARY 1, 2013
S. Vimala, J.
These 24 Tax Case Appeals have been filed by the Revenue, aggrieved over the orders passed by the Income Tax Appellate Tribunal, covering the assessment years 1996-1997, 1997-1998, 1998-1999, 1999-2000, 2000-2001 and 2001-2002, assessment having been made against each of the Directors, namely, C.S. Narasimhan, C.S. Srivatsan, C.S. Seshadri and C.S. Varadhan, (who are brothers), raising the following common substantial questions of law:-
“(i) Whether on the facts and circumstances of the case, the Tribunal was right in holding that the amounts paid by the company towards personal expenses of the assessee cannot be taxed in its hands under Section 2 (24)(iv) as the amount was routed through the franchisee, which was the HUF of the assessee?
(ii) Whether on the facts and circumstances of the case, the Tribunal was right in remanding the matter back to the assessing officer on the issue of receipt of commission, when the entity which is supposed to have received the commission was formed only after the survey was conducted?”
1.1. The details of each of the appeals filed are as follows:-
Tax Case Appeal No.
ITA order No.
Commissioner of Income Tax, Chennai
Commissioner of Income Tax, Chennai
Commissioner of Income Tax, Chennai
Commissioner of Income Tax, Chennai
2. The assessees in each of the batch of six cases are, C.S. Narasimhan, C.S. Srivatsan, C.S. Seshadri and C.S. Varadhan, who are the Directors of the Company, named, ‘M/s. C.R.S. Sons & Co., Limited’. The company is engaged in the business of retail-selling of silk sarees and other textiles. The said company makes all purchases from M/s. Sri Sundaravalli Collections (SSVC), which is an entity of Hindu Undivided Family (HUF) of two of the Directors of the company. M/s. Sri Sundaravalli Collections pays guarantee commission to CRS holdings, an entity in which all the four brothers are partners, representing their minor HUFs.
2.1 The company ‘M/s. C.R.S. Sons & Co., Limited’ effects its sale through franchisees, which was owned by different HUFs. These are,
|(i) Srinivas Silk House,||– C.S. Srivathsan (Minor HUF)|
|(ii) Srinivas Silks & Sarees||– C.S. Seshadri (Minor HUF)|
|(iii) Srinivas Silks||– C.S. Narasimhan (Minor HUF)|
|(iv) Hayagrivas Silk House||– C.S. Varadan & C.N. Rangan (HUF)|
|(v) Hayagrivas Silks||– C.S. Varadan (Kartha), &-C.V. Srinivas Vinayak (Co-parcener)|
|(vi) Balaji Silks||– C.S. Narasimhan (Co-parcener)|
2.2. These franchisees are paid franchisee commissions for the sales effected by them.
2.3 A survey was conducted in ‘M/s. C.R.S. Sons & Co., Limited’ under Section 133A of the Income Tax Act, 1961, (hereinafter will be referred to as “the Act”). During survey, the assessees admitted that commissions were received by the Directors from M/s. Sri Sundaravalli Collections (SSVC), which is the purchasing arm of the company.
2.4 Notices under Section 148 of the Act were issued in respect of the assessment years 1996-1997 to 2001-2002. The assessees filed ‘nil’ returns. The Assessing Officer treated the personal expenses of the assessees and their family members (Franchisee commission paid to different HUF) paid by the company as the income of the Directors, by invoking the provisions of Section 2(24)(iv) of the Act. The Commissions received from SSVC were also brought to tax in their hands for the assessment years 2000-2001 and 2001-2002.
2.5 Aggrieved over the assessments, the assessees filed appeals before the Commissioner of Income Tax (Appeals). The CIT (A) held that since the company had not claimed the amounts paid for personal expenses of the assessees, the same cannot be treated as income in the hands of its Directors. So far as commission from SSVC is concerned, it was held that although the assessees admitted the same by way of a letter, yet later on it was retracted, the commissions could not be assessed in the hands of the Directors (as there was no other evidence excepting the retracted letter).
2.6 The Revenue took up the matters in appeals to the Income Tax Appellate Tribunal. The Tribunal held that the personal expenses met out of the company’s money cannot be treated as income in the hands of the assessees under Section 2(24)(iv) of the Act, as the money had not been paid directly to them, but to the franchisees, which their HUF owned.
2.7 So far as the receipt of commissions from SSVC is concerned, the Tribunal ordered remand of the matters to the Assessing Officer as there was no clarity in the payment/mode of payment of commissions. When the assessees claimed that the commissions were paid to CRS Holdings, the CIT (A) gave a finding that no commissions were paid. Because of this disparity in the factual aspect in the payment of commissions, the Tribunal ordered remand of the matters.
2.8 Aggrieved over the orders passed by the Income Tax Appellate Tribunal, the Revenue has preferred these Tax Case Appeals.
3. The main contention of the learned counsel for the Revenue/appellant is that when the factum of each of the Directors, having received benefit towards the personal expenses, is not disputed, it is irrelevant and immaterial that the company has not claimed the amount as an expenditure in the profit and loss account of the company. When the payment of expenses is admitted, through whom it is paid is also irrelevant, i.e., whether such expenses were directly paid by the company or through franchisee (amount debited to the account of the franchisee).
3.1 The second contention of the learned counsel for the Revenue/appellant is that the Income Tax Appellate Tribunal, instead of looking into the contents of the transaction, has chosen to look into the form of the transaction and the Tribunal ought to have found that the company has simply used the medium of HUF of the Directors in whose name the franchisee stood, to make payment towards their personal expenses and therefore, the Tribunal ought to have upheld the orders of the Assessing Officer.
3.2 In support of the contention, the learned counsel for the Revenue relied upon the following decisions, which are distinguishable on facts:-
(I). K. Ramasamy v. CIT  261 ITR 358
“Income Capital or Revenue Receipt Firm composed of Four Brothers Company Formed with Four Brothers as Shareholders Company Taking Business of Firm on Lease Compensation paid to brothers for not engaging in similar Business Corporate Veil can be Pierced Amount Assessable as Revenue Receipt Income Tax Act, 1961.
Income Tax General Principles Company Corporate Veil can be pierced in Exceptional circumstances.
In cases where the same persons enter into transactions though by introducing a corporate personality into some of those transactions, the income tax authorities are entitled to pierce the veil of the corporate personality and look at the reality of the transaction.
(II) CIT v. S.S.M. Lingappan  129 ITR 597 (Mad.) (And Other cases):-
“Held, (i) that even if a benefit had been conferred on the director unilaterally without the aid of any agreement between the parties, the benefit could be taxed as a perquisite under s. 17 (iii) and (iv);
(ii) that in view of the difference in approach between the disallowance in the hands of the company and the assessment in the hands of the recipient of the benefit, it would be necessary for the Tribunal to look at the question whether there was any benefit obtained by the assessee from the proper standpoint and to consider the matter afresh in the light of the decision in CIT v. P.R. Ramakrishnan  124 ITR 545 (Mad.).
(III) Ravi Prakash Khemka v. CIT 295 ITR 33 (Mad.) :-
“Income Company Perquisite to Director Personal Expenses on Credit card of Director Payment by Company LIC Premium paid by Company Assessable as income of Director Income Tax Act, 1961, s. 2 (24) (iv).
On the question of addition by invoking section 2 (24) (iv) of the Act, learned counsel for the assessees could not deny the fact that the companies are all group concerns. Natural Energy Processing Company was a defunct firm. There are no materials to show that there was any kind of business activity carried on by the said firm and that the purpose of payments are to meet the expenses of these directors. Consequently, the payment through this firm is an attempt to circumvent the provisions of the Act. What could not be done directly was sought to be achieved by indirect means. We have gone through the kind of expenses incurred which clearly show that these expenses had anything to do with any of the business activities, that the paying company was a defunct company, no materials were furnished as regards the activities of the firm which necessitated this payment. Considering the nature of the personal expenses of the appellants, we have no hesitation in confirming the order of the Tribunal. The last question goes on the same footing as regards the other personal expenses.”
(IV) CIT v. Indian Express Newspapers (Madurai) (P.) Ltd.  238 ITR 70
“Income Tax General Principles Company Corporate Veil can be Lifted to Determine True Nature of a Transaction.
The fact that the money was not paid directly, but was shown as having been invested in the subsidiary company is not decisive of the true character of the transaction. The mere fact that Ace Investments Ltd., is a distinct legal entity does not by itself establish that the purported investment was a genuine investment, which the company had made for securing benefits to itself by way of trading or carrying on business through that subsidiary. We are concerned with the sum of Rs. 10 lakhs, interest on which had been disallowed by the Income-tax Officer. That sum of Rs. 10 lakhs, as noticed earlier was paid to the Bombay company on the same day on which it was paid to Ace Investments Ltd. Though Ace Investments is purported to charge interest in the first year, subsequently, no interest at all was charged to the Bombay company on that sum. It is not the assessee’s case, that money was returned to Ace Investments subsequently with interest or that the assessee received dividends from out of the investments made by it in Ace Investments Ltd.
It is well settled that the corporate veil of a company can be lifted for the purpose of ascertaining the real character of a transaction, if that transaction was a fraudulent one or was intended to evade payment of tax. While legitimate tax avoidance is always permissible, devices adopted to evade payment of tax, however, are not permissible though the dividing line is not always easy to draw, such a line does exist. The true character of the transaction here clearly was one of an advance of Rs.10 lakhs by the assessee to the Bombay company for whose benefit that sum was obviously intended and had only been channelled through Ace Investments Private Limited. The Tribunal has failed to notice the facts which had been set out in the draft assessment order in annexure B, and has also erred in adopting the wrong approach for the purpose of deciding as to whether the amount disallowed was a sum which could properly fall within the ambit of section 36 (1)(iii) of the Act. The amount disallowed was the amount paid on amounts borrowed, but not used for the purpose of business or profession of the assessee. Rupees 10 lakhs invested in Ace Investments Limited being in substance and reality an amount advanced to the Bombay company for financing the construction undertaken by it at Bombay, cannot be said to be an amount which formed part of the capital borrowed for the purpose of the assessees business.”
(V) CIT v. Tara Singh  233 ITR 669 (Delhi)
“Income Perquisite Assessee, Director in Company Certain Debit balance in Books of Company Against Assessee ITO adding value of benefit as income of assessee finding by Tribunal that value of benefit was not income within the meaning of Section 2 (24)(iv) is not correct in view of decision in Lingappans case No contrary view taken by other High Courts Addition of value of benefit as income of assessee justified Income Tax Act, 1961, s. 2(24) (iv).
For the assessment years 1974-74 and 1974-75, the Income tax Officer noticed certain debit balances in the accounts of the company G, against the assessee and formed an opinion that the assessee, who was one of the directors of the company, had derived benefit from the company assessable to tax within the meaning of section 2(24)(iv) of the Income tax Act, 1961, and, accordingly, the value of the benefit was added to the income of the assessee. The Appellate Assistant Commissioner, on appeal by the assessee, deleted the addition. The Tribunal held that the value of benefit derived by the assessee from the company was not income within the meaning of section 2(24)(iv) of the Act, On a reference:
Held, that the Tribunal was not correct in holding that no income within the meaning of section 2 (24) (iv) was assessable in the hands of the assessee.”
3.3 So far as the principles enunciated in the above decisions, there cannot be any contra argument. So far as these cases are concerned, the dispute did not centre around the Directors and the company alone. But it centres around institutions covering the company, its franchisees, the purchasing arm of the company (SSVC) and CRS Holdings. Moreover, the directors also play multiple roles in different capacities in different institutions, namely, Director in M/s. CRS Sons & Company Limited, partners in M/s. CRS Holdings, co-parceners in the Hindu Undivided Family in the franchisees, etc., Therefore, what is essential to be considered is, whether the income has been allowed to escape from being taxed or not.
It is the finding of the Assessing Officer that during the course of survey it was brought to light that the Directors of the company had received certain benefits from the company and the value of such benefits is assessable to tax in the hands of Directors, as per Section 2(24)(iv) of the Act.
3.4 During the course of survey under Section 133-A of the Act, it was noted that certain personal expenses, such as, tuition fees of children, travel expenses of wife and children of the Directors were paid by the company. With regard to these payments, the contention of the assessees was that it was claimed by the company only as franchisee commission and that the amount treated by the Assessing Officer, as personal expenses of the Directors, have not been claimed by the company in its profit and loss account. It was pointed out that the amounts paid were debited to the account of respective franchisees. Under those circumstances, it was contended that additions made by the Assessing Officer invoking the provisions of Section 2(24)(iv) of the Act have to be deleted.
3.5 Section 2(24) (iv) of the Act reads as follows:-
“2. Definitions. …
(24). “income” includes –
(iv) the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid;”
3.6 The Income Tax Appellate Tribunal has taken note of the following aspects and has given the specific findings:-
|CRS & Sons Co. Ltd., paid franchise commission to various firms owned by HUF of Directors|
|This has been done on the basis of agreement entered into which were in force.|
|The payment by CRS & Sons Co. Ltd., on the basis of franchise agreement to various persons cannot be treated as payment to Directors who have substantial interest in the company and Section 2 (24) (iv) cannot be invoked.|
|If the receiver of franchise commission has met the personal expenses of the Director, it is not the responsibility of the company for such act of the receiver of franchise commission.|
3.7 The findings rendered by the Income Tax Appellate Tribunal do not warrant any interference, as it is supported by factual matrix and legal reasoning.
3.8 Learned counsel for the assessees contended that the assessment pertaining to franchisees and also that of M/s. CRS Holdings have been reopened under Section 148 of the Act and completed subsequently and there is absolutely no scope left for evasion of tax and therefore, the Tax Appeals have to be dismissed.
3.9 Moreover, the learned counsel for the assessees has produced additional typed set of papers covering,
|expenditure claimed by CRS & Sons Co. Ltd.,;|
|expenses claimed by M/s.Sundaravalli Collections;|
|profit and loss account for the year which ended 31.03.1998, 31.03.1999, 31.03.2000, 31.03.2001 and 31.03.2002 relating to CRS & Sons Company Limited, and its franchisees, apart from Sundaravalli Collections, the purchasing arm of the company and CRS Holdings;|
|the assessment orders for the assessment years 1999-2000, 2000-2001 of Srinivasa Silk House and CRS Holdings;|
|to show that income has not escaped from the tax assessments and this fact is not disputed by the Revenue.|
4. Yet another contention of the Revenue/appellant is that the Tribunal ought not to have remanded the issue relating to receipt of commissions from the purchase wing of the Company (SSVC) and failed to see that CRS Holdings, which is supposed to have received the commissions, was formed only after the survey.
4.1 Learned counsel for the assessees/respondents contended that the Assessing Officer has made addition of income (from undisclosed sources) only on the basis of statement alleged to have been recorded during survey under Section 133A of the Act and that any admission made during such statement cannot be made the basis for such addition. In support of the contention, the following decisions are relied upon:-
(i) CIT v. S. Khader Khan Son  300 ITR 157 (Mad.). In this decision, it has been held as follows:-
“… (iv) the material or information found in the course of survey proceeding could not be a basis for making any addition in the block assessment; and (v) the word “may” used in section 133A(3) (iii) of the Act, viz., “record the statement of any person which may be useful for, or relevant to, any proceeding under this Act” makes it clear that the materials collected and the statement recorded during the survey under Section 133A are not conclusive piece of evidence by itself.”
The very same decision also detail the circular relied upon by the learned counsel for the assessee and it reads thus:-
“What is more relevant, in the instant case, is that the attention of the Commissioner and the Tribunal was rightly invited to the circular of the Central Board of Direct Taxes dated March 10, 2003, with regard to the confession of additional income during the course of search and seizure and survey operations. The said circular dated March 10, 2003, reads as follows:-
Instances have come to the notice of the Board where assessees have claimed that they have been forced to confess the undisclosed income during the course of the search and seizure and survey operations. Such confessions, if not based upon credible evidence, are later retracted by the concerned assessees while filing returns of income. In these circumstances, on confessions during the course of search and seizure and survey operations do not serve any useful purpose. It is, therefore, advised that there should be focus and concentration on collection of evidence of income which leads to information on what has not been disclosed or is not likely to be disclosed before the Income-Tax Department. Similarly, while recording statement during the course of search and seizure and survey operations no attempt should be made to obtain confession as to the undisclosed income. Any action on the contrary shall be viewed adversely.”
(ii) S. Khader Khan Son (supra). In this decision it has been held as follows:-
“Income from undisclosed sources addition addition on the basis of statement recorded during survey under S.133A does not empower any IT authority to examine any person on oath and thus, any such statement has no evidentiary value Therefore, any admission made during such statement cannot, by itself, he made the basis for addition In view of the concurrent findings of fact, appeal is dismissed- CIT v. S. Khader Khan Son  214 CTR (Mad) 589 affirmed.
Section 133A does not empower any IT authority to examine any person on oath and, therefore, any admission made in a statement recorded during survey cannot, by itself, be made the basis for addition.”
4.2 From the legal position, what emerges is that the admission made during the survey proceedings cannot be the basis for making any addition of amount which is liable to be taxed. But there had been subsequent proceedings under Section 147 of the Act.
4.3 A perusal of the records reveals that the assessees have various avathars in various establishments, as pointed out already. The assesses are Directors in the company called ‘M/s. C.R.S. Sons & Co. Ltd.,’. They are the partners, representing the Hindu Undivided Family, so far as ‘CRS Holdings’ are concerned. Two out of the four assesses represent the HUF in ‘M/s. Sri Sundaravalli Collections’, which is the purchasing arm for the M/s. CRS Sons & Co. Ltd., Apart from that, they also represent as franchisees (owned by the HUF, of which they are the co-parceners and karthas).
4.4 Each of the unit has different composition. Each unit has varied number of members. Under such circumstances, the acceptability of the following finding given by the Income Tax Appellate Tribunal has to be considered.
4.5 So far as the commission from SSVC is concerned, the Income Tax Appellate Tribunal, ordered remand of the issue on the ground that the commission by SSVC was not received by the assessees, but by the HUF of the assessees. The reasoning given by the Tribunal was that when the assessees claimed that the commission payments were made to the CRS Holdings, which is an income tax assessee and whereas, the CIT (A) held that commission was paid to HUF of the assessees and to sort out this contradiction, the Tribunal felt it appropriate to remand the matters to the Assessing Officer.
4.6 The learned counsel for the Revenue submitted that the remand is unwarranted, especially when the institution, namely, CRS Holdings, were brought into existence only after survey. But the fact remains that CRS Holdings is also the income tax assessee.
4.7 It is the contention of the Revenue that CRS Holdings did not file any return of income before the survey and the entire things were stage managed after survey.
4.8 Only based on this statement of the Revenue, the Income Tax Appellate Tribunal felt that it is a case to be investigated by the Assessing Officer. It is also relevant to point out that the assessee in all these cases did not file any return in their individual capacity and notices under Section 147 were issued only on the ground that they did not file any return disclosing the perquisites and benefits received by them from the company and that they are guilty of omission to file the returns. The Income Tax Appellate Tribunal has ordered remand only after considering the nature and circumstances of the transaction and in fact, after considering the modus operandi of the entire group. Learned counsel for the respondent has also filed the assessment order for the assessment year 2000-2001, by way of additional typed set of papers. Under such circumstances, the order of remand made by the Income Tax Appellate Tribunal is perfectly justified.
5. The findings given by the Income Tax Appellate Tribunal did not warrant any interference, having regard to legal and factual aspects discussed above.
6. In the result, all the Tax Case Appeals are dismissed, confirming the orders of the Income Tax Appellate Tribunal. No costs.