# India Cements Ltd v. Commissioner of

- **Citation:** [1967] 1 S.C.R. 934
- **Court:** Supreme Court of India
- **Decided:** 1966-10-25
- **Case number:** Civil Appeals Nos. 1084 to 1097 of 1965
- **Bench:** J.C. Shah, V. Ra~Aswami, V. Bhargava
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/india-cements-ltd-v-commissioner-of-3939
- **Pages:** 9

## Headnote

lndW.n Income-tax Act (II of 1922), s. 42-Scope--Finding of fact
by Tribunol-lnterference by High Court,
validity,~orporate entity, if
c:ourt can lift veilThe asscssee-companics .. carried on business in ~fadurai and each had
a branch at Pudukottai, a fofmer native State.
They held majorily (;hare
in a Bank which, too, bad its head office at Madurai and branch at Pudukottai. T, who wa; a shareholder of the Bank, was the moving figure in
the asses.see-companies.
The assessees borrowed moneys from the Madurai head office of the Bank on the security of fixed deposits made by the
asscssees' branches with the Pudukottai branch of th-o Bank.
The loans
were far in excess of the available profits at Pudukottai. The Income-tax
Officer held that the borrowings in British India on the security of the fixed
deposits made at Pudukottai amounted to constructive remittance of the
profits by the bcancbes of the assessee-eompanies to their Head Office in
India within the meaning oi s. 4 of the Income-tax Act, and this view the
Appellate Assi•tant Commissioner upheld.
The assessees appealed to the
Tribunal which took note that the branch whether of the assessec of the
Bank constituted only one unit, and the establishment of the branch of the
Bank at Pudukottai was intended to help the financial operations of T in
the concerns in which he was interested,. and the Pudukottai branch of the
Bank had transmitted funds deposited by the
assessees for enabling tho
Madurai branch to advance loans
at interest to the assessees and the
transmission of the funds was made with the knowledge of assessees. The
Tribunal held that the asses>ees were rightly assessed. In reference
the
High Court answered the question in favour of the assessees holding it
was not established that there was any arrangement between the assessees
and the Bank whether at Pudukottai or at Madurai for transference of
moneys from Pudukottai branch to Madurai and the facts on record did
not establish that there was any transfer of funds between Pudukottai and
Madurai for the purpose of advancini moneys to the assessees, and the
transactions represented ordinary banking transactions and
there was nothing to show that the amounts placed in fixed deposits in the branch were
intended to and were in fact transferred to he~d office for the purpose of
lending them out to the depositor himself. In
appeals by the Commissioner, this Court,
HELD : The appeals must be allowed :
The High Court erred in law in interfering with the findings of the appellate Tribunal. In a reference the High Court must accept the findings
of. fact reached by the appellate Tribunal a_nd it is for the party who applted for a reference to challenge those findings of fact first by an application under s. 66(1). If the party failed to file an application, under s.
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66( I) e~pressly r~ising the question about .the validity of the findings of
fact, he ts not enut!ed to urge before the High Court that the findings are
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vitiated for any reason.
[938 H-939 BJ
India Cements Ltd. v. Commissioner of
Income-tax,
'A1adras,
60,
I.T.R. 52, relied on.
I
A
B
c
c.I.T. v. MEENAKSHI MILLS (Ramaswami, /.)
935
In the context of the facts as found by the Tribunal, the entire transactions formed part of a basic -ar_~ang'ement or scheme. between the creditor
and the debtor that the money should be brought into British India aft~r
it was taken by the borrower outside the taxable territory. [940 B-C]
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 the 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 Jays down that the interest shall be deemed to be
interest accruing or arising within the taxable territories. [939 DJ
The provision in s. 4

## Text

THE COMMISSIONER OF Ii'ICOME-TAX, MADRAS
A
\'.
SRI MEENAKSHI MILLS LTD. & ORS.
October 25, 1966
[J.C. SHAH, V. RA~ASWAMI AND V. BHARGAVA, JJ.)
lndW.n Income-tax Act (II of 1922), s. 42-Scope--Finding of fact
by Tribunol-lnterference by High Court,
validity,~orporate entity, if
c:ourt can lift veilThe asscssee-companics .. carried on business in ~fadurai and each had
a branch at Pudukottai, a fofmer native State.
They held majorily (;hare
in a Bank which, too, bad its head office at Madurai and branch at Pudukottai. T, who wa; a shareholder of the Bank, was the moving figure in
the asses.see-companies.
The assessees borrowed moneys from the Madurai head office of the Bank on the security of fixed deposits made by the
asscssees' branches with the Pudukottai branch of th-o Bank.
The loans
were far in excess of the available profits at Pudukottai. The Income-tax
Officer held that the borrowings in British India on the security of the fixed
deposits made at Pudukottai amounted to constructive remittance of the
profits by the bcancbes of the assessee-eompanies to their Head Office in
India within the meaning oi s. 4 of the Income-tax Act, and this view the
Appellate Assi•tant Commissioner upheld.
The assessees appealed to the
Tribunal which took note that the branch whether of the assessec of the
Bank constituted only one unit, and the establishment of the branch of the
Bank at Pudukottai was intended to help the financial operations of T in
the concerns in which he was interested,. and the Pudukottai branch of the
Bank had transmitted funds deposited by the
assessees for enabling tho
Madurai branch to advance loans
at interest to the assessees and the
transmission of the funds was made with the knowledge of assessees. The
Tribunal held that the asses>ees were rightly assessed. In reference
the
High Court answered the question in favour of the assessees holding it
was not established that there was any arrangement between the assessees
and the Bank whether at Pudukottai or at Madurai for transference of
moneys from Pudukottai branch to Madurai and the facts on record did
not establish that there was any transfer of funds between Pudukottai and
Madurai for the purpose of advancini moneys to the assessees, and the
transactions represented ordinary banking transactions and
there was nothing to show that the amounts placed in fixed deposits in the branch were
intended to and were in fact transferred to he~d office for the purpose of
lending them out to the depositor himself. In
appeals by the Commissioner, this Court,
HELD : The appeals must be allowed :
The High Court erred in law in interfering with the findings of the appellate Tribunal. In a reference the High Court must accept the findings
of. fact reached by the appellate Tribunal a_nd it is for the party who applted for a reference to challenge those findings of fact first by an application under s. 66(1). If the party failed to file an application, under s.
B
c
D
F
G
66( I) e~pressly r~ising the question about .the validity of the findings of
fact, he ts not enut!ed to urge before the High Court that the findings are
H
vitiated for any reason.
[938 H-939 BJ
India Cements Ltd. v. Commissioner of
Income-tax,
'A1adras,
60,
I.T.R. 52, relied on.
I
A
B
c
c.I.T. v. MEENAKSHI MILLS (Ramaswami, /.)
935
In the context of the facts as found by the Tribunal, the entire transactions formed part of a basic -ar_~ang'ement or scheme. between the creditor
and the debtor that the money should be brought into British India aft~r
it was taken by the borrower outside the taxable territory. [940 B-C]
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 the 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 Jays down that the interest shall be deemed to be
interest accruing or arising within the taxable territories. [939 DJ
The provision in s. 42 ( 1), which brings within tht 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. [939 Fl
The section contemplates tho 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.
[940 A]
A.H. Wadia v. Commissioner of Incom•-tax, Bombay 17 I.T.R. 63,
D
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
facade.
For example, the Court has
power to disregard the corporate
entity if it is used for tax evasion ar to circumvent tax obligation. [941 BJ
Devid Payne & Co. Ltd. in re. Young v. David Payne & Co., Ltd.
E
[1904] 2 Ch. D. 608. distinguished.
F
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Case law referred to.
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 1084 to
1097 of 1965.
Appeals by special leave from the judgment and order dated
January 8, 1963 of the Madras High Court in Tax Case No. 108 of
1960.
B. Sen, A. N. Kirpal, S. P. Nayyar andR. N. Sachthey, for the
appellant (in all the appeals).
R. Venkataraman and R. Ganapathy Iyer, for the respondent
(in all the appeals).
The Judgment of the Court was delivered by
Ramaswami, J. These appeals are brought, by special leave,
from the judgment of the High Court of Madras dated January 8,
1963 in Tax Case No. 108 of 1960.
All the three respondents (hereinafter called the 'assesseeH
companies') are public limited companies engaged in the manufacture and sale of yam at Madurai. Each of the assessee-companies had a branch at Pudukottai engaged in the production and
9 36
SUPRBMB COURT RBPORTS
(1967] l S.C.R.
sale of cotton
yarn. The sale-proceeds of the branches were
periodically deposited in the branch of 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 years
Meenakshi
Rajendra
5aroja
Mills
Mills
Mills
Rs.
Rs.
Rs.
B
1946-47
1947-48
1948-49
1949-50
1950-51
1,08,902
1,18,791
1,50,017
1,27,314
24,953
33,632
42,369
41,957
25,511
30,620
36,890
41,393
c
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
assessee-<:<>mpanies as shown below:
D
1. Thyagaraja Chettiar
2. Manickavasagam
3. Sundaram
4. Mecnakshi Mills
5. Rajendra Mills
6. Saroja Mills
Share
holding
1,008
250
250
5,972
3,009
4,177
All the three assessee companies borrowed moneys from the
Madurai branch of the bank and on the security of the fixed
deposits made by their branches with the Pudukottai branch of the
Bank. It is the admitted case that the loans granted to the assesseecompanies were far in excess of the available profits at Pudukottai.
In the assessment proceedings of the assessee-companies for the
various years under dispute, the Income-tax Officer was of the view
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 s. 4 of the Indian
Income-tax Act, 1922 (hereinafter called the 'Act'). Accordingly
he included the entire profits of the assessee-companies including
the interest receipts from the Pudukottai branches in the assessment
of the assessee-companies, since the overdrafts availed of by the
assessee-companies
in British India far exceeded the
available
profits. The assessee-companics appealed to the Appellate Assistant Commissioner of Income-tax. After examining the constituE
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c.1.T. v. MEENAKSHI MILLS (R.amaswami, !.)
937
tion of the assessee-companies and the Bank and the figures
of deposits and overdrafts, the Appellate Assistant Commissioner
found that the deposits made by the assessee-companies and other
companies closely allied to them formed a substantial part of the
total deposits received by the Bank He was also of the view that
the Pudukottai branch of the Bank had transmitted the funds so
deposited for enabling the Madurai branch to advance loans at
interest to the assessee-companies and that the transmissions of the
funds were made with the knowledge of the assessee-companies
who were major shareholders of the Bank. The Appellate Assistant
Commissioner also considered that the Pudukottai branch of the
Bank had no other appreciable transactions except the collection
of funds fil!d on the facts found s. 42(1) of the Act applied to the
case. The as~essee-companies took the matter in appeal to the
appellate Tribunal which took note of the position that the head
office and the branch-whether of the assessee-companies or of
the Bank-constituted -0nly
one unit and that Thyagraja
Chettiar occupied a special position in both the concerns and the
establishment of the branch of the Bank at Pudukottai was intended
to help the
financial 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 thats. 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 tbe course of its judgment, the appellate Tribunal observed
as follows:
"Even so, it seems to us, we cannot escape the 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 the assessee. That
being
a non-taxable area, there
were
many very
rich men there with an influx of funds to invest in banks
and industries. By the same token, it appears to us it was
not necessary for the Madurai Bank which was after all a
creation of certain people which started with a small capital
of Rs. 32,800 to have gone to Pudukottai for opening a
branch. If there was an influx of money in Pudukottai
MIHup.C.l./66-14
938
SUPlll!MI! COURT lll!POllTS
ll!l67J I a.ca.
because of the finances, nobody would have agreed to
borrow money from it. At any rate, it is clear it would
have had no field for investment in Pudukottai the only
source of investment being outside Pudukottai.H
The
appellate Tribunal further stated:
"But having regard to the special position of ThyagaB
raja Chettiar and the balance sheets of the bank referred to
above and the lack of investments in Pudukottai itself of
the moneys borrowed there, it seems more reasonable to
conclude that the bank itself was started at Madurai and a
branch of it was opened at Pudukottai only with a view to
help the financial operations of Thyagaraja Chettiar
c
and the mills in which he was vitally interested. tt
At the instance of the assessee-companies ·the appellate Tn'bunal
referred the following question of law for the determination of the
High Court:
"Whether on the facts and in the circl111!6tances 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?"
The High Court answered the question in favour of the
asssessee-companies holding that it was not established that there
was any arrangement between the assessee-companies and the Bank
whether at Pudukottai or at Madurai for transference of moneys
from Pudukottai branch to Madurai and the facts on record did
not establish that there was any transfer of funds between
Pudukottai and Madurai for the purpose of advancing moneys
to the assessee-companies. The High Court further took the view
that the transactions represented ordinary banking transactions
and there was nothing to show that the amounts placed in fixed
deposits in the branch were intended to, and were in fact transferred
to head office for the purpose of lending them out to the depositor
himself.
On behalf of the appellant Mr. Sen submitted at the outset
that the High Court was 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 Lid., v. Commissi9ner
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C.I.T. v. MEENAKSHI MILLS (Ramaswami, I.)
939
of Income-tax, Madras(!) 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 s. 66(1). If the party concerned has failed to file an application under s. 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:
"All income, profits or gains accruing or ansmg
whether directly or indirectly ........ through or from any
money lent at interest and brought into the taxable territories in cash or in kind ........ shall be deemed to be income accruing or arising within the taxable territories ...... "
This section accordingly requires, in the first place, that any
money should have been lent at interest outside the taxable territory.
Jn the second· place, income, profits or gains should accrue or arise
directly or indirectly from such money so lent at interest, and,
in the 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 it down that the interest shall be deemed to be
income accruing or arising within the taxable territories. This
section was the subject-matter of interpretation by
the Federal
Court in A. H. Wadia v. Commissioner of Income-tax, Bombay(,_2)
It was held by the majority of the Judges in that case that the
provision in s. 42(1) of the Act, 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. It
was pointed out that the section contemplated the bringing of
money into British India with the knowledge of the lender and
borrower and this gave rise to a real territorial connection. The
learned Chief Justice took the view that the nexus was the knowledge
to be attributed to the lender that the borrower had borrowed
money for the purpose of taking it into British India and earning
income on that money. Mukherjea and Mahajan, JJ. took a
somewhat different view. Mahajan, J. considered that there must
be an arrangement between the lender and the borrower to bring the
loan into British India, and Mukherjea, J. further emphasised
the point by stating that it must be the basic arrangement underlying the transaction that the money should be brought into British
India after it is taken by the borrower outside his territory. But all
(I) 60 I.T.R. 52.
(2) 17 I.T.R. 63.
940
SUPREME COURT REPORTS
(I 967] 1 s.c.a.
the !e1r!led Judges agreed that the knowledge of the lender and
the borrower that the money is lo be taken into British India must
be an integral part of the transaction. That is the ratio of the
decision of the Federal Court with regard to the construction of s.
42(1) of the Act.
Having examined the findings of the appellate Tribunal in the
present case we 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 assessc'c-companies
and the Bank that the
money should be brought into 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 nontaxable territory there was nothing else to rewmmend the carrying
on of the cotton spinning or weaving business there. The Tribunal
further remarked that having regard to the special position of
Thyagaraja Chcttiar and the balance sheets of the Bank and lack
of investments in Pudukottai, it was reasonable lo 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 and the mills in which he was vitally interested.
The Tribunal
found that Pudukottai branch of the Bank had
transljlitted funds deposited by the assessee-companies for enabling
the Madurai branch to advance loans at interest to the assesseecompanies and the transmission of the funds was made with the
knowledge of the assessee-companies who were the major shareholders of the Bank. In the context of these facts it must be held
that 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 tho
borrower outside the taxable territory. We are accordingly of the
opinion that the principle laid down in Wadia's(') case is satisfied
in this case and that the Income-tax authorities were right in holding
that the entire interest earned on fixed deposits was taxable.
In the course of argument Mr. Venkataraman contended that
even if Thyagaraja Chettiar, a Director of the assessee-companies,
knew in his capacity as Director of the Madurai Bank that money
placed in fixed deposit by the assessee-companies would be transferred to the taxable territory, that knowledge cannot be imputed to
the assessc-e-companies and so it cannot be said that the transfer
was part of an integral arrangement of the loan transactio~ .. In
support of this argument learned Counsel referred to the dec1s1on.
of the Court of Appeal in David Payne & Co. Ltd., In re. Young v.
(I) 17 l.T.R. 63.
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941
David Payne & Co. Ltd.,(1) We are unable to accept the argument
of the respondents as correct. The decision in David Payne &
Co's (I) case, has
no bearing on the question presented for
determination in the present case. In David Payne & Co's (1) case,
supra, the question at issue related to the powers and duties of
Directors and it was held that because the same person is a common
director of two companies, the one company has not necessarily
notice of everything that is within the knowledge of the common
director, which knowledge he has acquired as director of the other
company. In the present case the question at issue is entirely
different. The appellate Tribunal has, upon examination of the
evidence, found that the transference of funds from Pudukottai to
Madurai was made as part of the basic arrangement between the
Bank
and the assessee-companies and that Thyagaraja Chettiar
who was the moving figure both in the Bank 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
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juristic point of view the company is a legal personality e.ntirely
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
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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.(2) 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's shares were held by the English company, and as the Commissioners also found, if the business was technically that of the
New York company, the latter was merely the agent of the English
company. In the light of these findings the Court of Appeal,
despite the argument based on Salomon's(') case, held that the New
York business was that of the English company which was liable
for English income tax accordingly. In another case-Firestone
Tyre and Rubber Co. v. Llewellin(4)-an American company had
an arrangement with its distributors on the Continent of Europe
whereby they obtained supplies from the English manufacturers,
its wholly owned subsidiary. The English company credited the
American with the price received after deducting the costs plus 5
(1) (1904) 2 Ch. D. 608.
{3} (1897] A.C. 22.
(2) 4 T.C. 41.
(4) [1957) 1 W.LR. 464.
9U
SUPJlBMI COURT ll'BPOJ.TS
(1967) t s.c.a.
per cent. It was conceded that the subsidiary was a separate legal
entity and not a mere emanation of the American parent, and that
it was selling its own goods as principal and not its parent's good~
as agent. Nevertheless, these sales were a means whereby the
American company carried on its European business, and it was
held that the substance of the arrangement was that the American
company traded in England through the agency of its subsidiary.
We, therefore, reject the argument of Mr. Venkataraman on
this aspect of the case.
For the reasons expressed we hold that 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 with costs.
Y.P.
Appeals allowed.
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