IN THE ITAT MUMBAI BENCH ‘G’
Income-tax
Officer, Ward 6(3)(2), Mumbai
v.
Janta
Bazar & Stores (P.) Ltd.
G.E.
VEERABHADRAPPA, VICE PRESIDENT
AND
SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER
IT
APPEAL NOS. 3849 TO 3855 (MUM) OF 2003
[ASSESSMENT
YEARS 1989-90 TO 1995-96]
OCTOBER
17, 2006
Section 22 of the Income tax Act, 1961 - Income from house property - Chargeable as - Assessment years 1989-90 to 1995-96 - Whether Court has power to disregard corporate entity of company, if it is used for tax evasion or to circumvent tax obligation or to perpetrate fraud - Held, yes - Whether as per section 22, it is legal owner, in whose name property stands, that is chargeable to tax under head ‘Income from house property’ on basis of its annual value - Held, yes - assessee company purchased a property in 1979 - In 1982, it divided said property into 17 stalls and allotted said stalls to its members on pro-rata basis - Subsequently, assessee entered into tripartite agreement with its members and a bank in terms of which, said stalls were given to bank on lease for a consideration of Rs.7 per sq. ft. out of which re.1 was to be paid to company for paying municipal taxes and maintenance charges and rs.6 were to be paid to its members on pro-rata basis - Whether property owned by company could be treated as collectively owned property of shareholders who comprised it - Held, no - Whether by working out scheme, whereby certain interest of shareholders was said to have been created in property belonging to company, assessee had evaded payment of tax by company - Held, yes - Whether on facts, assessee was liable to pay tax under head ‘income from house property’ on its property income at the rate of Rs.7 per sq. ft., i.e., rate on which it had given its property on lease to bank and rental income on that letting out was to be assessed by actual rent received by company - Held, yes
The assessee-company purchased a property in 1978. In 1982, the assessee divided the entire premises into 17 stalls, allotted the said stalls to its members on pro-rata basis. Subsequently, the assessee entered into a tripartite agreement with its members and a bank, in terms of which said 17 stalls were given to bank on lease for a compensation of Rs.7 per sq. ft. out of which Re. 1 was to be paid to the assessee for paying municipal taxes and maintenance charges and Rs.6 was to be paid to its members on pro-rata basis. While making assessment, the Assessing Officer was of the view that the assessee had used the façade of the company for escapement of the tax liabilities and, therefore, the assessee was held liable to pay tax on its property income at the rate of Rs. 7 per sq. ft.
On appeal, the Commissioner (Appeals) granted relief to the assessee.
On revenue’s appeal:
From the above, it was clear that the company had been used as an effective tool to evade the payment of tax due to the Government under the Income-tax Law. As per section 22, it is the legal owner, in whose name the property stands, is chargeable to tax under the head ‘Income from house property’ on the basis of its annual value. The annual value is the actual rent realized or the probable letting value prevailing in the market. The assessee had bypassed all these laws to evade tax by working out a scheme whereby certain interest of the shareholders are said to be created in the property belonging to the company. It is not known under which provision of law, the company can do it, unless ordered to be liquidated by the orders of a Court. There could not be division of the company’s property by meats and bounds as claimed in the arrangement with its shareholders in the Tripartite Agreement. For the purpose of assessment, it had used the VDIS scheme to declare certain amounts. Be that as it may, the only direction that the assessee had planned was to avoid the payment of just taxes. A company is, under the general law, a juristic person eligible to own property and to sue or to be sued in its name. It is separate and distinct from its shareholders. The doctrine that a corporation has a separate legal entity of its own is firmly rooted in common law. It is true that from the juristic point of view a company is a legal personality entirely distinct from its members and the company is capable to enjoying right 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 façade. The Court has power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation or to perpetrate fraud. Disregard of all these judicial pronouncements the assessee has ventured into making such kind of scheme whereby he had factually evaded payment of tax by the company. In the facts of the case, the assessee had to pay tax under the head ‘Income from house property’ on its property income at the rate of Rs. 7 per sq. ft., i.e., the rate on which it had given its property on lease to bank and the rental income on that letting out was to be assessed by the actual rent received by the company. Therefore, in those circumstances, the order of the Assessing Officer was to be restored. (PARA 4)