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A] Evasion of Tax

(2) It is established that the assessee, Mr. V. Markiv is the promoter as well as the majority
shareholder (99% shareholding) of the private limited company, Vulcan BPO Pvt. Ltd. He
stood as a guarantee for the repayment of a loan taken by the company from TN Financial
Corporation and had mortgaged certain property belonging to him in favour of the

(3) It is significant to point out that the assessee had tried to evade tax by mortgaging his
property for a loan taken by the company. Though a company is regarded as a separate
legal entity, here the doctrine has been misused by the assessee to his advantage. He being
the majority shareholder and the promoter of the company, his decisions will be the
decision of the company. A corporation is a separate legal entity distinct from its members
and share holders. It acts through living persons and the persons who acts for the company
are not acting as an agent or a servant but are acting as an alter ego as they are an
embodiment of the company and their mind is the mind of the company. The decision of
the directors, corporate officers, majority shareholders is the decision of the company1. In
the given case the decision of the assessee, the majority shareholder (99% shareholding) is
the decision of the company, which he has misused to evade his tax liability on the act of
transfer of property. He is obliged to pay tax on capital gains when he sells the property
directly. Therefore in order to avoid the same the assessee, of the opinion that if he uses
the company façade would be able to evade the payment of tax by way of diversion of
income at source.

Lifting of corporate veil means disregarding the corporate personality and looking at the real
person in control of the company.23In other words, when a company is a sham or where a
fraudulent and dishonest use is made of the legal entity, the individuals concerned will not be
allowed to take shelter behind the corporate personality. In this regard the court will pierce the
corporate veil4. The council humbly submits that in the given case, the assessee has dishonestly

Tesco Supermarket Ltd. V. Nattrass, (1971) UKHL 1.
Salomon v. A.Salomon & company Ltd, [1896] UKHL 1
Prest v. Petrodel Resources Ltd, [2013] UKSC 34
Vodafone Internatinal Holdings BV v. Union of India and Anr, [2010] 329ITR126(Bom).
used the legal entity for his personal benefit by mortgaging his property and hence the corporate
veil must be lifted.

Indian Courts have traditionally followed the approach that since tax statutes must be strictly and
literally interpreted, tax planning within the four corners of the law is permissible.5 Only in
extraordinary circumstances can courts ‘look through’ the form of a transaction to examine its
purpose and decide that its substance is to avoid taxes. This approach has sometimes been
subsequently deviated from by Indian courts, which have observed that if an assessee resorts to
using a ‘colourable device’ or subterfuge to avoid taxes, it may be considered as tax evasion
rather than tax planning.6 The court has the power to disregard corporate entity if it is used
for tax evasion or to circumvent tax obligation. 7

In Juggilal Kamlapat v. Commissioner of Income Tax8, the Hon’ble Supreme Court had taken
the view that the doctrine of lifting the corporate veil ought to be applied only in exceptional
circumstances and not as a routine matter. However, if the intention of the Assessee is to avoid
tax through a collusive device, and the real purpose was something else than what appeared on
the face, then the Court may lift the veil of corporate entity to pay due regard to the economic
realities behind the legal façade.

The assessee in order to avoid the payment of tax for the capital gains of his property, mortgaged
it in favour of TN Financial Corporation which in turn exercised its right as a mortgagee to
recover the loan, sold the property and got the entire sale proceeds. This entire transaction is a
sham so as to avoid payment of tax on the act of transfer of property, i.e., if he did directly sell
the property he would be entitled to pay taxes for the act of transfer, therefore the assessee has
used the company as a mere façade to implement his intention.

Duke of Westminster v. IRC(1936) AC 1.
McDowell and Co. Ltd. V. Commercial Tax Officer, (1985) 3 SCC 230.
Sunil Kumar Dabnath v. Mining & allied Machiner Corpn Ltd, (1968) 38 Comp Cas 652:(1968) 1 Comp LJ
Juggilal Kamlapat v. Commissioner of Income Tax, Uttar Pradesh2 1 Writ Petition No. 7716/2011,2 AIR 1969 SC
932 (SC Full Bench)
The Supreme Court’s verdict in CIT v. Sitaldas Tirthdas (1961) 41 ITR 367 is the authority for the
proposition that where by an obligation income is diverted before it reaches the assessee, it is deductible
from his income as for all practical purposes it is not his income at all but where the income is required to
be applied to discharge an obligation after it reaches the assessee, it is not deductible. Thus, there is the
difference between diversion of income by an overriding title and application of income as the former is
deductible while the latter is not.

In K.P.Verghese v.Income Tax Office, 1981,131 ITR 597 (SC) the Supreme Court held that section 48
begins with the words ‘the full value consideration received or accruing” and what in fact was never
received or has never accrued, cannot be computed as capital gains and therefore, in such a case, the
question of determining the cost of acquisition will not be relevant.

In CIT v. Dr.P.Rajendran, 1981, 127 ITR 810(Ker.) the Kerala High Court held that the expenditure need
not necessarily have been incurred before passing of title to the capital asset. It can be incurred even aftr
passing of title to the capital asset transferred.

True Test:
Inorder to decide whether a particular disbursement amounts to diversion or application of income, the
true test is to probe into, and decide, whether the amount sought to be deducted, in truth, did not or
did reah the assessee as his own income. Obligations are there in every case, but it is the nature of the
obligation which is the decisive factor. There is a difference between an amount which a person is
obliged to apply out of his income and an amount which by the nature of the obligation cannot be said
to be part of his income of the assesse. Whereby the obligation, income is diverted before it reaches the
assessee, it is deductible; but where the income is required to be applied to discharge an obligation after
such income reaches the assessee, the same consequence in law does not follow. It is the first kind of
payment which can truly be excused and not the second. The second payment is merely an obligation to
pay another a portion of one’s own income which has been received and is since applied. The first is a
case in which the income never reaches the assessee, who even if he were to collect it, does so, not as
part of his income but foor and on behalf of the person to whom it was payable. [CIT v. Sitaldas Tirthdas
(1961) 41 ITR 367].

It is only when income or a portion of income is diverted at the source by an overriding title before it
started flowing into the channel which was to reach the assessee concerned that it could be excluded fro
his assessable income. [CIT v. L.Bansi Dhar (1968) 67 ITR 374 (Del)].
If the obligation is on the receipt of the income and not on the source of it, the legal effect if different.In the
one case, income is diverted at source and hence cannot be deemed to have accrued or arisen
therefrom. In the other case, the income has accrued and therefore, it has to be applied in a particular
manner. In the former case, the income is not included at all. In the latter case it is.