Doctrine of piercing of veil to be applied only under compelling reasons: HC
Published: Sep 20, 2017
By TIOLCORP News Service
ALLAHABAD, SEPT 20, 2017: THE High Court of Allahabad in the Income Tax matter of Sahu Investment Mutual Benefit Company Ltd held that when basic objective of Mutual Benefit Company is to take deposit & lend loans to its members, mere fact that some members were also holding positions in Company & loans were given to sister company, it does not call for invoking doctrine of ‘piercing of veil'.
A Mutual Benefit Company takes deposits and gives advances only to its members or shareholders. Sahu Investment received funds from public in the form of various types of deposits, by paying a high rate of interest, and commission to agents, and advanced these funds in the form of unsecured loans mainly to sister concerns at a very low rate of interest. In cases of loans, other than to sister concerns, Assessee has charged interest upto 28% p.a. During assessment of relevant year under Income Tax Act, 1961, AO took the view that expenditure in regard to payment of interest on borrowings had not been incurred wholly and exclusively for business purposes by resorting to colourable device for siphoning the profit to its sister concerns and a few selected share holders amongst total share holders numbering 30,000. The Assessing officer (AO) held that Sahu Investment had not used funds for its own business but had merely advanced in the form of unsecured loans, at a low rate of interest of 16% per annum, in majority of cases to sister concerns. In this way it has incurred loss, year after year as shown in its annual accounts. The AO, therefore, disallowed interest charged less from sister concerns and said that it could not be allowed as "deduction". It held that instead of 16% interest, amount chargeable should have been 24.50%. In the result, it disallowed interest and commission of Rs. 29,20,123/-.
However when matter reached up the High Court, the Court held that whenever doctrine of "lifting of veil" has been applied, there have been compelling reasons therefore and many a times even statutory provision permits. In the present case it is not disputed that basic objective of Company was to take deposit and lend loans to its members and further that loans were actually advanced to members. The mere fact that some members were also holding certain position or status in Company, would make no difference. So long as there is no material evidence or otherwise findings recorded by AO that advancement of loan to members of particular category was for reasons other than bona fide, nothing was found to justify application of doctrine of "piercing of veil".
