K RAMASAMY Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE question referred to us at the instance of the assessee is, as to whether the Tribunal was right in law in holding that the compensation of Rs. 1,00,000 received by the applicants-assessees from Sree Annapoorna Gowrishankar Hotels P. Ltd. during the previous year ended March 31, 1986, relevant to the assessment year 1986-87 constituted a revenue receipt assessable as income of the applicants.

(2.) THE assessees were partners in the firm, viz., K. Damodaraswamy Naidu and Brothers, which firm was carrying on business of running a chain of hotels under the name Annapoorna and Gowrishankar in the city of Coimbatore. On July 5, 1984, the brothers formed a new company, viz., Sri Annapoorna Gowrishankar Hotels P. Limited. THE business of the hotel was leased to the newly formed company on July 16, 1984, for a yearly rent exceeding Rs. 40 lakhs. On the same day, the company also entered into an agreement with the four brothers and it was styled as a deed of compensation under which the company agreed to pay a further sum of Rs. 20 lakhs payable in five equal instalments to the four brothers as consideration for their promise not to carry on the business of running hotels individually or in association with others in or around Coimbatore for a period of five years. THE four brothers to whom compensation was to be paid were also the shareholders and directors of the newly formed company. On behalf of the company, one of the brothers signed the agreement as a director.

(3.) THE finding that the payment made by the company to these brothers is in the nature of revenue receipt in the hands of the brothers, would not negate the separate juristic existence of the company. THE company continues to remain a legal entity with a right to hold property, to contract, etc. THE true character of the payment made by it to these brothers who are shareholders and directors and who as partners of the firm own the buildings and the equipment used by the company for running the hotel, has to be judged by looking at the reality after removing or piercing the veil of the company, as the circumstances of the case justify such an exercise. THE purpose of the deed of compensation in reality was only to screen the payment made under that deed from liability to income-tax in the hands of the assessee.