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In Sir Kikabhai Premchand v. CIT [1953] 24 ITR 506 (SC), the Apex Court held that in revenue cases regard must be had to the substance or true legal effect of the transaction rather than to its mere form. The revenue took full benefit of this principle in piercing the veil of the corporate in earthing transactions of tax evasion. Also in another case of Pandit Lakshmikanta Jha Vs. Commissioner of Income-tax (75ITR790) the Apex Court held that in taxing a receipt to income tax the authorities are only concerned with the legal effect or character of the transaction and not with the substance of it. The revenue had best used the effect of this rule again. In either way the revenue took full benefit of the two pronouncements to the best of their advantage in holding a transaction as in genuine.

But in a solitary case of case of CIT v. 21st Society of Immaculate Conception (2001) 118TAX137 there is found to be a positive application of this rule. In this case nuns working for a charitable society were maintained by the society for their minimal needs. The nuns on the other hand did not charge for their salaries as teachers in a school run by such institution which was part funded by the State. The assessing officer denied exemption on the pretext that the funds of the trust are being applied for the benefit of nuns who have made monetary value of contribution (teaching earnings) exceeding the limits laid down in section 13(3) (b) to the society than for the purposes of the trust. He then alleged that by incurring maintenance expenditure on the nuns the society has violated the conditions for exemption u/s 13(1) (c).

The Madras High Court held that the monetary value of contributions to the society was the difference between the amount of the salary and other payments, which they received for their work as teachers minus the amount expended on them for their maintenance. In reading the rule of substance over form the Court further held that the reality and the substance of the matter in this case is that the amount made over by the nuns to the society was only the amount which was available for use to the society was only the amount which was available for use by the society for the purposes other than their maintenance. The amounts spent on their maintenance had for the purpose of convenience been spent through the society instead of each one of the sisters paying their own bills separately. The expenditure so incurred was not out of other donations made to the society, but out of monies which the nuns themselves had earned and for the purpose on convenience made over to the society instead of deducting from such donations the amount required for their own use.

The Court held that the very sacrifice made by the nuns has been held against them by treating them as beneficiaries of their own donations. But in such a case one would wonder, in the author’s opinion, whether it is a case of application of income by way of salary which otherwise should be brought to tax in the hands of the nuns!

Beautifully commenting at the end the Court held that even while it is permissible to pierce the corporate veil in certain circumstances, while dealing with charities, it is necessary to similarly ascertain the substance of the transaction rather than merely look at the form for the purpose of withholding from a charity the exemptions which have been provided under the law.

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