In a major blow to noted Chennai-based restaurateur M Mahadevan, the Chennai bench of the income tax appellate tribunal (ITAT) has ruled that the entrepreneur engaged in a 'colourable device' to avoid taxes on long-term capital gains (LTCG) amounting to Rs2.94 crore. Simultaneously, the tribunal confirmed that Mr Mahadevan, popularly known as Hot Breads Mahadevan, qualifies as a resident in India for income tax purposes for the assessment years (AYs)13–14, 14–15, and 19–20, making his global income taxable in India.
In an order last month, the ITAT bench of SS Viswanethra Ravi (judicial member) and Amitabh Shukla (accountant member) says, "The valuer proceeds to value shares of Oriental Cusine Pvt Ltd (OCPL) at Rs1105.56mn (million) or US$16,121,907. The value of Rs1,105.56mn aggregates to Rs19,566 per share. The value adopted by Mr Mahadevan at Rs100 per share and by his valuer at Rs30 per share is therefore far too low in comparison to the valuations done as on 30 June 2018. Nothing has been brought on record as to how and what prompted such a drastic reduction in the value of the shares. It all goes on to indicate that the valuation of shares was intentionally brought down by Mr Mahadevan to avoid true incidence of taxes. Be that as it may be, we are of the considered view that ends of justice would be met if the matter is remitted to the assessment officer (AO) for re-adjudication de novo of correct LTCG arisen to Mr Mahadevan from the share transactions."
The tribunal examined a complex web of transactions involving Mr Mahadevan’s shareholding in OCPL and his near-total ownership of Cool Cream Milano Pvt Ltd (CCMPL). On 1 August 2018, the fine dine division of OCPL, which included a prime property at 71 Cathedral Road in Chennai, was transferred to CCMPL through a slump sale agreement. Months later, on 18 December 2018, this property was sold to Mr Mahadevan’s wife Badrunissa for Rs3.29 crore, substantially below the valuation of over Rs10.5 crore.
Simultaneously, Mr Mahadevan sold 31.8% of his shares in OCPL to Peepul Fund II for just Rs100 per share, despite earlier valuations pegging the fair market value (FMV) at Rs19,556 per share. The sale was reported as resulting in a capital loss of Rs2.6 crore which he claimed in his tax returns.
The tax department challenged the genuineness of these transactions, citing email trails, backdated agreements, and manipulated valuation reports under Rule 11UA of the Income Tax Rules. ITAT agreed with the department, holding that the valuation and structuring are intentionally contrived to generate artificial capital loss while transferring value through the undervalued property sale.
“The series of email communications and post-dated agreements clearly indicate a cover-up exercise,” ITAT observed. “This is a textbook case of ill-legitimate tax planning using colourable devices.”
However, the tribunal also criticised the AO’s method of calculating the capital gains addition, particularly the approach of imputing notional gains to Mr Mahadevan based on the undervalued property transferred to his wife. It held that any tax liability from that sale would lie in her hands under Section 56(2), not Mr Mahadevan’s. Accordingly, the Rs2.94 crore addition was set aside, but ITAT left the door open for remedial action against Ms Badrunissa and others involved.
ITAT also ruled against Mr Mahadevan’s longstanding claim of non-resident Indian (NRI) status. The tax department had argued that Mr Mahadevan was physically present in India for more than 182 days during several assessment years and failed to qualify as a non-resident under section 6 of the Income Tax Act, 1961.
Although Mr Mahadevan submitted passport stamps, multi-entry visas, and even a UAE tax residency certificate obtained in 2021, ITAT held that:
FRRO (foreigner regional registration office) records are more reliable than passport stamps in calculating presence in India.
Social visit or tourist visas to countries like Singapore and Malaysia do not constitute valid business-related travel.
Control and management of his business affairs were effectively located in Chennai, strengthening the claim of Indian tax residency.
“The claim that frequent overseas visits imply business purpose cannot stand on probabilities. No credible evidence was provided that his control and management was outside India,” the tribunal remarked.
The tribunal dismissed arguments based on the India–UAE double taxation avoidance agreement (DTAA), holding that the domestic test of residency under section 6 must first be satisfied. Since Mr Mahadevan met the criteria for Indian residency, his global income becomes taxable in India.
However, ITAT directed the AO to grant foreign tax credit for taxes already paid by Mr Mahadevan in jurisdictions like the US and Canada, subject to verification.
Citing the Supreme Court’s landmark ruling in McDowell & Co Ltd vs CTO, ITAT reminded that while tax planning is legal, using deceptive devices to avoid tax crosses the line into illegality.
“Colourable devices cannot be part of tax planning… It is the obligation of every citizen to pay taxes honestly, without resorting to subterfuges,” it says.
With this ruling, ITAT has sent a strong message on two fronts: one, that global income is taxable in India if residency conditions are met and two, that sham transactions disguised through legal paperwork will not survive judicial scrutiny. While Mr Mahadevan has avoided the Rs2.94 crore LTCG addition on technical grounds, the tribunal’s remarks leave little doubt about the dubious nature of the transaction and open the door to further scrutiny of related parties.
(ITA No.1824/25/26-Chny/2024 Date: 30 May 2025)
