1968 (9) TMI 15 - SC - Income Tax

Whether there was, proper material before the Appellate Tribunal in support of its finding that the receipt of Rs. 2 lakhs by the assessee-firm was a receipt in the course of its managing agency business and was hence a revenue receipt - Held, Yes - Assessee s appeal dismissed

Summary

Issues Involved:

1. Legality of proceedings under section 34 of the Income-tax Act and section 15 of the Excess Profits Tax Act.
2. Nature of the Rs. 2 lakhs received by the assessee-whether it was a capital receipt or revenue receipt.
3. Validity of the termination of the managing agency agreement and the subsequent compensation.

Detailed Analysis:

1. Legality of Proceedings under Section 34 of the Income-tax Act and Section 15 of the Excess Profits Tax Act:

The assessee initially challenged the reopening of the assessment under section 34 of the Income-tax Act and section 15 of the Excess Profits Tax Act. However, during the appeals, the assessee abandoned this contention and focused solely on the nature of the Rs. 2 lakhs received. The Income-tax Officer and the Appellate Assistant Commissioner had rejected the challenge to the legality of the proceedings, and this issue was not further pursued by the assessee in the higher appeals.

2. Nature of the Rs. 2 Lakhs Received by the Assessee:

The main contention was whether the Rs. 2 lakhs received by the assessee was a capital receipt or a revenue receipt. The assessee argued that the amount was compensation for the loss of the managing agency office and should be treated as a capital receipt, not liable to tax. The Appellate Tribunal, however, found that the transaction of termination of the managing agency was collusive and not genuine, describing it as a "colourable transaction" meant to evade income tax. The Tribunal concluded that the payment was referable to the business of the assessee as managing agents and was thus a revenue receipt. The High Court upheld this view, stating that the amount was received "by virtue of its office" and "related to the work of the managing agency," even though the payment was collusive.

3. Validity of the Termination of the Managing Agency Agreement and the Subsequent Compensation:

The Tribunal found that the reasons given for terminating the managing agency were not true and that the transaction was a hoax to evade income tax. The High Court agreed, noting that the managing agency business was not destroyed or lost to the four individual partners who constituted the assessee firm. Instead, these individuals continued to benefit from the managing agency business through their roles in the newly formed J. K. Commercial Corporation. The court emphasized that the income-tax authorities are entitled to pierce the veil of corporate entity and look at the reality of the transaction, especially in cases of tax evasion or fraud. The court cited precedents where the corporate veil was lifted to prevent tax evasion, such as Apthorpe v. Peter Schoenhofen Brewing Co. Ltd. and Firestone Tyre and Rubber Co. v. Lewellin.

The court rejected the argument that the legal form of the transaction should not be scrutinized, affirming that the substance of the transaction revealed a collusive device to evade tax. The court also dismissed the argument that the Rs. 2 lakhs could not be considered a revenue receipt even if the transaction was collusive, stating that the managing agency business was not destroyed but continued under a different guise.

Conclusion:

The Supreme Court upheld the judgment of the Allahabad High Court, concluding that the Rs. 2 lakhs received by the assessee was a revenue receipt liable to tax. The appeals were dismissed with costs, affirming the findings that the termination of the managing agency was a collusive transaction aimed at evading income tax.