1970 (4) TMI 25 - SC - Income Tax

Appointment of companies controlled by person controlling assessee as selling agent and managing agent - Tribunal was right in disallowing the compensation amount paid by the applicant company to its selling agents on the breach of the selling agency agreement - assessee s appeal is dismissed

Summary

Issues:
1. Disallowance of compensation paid to selling agents under the Income-tax Act.
2. Disallowance of compensation paid to managing agents under the Income-tax Act.
3. Validity of Tribunal's conclusion on the nature of agreements and payments made.
4. Applicability of the Finance Act of 1955 amendments.
5. Allegations of sham or colorable transactions to withdraw tax-free sums.

Detailed Analysis:
1. The assessee claimed compensation under section 10(2)(xv) of the Income-tax Act for breach of agreements with selling agents and managing agents. The Tribunal disallowed the claim, alleging the agreements were part of a scheme to withdraw tax-free sums before liquidation. The Tribunal found the agreements and payments fraudulent, leading to the disallowance of Rs. 17,80,000 and Rs. 46,80,000 to selling and managing agents, respectively.

2. The Tribunal's decision to disallow the compensation paid to managing agents was based on similar grounds as the selling agents' case. The Tribunal concluded that the managing agency agreement was also a sham transaction designed to withdraw funds from the company before liquidation. The disallowance of Rs. 46,80,000 was upheld by the Tribunal.

3. The Tribunal's findings indicated that the entire chain of events involving the agreements with selling and managing agents was orchestrated to withdraw large sums of money tax-free from the company's profits. The Tribunal deemed the transactions as sham and colorable, with the intention to appropriate funds from the flourishing concern for personal use. The High Court upheld the Tribunal's decision, emphasizing the evidence supporting the conclusion.

4. The judgment highlighted the legislative amendments introduced by the Finance Act of 1955 to prevent taxpayers from exploiting loopholes to secure tax-free compensation payments. While these amendments were not directly applicable to the case, the authorities and Tribunal still considered the transactions as attempts to avoid tax liabilities by disguising compensation payments.

5. The Tribunal's assessment of the events leading to the agreements with selling and managing agents portrayed a deliberate design to withdraw funds tax-free before the company's liquidation. The sequence of events, including quick appointments, resolutions, and subsequent agreements for compensation, indicated a premeditated plan to siphon off profits. The Tribunal's characterization of the transactions as sham and colorable was supported by the evidence presented.

In conclusion, the Supreme Court upheld the decisions of the Tribunal and High Court, dismissing the appeal and affirming the disallowance of compensation paid to both selling and managing agents. The judgment underscored the fraudulent nature of the agreements and payments, emphasizing the orchestrated scheme to withdraw funds tax-free before the company's liquidation.