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TMI Blog1970 (4) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... textiles. The assessee was a flourishing concern: the annual profits earned by the assessee before October, 1946, ranged between Rs. 15 to Rs. 20 lakhs and it had very large reserves. Till October 7, 1946, the assessee was managed by the Provident Investment Co. Ltd. which owned a majority of the shares of the assessee. On October 7, 1946, the entire share capital of the assessee was purchased by Dalmia Investment Co. Ltd. and the Provident Investment Co. Ltd. resigned their office as managing agents of the assessee. Dalmia Cement and Paper Marketing Co. Ltd., hereinafter called "the D.C.P.M.", were incorporated on October 21, 1937, with the object, inter alia, of carrying on the business of and to work as selling agents or managing a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corresponding to the account year ending December 31, 1950, allowance under section 10(2)(xv) of the Income-tax Act, 1922, in respect of Rs. 17,80,000 and Rs. 46,80,000 expended under an agreement dated February 21, 1951, and confirmed by the directors on February 28, 1951, as compensation for breach of contracts respectively to the selling agents and the managing agent. The Income-tax Officer rejected the claim for allowance and the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. In second appeal the Income-tax Appellate Tribunal observed: " . . . we are satisfied upon the facts and circumstances of this case that the selling agency and the managing agency agreements in both the appeals were merely a mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in disallowing the compensation amount of Rs. 46,80,000 paid by the applicant-company to its managing agents on the breach of the managing agency agreement? 6. Whether the Tribunal had any material before it to come to the conclusion that there was a scheme on the appointment of the managing agents to withdraw a tax free sum from the applicant-company before its liquidation? 7. Whether the Tribunal was justified to hold that the managing agency agreement was merely a make-believe or sham or colourable transaction and that the claim for compensation and the payment thereof was fraudulent? 8. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the nature of compensation payment of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay large amounts of compensation free from tax liability: Lakshmiratan Cotton Mills Co. Ltd. v. Commissioner of Income-tax and Juggilal Kamlapat v. Commissioner of Income-tax. The legislature became wise to the devices adopted to secure for themselves large sums of money free of income-tax. The legislature, by the Finance Act of 1955, amended section 7, and added Explanation 2(i) and also incorporated section 10(5A). To the present case the amendment made by the Finance Act of 1955 does not apply. The revenue authorities and the Tribunal have, however, come to the conclusion that the appointments of the selling agents and the managing agent, and the agreements to pay compensation for determining their contracts formed a chain of sham or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits. A general meeting was held on July 5, 1950, and a resolution was passed appointing V. V. as managing agents for 20 years with effect from July 1, 1950. On July 25, 1950, a notice was issued calling an extraordinary general meeting seeking authority of the board of directors "to sell the mills if a suitable occasion arose". On August 16, 1950, a resolution was unanimously passed authorising the directors to sell the mills if "an opportunity arose". On October 26, 1950, the managing agency agreement between the assessee and V. V. was executed and on October 27, 1950, the assessee agreed to sell for Rs. 36,50,000 all its assets including stock-in-trade (except certain woollen goods, stock, stores, etc.) to M/s. Ram Sahai Mal More Ltd. of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors made and published two separate awards to the effect that there was a breach of contract by the assessee and that the selling agents and the managing agent were entitled to compensation and that all the settlements were valid and binding between the parties. A decree was obtained from the High Court of Bombay on April 16, 1953, confirming the awards made by the arbitrators declaring, inter alia, that the liquidators of the assessee were liable to pay to the selling agents and the managing agent the sums of Rs. 17,80,000 and Rs. 46,80,000, respectively, as and by way of compensation together with costs. On a review of these facts, the Tribunal reached the conclusion that the transactions entered into and the agreements made by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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