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TMI Blog1959 (11) TMI 73X X X X Extracts X X X X X X X X Extracts X X X X ..... reement with Sri Meenakshi Mills Ltd., Madurai, under which Karumuthu Thiagaraja Chetti and Co. was appointed managing agent of the mills for a period of 35 years. Under the managing agency agreement, Karumuthu Thiagaraja Chetti and Co. was to be paid by way of remuneration an allowance of ₹ 1,000 per month, a commission of a half percent. on purchases, one per cent. on all sales and ten per cent. on the nett profits of the mills. There was a partition between Karumuthu Thiagaraja Chettiar and his sons on 1st April, 1938, and the same was accepted by the Income Tax Department and given effect to from 1st May, 1939. The partition in the family did not interfere with management of Sri Meenakshi Mills. Karumuthu Thiagaraja Chetti and Co., in which members of the erstwhile undivided family were partners, continued the management as before. Under their management of the business of Sri Meenakshi Mills prospered. Likewise the fortunes of the assessee firm, its work increased as also its profits. On the 30th March, 1942, the firm wrote a letter to the directors of the Sri Meenakshi Mills Ltd. requesting them to relieve the managing agents of a part of their responsibilities and entr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and commission on the net profits at five percent. instead of ten per cent. given to them now. The executive committee also has accepted the same. Therefore it is resolved that the responsibility of purchasing cotton, machine, machine tools, store articles and other goods should be entrusted to a private company, viz., Sundaram and Co. Ltd., and that that company should be paid profits at half a rupee per cent. on all the aforesaid purchases and commission at five per cent. on the net profits got without deducting loss by wear and tear and that the aforesaid Sundaram and Co. should attend to these affairs subject to and under the supervision of the said managing agents. The matter that one of our directors, viz., Sri T. Sundaram Chettiar Avergal, is going to be the managing director of the aforesaid Sundaram and Co. has been recorded and approved. Resolved that in the said manner a private company, viz., Manickavasagam Ltd., should attend to the work of selling yarn wastage (cotton) and other articles produced at mill, that they should be paid commission at rupee one per cent. on all sales and that they should attend to all affairs subject to and under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttiar, who was one of the partners of the assessee firm owned 50 shares out of 60, while the remaining ten were owned by M. S. Chockalingam Chettiar, the son-in-law of Karumuthu Thiagaraja Chettiar. Manickavasagam Ltd. had a capital of ₹ 6,000 divided into 60 shares of ₹ 100 each; 50 of them were owned by Manickavasagam Chettiar, the brother of Sundaram Chettiar, who was also a partner of the assessee firm. The remaining ten were subscribed by his cousin brother, Muthukaruppan. Later, three shares of ₹ 100 each were allotted to a daughter of Karumuthu Thiagaraja Chettiar, by increasing the share capital to ₹ 6,300. On May 14, 1942, the firm as well as the two companies entered into fresh contracts with the directors of Sri Meenakshi Mills Ltd., in accordance with the resolution of the board of directors of Sri Meenakshi Mills Ltd. The agreements were for a period of 15 years. There was a meeting of the general body of the shareholders of the mills on September 27, 1942, when a resolution was passed approving the arrangements effected by the directors. The resolution was to the following effect : The managing agents requested the executive committee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded the profits of Sundaram and Co. Ltd. and Manickavasagam Ltd. with those of the assessee firm and imposed the tax. The assessee filed an appeal against the order to the Income Tax Appellate Tribunal. The Tribunal held that the extraordinary haste displayed in the matter of appointment of purchasing and selling agents by the directors of the mill on March 30, 1942, even before the companies came into existence, and the control the assessee firm retained over the activities of the two new companies, proved that the assessee firm and the two new companies were connected and that the new companies were nothing more than an expansion of the assessee firm. The Tribunal was of the view, that the transaction was effected mainly with a view to reduce the liability of the assessee firm to excess profits tax and affirmed the conclusion of the Excess Profits Tax Officer. Section 10A of the Excess Profits Tax Act deals with transactions desired to avoid or reduce liability to excess profits tax. A transaction which is a mere camouflage or sham or one not intended to be acted upon, would not come within the section, as such a transaction would be hit at by the other provisions of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject of avoiding the excess profits tax liability within the meaning of section 10A(2) The burden is on the Department to prove that this was the main purpose with which the transaction was effected. (3) The relationship between the parties to the transaction is not by itself conclusive to prove that the motive of the actors in that transaction was the avoidance of liability. (4) It is not sufficient if this was an incidental advantage which might have accrued to an assessee : it must be the main motive to compass which the transaction was brought about. Mr. Sethuraman, appearing for the assessee, raised three contentions : (1) that the giving up of a portion of its business by the assessee could not be held to be a transaction within the meaning of section 10A(2), that the main reason for the giving up of a portion of their rights under the managing agency agreement was the expansion of business which the assessee firm thought was more than it could deal with, and that this could not in law amount to an object to avoid a tax liability, and (3) that the Department had failed to discharge the onus which lay on it to show that the transaction was effected with the main objec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween the four branches; the adult members of the family formed two partnerships (admitting the minor members of the family to the benefits thereof), and carried on a similar business in Benares brocade. The main purpose of the partition and the formation of the partnerships was found to be for the avoidance or reduction of the excess profits tax. It was not contested that the partial partition and the formation of the two firms would be transactions within the meaning of section 10A. The Supreme Court held that the provisions of section 10A would not apply, as the joint family business was not carried on as such. They held that the provisions of section 10A would apply only to a case of a business continued during the chargeable accounting period, and as the joint family business had been discontinued it could have earned no profits during the chargeable accounting period and, therefore, no excess profits tax would at all arise. That question does not arise in the present case. The assessee firm is continuing and is earning profits. The decision is not an authority for the proposition, that the formation of the new firm for carrying on in part the business of the old firm would n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pproval should be held to be so inter-connected with the act of the assessee, that the resultant transaction would be as much that of the assessee as of the mills. The question which would then arise is, whether the transaction was effected with the main object of reducing or avoiding the liability to excess profits tax. That the transaction had the effect of such avoidance of liability, or that the result of it was that the two new companies earned large profits which if the transaction had not been effected would have gone to swell the profits of the assessee, though it may have some relevance on the question of the intention of the assessee while effecting the transaction, cannot be relied on as a decisive factor in judging the motive with which the transaction was effected. The two new companies were started at a time when the profits of the assessee exceeded three lakhs of rupees. Admittedly, the business was increasing enormously, from which one could reasonably conclude that the assessee would make more profits and would be liable to excess profits tax thereon. When under those circumstances a part of the expected profits is offered to be given up, it becomes relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X
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