TMI Blog1968 (9) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... cent. Total 100 per cent. The shareholding of the three Singhania brothers was 51 per cent. constituting a majority of the shareholding in the partnership firm. The partners of the said firm floated a company, namely, M/s. J. K. Iron and Steel Company Ltd., the constitution of which was that the three Singhania brothers and their wives had 166 shares while Sri S. M. Bashir and his wife had 42 shares. In consideration of the fact that the assessee firm promoted the company the assessee was appointed the managing agent of M/s. J. K. Iron and Steel Company Ltd. for a period of 25 years under a managing agency agreement dated December 15, 1938. It was provided in this agreement that the assessee will continue to be the managing agent until it resigned or it was removed from its office of managing agency by a majority of 3/4th of the shareholders of the managed company. According to the terms of the agreement the managing agent's remuneration was Rs. 1,500 per month and a commission of 10 per cent. on net profits of the company after deducting all expenses and after charging depreciation. There was no provision in the articles of association of the managed company f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny with working capital. A resolution was accordingly passed at the meeting to that effect. On August 19, 1943, the company addressed a letter to the assessee informing it of the resolution and asking it to make immediate arrangement for an amount which would not only reduce the account of M/s. Juggilal Kamlapat, Bankers, to a figure of Rs. 5 lakhs but must also provide the company with working capital. The assessee replied to this communication by a letter dated August 31, 1943, in which the assessee pointed out that under the terms of the managing agency agreement it was not obligatory upon it to make advances to the managed company. The assessee stated that it had been specially constituted to act as the managing agents of the managed company and had no capital of its own. It had no assets also on the security of which it could raise a sum of Rs. 30 lakhs which would be necessary to reduce the amount of M/s. Juggilal Kamlapat, Bankers, to the limit required by the managed company and to equip the company with working capital. The letter of the assessee was considered by the managed company at the meeting of its board of directors on September 2, 1943. Sri Lakshmipat Singhania, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 70 (b) Lala Purshottamdas Singhania, cousin of Sri Padampat 100 (c) Lala Sohan Lal Singhania, cousin of Sri Padampat 1,000 2,000 V. (a) Shri P. D. Chandra Rana, P. A. to Sri Padampat 100 100 (b) Shri Gopikishan Jaipuria, Munim of J. K. Kanpur (Kothi) 10 (c) Shri S. M. Bashir, Director J. K. Iron and Steel Co. Ltd. 100 (d) Lala S. D. Garg 100 (e) Lala Sital Prasad, Director of J. K. Woollen Mills 500 1,900 Total 8,580 15,000 It is apparent from this constitution that the shares of the three Singhania brothers, their wives and children in J. K. Commercial Corporation Ltd. were 6,600 ' A' class ordinary shares out of 8,580 and I 1,000 out of 15,000 ' B ' class ordinary shares. The remaining shares were allotted to the personal assistant to Sri Padampat Singhania, a munim of the firm of Juggilal Kamlapat, a director of the managed company, one S. D. Garg and to a director of an allied concern. M/s. J. K. Commercial Corporation Ltd. were appointed manag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the proceedings under section 34 of the Income-tax Act and section 15 of the Excess Profits Tax Act and confined its argument merely to the point that the sum was not liable to be charged to tax. The Appellate Tribunal came to the following findings of fact : The three Singhania brothers, Padampat, Lakshmipat and Kailashpat held 51 per cent. share in the assessee-firm. They and the members of their family held a large majority of shares both in J. K. Commercial Corporation Ltd. and in the managed company. There was no contract by reason of which the assessee was under any obligation to finance the business of the company. It was a false allegation on the company's part that it would be derogatory to its reputation to mortgage the property of the company to raise finance and the only alternative was to seek a party who might be willing and able to finance the company even if such a course warranted a change of the managing agents. For, the new managing agents advanced loan to the company only on the pledge of the goods of the company (vide balance-sheets of the company annexures I,J and K). It will also appear from these balance-sheets that Juggilal Kamlapat, Bankers, still con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferently, the contention of the appellant was that the High Court was not entitled to go behind the legal form of the transaction and to find out what was the substance. We are unable to accept the argument of Mr. Sukumar Mitra as correct. In the present case the Appellate Tribunal has found that the transaction of termination of the managing agency was a colourable transaction and the real purpose was to hand over a sum of Rs. 2 lakhs to the assessee-firm. It was also found that the payment was collusive and the partners of the firm continued to run and enjoy the benefit of managing agency as shareholders and directors of the newly formed company by reason of their holding a majority of shares in that company. It was also held by the Appellate Tribunal that the reason for terminating the managing agency was not a true reason but was merely a fake one and the whole transaction was a hoax for the purpose of evading income-tax. In other words, it was a collusive device practised by the managed company and the assessee-firm for the purpose of evading income tax both in the hands of the payer and of the payee. The Appellate Tribunal also found that there was only a change of personnel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the arrangement was that the American company traded in England through the agency of its subsidiary. It was accordingly held that the trade of selling tyres to persons outside the United Kingdom was carried on within the United Kingdom and was exercised by the American company through the English company as its agent. Therefore, the tax was chargeable in respect of that trade under Schedule D, para. 1(a) (iii), to the Income Tax Act, 1918, and the English company was the regular agent of the American company in whose name it was properly assessed to tax on profits of that trade under rules 5 and 10 of the All Schedules Rules. In our opinion, the principle applies to the present case, and the court is entitled to lift the mask of corporate entity if the conception is used for tax evasion or to circumvent tax obligation, or to perpetrate fraud. We accordingly reject the argument of Mr. Sukumar Mitra on this aspect of the case. We proceed to consider the next argument addressed on behalf of the assessee, viz., that the amount of Rs. 2 lakhs cannot be held to be a revenue receipt even though the transaction of termination of the managing agency was collusive and the intention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnection in this case between the managing agency business of the assessee-firm and the payment of a sum of Rs. 2 lakhs and there was, therefore, 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. On behalf of the appellant it was said by Mr. Sukumar Mitra that a mere intention on the part of the assessee to evade income-tax will not nullify an otherwise lawful transaction. But we have already shown that the Appellate Tribunal has found in the present case that the transaction of termination of the managing agency contract was a sham transaction and was stage-managed merely with a view to evade income-tax and the real intention was that the three Singhania brothers should continue to carry on the managing agency in a dominant capacity in the guise of a limited company and there was in fact no loss of office or destruction of profit yielding apparatus. Reference should be made in this connection to the following observations of Lord Greene M. R. in Lord Howard De Walden v. Commissioners of Inland Revenue : " But ..... X X X X Extracts X X X X X X X X Extracts X X X X
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