TMI Blog1962 (5) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... a private limited company. During the relevant accounting year the assessee was acting as the managing agent of two sugar companies, (1) The Raza Sugar Company Ltd., and (2) The Buland Sugar Company Ltd., under two different managing agency agreements, one executed on March 24, 1934, and the other on February 12, 1934. The relevant terms of the two agreements were the same. The managing agency in each case was to continue for a period of twenty years certain, and thereafter until the managing agents were removed by an extraordinary resolution of the managed company passed at an extraordinary general meeting specially convened for that purpose and of which not less than six calendar months' notice was given and at which shareholders owning not less than ? ths of the issued capital of the company were present. The managing agents were to receive an office allowance of ₹ 1,000 per month and a commission of 10%. In the event of the managed company being wound up during the period of the managing agency agreement with the object of transferring its business to another company, one of the terms and conditions of the agreement for transfer of the property and business of the ven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholders of the two managing companies, the vendees will vote in accordance with the desire of the vendors and in furtherance of the interest of the vendors in the office of the managing agents of the principal companies, so long as they enjoyed the benefits of any shares in the managing agency. Lastly it was declared that nothing in the agreement of sale was to be deemed to constitute a partnership as between the vendors and the vendees. Subsequently, on December 24, 1961, a further agreement between the parties was incorporated in this agreement of sale. This further agreement was to the effect that the provision for reduction in the percentage of commission and office allowance on reduction of the shareholding by the vendee company was to cease to be operative. The effect of this further agreement was that however much the shareholding of the vendee company in the shares of the managed company might become reduced, they will still be entitled to receive 25% of the commission and office allowance of the vendor company and there shall be no reduction in this percentage. It may be noted that the date of this further agreement, namely, December 24, 1951, fell outside the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the original agreement by the subsequent agreement dated December 24, 1951, that the percentage of commission and office allowance payable by the assessee to the vendee will not be affected by the reduction in the shareholding by the assessee. He observed, Messrs. Dalmia Cement Co. Ltd. could not in the absence of shares vote in accordance with the desire of the appellant. He went on to conclude, All this leads me to share the suspicion of the Income-tax Officer, who has held the agreement to be a manipulated affair, that these manipulations were possible, because all the persons concerned were close relatives who belonged to the Dalmia family, who in one way or the other controlled all the above mentioned companies. But curiously enough when he came to consider the allowability or otherwise of the sum of ₹ 64,239, he lost sight of his earlier observation and held that the purchase of shares from H.H. the Nawab of Rampur ...was ostensibly made for the purposes of safeguarding the managing agency and held the sum of ₹ 64,239 to be allowable as revenue expenditure. The Commissioner of Income-tax directed the Income-tax Officer to file an appeal to the Income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 10(2)(iii) one has to remember that the managing agency was still to run for a period of four years on the date of borrowing and purchase. Only eight months later the shares were transferred to Dalmia Cement Company as according to the assessee it had no funds to pay the amount borrowed. Clearly, the assessee must have taken its financial position even on the date of the borrowing and the purchase. It could not have suddenly dawned on the assessee only after the expiry of eight months that it could not hold on to the shares and must part with them. It follows that the borrowing and the purchase and the subsequent transfer of the shares to Dalmia Cement Company were all parts of a pre-determined scheme. There is the further fact that the assessee and the Dalmia Cement Company were closely linked as the shareholders of the latter company were relations and close friends of the managing director of the assessee. The pretext for the borrowing and the purchase and sale was that the arrangement would help the assessee to retain the managing agency for a further period as under the agreement of sale, the vendee would exercise its vote according to the desire and in the inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legal ways but the arrangement must be genuine and not a sham. Here it appears that the object of borrowing was illusory and colourable and not genuine or bona fide. It follows that the sum of ₹ 64,239 was not allowable as deduction under section 10(2)(iii) also. The deduction was not claimed under any other provision. The question referred to us should, therefore, be answered in the negative. So far as the amount of ₹ 3,000 in the succeeding assessment year is concerned that was disallowed by the Income-tax Officer. It is not possible to give the reasons on which the Income-tax Officer disallowed the amount as the assessment orders which have been included in our paper book relate to the assessment year 1951-52. In this year the Income-tax Officer has stated that he disallows the amount for the reasons given by him in the assessment order for the year 1952-53 in which also all the relevant facts are stated to have been stated by him. The assessment order for 1952-53 has not been included in our paper book. The Tribunal has also not given those reasons in the statement of the case drawn up by it. The assessee went up in appeal to the Appellate Assistant Commis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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