TaxTMI 
TaxTMI 
1968 (9) TMI 15
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....d., 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 for terminating the managing agency except in the case of the managed company being wound up in which case the managing agents were to receive compensation for loss of appointment. There was also the exception provided under the general law in case of fraud or gross negligenc....
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.... 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, one of the directors of the managed company, reported in the meeting that a new floated company under the name and style of J. K. Commercial Corporation was willing to make advance provided it was appointed the managing agent of the company. Sri Bashir pointed out that the ma....
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.... (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 managing agents for a period of 20 years, renewable thereafter for a term not exceeding 20 years at a time. The remuneration was to be an office allowance of Rs. 1,000 per month, a commission of 10% on the net annual profits of the company and a commission of 2 1/2% on the gross sales of the products of the company Paragraph 8 of the managing agency agreement states : " The managing agent....
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.... 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 continued to be the creditors of the company in the three years for which the balance-sheets have been filed in the sums of Rs. 3,13,169-11-6, Rs. 8,89,323-13-6 and Rs. 6,06,691. On these findings the Appellate Tribunal came to the conclusion that the reasons given by the assessee for terminating the managing agency were not true and the sum of Rs. 2 lakhs was not compensation for loss of ....
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....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 in the managing agency and not a change in office and that the assessee had no right of compensation for any loss of office. In a matter of this description it is well established that the income-tax authorities are entitled to pierce the veil of corporate entity and look at the reality of the transaction. It is true that from juristic point of view the company is a legal personality en....
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....er 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 of the parties was to evade income-tax. The argument put forward on behalf of the appellant was that, even if the transaction was collusive and not genuine, it was legally permissible for the assessee to arrange its affairs in such a way as to avoid the incidence of tax. It was argued that even upon the facts found by the Appellate Tribunal the amount of Rs. 2 lakhs paid to the assesse....