Law: Income Tax Act, 1961

Section: 256(1)

Law: Income Tax Act, 1922

Section: 66

Law: Indian Companies Act, (I of 1956)

Section: 314

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1961-62 - Assessee company paid an amount to a partnership firm towards commission and brokerage under an agency agreement - ITO found agency agreement was entered into by one of directors even before firm came into existence and director was also partner of firm and other partners were either directors of company or closely related to them - It was further found that firm did not actually perform primary function meat to be performed - Tribunal also found above facts to be true - Whether agreement with firm was only a device to divert profits of company to directors or close relatives and, therefore, amount claimed as deduction was rightly denied - Held, yes - Whether in view of section 314 of companies Act, all directors were deemed to have been vacated their office from date of agreement with firm and consequently directors remuneration paid by company had to be disallowed - Held, yes FACTS Company was exclusively engaged in the business of dyeing, bleaching and finishing and other such processes in almost all kinds of textile fabrics, i.e., woollen, art silk, nylon and staple, etc. In the profit and loss account, the assessee claimed brokerage and commission and that sum included an amount paid to TP. The commission to that firm was stated to have been paid in pursuance of an agreement dated 31-3-1960, whereby that firm was appointed as agent of the assessee. The firm, TP, came into existence on 1-4-1960, under a partnership agreement, which was executed on the same day. The ITO found that on 31-3-1960, when the agreement between the assessee and TP was executed, the firm, TP was not in existence. Since the firm had not come into existence on that date there was no question of director 'H' entering into an agreement with the assessee as agent of that firm. Since one of the parties to the agreement did not, as a matter of fact, exist on the date when the agreement was purported to have been made, the agreement was held by the ITO as void ab initio and the commission alleged to have been paid in pursuance of the agreement was accordingly held to be…

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