Law:

Section:

Section 10A of the Excess Profits Tax Act (XV of 1940) - Transaction for avoiding or reducing liability to excess profit tax - Assessee-firm, consisting of 'K' and his two sons, 'S' and 'M', was appointed as managing agents of 'SM' Ltd. entitling them to remuneration along with commission on purchases, on sales and also on net profits of 'SM' Ltd. - Thereafter, a partition took place between 'K' and his sons, however, erstwhile partners continued to manage 'SM' Ltd. - Later on, request of assessee-firm, directors of 'SM' Ltd. passed a resolution whereby two companies namely 'S' ltd. and 'M Ltd.' 'were appointed as purchase and selling agents respectively which were, liable to do business only under supervision and control of assessee-firm-'S' was major shareholder of 'S' Ltd. whereas M was holding majority shares of 'M' Ltd. - Excess Profits Tax Officer opined that aforesaid two companies were designed mainly to screen a portion of income obtained under original managing agency agreement and that formation of two new companies could not be held to be genuine - It was further held that aforesaid transactions were effected for purpose of reduction or avoidance of excess profits tax liability of assessee-firm - He therefore, included profits of 'S' Ltd. and 'M' Ltd. with those of assessee-firm and imposed tax accordingly - On appeal, Tribunal upheld order of EPTO - Whether, on facts, it could be concluded that formation of new companies was not prompted by desire to be relieved of a portion of work to assessee-firm but to divert profits to other partners, so that excess profits tax liability might be reduced - Held, yes - Whether, therefore, application of section 10A for clubbing profits of 'S' Ltd. and 'M' Ltd. with profits of assessee for purposes of computation of excess profits tax was justified - Held, yes FACTS The assessee, a firm consisting of three partners, 'K' and his two sons 'S' and 'M', entered into an agreement with 'SM Ltd.' wherein assessee was appointed managing agent of the 'SM' Ltd.' wherein assessee was appointed managing agent of the 'SM' Ltd. Under the managing agency agreement, assessee was to be paid by way of remuneration an allowance…

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