Law:

Section:

Section 37(1) of the Income-tax Act, 1961 (Corresponding to section 10(2)(xv) of Indian Income-tax Act 1922) - Business expenditure - Allowability of - Assessment year 1951-52 - Shares of assessee were taken over by company controlled by 'D' - Two other companies controlled by 'D' were appointed managing agents and selling agents of assessee for certain period under an agreement providing that even purchaser of assets of assessee, was bound to continue their appointment-Assessee sold all its assets and agreed to pay compensation to those companies for breach of agreement - Tribunal found that agreements and resolutions were sham and colourable transactions - Whether, on facts, compensation alleged to have been paid to those two companies was allowable as business expenditure - Held, no FACTS On 7-10-1946, shares of assessee were taken over by a company controlled by 'D' - Two other companies controlled by 'D' were appointed managing agents and selling agents of assessee for certain period under agreement providing that even purchaser of assets of assessee, was bound to continue their appointment. The assessee sold all its assets. The claim made by the assessee for allowance of the amounts alleged to have been paid to the two companies as compensation for breach of the agreements of the selling agency and the managing agency in the year of assessment for 1951-52 was disallowed by the ITO. That order was confirmed by the AAC and by the Tribunal. An application under section 66(1) of the 1922 Act for raising questions of law and for submitting a statement of the case was rejected by the Tribunal, and the High Court declined to call for a statement of the case. On appeal to the Supreme Court : HELD The facts in the instant case left no room for doubt that the agreements and resolutions passed by the assessee were all designed to secure one purpose-to extract out of the assets of the assessee large sums of money by persons controlling the assessee as well as the managing agency and selling agency, free of income-tax, and that the agreements and resolutions were sham and colourable transactions. Therefore, the High Court was right in refusing to call for a statement…

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