Law:

Section:

Section 10A of the Excess Profits Tax Act, 1940 - Avoidance or reduction of liability to excess profit tax - One 'S', managing director of assessee-company, transferred 50 per cent of shares held by him to his step brother - Subsequently, when issued share capital of assessee-company was increased, it brought holding of 'S' below 5 per cent of ordinary share capital - EPTO taking view that transfer of shares was gratuitous transaction main object of which was to avoid or reduce amount of excess profit tax payable held that remuneration paid to 'S' would not be deducted under provisions of section 10A - Tribunal upheld EPTO's order - Whether gratuitous transfer of shares by 'S' attracted provisions of section 10A considering that said transfer would affect liability of assessee-company to excess profit tax on its profits made in subsequent chargeable accounting periods - Held, yes - Whether, therefore, order passed by authorities below was correct - Held, yes FACTS The assessee company was floated in 1934 with 'S' as its managing director. On 22-2-1941, 'S' transferred 50 per cent of shares held by him to his step-brother (by his father's first wife). In 1943, the issued share capital of the company was increased that brought the holding of 'S' below 5 per cent of the ordinary share capital. During the accounting period 1-1-1943, to 31-12-1943, the assessee company claimed deduction on account of the remuneration paid to 'S', Managing Director, under Rule 7 of Schedule I on the ground that he held less than 5 per cent of the total number of shares and he as managing director devoted substantially the whole of his time to the management of the company. The EPTO held that the transfer of shares was a gratuitous transaction the main object of which was to avoid or reduce the amount of excess profits tax payable and that in reality 'S' still continued to hold all the shares. On that ground the remuneration paid to 'S' was not allowed to be deducted under the provisions of section 10A. On appeal, the Tribunal upheld the order of the EPTO. On reference: HELD Where there is material on the basis of which the EPTO can form the opinion that a certain transaction was…

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