fJudgment

SHAH, J. : Madhowji Dharamshi Mfg. Co. Ltd. - hereinafter called the assessee - was carrying on the business of manufacturing and selling textiles. The assessee was a flourishing concern; the annual profits earned by the assessee before October 1946 ranged between Rs. 15 to 20 lakhs and it had very large reserves.

Till October 7, 1946, the assessee was managed by the Provident Investment Co. Ltd. which owned a majority of the shares of the assessee. On October 7, 1946 the entire share capital of the assessee was purchased by Dalmai Investment Company Ltd. and the Provident Investment Co. Ltd. resigned their office as managing agents of the assessee.

2. Dalmia Cement and Paper Marketing Company Ltd. hereinafter called the D. C. P. M. - were incorporated on October 21, 1937 with the object, inter alia, of carrying on the business of and to work as selling agents or managing agents of any person, firm or company. By an agreement dated October 29, 1948, the D. C. P. M. were appointed selling agents of cotton goods manufactured by the assessee for a period of 10 years commencing from November 1, 1948 upon the terms and conditions mentioned in the selling agency agreement. Under the agreement it was provided that in the event of the assessee being at any time during the continuance of the agreement wound up for the purposes and with the object of transferring its business to another company, the tranferee shall appoint the D. C. P. M. and their successors and assigns to be selling agents for the residue of the term under the selling agency agreement on the same terms and conditions as otherwise. Pursuant to the agreement dated October 29, 1948, the D. C. P. M. acted as the selling agents of the assessee.

3. A company called "Vastra Vyavasaya Ltd." - hereinafter called "V. V." - was a private limited company incorporated on May 27, 1948 with the object, inter alia, of carrying on the business of managing agents, manager, secretaries or agents of any person, firm or company. V. V. was appointed managing agent of the assessee for 20 years with effect from July 1, 1950 under a resolution of the assessee dated July 5, 1950. A formal agreement was executed on August 30, 1950, setting out the terms and conditions of the managing agency agreement.

4. The assessee claimed in the proceeding for assessment for the year 1951-52 corresponding to the account year ending December 31, 1950, allowance under Section 10 (2) (xv) of the Income-tax Act, 1922 in respect of Rs. 17,80,000/- and Rs. 46,80,00/- expended under an agreement dated February 21, 1951 and confirmed by the directors on February 28, 1951, as compensation for breach of contracts respectively to the selling agents and the managing agent. The Income-tax Officer rejected the claim for allowance, and the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. In Second appeal the Income-tax Appellate Tribunal observed :

". . . . we are satisfied upon the facts and circumstances of this case that the selling agency and the managing agency agreements in both the appeals were merely a make-believe, or sham or colourable transaction and that the claim for compensation and the payments are equally fraudulent. They were part of a scheme x x x to withdraw a tax-free sum from the appellants before their liquidation."

5. The assessee then applied under Section 66 (1) of the Indian Income-tax Act to draw up a statement of the case and refer the following question to the High Court of Bombay for opinion.

"1. Whether on the facts and in the circumstances of the case the Tribunal was right in disallowing the compensation amount of Rs. 17,80,000/- paid by the applicant company to its selling agent on the breach of the selling agency agreement?

2. Whether the Tribunal had any material before it to come to the conclusion that there was a scheme from the very beginning of the appointment of the selling agents to withdraw a tax free sum from the applicant company before its li