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Income‑tax Reference Nos. 6 and 8 of 1959, decided on 10th May 1962.

Business expenditure‑

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----Interest on money borrow‑ed for purchase of shares for retaining managing agency‑Whether allowable as business expenditure or as interest on borrowed capital‑Indian Income‑tax Act, 1922, Ss. 10(2)(xv) & 10(2)(iii)‑Power to go into genuineness of transactions.

Interest paid on‑ capital borrowed for purchasing shares in a company for the purpose of retaining the managing agency of the company until the termination of the period of the managing agency is not allowable as business expenditure under section 10(2)(xv) of the Income‑tax Act as the expenditure is incurred in such a case to bring into existence a capital asset or an asset of an enduring nature or an apparatus for enabling profits to be earned, and not for purposes of the business.

The assessee‑firm, who were the managing agents of two sugar manufacturing companies, purchased on April 25, 1950, a number of shares valued at Rs. 19,04,126 in these two companies when the managing agency had still to continue for four years, with the ostensible purpose of retaining the managing agency. For the purchase of these shares the assessee borrowed substantial amounts from the Nawab of Rampur (who sold the shares) and others and paid a sum of Rs. 64,239 as interest to these persons in the accounting year ending 30th April 1951. About eight months after the purchase, the assessee sold these shares to Dalmia Cement Co. Ltd. for the same price and agreed to pay 25 percent. of the managing agency commission and office allowance to the latter so long as the latter held these shares. Later on, the agreement was modified by making the commission payable even if the latter sold away' the shares. The share‑holders in the Dalmia Cement Co. Ltd. were closely related to the partners of the assessee. The assessee claimed reduction of Rs. 64,239 from its business income:

Held, (i) assuming that the shares were purchased for retain ing the managing agency, the interest claimed could not be allowed under section 10(2)(xv) as business expenditure ;

(ii) the amount was not allowable under section 10(2)(iii) as capital borrowed for the purposes of the business, as the shares were sold soon after purchase and the capital was not in truth borrowed for the business ;

(iii) on the facts, the borrowing, the purchase and the transfer were all parts of a colourable and illusory scheme to reduce the tax liability and, in any event, the amount in question was rightly disallowed.

Dictum.‑

It is true that an assessee is entitled to arrange his affairs in such a way as to reduce his tax liability by all legal ways but if the arrangement is not genuine but a sham, the income‑tax authorities can ignore it.

STATEMENTS OF CASE

(R. A. No. 1127)

By this application the assessee requires the Tribunal to refer to this High Court certain question of law said to arise out of the order of the Tribunal in I. T. A. No. 1353 of 1956‑57. As, in our opinion, a question of law does arise out of the said order, we hereby draw up a statement of the case and refer it to the High Court of Judicature at Allahabad under section 66 (1) of the Income‑tax Act, 1922.

2. The statement of the case relates to the assessment year 1951‑52, the relevant accounting year for which commenced on May 1, 1950, and ended on 30th of April 1951.

3. The assessee is a private limited company. During the accounting year the assessee was acting as managing agent of two sugar companies, viz., (1) Raza Sugar Co. Ltd. and (2) Buland Sugar Co. Ltd., under the managing agency agreements executed in 1934. Copies of these two agreements are made part of the case and are Annexures "A" and "A‑1" respectively. The managing agency agreement was for a period of twenty years for both the companies. Accordingly, it was to continue for another four years from the end of the accounting period in question. The Nawab of Rampur was a major shareholder in both the above companies. With a view to acquire a controlling interest in these two companies, so that the managing agency in the hands of the assessee might continue undisturbed and uninterrupted, the assessee purchased on April 25, 1950, shares in these two companies (43,000 shares of Raza Sugar Mills and 66,478 shares in Buland Sugar Company Limited) valued at about Rs. 19,04,126 from the Nawab of Rampur. The assessee had very little funds of its own to make this payment. It, therefore, took loans in the form of deposits from the Vyapari Ltd., New Delhi, and Govan Agencies Ltd., New Delhi. Even then the full purchase consideration for these shares could not be paid to the Nawab of Rampur. For the balance of purchase price, the rate of interest payable was fixed at 6% per annum. The interest was paid by the assessee as under:

Rs.
12,768	Vyapari Ltd., New Delhi.
44,097	H. H. the Nawab of Rampur.
7,374	Govan Agencies Ltd., New Delhi.
64,239

After about eight months from the date of the acquisition of these shares, the assessee sold all the shares of these two companies thus acquired along with their own holdings to Messrs Dalmia Cement Ltd. practically at the same price at which they were acquired. By virtue of the agreement of sale dated January 15, 1951, it was stipulated that Messrs Dalmia Cement Co. Ltd. were to receive 25% of the managing agency commission and office allowance which the assessee was receiving from the two managed companies. This agreement with Dalmia Cement Co. Ltd. provided that the managing agency remuneration would be shared so long as Dalmia Cement Co. continued to hold all those shares in the two sugar companies. There was a further provision in the agreement that so long as Dalmia Cement Co. Ltd. was to get a share in the managing agency commission, they would always cast vote in the furtherance of the interest of the assessee‑company. This agreement was modified on December 24, 1951, by adding a rider to the effect that the shares of the managing agency commission were agreed to be payable to Dalmia Jain Trust. A copy of this agreement along with its endorsement is made part of the case and is Annexure "B."

4. The assessee claimed the payment of the interest of Rs. 64,239 as admissible deduction in the computation of its business income. The Income‑tax Officer, for reasons stated in his assessment order, held that the assessee, not being a dealer in shares, the loans on which the interest was paid did not relate to the assessee's business, and that the liability for the loan was really incurred in order to benefit the share holders of Dalmia Cement Co. Ltd. and the beneficiaries of the Dalmia Jain Trust who were mostly members of the family of the managing director of the assessee‑company or close relatives and friends. Holding that way, he disallowed the assessee's claim for the deduction of the interest. A copy of the Income‑tax Officer's order is made part of the case and is Annexure "C".

5. The assessee then preferred an appeal before the Appel late Assistant Commissioner. The Appellate Assistant Commissioner took the view that the purchase of shares from H. H. the Nawab of Rampur was a genuine purchase and was ostensibly made for the purpose of safeguarding the managing agency busi ness. In this view of the matter, he considered that the interest of the loans was an allowable expenditure. He, therefore, deleted the addition of Rs. 64,239 from the assessee's total income. A copy of the Appellate Assistant Commissioner's order is made part of the case and is Annexure "D".

6. The Income‑tax Officer then preferred an appeal against the order of the Appellate Assistant Commissioner to the Income tax Appellate Tribunal. It was contended for the Department before the Tribunal that the shares not being used in the business either, the interest paid on the borrowed money for the acquisition of these shares was not a proper Deduction. The Tribunal held that the shares which were purchased out of the borrowed money were not used as business assets. They observed that as a matter of fact, these shares were ultimately sold away to Dalmia Cement Co. Ltd. In the opinion of the Tribunal, even if it was considered that the acquisition of the shares had something to do with the retention of the managing agency business for a further period, in a very remote way, it had certainly no connection with the business carried on by the assessee during the accounting year because the managing agency was to continue for another four years under the already existing agreement. The Tribunal accordingly held that the payment of interest was not an admissible expenditure either under section 10(2)(iii) or section 10(2)(xv) of the Act. Holding that way, the Tribunal reversed the order of the Appellate Assistant Commissioner and confirmed the addition made by the Income‑tax Officer. A copy of the order of the Tribunal is made part of the case and is Annexure "E".

7. On these facts, we refer the following question of law for the opinion of their Lordships:

"Whether on the facts and circumstances of the case, the sum of Rs. 64,239 paid as interest to H. H. the Nawab of Rampur and others is a permissible deduction in computing the business income of the assessee "

8. The draft statement of the case was placed before the parties. The Commissioner of Income‑tax, Lucknow, pointed out some typographical mistakes which have been corrected. The counsel for the assessee has no suggestions to make. The draft statement is, therefore, finalised.

(R. A. No. 1126)

By this application the assessee requires the Tribunal to refer to the High Court certain question of taw said to arise out of the order of the Tribunal in I. T. A. No. 771 of 1956-57. As in our opinion, a question of law does arise out of the said order, we hereby draw up a statement of the case and refer it to the High Court of Judicature at Allahabad under section 66(1) of the Income tax Act, 1922.

2. The statement of the case relates to the assessment for 1951-52, the relevant accounting year of which commenced on May 1, 1950, and ended on 30th of April. 1951.

3. The assessee is a private limited company. During the accounting period, the assessee was acting as managing agent of two sugar companies, viz., (1) Raza Sugar Co. Ltd. and (2) Buland Sugar Co. Ltd., under the managing agency agreements executed in 1934. Copies of these two agreements are made parts of the case and are Annexures "A" and "A-1" respectively. The managing agency agreement was for a period of twenty years for both the companies. Accordingly, it was to continue, for another four years from the end of the accounting period in question. The Nawab of Rampur was a major shareholder in both the managed companies. With a view to acquire a controlling interest in these two companies so that the managing agency in the hands of the assessee might continue uninterrupted, the assessee purchased on April 25, 1950, shares in these two companies (43,000 shares of Raza Sugar Mills and 66,478 shares in Buland Sugar Co. Ltd.) valued at about Rs. 19,04,126 from the Nawab of Rampur. Not being able to secure the full finance for the payment of the purchase consideration the assessee became a debtor to the Nawab of Rampur for the balance of the purchase price. The rate of interest payable was fixed at 6% per annum. After about eight months from the date of the acquisition of these shares the assessee sold all these shares along with their own holdings to Messrs Dalmia Cement Co. Ltd., practically at the same price at which they were acquired. By virtue of the agreement of sale dated January 15, 1951, it was stipulated that Messrs Dalmia Cement Co. Ltd. were to receive 25% of the managing agency commission and office allowance which the assessee was receiving from the two managed companies. This agreement with the Dalmia Cement Co. Ltd. provided that the managing agency remuneration would be shared so long as the Dalmia Cement Co. Ltd. continued to hold all those shares in the two sugar companies. There was a further provision in the agreement that so long as the Dalmia Cement Co. Ltd. was to get a share in the managing agency commission they would always cast vote in the furtherance of the interest of the assessee company. This agreement was modified on December 24, 1951, by adding a rider to the effect that the share of the managing agency commission agreed to be payable to Dalmia Cement Co. should henceforward be payable to Dalmia Jain Trust. This provision having been operative from a date subsequent to the end of the relevant accounting period, it has, however, no effect on the assessment for 1951-52. A copy of the agreement is made part of the case and is Annexure "B". In pursuance to this agreement, the assessee claimed a deduction of a suns of Rs. 3,000 paid to Dalmia Cement Co. Ltd. as their share of managing agency commission for the two sugar companies under section 12-A of the Act. This payment was disallowed by the Income tax Officer and the disallowance was also sustained by the Appellate Assistant Commissioner on the ground that all the conditions laid down in section 12-A of the Income tax Act were not fulfilled inasmuch as there was no adequate consideration paid by Dalmia Cement Co. Ltd. for the sharing of the managing agency commission. The Income tax Officer's order and the order of the Appellate Assistant Commissioner are made parts of the case and are Annexures "C" and "D" respectively.

4. When the assessee came up in appeal before the Incometax Appellate Tribunal, the Tribunal found that the sum of Rs. 3,000 did not represent any share of the managing agency commission at all but was actually a share of the office allowance received by the assessee from the two managed companies. The Tribunal observed that the claim did not fall under section 23-A at all and that in the event it was not necessary to decide whether the conditions provided for in section 23-A had been satisfied. The Tribunal took the view that there being no specific provision in the Income tax Act for the sharing of the office allowance, it could not be allowed as a deduction in the computation of the assessee's income inasmuch as the payment represented a diversion of a part of the office allowance received by the assessee. Holding that way, the Tribunal confirmed the disallowance. A copy of the order of the Tribunal is made part of the case and is Annexure "E".

5. On these facts, we refer the following question of law for the opinion of their Lordships:

"Whether the sum of Rs. 3,000 which was paid to Dalmia Cement Co. Ltd. out of the office allowance received by the assessee from its managed companies was an admissible deduction in computing the business income of the assessee company under the Indian Income tax Act "

6. The draft statement of the case was placed before the parties. The learned counsel for the assessee made some minor suggestions verbally which have been accepted. The Commissioner of Income tax, Lucknow, has no suggestions to make. The statement is, therefore finalised.

R. S. Pathak for the Assessee.

Gopal Behari for the Commissioner.

JUDGEMENT

BRIJLAL GUPTA, J.

These are two income tax references under section 66(1) of the Income tax Act. They arise out of a consolidated appellate order of the Income tax Appellate Tribunal and may be conveniently disposed of by a common judgment.

The question referred to us for opinion in the first reference is:-

"Whether on the facts and circumstances of the case, the sum of Rs. 64,239 paid as interest to H. H. the Nawab of Rampur and others is a permissible deduction in computing the business income of the Assessee "

The question referred in the other reference is:

"Whether the sum of Rs. 3,000 paid to Dalmia Cement Company Ltd. out of the office allowance received by the assessee from its managed companies was an admissible deduction in computing the business income of the assessee under the Indian Income tax Act "

The facts giving rise to the two references are : The assessee is a private limited company. During the relevant accounting year the assessee was acting as the managing agent of two sugar companies, (1) The Raza Sugar Company Ltd., and (2) The Buland Sugar Company Ltd., under two different managing agency agreements, one executed on 24th March 1934, and the other on 12th February 1934. The relevant terms of the two agreements were the same. The managing agency in each case was to continue for a period of twenty years certain, and thereafter until the managing agents were removed by an extraordinary resolution of the managed company passed at an extraordinary general meeting specially convened for that purpose and of which not less than six calendar months' notice was given and at which shareholders owning not less than ths of the issued capital of the company were present. The managing agents were to receive an office allowance of Rs. 1,000 per month and a commission of 10%. In the event of the managed company being wound up during the period of the managing agency agreement with the object of transferring its business to another company, one of the terms and conditions of the agreement for transfer of the property and business of the vendor company to the vendee company was to be that the managing agents were to continue to be the managing agents of the transferred company on similar terms and conditions.

The fixed term of twenty years of the managing agency was to continue for four years from the end of the accounting year in question. In both the managed companies the Nawab of Rampur was a major shareholder. On 25th April 1950, the assessee purchased from the Nawab 43,000 shares of the Raza Sugar Company and 66,478 shares of Buland Sugar Company for a sum of Rs. 19,04,126. The assessee alleged that the purchase was with a view to acquire a controlling interest in the two companies in order to make certain of the continuance of the managing agency. The assessee had very little funds of its own to pay the purchase price. Accordingly, it took loans at 6% from (1) Vyapari Ltd., New Delhi, and (2) Govan Agencies Ltd., New Delhi. Even then the full purchase price of the shares could not be paid to the Nawab and the assessee remained indebted to him for part of the purchase price. Interest was accordingly paid by the assessee as under on the loans and the amount still due to the Nawab.

	Rs.
Vyapari Ltd., New Delhi	12,768
Govan Agencies Ltd., New Delhi	7,374
H. H. Nawab of Rampur	44,097
	64,239

After about eight months froth the date of the purchase of the shares, the assessee sold all the shares of the two companies to Messrs Dalmia Cement Company Ltd., practically at the same price at which it had acquired them. Under the agreement' of sale dated 15th January 1951, it was stipulated that Messrs Dalmia Cement Company Ltd. will receive 25% of the managing agency commission and the office allowance which the assessee was receiving from the managed companies. This was receivable by Messrs Dalmia Cement Company Ltd. only so long as the vendee company continued to hold all the shares purchased by it in the two companies. If the shareholding became reduced there would be a proportionate reduction in the percentage of the commission and office allowance payable by the assessee to Messrs Dalmia Cement Company Ltd. There was a stipulation in the agreement of sale that in all meetings of the shareholders of the two managing companies, the vendees will vote in accordance with the desire of the vendors and in furtherance of the interest of the vendors in the office of the managing agents of the principal companies, so long as they enjoyed the benefits of any shares in the managing agency" Lastly it was declared that nothing in the agreement of sale was to be deemed to constitute a partnership as between the vendors and the vendees.

Subsequently, on 24th December 1961, a further agreement between the parties was incorporated in this agreement of sale. This further agreement was to the effect that the provision for reduction in the percentage of commission and office allowance on reduction of the shareholding by the vendee company was to cease to be operative. The effect of this further agreement was that however much the shareholding of the vendee company in the shares of the managed company might become reduced, they will still be entitled to receive 25% of the commission and office allowance of the vendor company and there shall be no reduction in this percentage. It may be noted that the date of this further agreement, namely, 24th December 1951, fell outside the accounting year relevant to the assessment year in question.

There was yet another agreement incorporated in the original agreement of sale on 2nd January 1952, with effect from 1st January 1952. This was to the effect that the percentage of commission and the office allowance shall be payable to Messrs Dalmia Jain Trust instead of Messrs Dalmia Cement Company Ltd.

In the assessment for the year 1951-52, the assessee claimed the sum of Rs. 64,239 paid by it as interest on the loan for purchase of the shares of the two managed companies as an admissible deduction in the computation of its business income. The Income tax Officer disallowed the claim. He found that the shareholders of the Dalmia Cement Company and the beneficiary of Dalmia Jain Trust were mostly members of the family of the managing director of the assessees or his close relations and friends. The loan was incurred not for the purpose of the assessee's business but for the benefit of the shareholders and beneficiaries of Dalmia Cement Company Ltd. And Dalmia Jain Trust, who ultimately became entitled to the dividend income of the shares purchased out of the loan incurred and to a percentage of the managing agency commission and the office allowance of the assessee. He further held, that the purchase of the shares by taking the loan and transfer of the shares was a device adopted to reduce the tax liability of the assessee. An alternative argument also appears to have been addressed to the Income tax Officer to the effect that the assessee carried on business on share dealings also and the interest paid was an allowable expense of its business of share dealing. This argument was repelled by the Income tax Officer on the ground that the asses see did not carry on business in shares. Indeed, according to its articles of association it was not authorised to carry on such business.

Against the orders of the Income tax Officer, the assessee went up in appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner dealt with the subject at considerable length in connection with the disallowance of the sum of Rs. 3,000 representing 25% of the office allowance paid by the assessee to Dalmia Cement Company Ltd. under the terms of the agreement dated 15th January 1951, and subsequent agreements. In particular he considered the effect of the deletion of the provision in the original agreement by the subsequent agreement dated 24th December 1951, that the percentage of commission and office allowance payable by the assessee to the vendee will not be affected by the reduction in the shareholding by the assessee. He observed, "Messrs Dalmia Cement Co. Ltd. could not in the absence of shares vote in accordance with the desire of the appellant". He went on to conclude. "All this leads me to share the suspicion of the Income tax Officer, who has held the agreement to be a manipulated affair, that these manipulations were possible, because all the persons concerned were close relatives who belonged to the Dalmia family, who in on way or the other controlled all the above mentioned companies". But curiously enough when he came to consider the allow ability or otherwise of the sum of Rs. 64,239, he lost sight of his earlier observation and held that the purchase of shares from H. H. the Nawab of Rampur " . . . .was ostensibly made for the purposes of safeguarding the managing agency" and held the sum of Rs. 64,239 to be allowable as revenue expenditure.

The Commissioner of Income tax directed the Income tax Officer to file an appeal to the Income tax Appellate Tribunal against the deduction of Rs. 64,239 allowed by the Appellate Assistant Commissioner. The Tribunal allowed the appeal on the finding that the debt incurred for purchase of the shares and interest paid thereon had no connection with the business carried on by the assessee. On the date of taking the loan the managing agency was still to run for a period of four years. Only eight months after the purchase of the shares with the money borrowed, the shares were sold away. The shares were not used as a business asset. Even if the acquisition of the shares had something to do with the renewal of the managing agency business for a further period is a very remote way, it had no connection with the business carried on by the assessee during the accounting year. In this view, the interest paid could not be allowed as a deduction under section 10 (2) (iii) or 10 (2) (xv).

Thereafter the assessee asked for the statement of case to this Court and the case has been stated as mentioned above.

So far as the allowability of the sum of Rs. 64,239 under section 10 (2) (xv) is concerned that is easily disposed of. The argument of the assessee both before the Appellate Assistant Commissioner as well as before the Tribunal was that "the main purpose" of the acquisition of the shares was to retain the assessee's business in the managing agency. On this argument itself, the amount could not be allowed under that section. If an amount is to be allowed as a deduction under section 10 (2) (xv) it should be an expenditure made exclusively for the purposes of business. The assessee himself did not allege that the amount was "wholly and exclusively" expended for the purposes of business. It merely alleged that it was done so "mainly" for that purpose. Another answer to the assessee's claim under section 10 (2) (xv) is that even if it is accepted that the purpose of the borrowing and the purchase of shares was the retention of the managing agency business, the expenditure incurred by payment of interest on the loan was to bring into existence a capital asset or an asset of an enduring nature or an apparatus for enabling profits to be earned. Such expenditure is not a revenue expenditure which alone is allowable under section 10 (2) (xv); hence the deduction of interest cannot be allowed to the assessee under section 10 (2) (xv).

Coming now to its allowability under section 10 (2) (iii) one has to remember that the managing agency was still to run fur a period of four years on the date of borrowing and purchase. Only eight months later the shares were transferred to Dalmia Cement Company as according to the assessee it had no funds to pay the amount borrowed. Clearly, the assessee must have taken its financial position even on the date of the borrowing and the purchase. It could not have suddenly dawned on the assessee only after the expiry of eight months that it could not hold on to the shares and must part with them. It follows that the borrowing and the purchase and the subsequent transfer of the shares to Dalmia Cement Company were all parts of a pre determined scheme. There is the further fact that the assessee and the Dalmia Cement Company were closely linked as the shareholders of the latter company were relations and close friends of the managing director of the assessee. The pretext for the borrowing and the purchase and sale was that the arrangement would help the assessee to retain the managing agency for a further period as under the agreement of sale, the vendee would exercise its vote according to desire and in the interest of the assessee. This pretext stands completely exposed when we find that by further agreement between the parties incorporated on December 24, 1951, the benefit of the receipt of 25% commission and office allowance was in no way to stand reduced even if the vendee parted with all but a negligible portion of its shareholding. As the Appellate Assistant Commissioner observed if the vendee did not own a sufficient number of shares how was it possible to influence the voting in the interest of the assessee. It is true that this further agreement came into existence after the end of the accounting year but it is relevant for the purposes of determining the real nature of the transaction. It might also be noted that there is nothing on the record to show what proportion the shares purchased by the assessee and sold to Dalmia Cement Company formed of the total issued share capital of the two companies and whether in any case the acquisition of the shareholding would have achieved the object which is said to constitute the purpose of the purchase. If the purpose of retention of the managing agency could not be achieved, then it is clear that the purchase could not have even a remote connection with the business carried on by the assessee. If, as is clear, the purchase had no connection with the assessee's business, the interest paid on the money borrowed cannot be claimed as a deduction under section 10 (2) (iii).

The device is further exposed by the further agreement dated January 2, 1952, by which the benefit of the agreement was transferred to Messrs Dalmia Jain Trust. Presumably this was done with a view to completely evade payment of tax on 25% of the managing agency commission and office allowance, the amount of which it appears was quite considerable. It is significant that the assessee himself probably felt that the arrangement for parting with 25% of the managing agency commission and the office allowance was in the nature of a partnership arrangement for depleting the profits of the business of the managing agency and not a bona fide arrangement for acquiring assets necessary for its business. It, therefore, incorporated a paragraph in the agreement of sale that the agreement did not amount to a partnership between the parties. It is true that an assessee is entitled to arrange its affairs in such a way as to reduce its tax liability by all legal ways but the arrangement must be genuine and not a sham. Here it appears that the object of borrowing was illusory and colourable and not genuine or bona fide. It follows that the sum of Rs. 64,239 was not allowable as deduction under section 10 (2) (iii) also. The deduction was not claimed under any other provision. The question referred to us should, therefore, be answered in the negative.

So far as the amount of Rs. 3,000 in the succeeding assessment year is concerned that was disallowed by the Income tax Officer.

It is not possible to give the reasons on which the Incometax Officer disallowed .the amount as the assessment orders which have been included in our paper book relate to the assessment year 1951-52. In this year the Income tax Officer has stated that he disallows the amount for the reasons given by him in the assessment order for the year 1952-53 in which also all the relevant facts are stated to have been stated by him. The assessment order for 1952-53 has not been included in our paper book. The Tribunal has also not given those reasons in the statement of the case drawn up by it.

The assessee went up in appeal to the Appellate Assistant Commissioner against disallowance by the Income tax Officer.

Before the Appellate Assistant Commissioner one of the grounds on which deduction was claimed was that it was allowable under section 12-A. That provision relates to division of managing agency commission. As the claim related to the office allowance and not to the managing agency commission it was held by the Appellate Assistant Commissioner that it could not be allowed under that section. Other reasons given by the Appellate Assistant Commissioner were that all the conditions laid down in section 12-A were not fulfilled, and that having regard to the modification made in the original agreement by a further agreement dated December 24, 1951, it was clear that there was no adequate consideration for payment of 25 percent. of the office allowance to Dalmia Cement Co. Ltd. It may be recalled that this further agreement removed the bar to transfer by Dalmia Cement Co. Ltd. of any number of shares purchased by it. It would follow that the transfer could be of such number of shares as to make it impossible for Dalmia Cement Co. Ltd. to exercise the voting right effectively in the interest of the assessee company, and yet it would still be entitled to receive 25 percent. of the managing agency commission and the office allowance. Extracts from the order of the Appellate Assistant Commissioner have already been quoted in an earlier portion of this judgment.

The assessee went up in appeal to the Income tax Appellate Tribunal against the disallowance of this sum of Rs. 3,000 also. The Tribunal armed the view of the Appellate Assistant Commissioner that the amount could not be allowed under section 12-A and as such they held that it was not necessary for them to consider whether the conditions laid down in that section were satisfied or not. It is clear that on the plain language of section 12-A the conclusion of the Tribunal that the deduction of Rs. 3,003 could not be claimed under section 12-A was perfectly correct. The Tribunal went on to hold that the amount represented by the payment of Rs. 3,000 was merely a diversion of part of the office allowance to which the assessee was entitled. Presumably the view of the Tribunal was on the basis that there was no consideration for the payment of this amount. It is, therefore, clear that it could not be said that the payment of this sum of money was an admissible deduction under any part of section 10 of the Income tax Act under which alone it could be allowed. Clearly, the payment was not influenced by business considerations. It appears to have been influenced by considerations of relationship and other extraneous considerations such as the desire to evade liability for payment of the proper amount of tae. It follows that the question relating to the amount of Rs. 3,000 should also be answered in the negative.

Both the references should, therefore, be returned to the Tribunal with the above answer. The Department should get the costs of both these references assessed at Rs. 100 each.

Questions answered in the negative.

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