# Apthorope v. Peter Schoenhofrn HrewinR Co., 4 T.C. 41 and Fireston~ - **Citation:** [1969] 1 S.C.R. 988 - **Court:** Supreme Court of India - **Decided:** 1968-09-04 - **Case number:** Civil Appeals Nos. 968 and 969 of 1967 - **Bench:** J. C. Shah, V. Ramaswami, A. N. Grover - **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/apthorope-v-peter-schoenhofrn-hrewinr-co-4-t-c-41-and-fireston-4546 - **Pages:** 11 ## Headnote B lncon1e-tax-Assessee firm a managing a1:ent-A1annginR agency termiw.ted and a Corpornlion appointed in its place-Partners of assessee firm n1ajor shaN·holders and directors of Corporation-Payment to firm b.v managed cornpany co111pr.nsation for premc.ture 1e1mina:1on of 1nana1Jing agency--!/_ revenue receipt. Corporate \:eil-When can be pierced for finding the nalure of transaction. The asscsscc-firm \\', remuneration was Rs. 1500 per month and a commission of 10 per cent on net profit of the C company after deducting ail expenses and after charging depreciation. There was no provision in the Articles of Association of the managed company for terminating the managing agency ellcept in the case of the managed company being wound up in which case, the managing agents were to receive compensation for loss of appointment. There was also the exception provided D under the general law in case of fraud or gross negligence on the part of the managing agents. The relevant terms of the managing agency agreement were as follows : "Para 2(m). It shall be lawful for the firm to assign their office as Agents and all the rights and obligations as such agents and in the event of assignment, E the assignee or assignees shall be deemed to have been appointed Agents of the company with like powers and authorities remuneration and emoluments and subject to like terms and conditions as are herein contained ...... " "Para 2(c). The firm may at their option from F time to time lend and advance to and for the use of the Company, money on interest to any extent as they may like, the same to run at a minimum rate of five per cent per annum provided that if the bank rate prevailing at the date of advance is higher than five per cent the firm may charge interest at one per cent above G the bank rate." On August 12, 1943 a meeting of the Board of Directors of the managed company was held. The Directors present were : ( 1) Sri Padampat Singhania, (2) Sri Lakshmipat Singhania a~d (3) Shri S. M. Bashir with Sri Padampat Singhania in the chair. At this meeting a letter dated August 3, 1943 from M/s. Juggilal H Kamlapat, Bankers, the financiers of the managed company asking for repayment of advances made by the financier to the c~m- • pany exceeding Rs. 5 lacs was discussed. Sri S. M. Bashir pmnt- A B c , D E F G H • J, L. KAMLAPAT v. c. I, T, (Ramaswami, J.) 9~ I ed out that the managing agents were under no obligation to • provide finance for the company at the latter's direction. It was the option of the firm to provide or not to provide finance and • also to determine the extent of the advance. Sri Padampat Singhania, thereupon pointed out that even though the matter. of providing finance might be at the discretion of the managmg agents but "it was the usual practice with companies under the management of the managing agents to obtain their finance from the managing agents". Accordingly the meeting decided to ask the assessee to arrange for advance of such sums of moneys as would be necessary to pay off the loan of the financiers M/ s. Juggilal Kamlapat Banker and also to equip the company with working capital. A resolution was accordingly passed at the meeting to that effect. On August 19, 1943, the company addressed a letter to the assessee informing it of the resolution and asking it to make immediate arrangement for an amount which would not only reduce the account of . M/ s. Juggilal Kamlapat Bankers to a figure of Rs. 5 lacs but must also provide the company with .,.rorking capital. The assessee replied to this commu· nication by a letter dated August 31, 1943 in which the assessee pointed out that under the terms of the managing agency agreement it was not obligatory upon it to make advances to the managed company. The assessee stated that it had been specially constituted to act as the managing agent of the managed company and had no capital of its own. It had no assets also on the security of which it could raise a sum of Rs. 30 lacs which would be necessary to reduce the amount of Mis. Juggilal Kamlapat Bankers to the limit required by the managed company and to equip the company with working capital. The letter of the assessee was considered by the managed company at the meeting of its Board of Directors on September 2, 1943. Sri Lakshmipat Singhania, one of the Directors of the managed company reported in the meeting that a new floated company under the name and style of J. K. Commercial Corporation was willing to make advance provided it was appointed the managing agent of the company. Sri Bashir pointed out that the managed company had reached a stage when it would make substantial profits and enable the assessee to earn better remuneration and that it would be unjust to ask the assessee to relinquish office on a ground which did not constitute a term of the contract between the assessee and the managed company. Sri Padampat Singhania who' presided over the meeting recognised that the assessee would be adversely affected and he therefore suggested that the company should pay a fair compensation in consideration of the premature termination of the managing agency. A compensation of Rs. 2 lacs was worked out and Sri Bashir agreed to accept the amount for the termination of the managing agency on behalf of the assessee . It was decided that the sum of Rs. 2 lacs should be paid as soon • • •• 9'92 SUPREME COURT REPORTS [ 1969] I S.C.R. •as ~n agreement was arrived at "".ith the J. K. Commercial CorpoA • ral!on for taking over the managing agency of the company. Tbc managing agency of the assessee was thereafter tenninated with effect from November I, 1943 and M/s. J. K. Conunercial Corporation were appointed the managing agents with effect from that date: The constitution of M/s. J. K. Commercial Corporation was as follows : 'A' Class ordinary !'.hares of Rs. 100 each Rs. -----·· -------·-------- I. (:i) Sri PadampHt (h) Lady Ansulya Singhania wife of Sri Padampat (naiural guardi;u1 of her minor son Gopal Hari.) (c) Lady Ansuiya Singhania (NJlural gu,1TdiJn of her rninor son Ch. Gaur Il;iri_) II. (,1) Lala Kaila~hp3[ Singhania. (b) La ta Kaf!;ishr.:u, (~:nural guardi;1n of his minor c:.on Vijaipat) III. (:1) Llla Lak<:.hrnip;•f Sin~~hanin (b) Shrin1~11i Pthllp~n\t: Devi wife of Lakshn1ipJt her n1inor son (na1ur:1I gu;1rdian or Hari<;hankar). JV. (;!) L;1Ja Radh;iki,han Singhania uncle of Sri Padamr:1t. (b) l.1Ja PL1rshot1an1das Singhar.ia cc'l\1sin of Sri P.1lia1npat. (c) L:da Suhan Lal S nghan a cous n of Sri. Padan1pat. . . . . , . V. (:1) Shri P.D.Chandra Rana, P.A. to Sri J>adampat. (b) Shri Gorik;c;,han J;1ipuri;"1 M;111in1 of J.K.Kanpur (Ko!hi) . . . . . . . . (c) Shri S.YJ.Bashir. Director J.K. Iron and Steel Co .• L!d. (d) Lala S.D. Gacg (c) L:>la Sita! Pr:1sad, Director of J.K. Wooi!cn t-.1i1Js. , . TOTAi. 1,750 750 500 1.750 600 500 750 70 1()0 1,0(}0 100 10 100 100 soo 8.580 'U' Class ordinary shares of Rs. IO each Rs. 5,000 5,000 1,000 2,000 100 1.900 15,000 It is ·apparent from this constitution tha.t the ~hares of the three Singhania brothers. their wives and children m. J. K. Commercial Corporation Ltd. were 6,600 'A'. Class onhnary shares out of 8.580 and 11.000 out of 15,000 'B Class ordmar~ shares. The remainin" shares were allotted to the Personal 0ss1stant to Sri Padampat "singhania, a Munim of the firm of Jugg1la! Kamlapat, a Director of th_e managed company, one S. D. Garg and to a Director of an alhed concern. B c D E F G H • I ' rJ , I J. L. KAMLAPAT v. C.LT. (Ramaswami, !.) 99~ A M/s. J. K. Commercial Corporation Ltd. were appointed • mru111aging agents for a period of 20 years, renewable thereafter • for a term not exceeding 20 years at a time. The remuneration was to be an office allowance of Rs. 1,000/ per month, a commission of 10 % on the net annual profits of the company and a commission of 2t% on the gross sales of the products of the B company. Para 8 of the Managing Agency Agreement states : "The Managing Agents shall from time to time lend and advance to and for the use of the Company such moneys as may from time to time be required by the Company up to an amount not exceeding Rs. 20,00,000 at any one time, but they may, however at their option C lend and advance even more money if so required by the Company. The Company shall pay to the Managing Agents, interest on moneys so lent and advanced at a rate to be mutually agreed upon from time to time." The amount of Rs. 2 lacs compensation paid to the assessee firm was worked out on the basis of 5 preceding years profits of D the managing agency from November 1, 1938 to October 31, 1943. The sum of Rs. 2 lacs was paid to the assessee on October 31, 1943. The amount was claimed by the assessee as compensation for loss of office not liable to tax under the Income Tax Act as a capital receipt. The receipt of this sum of Rs. 2' lacs, though incorporated in its books by the assessee, was not disE closed at the time when the assessment was originally made against it on April 6, 1945. Later on when it was discovered that the assessee had received the sum from the managed company the assessment was reopened under s. 34 of the Income Tax Act and proceedings were also taken under s. 15 of the Excess Profits Tax Act for the corresponding chargeable accounting period and the amount was included in the total computation of F the assessee's business income. The assessee challenged these assessments on the ground that the proceedings under s. 34 of the Income Tax Act ahd under s. 15 of the Excess Profits Tax Act were invalid and on merits therefore there was no justification for the inclusion of the sum of Rs. 2 lacs as its business income liable to tax. Both these contentions were rejected by the Income Tax G Officer and by the Appellate Assistant Commissioner in' appeal. The assessee thereafter preferred second appeals to the Income Tax Appellate Tribunal. In these appeals the assessee abandoned the contention regarding the legalitv of the proceedings under s. 34 of the Income Tax Act and s. 15 of the Excess Profits Tax Act and confined its argument merely to the point that the sum H was not liable to be charged to tax. The AppeUate Tribunal came to the following findings of fact :-The three Singhania • brothe.rs, Padampat, Lakshmioat and Kailashpat held 51 per cent share m the assessee firm. They and the members of their family • • •• • 994 SUPREME COURT REPORTS (1969) I SC.R. • held a large majority of shares both in J. K. Commercial Corpo- • ration Ltd. and in the managed company. There was no contract by reason of which the assessee was under any obligation to finance the business of the company. It was a false allegation on the company's part that it would be derogatory to its reputation to mortgage the property of the company to raise finance and the only alternative was to seek a party who might be willing and able to finance the company even if such a course warranted a change of the managing agents. For the new managing agents advanced loan to the company only on the pledge of the goods of the company ( vide balance sheets of the company annexures I. J. and K.). It will also appear from these balance sheets that Juggilal Kamlapat Bankers still continued to be the creditors of the company in the three years for which the balance sheets have been filed in the sums of Rs. 3, 13, 169-11-6, Rs. 8,89,323-13-6 and Rs. 6,06,691. On these findings the Appellate Tribunal came to the conclusion that the reasons given by the assessec for terminating the managing agency were not true and the sum of Rs. 2 lacs was not compensation for Joss of office but was payment referable to the business of the assesscc as managing agents of the Company. The Appellate Tribunal described the transaction of the termination of the managing agency as "collusive" and "not genuine" and that the "payment was not compensation for any loss" as in the view of the Appellate Tribunal no loss was sustained by the assessee. At the instance of the assessee the Appellate Tribunal stated a case to the High Court under s. 66 ( 1 ) of the Income Tax Act on the following question of law : "Whether there was material on which the Tribunal could hold that the receipt of Rs. 2,00,000 by the assessee was revenue receipt liable to tax under the Income Tax Act and the Excess Profits Tax Act?" By its judgment dated July I 0, 1962 the High Court answered the question against the asscssee and in favour of the Commissioner of Income Tax, U.P. The High Court took the view that the amount of Rs. 2 lacs was received by the assessee "by virtue of its office" and "related to the work of the managing agency" even though the payment was collusive and there was no real termination of the managing agency agreement. It was pointed out by the High Court that the collusive payment could not have been made if the asscssce had not been the managing agent of the managed company and the managing agency business of the asscssee was exploited for getting the amount of Rs. 2 lacs. On behalf of the appellant Mr. Sukumar Mitra stressed the argument that the High Court failed to appreciate that the assessee firm was a distinct legal entity and was different from J. K. Commercial Corporation which was a separate legal entity A B c D E F G H • • l . ' . . J. L. KAMLAPAT v. C.I.T. (Ramaswami, J.) 995 A in the eye of law and the mere fact that the share Jioldings of !he · partners of the assessee firm in the J. K. Commercial Corpora~on was of a considerable proportion should not have led the High Court to the inference that the rights of the assessee firm were not destroyed, sterilized or lost on account of the transaction. To put it differently, the contention of the appellant was that the B High Court was not entitled to go behind the legal form of the transaction and to find out what was the substance. We are unable to accept the argument of Mr. Sukumar Mitra as correct. In the present case, the Appellate Tribunal has found that the transaction of termination of the managing agency was a colourable transaction and· the real purpose was to hand over a sum of Rs. 2 lacs to the assessee firm. It was also found that the payC ment was collusive and the partners of the firm continued to run and enjoy the benefit of managing agency as shareholders and Directors of the newly formed company by reason of their holding a majority of shares in that company. It was also held by the Appellate Tribunal that the reason for terminating the managing agency was not a true reason but was merely a fake one and the D whole transaction was a hoax for the purpose of evading incometax. In other words, it was a collusive device practised by the managed company and the assessee firm for the purpose of evading income-tax both in the hands of the payer and of the payee. The Appellate Tribunal also found that there was only a change of personnel in the managing agency and not a change in office and that the assessee had no right of compensation for any loss of E office. In· a matter of this description it is well-established that the Income-tax authorities are entitled to pierce the veil of corporate entity and look at the reality of the transaction. It is true that from juristic point of view the company is a legal personality entirely distinct from its members and the company is capable of enjoying rights and being subjected to duties which are not the F same as those enjoyed or bome by its members. But in certain exceptional cases the Court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade. For example, the Court has power to disrei;ard the corporate entity if it is used for. tax evasion or to circumvent tax obligation or to perpetrate fraud. For instance, in Apthorpe v . G Peter Schoenhofen Brewing Co.(') the Income Tax Commissioners had found as a fact that all the property of the New York company, except its land, had been transferred to an English company, and that the New York company had only been kept in being to hold the land, since aliens were not allowed to do so under New York law. All but three of the New York company's shares 'were held by the English company, and as the CommisH sioners also found, if the business was technically that of the New •York company, the latter was merely the agent of the English· (I) 4 T.C. 41. •• • • •• • • • 996 SUPREME COURT REPORTS ( 1969] l S.C.R. company. In the light of these findings the Court of Appeal, despite the argument based on Salomon's(') case held that the New York business was that of the English company which was !ia"1e for English ·income tax accordingly. In another caseFirestone Tyre and Rubber Co. v. L/ewel/in(')-an American company had an arrangement with its distributors on the Continent of Europe whereby they obtained supplies from the English manufacturers, its wholly owned subsidiary. The English company credited the American company with the price received after deducting the costs plus 5 per cent. It was conceded that the subsidiary was· a separate legal entity and not a mere cmanadon of the American ;_,Jrcnt, and that it was selling its own goods as principal. and not its parent's goods as agent. Nevertheless, the.