The judgment of the court was delivered by
SHAH J.--In proceedings for assessment of tax for the year
1945-46 the Lakshmiratan Cotton Mills--hereinafter called " the company
" claimed allowance under section 10(2)(xv) of the Indian Income-tax Act,
1922, of Rs. 18,90,000 paid by it as compensation for termination of the
managing agency of the firm, Beharilal Kailashpat, and Rs. 13,300 incurred as
expenditure in respect of arbitration proceedings in connection with the
determination of the compensation. The Income-tax Officer disallowed the claim.
The order was confirmed by the Appellate Assistant Commissioner and by the
Income-tax Appellate Tribunal. The High Court of Allahabad, in a reference under
section 66(2) of the Indian Income-tax Act, 1922, held that there was material
on which the Tribunal could hold that the allowance claimed was not spent wholly
and exclusively for the purpose of the company's business.
The facts which give rise to the reference require to be
stated in some detail. The company was incorporated in 1934. The shares of the
company were held in equal moities by members of two families, who may, for the
sake of convenience, be referred to as " Singhanias " and "
Guptas ". Under a deed dated August 3. 1934, Singhanias and Guptas formed a
partnership to carry on, in the name of Beharilal Kailashpat, several businesses
including the business of secretaries, treasurers and agents of the company. By
agreement dated May 2, 1935, the company appointed Beharilal Kailashpat as its
managing agents. The firm then consisted of eight partners--four belonging to
the family of Singhanias and the other four belonging to the family of Guptas.
Under the articles of association of the company two ex-officio directors were
to be nominated by Beharilal Kailashpat. Clause 2 of the managing agency
agreement read as follows :
" In consideration of the agreement hereinbefore
contained on the part of the firm and in further consideration of the firm
having promoted the company, the company hereby promise and agree with the firm
and its members for the time being :
(a) That the firm shall be the agents of the company for a
period of ninety-nine years and thereafter until they shall resign or until they
are thereafter removed from their office as agents of the company by a majority
of three-fourths of the shareholders of the company.
(b) The firm shall receive from the company a commission
at the rate of two per cent. on the sale price of all the cotton, yarn and
cotton cloth manufactured and sold by the company and a commission of one per
cent. on the sale proceeds of all materials, yarns and fabrics manufactured from
wool, jute, silk and other fabrics, and sold by the company, and a commission of
ten per cent. on the gross profits after deducting all expenses but before
deducting depreciation, made by the company from its ginning or pressing
operations independently of the usual adat commission, exchange and interest
payable to their branch firms or agents and adatias appointed by them outside
Cawnpore for purchasing or selling any goods or commodities for or on account of
the company.
(c) The company shall defray the expenses of maintaining a
suitable office and such staff as the firm may deem proper to transact the
business of the firm as agents of the company.
(d) In case the company shall sell their mill premises and
machinery and the business thereof, the same shall be sold subject to the rights
and claims of the firm of the agents of the company as provided by this
agreement and the memorandum and articles of association of the company. "
By clause 3 of the agreement it was provided that in the
event of the company being wound up the managing agents, Beharilal Kailashpat,
shall be entitled to receive compensation for loss of appointment as agents a
sum equal to the amount earned by the firm during the five vears preceding the
winding up of the company. Beharilal Kailashpat were, under clauses 3(f) and
(g), to purchase all cotton, wool, machinery and stores that may from time to
time be required for the use of the company's mills and to sell the same and
also to sell all loose or baled yarn, and cloth produced or manufactured at the
company's mills. By clause (h) the managing agents were to exercise all the
powers given to them by the articles of association of the company. It was also
provided that if the firm be not dissolved it shall be lawful for the firm to
change its constitution, name or style from time to time without thereby in any
way affecting their appointment as agents of the company.
From time to time the constitution of Beharilal Kailashpat
was changed--some members ceased to be partners and new members entered the
firm--without affecting the equal representation of Singhanias and Guptas. On
February 15, 1943, a fresh deed of partnership of Beharilal Kailashpat was
executed under which the four representatives of Singhanias were--(1) Smt.
Ansuiya Devi ; (2) Pushpavati Devi ; (3) Vijaipat (minor) and (4) Ajaipat
(minor) [Nos. (3) and (4) being minor sons of Lala Kailashpat Singhania] ; the
representatives of Guptas were--(1) Smt. Ramdevi ; (2) Smt. Keshobai ; (3) Lala
Ram Rattan Gupta, and (4) Lala Ram Prasad Gupta. Each of the families
collectively held an eight annas share. Under the terms of this partnership deed
it was agreed that Lala Ram Rattan Gupta, a partner of the firm, will be
entitled to carry on business on behalf of the firm.
Disputes arose in 1943 between Singhanias and Guptas in
regard to the management of the various businesses in which they were
interested. These disputes were referred for adjudication to Thakur Kanhaiya
Singh who made and published his award on January 18, 1944. Under the award the
arbitrator allotted certain businesses exclusively to Singhanias and the rest to
Guptas. In regard to the managing agency of the company, the award directed that
the Singhania group do withdraw from the company, and the shares held by them be
given to the Guptas " at the rate of Rs. 2,000 per share " : that
Padampat and his two brothers do resign from the board of directors, that the
Singhanias group be deemed to have retired from the partnership of the managing
agency as from 25th January, 1944, and that L. Ram Rattan Gupta along with his
members of the group be entitled to continue the said managing agency business :
that the name of Kailashpat be removed from the firm's name of Beharilal
Kailashpat ; that the profit and loss account of Beharilal Kailaspat be made up
to January 18, 1944, and that the amount due to either of the groups ascertained
after providing for excess profits tax and income-tax liabilities be paid.
Pursuant to the award the shares held by the Singhanias were taken over by the
Guptas, and the name of the managing agency firm was changed to Beharilal
Ramchandran. On March 31, 1944, the shareholders of the company approved of the
changes in the constitution of the managing agency firm.
Apparently Singhanias were not satisfied with the award
made by Thakur Kanhaiya Singh and they commenced an action (Suit No. 31 of 1944)
in the Civil Court at Kanpur, and claimed relief in respect of the termination
of their interest in Beharilal Kailashpat, and in respect of certain other
matters. There was correspondence between Singhanias and Guptas to which it is
unnecessary at this stage to refer. On September 19, 1944, at a meeting of the
shareholders of the company the firm of Beharilal Ramcharan which was brought
into existence under a deed of partnership dated January 27, 1944, were
appointed managing agents of the company. The Singhanias insisted that they
remained interested in the managing agency and the Guptas asserted that under
the award of Thakur Kanhaiya Singh the Singhania group had ceased to have
interest in the managing agency and on retirement of the members of the
Singhanias, the name of Beharilal Kailashpat was changed to Beharilal Ramcharan.
The shareholders of the company at their meeting held on September 19, 1944,
also passed a resolution that the managing agents be dismissed from the office
and the managing agency agreement be terminated with effect from September 30,
1944.
Thereafter the members representing the Singhanias claimed
compensation from the company for wrongful termination of the managing agency.
The Guptas also made a claim for compensation and threatened to bring an action
against the company. By agreement dated October 19, 1944, the disputes between
the company and Beharilal Kailashpat were referred to the arbitration of Mr. K.
M. Munshi with authority to decide two questions --(1) whether the termination
of the managing agency and removal from the office of the managing agents of the
firm of Beharilal Kailashpat and/or its alleged successor, Beharilal Ramcharan,
was wrongful or not ; and (2) if it was wrongful, to what compensation, if any,
are the ex-managing agents entitled ? Before Mr. Munshi entered upon the
reference, the award made by Thakur Kanhaiya Singh was modified by a
supplementary award made by Thakur Kanhaiya Singh with the consent of the
parties. Under the award so modified, it was provided that :
" Regarding the claim of the retiring partners for a
share in the goodwill of the said firm and in the value of the said managing
agency the said L. R. C. M. Co. Ltd. having terminated the said managing agency
agreement and the managing agents having claimed compensation for the said
termination which they allege was wrongful and the dispute arising out of such
claim having been referred to arbitration, it is agreed and awarded that any sum
awarded as compensation in the said arbitration shall be paid to and retained by
the continuing partners and that irrespective of the result of the said award
and in any event they, i.e., the continuing partners shall pay to the retiring
partners a sum of rupees eight lakhs as representing their share in the
compensation for the premature and wrongful termination of the managing agency
agreement with the said firm. The above payments shall be in full satisfaction
and discharge of all claims and demands whatsoever of the retiring partners on
and to the assets, goodwill and contracts of the said firm including the
managing agency agreement with the L.R.C.M. Co. Ltd., and also in full
satisfaction and discharge of the claim made by them against the Lakshmiratan
Cotton Mills Co. Ltd., for compensation for the termination of the said managing
agency. "
On this modified award a consent decree was obtained in
Suit No. 31 of 1944 filed by Singhanias.
Thereafter, Mr. Munshi made an award on March 25, 1945,
directing :
(1) that the termination of the managing agency of M/s.
Beharilal Kailashpat and their removal from the office of managing agents of the
said company, i.e., Laxmiratan Cotton Mills Co. Ltd. was wrongful ;
(2) that the said Laxmiratan Cotton Mills Co. Ltd. are
liable to pay to the firm of M/s. Beharilal Kailashpat a sum of Rs. 18,90,000
only as and by way of compensation for such wrongful dismissal ;
(3) that the said Laxmiratan Cotton Mills Co. Ltd. do pay
to party of the third part, that is to say, L. Ramratan Gupta and Lala Ramprasad
Gupta, sons of L. Beharilal, and Smt. Keshobai, wife of L. Ramgopal, the said
sum of Rs. 18,90,000 only, with interest thereon at the rate of 3 per cent. per
annum from the date hereof ;
(4) that the said company do pay the said parties of the
2nd part and of the 3rd part their respective costs of the reference and the
arbitration proceedings (which included fees of Rs. 10,000 to Mr. K. M. Munshi).
Payment was thereafter made by the company in pursuance of
this award of Rs. 18,90,000 to Beharilal Kailashpat and Rs. 13,300 were
disbursed as expenses of arbitration.
The Income-tax Officer rejected the claim of the company
to treat as a permissible allowance under section 10(2)(xv) of the Income-tax
Act, 1922, the amount of Rs. 19,03,300. He held that the expenditure incurred
was not connected with the business of the company and in any event it was
capital expenditure. In appeal the Appellate Assistant Commissioner held that
the payment was made " for some improper purpose ... not connected with the
business ". In further appeal before the Tribunal, counsel for the company
urged two arguments in support of the claim for allowance :
(1) that the main object in terminating the managing
agency was to save the company from loss which the company would have suffered
on account of the disputes between the two groups of partners of the managing
agency firm ; and
(2) that the company was by the payment absolved from
liability to the remuneration of the managing agents for the year of account and
for future years also.
The Tribunal held that before the termination of the
managing agency agreement the affairs of the company were administered by Lala
Ram Rattan Gupta and Lala Ram Prasad Gupta, that even after the termination of
the managing agency Lala Ram Rattan Gupta and Lala Ram Prasad Gupta continued to
administer the affairs of the company, and that on the materials on record it
was not proved that the managing agents were performing any service to the
company. The Tribunal therefore held that the payment of the managing agency
commission to the managing agents was not expenditure wholly and exclusively
incurred for the purpose of the company's business. The Tribunal also observed
that the disputes between the two groups could in no way harm or cause hindrance
to the " normal day to day working " of the company.
Referring to the second plea the Tribunal observed that
consideration for the appointment of the managing agents were :--(1) promotion
of the company ; (2) rendering service to the company, anything paid for
promoting the company was not admissible as a revenue deduction, and by making a
consolidated payment to pay off such a liability the company did not reduce the
future revenue liability of the company.
The Tribunal in summarising the findings observed :
" These disputes (between Singhanias and Guptas) were
taken to the court and (were) also referred to arbitration. After the first
arbitration dated January 18, 1944, the Singhania group was not satisfied.
Ultimately some sort of a settlement was arrived at through an arbitrator whose
supplementary award forms the basis of the consent decree of the court. Under
this award each party had to pay the other large sums. Therefore, a device was
adopted to provide funds in the hands of the parties at the expense of the
company for the purpose of settling their individual accounts. In preparing the
scheme, the authors had made an effort to reduce the tax liability of the
company by claiming the amount as a revenue deduction. "
The Tribunal also observed that the firm styled Beharilal
Ramcharan was brought into existence in place of Beharilal Kailashpat, but it
rendered no services as managing agents. The Tribunal accordingly rejected the
claim of the company for treating the compensation paid to the managing agents
and the legal expenses in relation thereto as a permissible deduction in the
computation of its total income.
The company submitted an application under section 66(1)
of the Income-tax Act, 1922, for submitting a statment of case and prayed that
seven questions set out in the application be referred to the High Court. The
Tribunal rejected the application holding that no question of law arose out of
the order of the Tribunal, and that the questions sought to be raised by the
company " were pure questions of fact ". The company then moved an
application in the High Court of Allahabad requesting that the Tribunal be
directed to state a case in respect of two questions :
" (1) Whether, in the circumstances of the case, the
expenditure made by the assessee-company for the purpose of getting rid of the
managing agents was not expenditure admissible under section 10(2)(xv) of the
Income-tax Act ?
(2) Whether there was any or sufficient evidence to
justify the Tribunal to hold that no services whatever were rendered by the
managing agents to the assessee-company under the managing agency agreement and
that there was nothing payable to the managing agents in respect of such
services ? "
The High Court directed the Tribunal to state a case on
questions of law arising out of its order. Pursuant to this order, the Tribunal
on December 29, 1954, submitted the following question :
" Whether there was any material on which the
Tribunal could have come to the conclusion that Rs. 19,03,300 were not spent by
the assessee-company wholly and exclusively for the purpose of its business ?
"
The company was apparently dissatisfied with the question
referred by the Tribunal and filed a petition in the High Court praying that
certain questions set out in the application be decided along with the question
already referred and the Income-tax Appellate Tribunal be directed to amend the
statement of case and to refer the additional questions also to the High Court
for decision. The High Court, in purported exercise of the power under section
66(4) of the Indian Income-tax Act, called upon the Tribunal to submit another
statement of case on the following questions :
" 1. Was there any material for the finding--
(a) that the managing agents had rendered no service to
the assessee-company ;
(b) that Lala Ram Ratan Gupta and Lala Ram Prasad Gupta
were acting qua their position as directors and not as partners of the managing
company ;
(c) that a device was adopted to provide funds in the
hands of parties at the expense of the company for the purpose of settling their
individual accounts and that the payment of the amount in question was made only
as a part of this device ;
(d) that the disputes between the partners of the managing
agency firm could not, in any way, have affected the carrying on of the normal
business of the company ; and
(e) that the company gained nothing by teriminating the
managing agency agreement ?
2. Whether the whole or any part of the sum of Rs.
18,90,000 was paid by the company to the managing agents for having promoted the
company ?
3. What was the true nature of the payment of the sum of
Rs. 18,90,000 by the company to the managing agents on a correct interpretation
of the managing agency agreement ?
4. Whether the sum of Rs. 18,90,000 together with the sum
of Rs. 13,300 paid as expenses of litigation or any part thereof was an
expenditure incurred wholly and exclusively by the company for purposes of its
business and as such it was an allowable deduction ? "
The Tribunal complied with the order and submitted another
statement of the case setting out in detail the materials on which the various
findings which were sought to be incorporated in the questions were founded.
At the hearing of the reference the High Court was of the
view that the court had no jurisdiction under section 66(4) of the Income-tax
Act to direct the Tribunal to submit a second statement of case and the
questions in addition to the one submitted before the Tribunal " could not
legally have come before the High Court ", since the earlier statement of
the case was not quashed, nor was it returned to the Tribunal ; and the court in
calling upon the Tribunal to submit another statement of case did not act in
conformity with the provisions of sub-section (4) of section 66 of the
Income-tax Act. In the view of the High Court a comparison of the question
originally framed with the questions referred with the second statement of case
by the Tribunal showed that the second set of questions were not parts of, or
included in, the former question but were substantially different ; some of
the,questions in the view of the High Court were pure questions of fact, some of
them were overlapping, and the questions were different from the two questions
mentioned in the application under section 66(2), and that on the application
submitted by the company, even if it be treated as an application for calling
for a statement of case under section 66(2), the only question that the court
could call upon the Tribunal to refer was question No. 1(a) submitted with the
second statement of case. The High Court then observed that they were under a
duty to refuse to answer questions which did not arise out of the order passed
by the Tribunal or were not included in the application under section 66(1) and
(2). But out of deference to the order previously passed, the court proceeded to
consider and set out reasons in support of the answers to the questions referred
if those questions were required to be answered. The High Court said that on the
question there was evidence that no change had taken place for carrying on the
company's business after the termination of the agreement. Questions 1(b), 1(c),
1(e) and (2) and (3), the High Court observed, were not incorporated in the
applications under section 66(1) and (2) and question 1(d) was not mentioned in
the application under section 66(2), and those questions did not arise out of
the order of the Tribunal. Further, the High Court observed, questions 1(b),
1(c), 1(d), 1(e) and (2) could not be answered in favour of the assessee, and
question (3) was irrelevant and need not be considered. In the view of the High
Court question (4) consisted of two limbs : whether the payment of Rs. 18,90,000
was made for the purpose of the company's business, and whether the payment for
that purpose amounted to revenue expenditure. The first, in the view of the High
Court, was a question of fact and the second, though a mixed question of law and
fact, did not arise for determination unless the first limb was answered in
favour of the company, and that in any event if the question were to be reduced
to the form whether there was any material for the finding that the payment was
not an expenditure incurred wholly and exclusively for the purpose of the
company's business, the answer must be against the company.
After a detailed consideration the High Court held that
the expenditure in question was not made wholly and exclusively for the purpose
of the company's business, and was by way of distribution of profits, and being
wholly gratuitous or " for some improper or oblique purpose outside the
course of business management ", it could not be treated as a permissible
deduction. Against the order recorded by the High Court, this appeal has been
preferred with special leave.
We propose in the first instance to consider whether the
High Court acted with jurisdiction in calling for a second statement of case on
questions which were not incorporated in the applications under section 66(1)
and (2) of the Act after the Tribunal had submitted a statement of case in
response to the order under section 66(2). Under section 66(1) of the Income-tax
Act, 1922, the assessee or the Commissioner may by application in the prescribed
form within the period provided require the Appellate Tribunal to refer to the
High Court any question of law arising out of such order and the Tribunal is
enjoined by law to draw up a statement of case and refer it to the High Court.
If on any application made under sub-section (1) the Appellate Tribunal refuses
to state a case on the ground that no question of law arises, the assessee or
the Commissioner may, if he is not satisfied with the correctness of the
decision of the Appellate Tribunal, make an application to the High Court to
require the Appellate Tribunal to state the case and to refer it to the High
Court and on receipt of any such requisition the Tribunal shall state the case
and refer it. If the High Court is not satisfied with the statement of case
referred under sub-sections (1) and (2) of section 66 and the facts are not
sufficient to enable determination of the question raised thereby, the court
may, in exercise of the power under sub-section (4), refer the case back to the
Appellate Tribunal to make such additions thereto or alterations therein as the
court may direct in that behalf. Under sub-section (5) of section 66 the High
Court upon hearing any such case shall decide the question of law raised
thereby.
This court in New Jehangir Vakil Mills Ltd. v.
Commissioner of Income-tax observed :
" It is clear.... that the only question of law which
the assessee or the Commissioner can require the Tribunal to refer to the High
Court is 'any question of law arising out of the order of the Tribunal' . . . .
What has, therefore, to be looked at in the first instance is whether the
question of law thus required to be referred arises out of the order of the
Tribunal ....... Section 66(2) which gives the power to the High Court to
require the Tribunal to state the case and refer the question of law to it also
proceeds on the same basis and even where the High Court exercises the power
under section 66(2) it can only require the Tribunal to state the case on any
question of law arising out of such order. The scope and subject-matter of the
reference under section 66(2)..... is co-extensive with that of the reference
under section 66(1) of the Act and the High Court has no power or jurisdiction
under section 66(2) to travel beyond the ambit of section 66(1). Section 66(2)
comes into play only when the Tribunal refuses to state the case on the ground
that no question of law arises and if the High Court is not satisfied of the
correctness of the decision of the Tribunal, it has....... the power and
jurisdiction to require the Tribunal to state the case and refer the same to
it.... This statement of case which is based..... on the facts which are
admitted and/or found by the Tribunal may not contain sufficient material to
enable the High Court to determine the question raised thereby and in that case
the High Court under section 66(4) is vested with the jurisdiction to refer the
case back to the Tribunal to make such additions thereto or alterations therein
as the court may direct in that behalf only for the purpose of determining the
question referred to it.... But section 66(4) does not enable the High Court to
raise a new question of law which does not arise out of the Tribunal's order and
direct the Tribunal to investigate new or further facts necessary to determine
this new question which had not been referred to it under section 66(1) or
section 66(2) and direct the Tribunal to submit a supplementary statement of
case. This power and jurisdiction which is vested in the High Court is to be
exercised within the four corners of section 66. "
It is also well settled that in an application under
section 66(2) of the Income-tax Act the High Court cannot order that a case be
stated on questions which were not included in the application submitted under
section 66(1). It was observed by this court in Commissioner of Income-tax v.
Scindia Steam Navigation Co. Ltd. :
" ...... the power of the court to direct a reference
under section 66(2) is subject to two limitations--- the question must be one
which the Tribunal was bound to refer under section 66(1) and the applicant must
have required the Tribunal to refer it.... It is, therefore, clear that under
section tion 66(2), the court cannot direct the Tribunal to refer a question
unless it is one which arises out of the order of the Tribunal and was specified
by the applicant in his application under section 66(1). "
The High Court was, therefore, incompetent to call upon
the Tribunal to submit a statement of case on questions of fact or questions
which were not incorporated in the application under section 66(1).
The company in its application under section 66(2)
requested that a statement of case be called for in respect of only two
questions. Thereafter the company applied to the High Court for an order that
other questions which were neither incorporated in the application under section
66(1) nor in the application under section 66(2) be submitted to the High Court.
The High Court had no power, in our judgment, to grant that application. The
power under section 66(4) may be exercised to call for a supplementary statement
only when the court is satisfied that the statements in a case referred under
sub-section (1) or sub-section (2) of section 66 are not sufficient to enable it
to determine the question raised by that statement. It does not confer a power
to raise any additional questions or to call for a statement of case on
questions not referred by the Tribunal. If it happens that the Tribunal makes an
inadequate statement of case and does not submit all the questions of law
arising out of the order of the Tribunal, the remedy of the aggrieved party is
to proceed in the manner suggested by Kania J. in N. V. Khandvala v.
Commissioner of Income-tax :
" When a statement of case, with the question of law
framed by the Tribunal, is filed in court for disposal, if a party is aggrieved
and wants to contend that certain further facts ought to be stated, or certain
questions of law should be raised, he can make an application by way of notice
of motion. That should be heard along with the case stated by the Tribunal for
the court's opinion. At that time the court will consider whether the statement
of case is complete for the question of law raised by the Tribunal. The court
can also consider whether on the case stated by the Tribunal the proper question
is raised or not. "
The power under section 66(4) may be exercised when the
High Court is not satisfied that the statements in a case referred are
sufficient to determine the question referred thereby ; it cannot be exercised
for calling for another statement on questions not referred by the Tribunal. The
procedure followed by the High Court in calling for, in exercise of the power
under section 66(4), an additional statement of the case on questions which were
not incorporated in the applications under section 66(1) and (2) was, in our
judgment, irregular.
Correctness of an order of the High Court calling for a
statement of case may be challenged at the hearing of the reference and the
court may decline to answer the question referred pursuant to the direction of
the High Court, if it did not arise out of the order of the Tribunal, or is a
question of fact or is academic or could not have been raised because it was not
incorporated in the application under section 66(1) : Commissioner of Income-tax
v. Smt Anusuya Devi. Counsel for the company has, therefore, rightly confined
himself to the question which was originally submitted by the Tribunal by order
dated December 29, 1954, and has raised his argument on that question only.
The company claims that the expenditure of Rs. 19,03,300
is a permissible allowance under section 10(2)(xv) of the Indian Income-tax Act
as expenditure wholly and exclusively incurred for the purpose of the business
of the company. The burden of proof lay upon the company to prove that the
expenditure was incurred wholly and exclusively for the business of the company.
In the view of the Tribunal the management of the company was being carried on
by two members of the Gupta group who were acting as ex officio directors. Even
after the termination of the managing agency on September 30, 1944, those two
members continued to carry on the management, and the company appointed no
managing agents till July, 1947 ; then a private limited company styled B. R.
Sons Ltd., of which the members of the Gupta group were shareholders, was
brought into existence. Singhanias were represented at the relevant time in the
firm of Beharilal Kailashpat by two women and two minors who could not and did
not take any effective part in the business of the partnership or in the
management of the company's business. The members of the Gupta group were
managing the affairs of the company, not as partners of Beharilal Kailashpat but
in their capacity as directors of the company, and there was no evidence that
the firm of Beharilal Kailashpat rendered any services to the company. After the
termination of the managing agency, Lala Ram Rattan Gupta and Lala Ram Prasad
Gupta were appointed directors of the company and looked after the business of
the company.
The Tribunal held that the disputes between the Singhania
group and the Gupta group were real, but the disputes were personal to the two
families who constituted the firm, and the disputes did not and could not
prejudicially affect the business of the company. The Tribunal also found that
the, firm, Beharilal Ramcharan, who were appointed managing agents on March 31,
1944, were not formally dismissed but they merely drew remuneration under the
agreement and rendered no service. There was no evidence that any specific
functions were entrusted to the managing agents, besides those specified in the
managing agency agreement, and it was conceded by the representative of the
managing agents that after the termination of the managing agency agreement on
September 30,1944, " no change took place besides that Ram Rattan and Ram
Prasad who were the ex officio directors became ordinary directors. " From
these facts the Tribunal inferred that the managing agents as such rendered no
service to the company.
Counsel for the company contended that the findings of the
Tribunal were based upon mere surmises and conjectures and were in any event
based on no evidence. He relied upon the last paragraph of the statement of case
that the " Tribunal's real finding " (on which the finding relating to
the inadmissibility of the expenditure was based) was that a device was adopted
to provide funds in the hands of the parties at the expense of the company for
settling their individual accounts. Counsel also submitted that there was a mass
of evidence which the Tribunal ignored in deciding whether the managing agents
rendered any service. Our attention was invited to the terms of the managing
agency agreement and also to assertions made in the correspondence between the
company and the Singhanias, and also to the finding recorded by the Income-tax
Officer who observed that all circumstances pointed to the fact that " the
managing agents were managing the affairs of the company well. Hence if still
they were removed from service the inference is clear that they were removed for
some reasons not connected with business ".
In reaching its confusion the Tribunal considered all the
relevant evidence. The Tribunal has referred to the order of the Income-tax
Officer, to the terms of the managing agency agreement and also to the
correspondence. The Tribunal primarily relied upon the facts that before and
after the termination of the managing agency agreement, only two directors, Lala
Ram Rattan Gupta and Lala Ram Prasad Gupta, carried on the business of the
company and no explanation was rendered before the Tribunal about the specific
services rendered by the managing agents. They observed :
" There is nothing on record to show or even to
indicate the nature of the services rendered by them besides nominating
directors to act as ex officio directors. Whatever may be the functions assigned
to the ex officio directors, they were qua their position as directors. We have
looked every where but we failed to have any indication as to the services
rendered by the managing agents. Services are not rendered by merely entering
into an agreement with the company to do the functions of the managing agents.
There must be something more than that and we have not the least hesitation in
saying that in the present case, on the facts on record, there is nothing to
indicate that the managing agents as such rendered any service.
We are unable to hold that the finding that no services
were rendered by the managing agents was based on " surmises and
conjectures ", or that it was based on no evidence. The burden of proving
that services were rendered by the managing agents for earning the remuneration
lay upon the company, and if no reliable evidence was forthcoming, the Tribunal
was competent to reach the conclusion it did.
The recitals in the agency agreement which authorised the
managing agents to do certain acts could not be a substitute for evidence that
those acts were done by the managing agents. Counsel for the company made no
effort to enlighten the Tribunal on how the business of the company would have
suffered by the quarrels between Guptas and Singhanias. Even prior to the
termination of the contract of the managing agents of the company, the
Singhanias had no effective voice in the management of the firm. No
representative of the Singhanias was on the board of directors prior to the
termination of the contract. If in that state of evidence the Tribunal concluded
that quarrels between the Guptas and Singhanias could in no way harm or put
hindrance in the normal day to day working of the company, the finding could not
be again said to be based on surmises and conjectures.
Counsel for the company invited our attention to the
threat by the Singhanias to move the civil court to appoint a receiver for the
management of the company, and contended that if a receiver was appointed for
management of the company, the affairs of the company might possibly have been
mismanaged. It is difficult to understand that because of the disputes between
the two sets of partners of the managing agency firm, a civil court could have
appointed a receiver to manage the affairs of the company : a receiver may have
been appointed of the remuneration payable by the company but not of the
management. It is not suggested that the affairs of the company were mismanaged.
The management of the company was conducted after September 30, 1944, in the
same manner and by the same directors as it was originally conducted. A futile
threat could not reasonably be taken into consideration, and was not apparently
taken into account, for determining the managing agency agreement. This plea was
apparently not even suggested before the Tribunal.
The burden of proving that the expenditure was incurred
wholly and exclusively for the purpose of the business lay upon the company and
no evidence was led and not even an attempt was made to explain how the affairs
of the company would have been prejudiced by the disputes pending between the
Singhanias and Guptas.
The remuneration payable under the managing agency
agreement was for a two-fold consideration---(1) the services rendered by the
managing agents in the promotion of the company ; and (2) for rendering services
to the company. Expenditure incurred for remunerating the persons who had
promoted the company was not in law a revenue expenditure admissible under
section 10(2)(xv) of the Income-tax Act and if no services were rendered by the
managing agents, the remuneration must be regarded as exclusively payable for
the services rendered by the managing agents in the promotion of the company.
The expenditure could not, in the circumstances, be said to be made wholly and
exclusively in the interest of the business of the company.
The Tribunal has stated in paragraph 30 of its order that
under the award of Thakur Kanhaiya Singh each party had to pay the other large
sums, and a device was adopted to provide funds in the hands of the parties at
the expense of the company for settling their individual accounts and that
" in preparing the scheme the authors had made an effort to reduce the tax
liability of the company by claiming the amount as a revenue deduction ".
The Tribunal appears to have reached this conclusion from the terms of the award
of Thakur Kanhaiya Singh, the settlement between Singhanias and Guptas of the
civil suit by consent decree dated January 11, 1945, by a supplementary award
which provided for distribution of compensation which it was expected "
would be receivable " for determination of the managing agency, and the
ultimate award of Mr. K. II. Munshi which contained a mere bald decision and no
reasons in support thereof. Whether this part of the judgment of the Tribunal is
correct need not detain us in this case. If the amount paid was not expenditure
incurred wholly and exclusively for the purpose of the business, it is
unnecessary to consider whether a " device " was adopted to provide
funds in the hands of the parties at the expense of the company for the purpose
of settling their individual accounts or for some other reason. The question
raised by the Tribunal for the decision of the High Court, it may be recalled,
was whether there was any material on which the conclusion of the Tribunal could
be justified, and in our judgment, there was ample material on which the
conclusion could be founded. The answer recorded by the High Court was, on the
question referred by the Tribunal by their statement dated December 29, 1954, in
our judgment, right. The High Court was also right in declining to record formal
answer on the other questions.
No separate argument was advanced in regard to the amount
of Rs. 13,300 which was incurred for the costs of the arbitrator and for the
arbitration proceedings. No argument was also apparently raised before the High
Court supporting the claim for that amount as a permissible allowance even if
the claim for Rs. 18,90,000 was disallowed.
The appeal, therefore, fails and is dismissed with costs.
Appellate dismissed
