GREAVES COTTON AND COMPANY LIMITED Vs. COMMISSIONER OF INCOME TAX
LAWS(BOM)-1962-7-5
HIGH COURT OF BOMBAY
Decided on July 11,1962

GREAVES COTTON And CO. LTD. Appellant
VERSUS
COMMISSIONER OF INCOME TAX Respondents


Cited Judgements :-

DALMIA DADRI CEMENT LTD VS. COMMISSIONER OF INCOME-TAX [LAWS(P&H)-1969-3-2] [REFERRED TO]
COMMISSIONER OF INCOME TAX VS. KARAMCHAND THAPAR AND BROS P LTD [LAWS(CAL)-1966-9-27] [REFERRED TO]


JUDGEMENT

Y.S.TAMBE,J. - (1.)THIS is a reference under Sub -S. (i) of S. 66 of the Indian IT Act (hereinafter referred to as the Act). Facts giving rise to this reference in brief are: The assessee company, M/s Greaves Cotton & Co. Ltd., Bombay, was incorporated as a private limited company sometime in the year 1922. A partnership firm of M/s Greaves Cotton & Co. was appointed the managing agents of the assessee company and the managing agents continued to manage the assessee company till the date of their resignation in January, 1947. In I947 M/s Karamchand Thapar & Bros. Limited (hereinafter referred to for brevity's sake as Thapars), a private limited company, were appointed managing agents of the assessee company. Thapars paid their predecessors -in -office, viz., M/s Greaves Cotton & Co., a sum of Rs. 27,34,325 for securing the managing agency. It appears that Thapars also paid Rs. 50,00,000 and took over all the shares held by M/s Greaves Cotton & Co. in the assessee company, viz., Greaves Cotton & Co. Limited. The result was that all the shares of the assessee company came to be held by Thapars and Thapars also became the managing agents of the assessee company. The entire arrangement was completed by 8th Jan., 1947. On that day a fresh managing agency agreement was executed by the assessee company in favour of Thapars. The duration thereof was 20 years. The remuneration of the managing agents under the agreement was fixed at 2 1/2 per cent. on the value of all goods shipped to India by M/s James Greaves & Company of Manchester to and for or on behalf of the said company or at its order whether the same be for the account of the said company or its constituents. The agreement also provided the mode of calculating the commission.
(2.)ON 19th Oct., 1949, the assessee company made an application to the Controller of Capital Issues, Ministry of Finance, Government of India, for permission to increase its share capital. It prayed for sanctioning the issue of 25,000 five per cent. cumulative preference shares of Rs. 100 each and 30,000 ordinary shares of Rs. 100 each. It appears that sanction was accorded by the Controller of Capital Issues on 25th April, I950. The assessee company then converted itself from a private limited company to a public limited company on 8th May, 1950. On 10th May, 1950, a fresh managing agency agreement was arrived at between the assessee company, which had by then converted itself into a public limited company and the Thapars for a period of 20 years. Under this agreement, the remuneration of the managing agents was fixed in the following manner:
(a) A sum at the rate of rupees five thousand per month as office allowance payable on the last day of each month for and in connection with the general supervision of the business of the company and the maintenance and upkeep of the managing agents' office in Calcutta including the payment of the rent of the managing agents' office premises in Calcutta. (b) A commission of 10 per cent. of the net profits of the assessee company was agreed to be paid to the managing agents. Since that day Thapars managed the company under the new managing agency agreement of 10th May, 1950.

It appears that sometime between the 8th May, 1950, and 28th Feb.,1951, H. E. H. the Nizam had purchased shares worth Rs. 50 lakhs and the said amount had been received by the assessee company. About Rs. 33 lakhs out of the said amount had been utilised by the assessee company and about Rs. 17 lakhs in cash had remained in the hands of the assessee company. At the meeting of the board of directors of the assessee company held on 28th Feb.,1951, the question of cancellation of the aforesaid managing agency agreement of 10th May, 1950, was considered and it was resolved that the sub -committee consisting of M/s T. Kemp, J. Blezard and N. M. Wagle be appointed and instructed to submit a report with their recommendations to the board of directors for sub -mission to the members. It appears that in the agenda mentioned in the notice issued for calling that board meeting, there was no item relating to consideration of the question of the cancellation of the managing agency agreement, but the subject appears to have been taken up for consideration under the residuary item ' any other subject with the permission of the chairman -. It may also be mentioned that the said three members of the committee were executive directors of the assessee company. The said sub -committee submitted its report to the board on 16th March, 1951. In this report the sub -committee stated that it was of the opinion that termination of the agreement would be to the benefit of the shareholders, that the termination of the managing agency would not be detrimental to, nor adversely affect, the business of the company, that the termination of the agreement would be likely to instil a greater degree of public confidence in the company and its shares and that the board of directors would be fully competent to carry on the affairs of the company. The compensation suggested to be paid to the managing agents for premature termination of the agreement amounted to Rs. 18,87,620. The committee expressed its opinion that the said amount of compensation could not be paid out' of Rs. 17 lakhs in the hands of the company unless sanction therefor was obtained from the Controller of Capital Issues. The committee stated that the compensation must be made from the free profits of the company accruing subsequent to the date on which the application was made to the Controller of Capital Issues. In the report it was also stated that in the event the managing agency agreement was terminated, provision will have to be made in the articles of association of the company providing for remuneration in the form of commission payable to the company's non -working directors. The said report of the sub -committee was considered by the board in its meeting held on 17th March, 1951, and at the said meeting it was discussed that compensation be paid in three equal instalments on 15th April, 1951, 15th April, 1952, and 15th April, 1953. Khan Bahadur C. B. Tarapore, the nominee -director of H. E. H. the Nizam, stated that he was in general agreement with the sub -committee's report and did not consider the compensation to be unreasonable, but he felt that the managing agents might in the general interest of the shareholders be persuaded to reduce the total amount of compensation payable to a sum of Rs. 18 lakhs. Mr. K. C. Thapar, who was one of the nominee -directors of the managing agents, on behalf of the managing agents, stated at the said meeting that if the company terminated their employment as managing agents, they would agree to the amount of Rs. 18 lakhs payable in three annual instalments of Rs. 6 lakhs each. With this modification the board accepted the sub -committee's report and it was resolved that, provided all members agreed to the calling of a meeting for this purpose at short notice, an extraordinary general meeting of the members of the, company be convened for 4 -30 p. m. on 31st March, 1951, for the purpose of considering and, if thought fit, passing with or without modification, the following resolutions as extraordinary resolutions: (i) That in the interests of the company the managing agents, M/s Karam Chand Thapar and Bros. Ltd., be removed from their office as such and that not given to them terminating the managing agency agreement dt. 10th May, I950, whereby they were appointed managing agents of the company for a period of twenty years from 8th May, 1950, w.e.f. 31st March, 1951. (2) That the managing agents, M/s Karam Chand Thapar and Bros. Ltd., be offered as compensation for loss of office as such the sum of Rs. 18,00,000 payable by instalments of Rs. 6,00,000 on 15th April, 1951, Rs. 6,00,000 on 15th April, 1952, and Rs. 6,,00,000 on 15th April, 1953.

(3.)THE extraordinary general meeting of the shareholders held on 31st March, 1951, after due notice adopted the aforesaid two resolutions. It appears that the assessee company by its letter dt. 3rd April, 1951, informed the managing agents about the said two resolutions passed by the extraordinary general meeting of the shareholders. By their letter of 10th April, 1951. Mr. K. C. Thapar on behalf of the managing agents accepted the termination of the managing agency on payment of compensation of Rs. 18 lakhs. The assessee company, whose system of accounting appears to be mercantile, thereafter had appropriated in its books of account the said amount of Rs. 18 lakhs as compensation payable to the managing agents for termination of their managing agency and in the account year 1951 -52 the assessee company claimed deduction of the said amount of Rs. 18 lakhs in computation of its profits as expenditure laid out wholly and exclusively for the purpose of its business under cl. (xv) of Sub -S. (2) of S. 10 of the Act.


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