SANKAR PRASAD MITRA, J. - (1.)THIS is a reference under s. 66(1) of the Indian IT Act, 1922. The CIT by three several applications presented of the 4th September, 1958, required the Tribunal to refer to this Court certain questions of law which were said to arise out of the order of the Tribunal in the I. T. A. Nos. 2415, 2416 and 2417 of the 1957-58 dated the 20th June, 1958. A statement of the case has been drawn up by the Tribunal, West Bengal, for all the three applications mentioned above.
(2.)THE assessment years are 1950-51, 1951-52 and 1952-53 and the relevant accounting years are those ending on the 30th September, 1949, the 30th September, 1950, and the 30th September, 1951, respectively.
The assessee is a company incorporated under the Indian Companies Act, 1913. The certificate of incorporation was obtained on the 28th May, 1945. The company was appointed the managing agent to Reform Flour Mills Ltd. on and from the 1st June, 1945. In the three assessment years referred to above, the assessee carried on certain speculative activities in B-Twills, hessian, etc. In the first year, there was a loss of Rs. 1,38,675. In the second accounting year, there was a loss in speculation of Rs. 32,625. Similarly, in the third accounting year, there was a speculative loss of Rs. 53,250. The Department disallowed the losses in all the three years on the ground that the speculative activities were outside the scope of the objects of the assessee-company, and such activities were ultra vires the company's memorandum of association and on the ground that the activities were not in the nature of an adventure in trade.

The Tribunal held that the activities of the company were well within the objects as enumerated in the memorandum of association and the activity of purchases and sale of hessian and B-Twill could not be for the purpose of investment but was only for carrying out the business of the company. In this view, it held that the losses were incurred in the carrying out of the assessee's business and should be set off against the computation of its total income.

(3.)THE other point in this reference is that the assessee- company, as I have said, was the managing agent of the Reform Flour Mills Ltd. Both the assessee and the Reform Flour Mills Ltd. were private companies. Under its agreement with the managed company the assessee was entitled to a fixed remuneration of Rs. 1,000 per month and a commission of 2per cent on the sales of the managed company. According to this arrangement, for the assessment year relevant to the accounting year ending upon the 30th September, 1950, the amount of commission and allowance accrued to the assessee was Rs. 3,93,124 and Rs. 12,000 respectively. For the accounting year ending on the 30th September, 1951, the commission was Rs. 3,11,902. In both the two assessment years the managed company was not disclosing good profits and the assessee- company forwent Rs. 2,81,599 for the accounting year ending on the 30th September, 1950, relevant for the asst. yr. 1951-52 and Rs. 2,22,641 for the accounting year ending on the 30th September, 1951, relevant for the asst. yr. 1952-53.
The ITO held that this forgoing on the part of the assessee- company amounted to parting with a portion of the profit and, therefore, not deductible from the total income. The AAC upheld this decision. For the asst. yr. 1951-52, the assessee-company did not pass any resolution either in any of the meetings of its board of directors or in its general meeting. For the asst. yr. 1952-53, a resolution was passed at a meeting of the directors held on the 19th November, 1952, resolving that in view of the unsatisfactory working of the Reform Flour Mills Ltd., it was decided to give up the commission for the sum of Rs. 2,22,641 being the managing agency commission for the period from October, 1950, to September 30, 1951. On the 15th March, 1951, the assessee-company wrote to the managed company a letter stating that the commission and allowance for the period from October 1, 1949, to September 30, 1950, amounted to Rs. 3,93,124 and Rs. 12,000 respectively but in view of the unsatisfactory trading conditions of the mills, they were prepared to accept a sum of Rs. 1,23,525 in full settlement of their commission and allowance for the year and agreed to refund Rs. 2,81,599. The assessee's accounting year ended each year on the 30th September, whereas the accounting year of the managed company ended each year on the 30th December. In the report to the shareholders, the managed company intimated to the shareholders about the surrender of the foresaid sum of Rs. 2,81,599. Similarly it reported to the shareholders to the same effect in the next accounting year. In the report it was stated that the managed company approached the managing agent (the assessee) to give up its claims of managing agency remuneration and the managing agent agreed to the proposal. The assessee-company also intimated to the shareholders in the directors' report ending on the 30th September, 1950, and the 30th September, 1951 about the surrender of these commissions. The Tribunal found that the managed company's balance-sheet showed that the said company was not financially strong and if the managing agency commission was paid in full, the managed company would run into debts.