RAMASWAMI, J. - (1.) THIS appeal is brought, by special leave, on behalf of the Commissioner of Income-tax, Bombay, from the judgment of the Bombay High Court dated July 11/12, 1962, in Income-tax Reference No. 52 of 1960 The respondent-company was incorporated as a private limited company in the year 1922. A partnership firm called "M/s. Greaves Cotton & Co." was appointed as the managing agents of the respondent-company. The said partnership firm continued to be the managing agents from April 1, 1922, to January 7, 1947. From January 8, 1947, a company called M/s. Karamchand Thapar & Brothers Ltd. (hereinafter referred to as the "managing agents") was appointed managing agents of the respondent-company. The managing agents had paid to M/s. Greaves Cotton & Co. a sum of Rs. 27, 34, 325 for securing the managing agency rights of the respondent-company. It appears that the managing agents also paid a sum of Rs. 50 lakhs as purchase price of all the shares held by Messrs. Greaves Cotton & Co. in the respondent-company. The result was that all the shares of the assessee company came to be held by the managing agents. The entire arrangement was completed on January 8, 1947. A fresh managing agency agreement was executed on the same day by the respondent-company in favour of the managing agents. The duration of the agreement was fixed under clause 1 to be a period of 20 years. Under clause 2 of the agreement the remuneration of the managing agents was fixed at 21% on the value of all goods shipped to India by Messrs James Greaves & Co. of Manchester to and for or on behalf of the respondent-company or its constituents. The mode of calculating the commission was also provided in the agreement. The respondent-company made an application on October 19, 1949, to the Controller of Capital Issues, Ministry of Finance, Government of India, for permission to increase its share capital. It was prayed that sanction should be accorded for the issue of 25, 000 five per cent. cumulative preference shares of Rs. 100 each and 30, 000 ordinary shares of Rs. 100 each. Sanction was accorded by the Controller of Capital Issues on April 25, 1950. The respondent-company then converted itself from a private limited company to a public limited company on May 8, 1950. Two days later, i.e., on May 10, 1950, a fresh managing agency agreement was arrived at between the respondent-company and the managing agents 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 ten per cent of the net profits of the assessee company was agreed to be paid to the managing agents." Some time between May 8, 1950, and February 28, 1951, H.E.H. the Nizam of Hyderabad purchased shares worth Rs. 50 lakhs and the said amount had been received by the respondent-company. Out of the said amount of Rs. 50 lakhs about Rs. 33 lakhs had been utilised by the respondent-company and about Rs. 17 lakhs in cash remained in the hands of the respondent-company A meeting of the board of directors of the respondent-company was held on February 28, 1951, and the question of cancellation of the managing agency agreement dated May 10, 1950, was considered at that meeting. It was resolved that a sub-committee consisting of Messrs. T. Komp, J. Blezard and N. M. Wagle be appointed and instructed to submit a report with their recommendations to the board of directors for submission 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 should be mentioned that the aforesaid three members of the committee were executive directors of the respondent-company. The sub-committee submitted its report to the board of directors on March 16, 1951. In this report, the sub-committee suggested that a sum of Rs. 18, 87, 620 should be paid to the managing agents for premature termination of the agreement. The sub-committee also considered that the 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 therefore, suggested that 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 said that in the event the managing agency agreement was terminated, provision will have to be made in the articles of association of the company for remuneration in the form of commission payable to the company's non-working directors. The board of directors at their meeting held on March 17, 1951, considered the report of the sub-committee and it was decided that compensation should be made in three equal instalments on April 15, 1951, April 15, 1952, and April 15, 1953. An extraordinary general meeting of the members of the respondent-company was convened on March 31, 1951, for the purpose of considering and passing the following resolutions as extraordinary resolutions"(1) That in the interests of the company the managing agents, Messrs. Karam Chand Thapar and Brothers Limited, be removed from their office as such and that notice be given to them terminating the managing agency agreement dated 10th May, 1950, whereby they were appointed managing agents of the company for a period of 20 years from 8th May, 1950, with effect from 31st March, 1951 (2) That the managing agents ; Messrs. Karamchand 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."
(2.) THE extraordinary general meeting adopted the aforesaid two resolutions. By its letter dated April 3, 1951, the respondent-company informed the managing agents about the two resolutions passed at the extraordinary general meeting of the shareholders. By its letter dated April 10, 1951, Mr. Karam Chand Thapar on behalf of the managing agents accepted the termination of the managing agency on payment of compensation of Rs. 18 lakhs. The respondent-company, which adopted the mercantile system of accounting, thereafter appropriated in its books of account the said amount of Rs. 18 lakhs as compensation payable to the managing agents for termination of the managing agency agreement. In the accounting year ended March 31, 1952, the respondent-company claimed deduction of the amount of Rs. 18 lakhs in computation of its profits as expenditure laid out wholly and exclusively for the purpose of its business under section 10(2)(xv) of the Indian Income-tax Act, 1922. The Income-tax Officer rejected the claim of the respondent-company and observed as follows "The facts of the case appear to show that the termination of the managing agency and the consequent payment of compensation was not done on strictly business considerations. . . It appears to me that the termination of the managing agency was effected in order to give Messrs. Karam Chand Thapar and Bros. Ltd. a capital receipt of Rs. 18 lakhs and to claim revenue deduction of like amount in the hands of the assessee-company. The amount of Rs. 18 lakhs claimed and the legal expenses connected therewith is disallowed."The respondent-company took the matter in appeal to the Appellate Assistant Commissioner who dismissed the appeal and stated in the course of his order ; "I agree with the Income-tax Officer that the whole transaction of termination of the managing agency and payment of the compensation of Rs. 18 lakhs is only a made up show. Though the ostensible reason given is 'in the interest of the company', in the context and surrounding circumstances of the appellant's case, I am satisfied that the expenditure of the 18 lakhs of Rupees--ostensibly paid for the termination of the managing agency--cannot be held to be an expenditure wholly and exclusively laid out for the purposes of the business within the meaning of section 10(2)(xv)." The respondent-company took the matter in further appeal to the Income-tax Appellate Tribunal which dismissed the appeal in a short order. The reasons given by the Appellate Tribunal are set out in paragraph 5 of that order as follows "We have carefully considered the various aspects of the case. We cannot understand how by any stretch of imagination the sum of Rs. 18 lakhs paid to the managing agents can be styled as compensation for the loss of office or money spent wholly and solely for the purpose of the assessee's business. Committee were appointed not in the interest of business, but as desired by the interested parties. The appointment of the managing agents had only been made a few months before they were removed from the office. Managing agency commission is payment for services rendered. How can it be said that the dismissal of the managing agents is wholly and solely for the purpose of the business, unless of course they are inefficient or corrupt ? If services of efficient agents are dispensed with, it would follow that efficiency would go down and profits would be reduced. In our opinion, it is not possible to say that the services of the managing agents were terminated solely to make a saving to the company. The company under article 144 took the power to remunerate directors for work done. It appears, as a result of this change, the management of the business was to be conducted by the board itselfWe think that the income-tax authorities have given valid reasons for holding that the company's main effort was to put a substantial sum in the hands of the managing agents. The whole affair was nothing short of a farce. It is not a payment made solely to compensate the agents for the loss of employment. The amount cannot be said to have been spent wholly and solely for the purpose of the assessee's business."
(3.) AT the instance of the respondent-company the Appellate Tribunal stated a case to the High Court under section 66(1) of the Income-tax Act on the following question of law "Whether, on the facts and circumstances of this case, the amount of Rs. 18 lakhs paid by the assessee-company to the managing agents on the termination of their managing agency agreement dated May 10, 1950, was an admissible deduction under section 10(2)(xv) of the Income-tax Act ?" ;