KAMASWAMI - (1.) THE following Judgment of the courtwas delivered by:
(2.) THESE appeals arebrought by special leave from the judgment of the Allahabad High court dated 10/07/1962 in Income Tax Miscellaneous Cases Nos. 255 and 256 of 1955. The appellant. M/s. Juggi LalKamlapat, hereinafter called the 'assessee' was a registered partnership firmhaving the following constitution: JUDGEMENT_932_AIR(SC)_1969Html1.htm The share-holding of the three Singhania brothers was 51 per cent. constituting a majority of the share holding inthe partnership firm. The partners of thesaid firm floated a company, namely,M/s. J. K. Iron and Steel Company Ltd.,the constituon of which was that thethree Singhania brothers and their wiveshad 166 shares while Sri S. M. Bashirand his wife had 42 shares. In consideration of the fact that the assesseefirm promoted the company the assesseewas appointed the managing agent ofM/s. J. K. Iron and Steel Company Ltd.for a period of 25 years under a Manag933ing Agency agreement dated 15/12/1938. It was provided in this agreement that the assessee will continue tobe the managing agent until it resignedor it was removed from its office ofmanaging agency by a majority of 3/4thof the share-holaers of the managed company. According to the terms of theagreement the Managing Agent's remuneration was Rs. 1,500.00 per month anda commission of 10 per cent. on net profit. of the company after deducting allexpenses and after charging depreciation. There was no provision ,in the Articles of Association of the managed company for terminating the managingagency except in the case of the managed company being wound up in whichcase the managing agents were to receive compensation for loss of appointment. There was also the exception provided under the general law in case offraud or gross negligence on the part ofthe managing agents. The relevant termsof the managing agency agreement wereas follows: "Para 2 (m). It shall be lawful for thefirm to assign their office as Agents andall the rights and obligations as suchagents ana in the event of Assignment,the assignee or assignees shall be deemed to nave been appointed Agents ofthe company with like powers and authorities remuneration and emolumentsand subject to like terms and conditionsas are herein contained. ,-....." "Para 2 (c). The firm may at theiroption from time to time lend and advance to and for the use of the Company, money on interest to any extent asthey may like the same to run at a minimum rate of five per cent per annumprovided that if the bank rate prevailingat the date of advance is higher than fiveper cent the firm may charge' interest atone per cent above the bank rate." On 12/08/1943, a meeting of theBoard of Directors of the managed company was held. The Directors presentwere: (1) Sri Padampat Singhania, (2) SriLakshmipat Singhania and (3) Sri S. M.Bashir with Sri Padampat Singhania inthe chair. At this meeting a letter dated 3/08/1943 from M/s. Juggilal Kamlapat Bankers, the financiers of themanaged company aslang for repaymentof advances made by the financier tothe company exceeding Rs. 5 lacs wasdiscussed. Sri S. M. Bashir pointed outthat the managing agents were under noobligation to provide finance for thecompany at the latter's direction* It wasthe option of the firm to provide or notto provide finance and also to determinethe extent of the advance. Sri PadampatSinghania, thereupon pointed out thateven though the matter of providingfinance might be at the discretion of themanagihis communication by a letter dated 31/08/1943 in which the assesseepointed out that under the terms of themanaging agency agreement it was notobligatory upon it to make advancetothe managed company. The assessesstated that it had been specially constituted to act as the managing agents ofthe managed company and had no capitalof its own. It haa no assets also onthe security of which it could raise asum of Rs. 30 lacs which would be necessary to reduce the amount of M/s. Juggilal Kamlapat Bankers to the limitrequired by the managed company andto equip the company with working capital. The letter of the assessee was considered by the managed company at themeeting of its Board of Directors on 2/09/1943. Sri Lakshmipat Singhania, one of the Directors of themanaged company reported in the meeting that a new floated company underthe name and style of J. K. CommercialCorporation was willing to make advance provided it was appointed themanaging agent of the company. SriBashir pointed out that the managedcompany had reached a stage when itwould make substantial profits and enable the assessee to earn better remuneration and that it would be unjust to askthe assessee to relinquish office on aground which did not constitute a termof the contract between the assessee and934the managed company. Sri PadampatSinghania who presided over the meeting recognised that the assessee wouldbe adversely affected and he thereforesuggested that the company should paya fair compensation inconsideration ofthe premature termination of the managing agency. Acompensation of Rs.2lacs was worked out and Sri Bashir agreed to accept the amount for the termination of me managing agency on behalf of the. assassee. It was decidedthat the sum of Rs. 2 lacs should bepaid as soon as an agreement was arrived at with. the J. K. Commercial Corporation for taking over the managingagency of the company. The managingagency of the assessee was thereafterterminated with effect from 1/11/1943 and M/s. J. K. Commercial Corporation were appointed the managingagents with effect from that date. The constitution of M/s. J. K. Commercial Corporation was as follows: JUDGEMENT_932_AIR(SC)_1969Html2.htm
(3.) IT is apparent from this constitution that the shares of the three Singhania brothers, their wives and childrenin J. K. Commercial Corporation Ltd.were 6600 'A' Class ordinary shares outof 8580 and 11,000.00 out of 15,000.00 'B' Classordinary shares. The remaining shareswere allotted to the Personal Assistantto Sri Padampat Singhania, a Munim ofthe firm of Juggilal Kamlapat, a Directorof the managed company, one S. D.Garg and to a Director of an allied concern. M/s. J. K. Commercial CorporationLtd. were appointed managing agents fora period of 20 years, renewable thereafter for a term not exceeding 20 yearsat a time. The remuneration was to bean office allowance of Rs. 1,000.00 perout monThe a commission of 10% on the netannual profits of the company and acommission of 2 % on the gross salesof the products of the company. Para 8of the Managinganaging agencyAgreement states :"The managing Agent shall from time to time land and advance to and for the use of the compan such mones as may from timeto time be required by The Compnay up to an amount not to axceed ing Rs. 20,00,000 at any one time, but they however at their option 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 advance at a rate to be mutually agreed upon from time to time.";