Shah, J. - (1.) In proceedings for assessment of tax for the year 1945-46 the Lakshmiratan Cloth Mills- hereinafter called 'the Company'- claimed allowance under Section 10 (2) (xv) of the 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 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 Sec. 66 (2) of the 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.
(2.) 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 way 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 five years 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 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.
(3.) 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) Smt. 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 family 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.;