Tulzapurkar, J. - (1.) These appeals by special leave raise a common question whether on proper construction of the agreement dated Nov. 10, 1955, entered into by the assessee with Kamala Mills Ltd., the latter was the "Manager" of the assessee within the meaning of S. 384 read with Section 2 (24) of the Companies Act, 1956 and if so whether the remuneration paid by the assessee to the latter in the two calendar years 1957 and 1958 relevant to the assessment years 1958-59 and 1959-60 cannot be allowed as business expenditure under S. 10 (2) (xv) of the Indian Income Tax Act, 1922
(2.) The facts giving rise to the question may briefly be stated as follows:The assessee (M/s. Alagappa Textiles (Cochin) Ltd.) is a public limited company carrying on business of manufacture and sale of yarn and has its registered office at Alagappa Nagar in Kerala State. It entered into an agreement dated Nov. 10, 1955 with Kamala Mills Ltd., Coimbatore for financing and managing the assessee mills at Alagappa Nagar for a period of five years. Clause 8 of the agreement provided that Kamala Mills Ltd. shall be paid, for the services rendered by it by way of purchases, sales and management, remuneration at the rate of 1% on all purchases made by it for the assessee mills and at half a per cent on all sales of yarn, yarn waste and cotton waste and other products of the mill. Pursuant to the aforesaid term Kamala Mills Ltd. drew remuneration to the tune of Rs.1,03,547/- and Rupees 18,294/- respectively for the calendar years 1957 and 1958 corresponding to the assessment years 1958-59 and 1959-1960. These amounts were assessed to tax in the hands of Kamala Mills Ltd. The assessee in its assessment proceedings for the said two assessment years claimed deduction in respect of the said two amounts as business expenditure under S. 10 (2) (xv) of the Act. The claim was disallowed by the Income-tax Officer on the ground that under S. 384 of the new Companies Act, 1956, which had come into force on April 1, 1956, the continuation of a body corporate as manager was prohibited for the period beyond six months from the coming into force of the Act, that remuneration paid to Kamala Mills Ltd. subsequent to Oct. 1, 1956, was illegal being in violation of S. 384 and, therefore, the deduction claimed in respect of such payment for the calendar years 1957 and 1958 could not be allowed. In the appeals preferred by the assessee against the decision of the Income-tax Officer, it was contended that though the payment of remuneration to a body corporate as Manager after Oct. 1, 1956 was illegal under S. 384, the payments were for services rendered and were fully justified by commercial expediency and as such that same should be allowed under Section 10 (2) (xv) of the Act. It was also urged that even if the expenses incurred were in violation of the statute such expenses should be allowed since in computing the profits even of illegal business only the net profit was taxed after allowing all the expenses. The Appellate Assistant Commissioner was not impressed by these arguments; but he disallowed the deduction mainly on the ground that the assessee by its own conduct had disputed its liability to pay any remuneration to Kamala Mills Ltd. after Oct. 1, 1956 and in that behalf be relied on an admitted fact that the assessee had filed a suit against Kamala Mills Ltd. to recover back such remuneration which had been paid to it in contravention of S. 383 on the basis that since the payment was illegal Kamala Mills Ltd. was holding such amounts of remuneration in trust for and on behalf of the assessee and in such a situation the deduction could not be allowed. The assessee carried the matter in further appeals to the Tribunal, but the Tribunal confirmed the view of the taxing authorities that under S. 384 of the Companies Act, 1956 it was not legal for the assessee to have permitted Kamala Mills Ltd. to continue to work as its Manager after Oct. 1, 1956 and that the payment of remuneration after the said date was illegal and could not be considered as valid expenditure for the purpose of Income Tax Act. In this behalf the Tribunal relied on two decisions in C.I.T. v. Haji Amin and Abdul Sakoor Bros., (1955) 28 ITR 266 (Bom) and Raj Woollen Industries v. C.I.T., (1961) 43 ITR 36 (Punj). An argument was raised before the Tribunal that Kamala Mills Ltd. was not only a Manager but also a financier and that the remuneration should be treated as having been paid to the financier. While observing that it was a new case put forward by the assessee, the Tribunal negatived the contention holding, on construction of the agreement, that it was by virtue of its position as Manager that Kamala Mills Ltd. was allowed to carry on the financial affairs of the assessee and the remuneration was payable to it as Manager and in no other capacity. The Tribunal also held that the claim for deduction was in respect of a disputed liability inasmuch as the assessee had not merely filed a suit to recover the amount but had in the meantime obtained a decree against Kamala Mills Ltd., and, therefore, the amounts could not be lawfully claimed as permissible deduction.
(3.) At the instance of the assessee the following question was referred to the High Court for its opinion: "Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in disallowing the claim of the assessee for deduction of Rs.1,03,547/- and Rs.18,294/- from the income of the assessment years 1958-59 and 1959-60 as not an admissible business expenditure under Section 10 (2) (xv) of the Indian Income Tax Act, 1922". The High Court answered the question in the negative in favour of the assessee and against the Department. The High Court, on construction of the Agreement dated November 10, 1953, took the view that since in the matter of the exercise of its powers and the discharge of its functions thereunder Kamala Mills Ltd. could not be said to be "subject to the superintendence, control and direction of the Board of Directors" of the assessee. Kamala Mills Ltd. was not a "Manager of the assessee within the definition given in Section 2 (24) of the Companies Act, 1956, and, therefore, the illegality under Section 384 was not attracted and as such the remuneration paid by the assessee to Kamala Mills Ltd. for services rendered during the calendar years 1957 and 1958 was allowable as a business expenditure under Section 10 (2) (xv) of the Act. As regards the decree that had been obtained by the assessee against Kamala Mills Ltd. the High Court observed that the appeal filed by Kamala Mills Ltd. against the said decree was still pending in the High Court and if ultimately the appeal was dismissed and the amounts were recovered back from Kamala Mills Ltd. the assessee could be taxed on those amounts under Section 41 (1) of the 1961 Act, but that could not be a valid ground for disallowing the deduction claimed by the assessee. The Revenue has challenged in these appeals the view of the High Court that Kamala Mills Ltd. was not the Manager of Section 384 read with Section 2 (24) of the Companies Act, 1956 and the further view that the remuneration paid to Kamala Mills Ltd. during the calendar years 1957 and 1958 was deductible as business expenditure under Section 10 (2) (xv) of the Act.;