M.C. Agarwal, J. - (1.) THE Income-tax Appellate Tribunal, Allahabad, has under Section 256(1) of the Income-tax Act, 1961, referred the following question stated to be of law and to arise out of the Tribunal's order dated October 31, 1980, passed in ITA Nos. 942 and 943 (All) of 1977-78 for the assessment years 1972-73 and 1973-74 for the opinion of this court : "Whether, on the facts and in the circumstances of the case and on a correct interpretation of the word 'lawfully' appearing in Section 70 of the Indian Contract Act, the Appellate Tribunal was justified in holding that the appointment of the sole selling agent, Tools Implements and Machinery Distributors, was in contravention of Sections 294 and 314 of the Companies Act, 1956, and, therefore, the sole selling agency commission paid by the assessee-company was not an admissible deduction in working out the business income ?"
(2.) WE have heard Sri Bharat Ji Agarwal, learned counsel for the assessee, at whose instance this reference has been made and Sri Prakash Krishna, learned standing counsel for the Commissioner-respondent. The facts of the case are that the assessee, Cossul and Company (P.) Ltd. is a private limited company and the matter in issue relates to the assessment years 1972-73 and 1973-74. By an agreement dated October 24, 1963, the assessee-company appointed a partnership firm, Tools Implements and Machinery Distributors, as its sole selling agent with effect from October 1, 1963. The following persons were partners in the said firm : JUDGEMENT_312_ITR245_2000Html1.htm Out of the aforesaid persons, Smt. Pushpa Khanna was the wife of Shri Nand Lal Khanna who was the chairman of the board of directors of the assessee-company and Shri Mahendra Kapoor was the son of Shri V. C. Kapoor, a director of the said company. The company paid commission to the said partnership firm purportedly for services rendered as a selling agent. The Assessing Officer disallowed the payment on the ground that the relatives of the directors being partners in the said firm the appointment of the firm as a sole selling agent was in violation of Sections 294 and 314 of the Companies Act, and, therefore, the appointment was invalid. The Assessing Officer also held that the agreement was a fictitious transaction merely to evade tax. The assessee appealed to the Appellate Assistant Commissioner without success. Second Appeals Nos. 942 and 943/(All) of 1977-78 preferred by the assessee before the Tribunal were also unsuccessful. The Tribunal was of the view that the following three points were relevant for deciding the issue relating to the admissibility of the expenditure : "(1) Whether the sole selling agency agreement dated October 24, 1963, was in operation in the eye of law during the accounting periods under consideration ? (2) If so, whether it was a sham device or a genuine agreement which was acted upon ? and (3) If the latter, what was its scope ?"
(3.) AFTER a very detailed discussion it held that the appointment of the firm as sole selling agent was in violation of the provisions of the Companies Act and, therefore, the payment of commission to the firm was not allowable as expenditure. Regarding points Nos. 2 and 3 formulated by the Tribunal it observed that in view of answer to question No. 1 it was not necessary to answer questions Nos. 2 and 3, nevertheless as the same had been argued before it at length, it went on to decide the same. It held that the payment made in respect of sales out of the territory of India was not covered by the agreement and, therefore, such commission was not allowable as expenditure. As regards question No. 2, although the Tribunal had stated that the same was argued before it and it would record its finding thereon, the Tribunal's order shows that it failed to record any finding on question No. 2. The relevant portion of Section 294 is as under : "294. Appointment of sole selling agents to require approval of company in general meeting.--(1) No company shall, after the commencement of the Companies (Amendment) Act, 1960, appoint a sole selling agent for any area for a term exceeding five years at a time : Provided that nothing in this sub-section shall be deemed to prohibit the re appointment, or the extension of the term of office, of any sole selling agent by further periods not exceeding five years on each occasion. (2) After the commencement of the Companies (Amendment) Act, 1960, the board of directors of a company shall not appoint a sole selling agent for any area except subject to the condition that the appointment shall cease to be valid if it is not approved by the company in the first general meeting held after the date on which the appointment is made. (2A) If the company in general meeting as aforesaid disapproves the appointment, it shall cease to be valid with effect from the date of that general meeting." ;