B.L.GUPTA J. - (1.) THESE are two income-tax references under section 66(1) of the Income-tax Act. They arise out of a consolidated appellate order of the Income-tax Appellate Tribunal and may be conveniently disposed of by a common judgment.
(2.) THE question referred to us for opinion in the first reference is : Whether on the facts and circumstances of the case, the sum of Rs. 64,239 paid as interest to H. H. the Nawab of Rampur and others is a permissible deduction in computing the business income of the assessee ? The question referred in the other reference is : Whether the sum of Rs. 3,000 paid to Dalmia Cement Company Ltd. out of the office allowance received by the assessee from its managed companies was an admissible deduction in computing the business income of the assessee under the Indian Income-tax Act ? The facts giving rise to the two references are : The assessee is a private limited company. During the relevant accounting year the assessee was acting as the managing agent of two sugar companies, (1) The Raza Sugar Company Ltd., and (2) The Buland Sugar Company Ltd., under two different managing agency agreements, one executed on March 24, 1934, and the other on February 12, 1934. The relevant terms of the two agreements were the same. The managing agency in each case was to continue for a period of twenty years certain, and thereafter until the managing agents were removed by an extraordinary resolution of the managed company passed at an extraordinary general meeting specially convened for that purpose and of which not less than six calendar months notice was given and at which shareholders owning not less than 3/4 ths of the issued capital of the company were present. The managing agents were to receive an office allowance of Rs. 1,000 per month and a commission of 10%. In the event of the managed company being wound up during the period of the managing agency agreement with the object of transferring its business to another company, one of the terms and conditions of the agreement for transfer of the property and business of the vendor company to the vendee company was to be that the managing agents were to continue to be the managing agents of the transferred company on similar terms and conditions.
(3.) THE fixed terms of twenty years of the managing agency was to continue for four years from the end of the accounting year in question. In both the managed companies the Nawab of Rampur was a major shareholder. On April 25, 1950, the assessee purchased from the Nawab 43,000 shares of the Raza Sugar Company and 66,478 shares of Buland Sugar Company for a sum of Rs. 19,04,126. THE assessee alleged that the purchase was with a view to acquire a controlling interest in the two companies in order to make certain of the continuance of the managing agency. THE assessee had very little funds of its own to pay the purchase price. Accordingly, it took loans at 6% from (1) Vyapari Ltd., New Delhi, and (2) Govan Agencies Ltd., New Delhi. Even then the full purchase price of the shares could not be paid to the Nawab and the assessee remained indebted to him for part of the purchase price. Interest was accordingly paid by the assessee as under on the loans and the amount still due to the Nawab. JUDGEMENT_930_ITR48_1963Html1.htm After about eight months from the date of the purchase of the shares, the assessee sold all the shares of the two companies to Messrs. Dalmia Cement Company Ltd., practically at the same price at which it had acquired them. Under the agreement of sale dated January 15, 1951, it was stipulated that Messrs. Dalmia Cement Company Ltd. will receive 25% of the managing agency commission and the office allowance which the assessee was receiving from the managed companies. This was receivable by Messrs. Dalmia Cement Company Ltd, only so long as the vendee company continued to hold all the shares purchased by it in the two companies. If the shareholding became reduced there would be a proportionate reduction in the percentage of the commission and office allowance payable by the assessee to Messrs. Dalmia Cement Company Ltd. There was a stipulation in the agreement of sale that in all meetings of the shareholders of the two managing companies, the vendees will vote in accordance with the desire of the vendors and in furtherance of the interest of the vendors in the office of the managing agents of the principal companies, so long as they enjoyed the benefits of any shares in the managing agency. Lastly it was declared that nothing in the agreement of sale was to be deemed to constitute a partnership as between the vendors and the vendees.;