R.S. Pathak, J. - (1.) THIS is a reference under Section 66 (1) of the Indian Income-tax Act. The assessee, which is a partnership firm, was appointed by the British India Corporation as the sole selling agent of one of its managed concerns, the Cawn-pore Cotton Mills, under an agreement D/- January 22, 1946. The agreement, which was originally intended to endure for one year, was subsequently extended from time to time. It appears that the assessee was informed that its continuation as sole selling agent was not considered feasible as it was no longer in a position to run the selling agency in accordance with the wishes of the British India Corporation. The assessee also owed the Corporation a sum of Rs. 8,39350-15-6, which, it seems, it was unable to pay. On March 23, 1955, the assessee entered into a written agreement with one Kailash Nath Agarwal, the preamble to which recited the circumstances in which the assessee was unable to continue as sole selling agent and also the circumstance that the British India Corporation intended to appoint the said Kailash Nath Agarwal or a firm or limited company managed and controlled by him as sole selling agent provided the assessee and Kailash Nath Agarwal were successful in coming to an agreement which, while enabling the assessee to retire from the agency, safeguarded the payment of the debts owed by it to the Corporation. The relevant terms of the agreement between the assessee and Kailash Nath Agarwal are reproduced hereunder: "(1) That Messrs. Sharma and Co., will resign (or will accept the termination of their) sole selling Agency of the Cawnpore Cotton Mills Branch of the Corporation. (2) That Messrs Sharma and Co. will have no objection to the appointment of Shri Kailash Nath Agrawal or a firm or company formed by him as sole selling agents of Cawnpore Cotton Mills Branch of the Corporation and will have no claim whatsoever against the Corporation for the termination of Sharma and Company's agency and the appointment of Kailash Nath Agrawal or his nominee as sole Selling Agents of the Cawnpore Cotton Mills Branch of the Corporation. 3. That is consideration of the above covenants Kailash Nath Agarwal or the firm or Company formed by him to take over the Sole Selling Agency will pay to Messrs. Sharma and Co., one seventh of the commission earned by them on the sales of the Branch or a sum of Rs. 50,000/- per annum whichever is greater till such time as the Corporation dues against Messrs. Sharma and Co. are liquidated as provided in paras 4 and 5 hereinafter. 4. That the parties agree that the 'Corporation' will be authorised to retain an amount equal to one-seventh of the commission of the sole Selling Agency with minimum of Re. 50,000/- per annum and to adjust the sum so retained towards the dues against Messrs. Sharma and Co., till the liability of the latter firm with interest thereon at 6 per cent per annum is entirely liquidated. 5. That in the event of the dissolution of Messrs. Sharma and Co., before the complete repayment of the liability of Messrs. Sharma and Co., Kailash Nath Agrawal agrees that the 'Corporation' may continue to retain an amount equal to one-seventh of the Selling Agency commission and adjust it towards such dues of Sharma and Co, as may then be outstanding. 7. That Kailash Nath Agrawal will get an agreement containing the covenants herein agreed executed by the sold Selling Agency firm formed by him failing which he, his successors, legal representatives, or assigns will be personally liable for the due performance hereof."
(2.) ON the same day, March 23, 1955, the assessee informed the British India Corporation of the agreement and tendered its resignation as sole selling agent. In respect of the liquidation of the debts owed by it to the Corporation, it stated that it was entitled to receive one-seventh of the commission due to the new selling agency or to a sum of Rs. 50,000/- per annum whichever was greater until the debts with interest thereon were fully liquidated, and it authorised the Corporation to retain that amount falling due to the assessee out of the commission payable to the agency and to adjust the same to the assessee's account with the Corporation. It emphasised that the resignation, was in consideration of the terms offered by the new selling agents and accepted by it. Another letter was addressed by Kailash Nath Agarwal to the British India Corporation on March 23, 1935, similarly informing the Corporation of his agreement with the assessee and of the terms included in that agreement, and requested the Corporation to giant the sole selling agency to Meesrs. M. K. Brothers, a partnership firm consisting of himself and Moti Chandra. The British India Corporation in its reply to the assessee on March 23, 1955, communicated its acceptance of the assessee's resignation from the sole selling agency of the Cawnpore Cotton Mills and intimated its proposal to appoint Kailash Nath Agrawal or a firm nominated by him to that office. It confirmed the arrangement arrived at between the assessee and Kailash Nath Agarwal in respect of the liquidation of the assessee's debts to the Corporation and assured the assessee that these terms would be incorporated in the new sole selling agency agreement to be executed with Kailash Nath Agrawal.
(3.) ON March 26, 1955, the Board of Directors of the British India Corporation held a meeting, in which the resignation of the assessee and the appointment of Messrs. M. K. Brothers were noted and a minute was recorded in the following terms: "M.K. Brothers had undertaken to pay off gradually the outstanding unsecured debt of 5 1/2 lacs due by M/s Sharma and Co. to the extent of one-seventh of their selling agency commission or Rs. 50,000/- per annum whichever is greater until the debt was cleared." It seems that ultimately the Corporation decided upon appointing a private limited company, M. K. Brothers Ltd., which was promoted by Kailash Nath Agarwal, and an agreement appointing it as sole selling agent was executed on July 31, 1956. Under that agreement, M. K. Brothers Ltd., ratified and adopted the agreement entered into by Kailash Nath Agarwal with the assesses and authorised the Corporation to give effect to the terms of the agreement so far as it affected it, particularly in regard to the retention of an amount equal to one-seventh of the commission, with a minimum of Rs. 50,000/-per annum, which amount would be adjusted by the Corporation against the dues of the assessee. This and similar other provisions were included in the agreement in order to give effect to the several agreements of March 23, 1955, to which we have referred above.;