Decided on July 27,1965


Cited Judgements :-



M.C.DESAI, J. - (1.)THIS statement of case has been submitted by the Income-tax Appellate Tribunal, Bombay Bench, professedly under section 66(2) of the Income-tax Act on July 15, 1960, at the instance of the assessee. The questions formulated by the Tribunal are these :
1. Was there any material for the finding -

(a) that the managing agents had rendered no service to the assessee company

(b) that Lala Ram Ratan Gupta and Lala Ram Prasad Gupta were acting qua their position as directors and not as partners of the managing company

(c) that a device was adopted to provide funds in the hands of parties at the expense of the company for the purpose of settling their individual accounts and that the payment of the amount in question was made only as a part of this device

(d) that the disputes between the partners of the managing agency firm could not, in any way, have affected the carrying on of the normal business of the company and

(e) that the company gained nothing by terminating the managing agency agreement.

2. Whether the whole or any apart of the sum of Rs. 18,90,000 was paid by the company to the managing agents having promoted the company ?

3. What was the true nature of the payment of the sum of Rs. 18,90,000 by the company to the managing agents on a correct interpretation of the managing agency agreement ?

4. Whether the sum of Rs. 18,90,000 together with the sum of Rs. 13,300 paid as expenses of litigation or any part thereof was an expenditure incurred wholly and exclusively by the company for purposes of its business and as such it was an allowable deduction ?

(2.)THE statement arises out of an order passed by the Tribunal on April 25, 1951, holding that the sum of Rs. 19,03,300 paid by the assessee company to the partners of the partnership, Beharilal Kailashpat, which was its managing agents, was not a revenue or business expenditure within the meaning of section 10(2)(xv) of the Income-tax Act,i.e., an expenditure not being in the nature of capital expenditure..... laid out or expanded wholly and exclusively for the purpose of such business.
The facts, as gathered from the statement of the case and its annexures, are as follows :

The assessee-company was incorporated in 1934 as a private limited company to carry on various business and for other purposes and its 3,000 ordinary shares of Rs. 500 each were held equally by members of two families, (1) the family of Sir Padampat Singhania, and (2) the family of Lala Ram Ratan Gupta. About the same time the firm Beharilal Kailashpat was brought into existence its partners were eight, four being members of the Singhania family and the other four being members of the Gupta family and the total of the shares held by each family was 8 annas. The memorandum of association of the company, clause 6, provided that M/s. Beharilal Kailashpat were appointed as the secretaries, treasurers and agents of the company upon the remuneration and the terms, with the powers, and for the consideration, set forth in the draft agreement annexed to the memorandum. The articles of association provided that there must be between 3 and 7 directors, including ex-officio directors, that two members named from time to time by M/s. Beharilal Kailashpat must be the ex-officio directors, that the business of the company (except as was by the articles expressly provided to be carried on by the agents) must be managed with the assistance of the agents by the directors and that such of the powers as were entrusted to the agents from time to time must be exercised by them : vide articles 103, 104 and 121. Article 142 dealt with the management of the business affairs of the company will be in the agents of the company and that the agents must be entrusted with, and exercise and perform, the powers and duties of building, erecting and maintaining warehouse, factories, etc., buying machinery and machinery stores, buying and selling cotton, waste, and spinning and weaving the same, selling the yarn and cloth so manufactured, buying and selling raw cotton, wool, etc., for dyeing, spinning, cleaning, weaving and manufacturing the same and selling the same in Kanpur, shipping or consigning for sale to any place goods manufactured by the company, borrowing money, entering into negotiations and contracts, executing and signing agreements, contracts, etc., commencing, instituting, prosecuting and defending actions and suits and generally doing all such other acts and things as are necessarily incidental or conductive to the attainment of all or any of the objects of the company. By article 143 the members for the time being of the firm of Beharilal Kailashpat were appointed agents of the company upon the terms, for the remuneration, and with the powers mentioned in the draft agreement attached as a schedule and it was expressly provided and declared that in consideration of the services rendered by them in promoting this company, the appointment of the said firm of Beharilal Kailashpat to the office of the agents of the company shall not be liable to be, at any time hereafter, revoked or cancelled on any ground or for any reasons whatever, save and except their being found guilty of fraud in the management and discharge of their duties as such agents of the company. On May 2, 1935, the managing agency agreement was executed by the company and the firm, M/s. Beharilal Kailashpat, as provided in the memorandum and the articles of association of the company. The relevant terms of the agreement are as follows :

The firm will perform the office of the agents of the company faithfully and to the best of its ability. In consideration of this promise 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.

(b) The firm shall receive from the company commission at certain rates on sale of various products.

(c) The company shall defray the expenses of maintaining a suitable office of the firm as agents.

(d) In case the company sells its mills, machinery and business the sale will be subject to the rights and claims of the firm as provided by the agreement and the memorandum and the articles of association.

(3.)THE firm shall keep books of account for the use of the company, shall have the superintendence of all the hands engaged in the companys mills, shall approaches all cotton, wool, machinery and stores required for the use of the companys mills and sell the same, shall sell at the market rate all loose or baled yarn and cloth produced or manufactured in the mills and shall exercise all the powers given to the agents by the articles of association. So long as the firm is not dissolved it shall be free to change its constitution, name or style from time to time, without thereby in any way affecting their appointment as agents of the company. It would be lawful for the firm, or subject to the partnership contract, for any member of the firm, to assign the whole or any portion of the earnings of the firm or the partner without affecting its appointment as agents of the company, for any member of the firm, to assign the whole or any portion of his interest or to withdraw from the firm altogether, without thereby in any way affecting the appointment of the firm as agents, and for the firm to assign its office as agents and all the rights and obligation as agents and in the event of assignments the assignee will be deemed to have been appointed as agents of the company with like powers, authorities, remuneration and emoluments and subject to like terms and conditions.
The partners of the firm, Beharilal Kailashpat, were changed from time to time and in 1943 they were, (1) Lady Ansuiya Devi (wife of Sri Padampat Singhania), (2) Shrimati Pushpavati Devi (wife of Sri Lakshmipat Singhania), (3) Vijaipat and Ajaikumar (minor sons of Shri Kailashpat Singhania), (4) Srimati Ram Devi (wife of Sri Beharilal Gupta), (5) Lala Ram Ratan Gupta, (6) Lala Ram Prasad Gupta and (7) Shrimati Keshobai (wife of Lala Ramgopal Gupta). The Singhanias held 8 annas share and the Guptas held the remaining 8 annas. In 1943 disputes arose between the members of the two families in respect of the business carried on under the names of the company and the firm and under other names and they were referred to the arbitration of Sri Kanhaya Singh. By his award dated January 18, 1944, he declared as follows :


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