Mukherjee, J. - (1.) THIS is a case stated under Section 66(1) of the Income-tax Act, 1922, by the Allahabad Bench of the Appellate Tribunal. The material facts are these: The Muir Mills Ltd. is a public limited company, having a share capital of Rs. 60,00,000 divided into 30,000 ordinary shares of Rs. 100 each and 30,000 preference shares of Rs. 100 each. Previously, one Mr. K.J.D. Price and Mr. T. I. Smith were the managing directors of this company and they, along with the members of their family and friends, held the largest single block of shares in the company. Towards the end of the year 1945, they decided to leave India and sell away their shares. Their shares were purchased by Major General Mahabir Shamsher Jung Bahadur Rana, Major General Madan Shamsher Jung Bahadur Rana and Shri Hanuman Prasad Dhanuka. They also purchased some more shares in the open market and by May, 1947, they possessed 5,085 ordinary shares and 19,540 preference shares of the said company. Thereafter, they floated two private companies, viz., the Indian Textile Syndicate Ltd. and the Cotton Textile Corporation Ltd. The Indian Textile Syndicate Ltd. was appointed as the managing agents and the Cotton Textile Corporation Ltd. as the selling agents of the Muir Mills. Subsequently, there were differences between them and the entire lot of shares, which had been pledged with M/s. Hongkong and Shanghai Banking Corporation Ltd., as security for certain advances taken from that bank, were sold in auction on April 18, 1950. The bidders at the auction were M/s. Bengal and Assam Investors Ltd., represented by their director, Shri Lakshmipat Singhania, and one Shri Hari Shankar Bagla. Ultimately, the highest bid of Shri Lakshmipat Singhania for Rs. 87,05,000 was accepted and thereupon M/s. Bengal and Assam Investors Ltd. came to be the owners of those 5,085 ordinary shares and 19,540 preference shares of the Muir Mills Ltd.
(2.) ALTHOUGH by the purchase at the auction M/s. Bengal and Assam Investors Ltd. became owners of the largest single block of shares in the Muir Mills Ltd., the Singhanias failed to gain control of that company. The Baglas, on the other hand, having failed to purchase the shares in the public auction, devised ways and means to seize control and management of the Muir Mills Ltd. They purchased 2/3rds share of the Ranas in the Indian Textile Syndicate Ltd. and the Cotton Textile Corporation Ltd., which were, respectively, the managing and sole selling agents of the Muir Mills Ltd., and having acquired the dominating voting power in the managing agency, the Baglas came into actual control of the said mills. The Singhanias, though they were holding the largest single block of shares, were reduced to non-entities in view of the tactics adopted by the Baglas. The Baglas saw to it that no meeting of the general body of the shareholders of the said mills was called for for six years from 1950 to 1955 and they also did not allow the registration of the shares purchased by the Singhanias. The Singhanias, therefore, continued to hold the shares in blank transfers. In February, 1955, M/s. Bengal and Assam Investors Ltd. sold out of their own shareholding a block of 750 ordinary shares and 3,625 six per cent. cumulative preference shares of the Muir Mills Ltd. to the assessce-company for Rs. 15,01,250. The assessee-company was under the management and control of the Singhanias who held more than 70% of its shares. When the Singhanias failed to secure registration of the shares purchased by them and gain control of the Muir Mills Ltd., they filed an application in this court under Sections 397 and 398 of the Companies Act, 1956, which was registered as Company Case No. 32 of 1956. In this case there were six applicants : (1) M/s. J. K. Investment Trust Ltd. ; (2) Lala Lakshmipat Singhania; (3) Major General Sham Sher Jung Bahadur, through his duly constituted attorney, Shri Lakshmipat Singhania ; (4) Rani Jagadamba Kumari Devi, widow of the late Madan Sham Sher Jung Bahadur Rana, through her duly constituted attorney, Shri Lakshmipat Singhania; (5) M/s. Bengal and Assam Investors Ltd., through its director, Shri Lakshmipat Singhania; and (6) Shri Hanuman Prasad Dhanuka.
(3.) VARIOUS reliefs were asked for by the applicants, one of which was that the respondent-company be directed to rectify the register of members by registration of the transfer of the preference and ordinary shares held by M/s, Bengal and Assam Investors Ltd. Another relief prayed for was that the managing agency agreement entered into by M/s. Muir Mills Ltd. with M/s. Indian Textile Syndicate (Private) Ltd. and the sole selling agency agreement with M/s. Kanpur Agencies (Private) Ltd. be terminated. An ad interim order was passed by the court whereby the existing board of directors was suspended and a committee of management was appointed with the late Dr. N. P. Asthana, as the chairman. The court also directed the suspension of the existing managing agents for a period of six months and the assessee-company was ordered to run the Muir Mills Ltd. under the supervision of the committee of management. These interim orders were made by the court on March 1, 1957, and October 27, 1957. Before the orders aforesaid had been made by this court, the directors of the assessee-company held a meeting on August 30, 1955. In that meeting the report of the financial adviser submitted to the directors was considered. The financial adviser pointed out that the assessee-company had a substantial stake in the Muir Mills Ltd., and that the existing directors and managing agents were misappropriating the funds and assets of the company. He further reported that the company had been showing loss from 1950 to 1954 and the loss aggregating to Rs. 72 lakhs exceeded the paid-up capital of the Muir Mills Ltd. In these circumstances, the financial adviser advised that it would be in the best interest of the assessee-company if it took such steps as to protect the interest of the company against the reported misappropriation and mismanagement made by the existing directors and managing agents of M/s. Muir Mills Ltd. in collaboration with the shareholders who had already filed the application under Sections 397 and 398 of the Companies Act, 1956. At the meeting of the board of directors held on August 30, 1956, referred to above, it was resolved, inter alia, that the assessee-company should " bear the cost of such proceedings and reimburse such expenses as the applicant or applicants may incur ".;