- (1.) THIS is an incomer tax reference to this court under Sub-section (1) of Section 66 of the Indian Income-tax Act, 1922, hereinafter called "the Act", at the instance of the assessee-company, Dalmia Dadri Cement Ltd. , hereinafter also called "the company".
(2.) RIGHT from 26th May, 1938, when the assessee-company was registered, it appointed Dalmia Jain and Company as its managing agents for a period of thirty years on a remuneration of Rs. 1,000 per month besides ten percent. commission on net yearly profits of the company. The managing agents had the power to assign its rights under this agreement to any private or public limited company subject to certain restrictions with which we are not concerned. Disputes between the company and the managing agents were to be settled by reference to arbitration. Subsequently, on 14th August, 1941, Dalmia Jain and Company (Jind State) Ltd. , were appointed managing agents instead of Dalmia Jain and Company under the same terms and conditions for the residue of the thirty years' term expiring on 25th May, 1968.
(3.) THE board of directors of the company decided on 14th November, 1952, to terminate the managing agency agreement and a resolution was passed to this effect by the extraordinary general meeting of the shareholders on 2nd December, 1952. The managing agents, after receiving the resolution on 3rd December, 1952, wrote back that the resolution constituted a breach of the contract of the managing agency and lodged a claim for Rs. 8,87,800 as compensation, out of which Rs. 8,22,168-13-3 was for premature termination of the agreement which was to subsist for another 15 years and 178 days, the amount being calculated at 6 1/2 times the average commission earned during the past three years. The comparatively small balance of Rs. 65,687-10-9 was claimed as compensation for loss of monthly remuneration of Rs. 1,000 for a period of 6 1/2 years. The board of directors of the company, which met to consider the situation on 9th December, 1952, authorised Shri S. K. Sanghi, a director, to settle the claim with the managing agency and he recommended for acceptance by the board of a sum of Rs. 6,00,000 at which the matter could be settled. The board approved this suggestion of Shri Sanghi on 12th December, 1952, and in pursuance of another resolution passed by the extraordinary general meeting of the company on 30th December, 1952, the sum of Rs. 6,00,000 was actually paid to the managing agency the same day. In course of time the question arose with respect to the assessment year 1953-54, whether the sum of Rs. 6,00,000 fell under Clause (xv) of Sub-section (2) of Section 1c of the Act dealing with allowances which are to be deducted in computation of profits, this being : " (xv) Any expenditure (not being an allowance of the nature described in any of the Clauses (i) to (xiv) inclusive and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of such business, profession or vocation. ";