COMMISSIONER OF INCOME TAX Vs. GREAVES COTTON AND COMPANY LIMITED

JUDGEMENT

(1.) THIS appeal is brought, by special leave, on behalf of the Commissioner of Income-tax, Bombay, from the judgment of the Bombay High Court dated July 11/12, 1962, in Income-tax Reference No. 52 of 1960 The respondent-company was incorporated as a private limited company in the year 1922. A partnership firm called "M/s. Greaves Cotton & Co." was appointed as the managing agents of the respondent-company. The said partnership firm continued to be the managing agents from April 1, 1922, to January 7, 1947. From January 8, 1947, a company called M/s. Karamchand Thapar & Brothers Ltd. (hereinafter referred to as the "managing agents") was appointed managing agents of the respondent-company. The managing agents had paid to M/s. Greaves Cotton & Co. a sum of Rs. 27, 34, 325 for securing the managing agency rights of the respondent-company. It appears that the managing agents also paid a sum of Rs. 50 lakhs as purchase price of all the shares held by Messrs. Greaves Cotton & Co. in the respondent-company. The result was that all the shares of the assessee company came to be held by the managing agents. The entire arrangement was completed on January 8, 1947. A fresh managing agency agreement was executed on the same day by the respondent-company in favour of the managing agents. The duration of the agreement was fixed under clause 1 to be a period of 20 years. Under clause 2 of the agreement the remuneration of the managing agents was fixed at 21% on the value of all goods shipped to India by Messrs James Greaves & Co. of Manchester to and for or on behalf of the respondent-company or its constituents. The mode of calculating the commission was also provided in the agreement. The respondent-company made an application on October 19, 1949, to the Controller of Capital Issues, Ministry of Finance, Government of India, for permission to increase its share capital. It was prayed that sanction should be accorded for the issue of 25, 000 five per cent. cumulative preference shares of Rs. 100 each and 30, 000 ordinary shares of Rs. 100 each. Sanction was accorded by the Controller of Capital Issues on April 25, 1950. The respondent-company then converted itself from a private limited company to a public limited company on May 8, 1950. Two days later, i.e., on May 10, 1950, a fresh managing agency agreement was arrived at between the respondent-company and the managing agents for a period of 20 years. Under this agreement the remuneration of the managing agents was fixed in the following manner"(a) A sum at the rate of Rupees five thousand per month as office allowance payable on the last day of each month for and in connection with the general supervision of the business of the company and the maintenance and upkeep of the managing agents' office in Calcutta including the payment of the rent of the managing agents' office premises in Calcutta

(2.) THE extraordinary general meeting adopted the aforesaid two resolutions. By its letter dated April 3, 1951, the respondent-company informed the managing agents about the two resolutions passed at the extraordinary general meeting of the shareholders. By its letter dated April 10, 1951, Mr. Karam Chand Thapar on behalf of the managing agents accepted the termination of the managing agency on payment of compensation of Rs. 18 lakhs. The respondent-company, which adopted the mercantile system of accounting, thereafter appropriated in its books of account the said amount of Rs. 18 lakhs as compensation payable to the managing agents for termination of the managing agency agreement. In the accounting year ended March 31, 1952, the respondent-company claimed deduction of the amount of Rs. 18 lakhs in computation of its profits as expenditure laid out wholly and exclusively for the purpose of its business under section 10(2)(xv) of the Indian Income-tax Act, 1922. The Income-tax Officer rejected the claim of the respondent-company and observed as follows

(3.) AT the instance of the respondent-company the Appellate Tribunal stated a case to the High Court under section 66(1) of the Income-tax Act on the following question of law