LAKSHMIRATTAN COTTON MILLS versus COMMISSIONER OF INCOME-TAX, U.P.

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LAKSHMIRATIAN COTION MILIS v. COMMISSIONER OF INCOME-TAX, U.P.

September 3, 1968

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(J. C. SHAH, V. RAMASWAMI AND A. N. GROVER, JJ.]

Income-tax Act (11 of 1922), ss. !0(2)(xv), 66(1), (2) and (4) T ermination of managinJ? agency-No evidence of services don~ by managing agent-Payment of compensation fvr termination-If permis sible deduction under s. 10(2) (xv).

Questions not raised in application under s. 6Gf 1) and (2)-:-lurisdic tion of High Court to direct Tribunal to state case on such question under s. 66(4).

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The shares in the a·ssessee-company were held in equal moieties by nvo families. Four members of each family, together, formed a partnership firm and by a managing agency agreement the ao;~ss<e appointed the fir!" as· its managing agent. In 1943, one of the fatnll!es was represented m tb.e firm by two women and two minors. The management o~ the asses.see was carried on by two df the four members of the other farruly who were the partners in the fi'rm. Those two members were also directors of the and the assessee-company. Disputes arose between assessee terminated the managing agency with effect from September 30, 1944. Thereupon the members of the two families asserting that they, as partners of the firm we're interested in the mdD.agiug agency, claimed compensation from the assessee for wrongful ts1niuation of the agency. The dispute between the firm and the assessee was referred to arbitration, and in pursuance of the award the assessee paid Rs. 18,90,000 to the firm and Rs. 13,300 were disbW:sed as expenses of arbitration.

the two

families

The assessee claimed the payment of Rs. 19,03,300 as a permissible allowance under s. 10(2) (xv) of the Income-ta>. Act, 1922, but the Income-tax Offioer, Appellate Assistant Comm '.ssioner and the Appellate Tribunal disallowed the claim. The assessee thcu filed an application under s. 66(1) for stating a case for the opinion ot tile High Court, but the Tribunal rejected the apolication. The assessee then moved the High Court under s. 66(2) for directing the Tribunal to state a case in respect of two questions. On the direction of the High Court, the Tribunal referred to the High Court the question : Whether there was material on which that Rs. 19,03,300 were not spent by the assessee wholly and exclusively for the purpose of its business. The assessee, thereafter, filed another appli· cation before the High Court for referring additional questions which were not incorporatqj. in ~he applications under s. 66(1) or (2); and the High Court, in purported exercise of the power under s. 66( 4) directed the Tribunal to submit another statement with respect to the additional questions and the Tribunal complied with the order.

the Tribunal could haye come

the conclusion

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At the hearing of the reference, the High Court was of the view that it had no jurisdiction under s. 66( 4) to direct the Tribunal to submit the second st-atement and declined to record format answers on the additional questions. On the original question, the Hip;h Court held that there was material on which the Tribunal could hold that the allowance claimed \ras not spent wholly and exclusively for the purpose of the asS>essee's businesil and confirmed the Tribunal's order.

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• 952

SUPREME COURT REPORTS

(1969] J S.C.R .

th!! High , In appeal ~o this. C"-?ui: •. on !he qu_estions : \I) \V'hcthcr C~oun acted vtnhout 1un'id1cllon, 1n calling for 1he second statement of '?s7; .and (2) ~hether there was material before the Ttihunal h· justify 11 1n 1ls conclu\1on.

HELD : (I) In an application under s. 66(2). the High C.ourl cannot cft<lcr rhat a case he stated on auestion<; which \\.·ere not inclu<.!i.!<l ia the application under s. 66(1). Po"·er under s. 66(-1l. n1;1y he cxcr~ised lo call for a supplementary statement only when the t:ourt is :,Jlisl~-:d that the !itatcmcnt in 1he cac;e referred under s. 66( 1) or (2) is not '.:1.,;ffic:cnt to enable it to determine the question raised by stalcmrnr. The power cannot he exercised for calling for anoth\.T ~1:1:..:1n~nt on "-!Uestion~ not referred hy lh·;! ·rribunal. Therefore, the t1(ocedurc rollov;c~ by the l·ligh Court. in exercise of the power under s. 66( 4), ~3iiin2 for ::n addi tional statement of case on questions which \Vere not 111cor?orat-:d in the applications umkr s. 66(1) and (2) was irregular. (963 G-H; 964 D. Il-965 A I

that

New f<./wngir Vakil Mil/; Ltd. v. C.l.T. (1960]

I S.C.R. 249; 37 1.T.R. 11 (S.C.) and c:.1.r. V, Scindia SU!l/11l /\i(lvi;:~tlvfl Co., ·+2 1.·r.R. 589, 609 <S.C.,l followed.

l'hc 1-Jigh Court, at the hearing: of the reference. wa.; jusdli'!d in refu~;­ ing to ans.,..'Cr the addit!onal qucs~ions. since, !t may decline to ;1nswc-r a question referred pu·rsuant to the direction of the Hil!.h C..ourt if the qucs- 'A':t" not inco'rporalcd in the tion could not have hecn r:iised because it application under s. 66( I). J965 Il-CJ

CJ.T. v. Smr. A111m1ya Dr•vi, 68 I.TR. 750 (S.C). followed.

service

rendered

the managc1ncnt. Even

(2) (a) The burden of proof 101y upon the ao;scs....;ee to prove that the In the expenditure \Vas incurred \i.·holly and exclusivelv for its t1us1nes":>. present case, the remuneration payable under the manJgi.:H? .l!!Ct~cy agret: n1cnt was for a t\VO-fold consideration (i) tor the in promoting the a-;sc'iscc:- and (ii) for rendering scrvict!s to the .1s:-.esse~ as \Vas no evidence th.'.lt anr spccdic functions n1anaging agent. But thcr-.: \\·ere entrusted to 1hc m:inaging agent. A 'recital in tlie n1anaginf ag~ney agreement authorising the ;lgcnt to do certain actc; woulJ not b-~ :1 .suhs titute for cvicJcncc th~1t those ;1cl-. \\'ere done. ·fhc 1n;lnacen1cnt of the asses.sec 'A'as in fact carried on hy (\l,'O membcr'i of one o.f the farnilics, hoth hcforc :ind after the termination of the m:in,1~ing agcr.cy; anJ the mcmh-~rs of the olhcr famih· I \\·omen and niinors) had 110 r.;:!lcclivc voice lhc in affairs of 1hC ;L'>\Csscc "''ere doing so not as oartncr:; of !hi.! llrn1 hut in their eapacitv as directors of the asscssec·company l'hcrc \\1<lS no reliable evidence bcfOrc the ·rribun:il. ;ind the Trihun;1l was justified in reaching the conclusion thaL the firm did not render any scrv;cc to tile a'>~.t.:~:>~c :~s its Jf no service w;1s in fact ren~crcd by the n1:1naging a<!c.nt n1anaging agent. the remuneration mu5t he regarded :i.s cxcl11s1vely pavahle for the service rendered in pron1oting Iii·: ~1sr,cssce. But expcn~1;~uf'e in..:urn.:d for rcmu ·Jlcratin_g per~ons .,..·ho- had t>rornotcd ~1 companv i" not in L:"' a revc~uc cxpendilurc compensation r.avablc to the n1anaging a!.!Cllt for tcrn1in<1tion c:I !he m.1n<:gir~ "·!!COL')' could not he s.aicl to he expenditure incu'rrc<l \vhollv .and c:xdu~:;v~h· i:1 the interest of the hnsincs<o of 'the ;:sses<>ee. r965 I), f-G: 966 r-G: 967 B-J): %8 lHlJ

I0(2)(xv). Therefore.

admis\ihle under s.

t.,..·o men1hcrs

\\'Crc 1;1,1na(dn.g

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{ h) ·rherc \~·as no evidence ;ind not even an ::ittcmpt

lo the affairs o; .thl' cn~l~pany \i.·ouhl. have !1~:.=n 11rcjudiccd 1~1 c'<olain hn"- fhc clisrn1tcs hct\vccn the t\vo fan11hes. The Tribunal found: on .t~e C\r d~n1.:c llCforc ii. that lhc di-;putcs \\'Crc personal 1-0 the i\\10 fa:nihes and

v.·~is rnade

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L. C. MILLS V. C. I. T. (Shah,/.)

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did not and could not prejudicially affect the business of the assessee or put any hindrance in its normal day to day working? and that the~e was no necessity for t'erminating the agency and fdr paying wmpensatlon on that ground. [965 G-H; 968 A-Bl

( c) It was not suggested that the affairs of the u::>Sessee were n1is .. managed. Hence, even if one of the families threatened to apply for the appointment of a receiver for the management of the assessee com pany no receiver would have been appointed for the management of the assessee. Therefore, it was unlikely that :such a futile threat was taken into account for determining the managing agency, necessitating the pay ment of compensation. [967 G-H]

There was thus ample material on which the conclusion of the Tribunal was based, The Tribunal considered all the relevant evidence and its finding could not be said to be based on mere surmise~ and conjectures. [968 H]

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2139

of 1966.

Appeal by special leave from the judgment and order dated Income-tax

lligh Court

in

July 27, 1965 of the Allahabad Reference No. 586 of 1961.

S. T. Desai and J. P. Goyal, for the appellant.

B. Sen, R. N. Sachthey and B. D. Sharma, for the respondent.

The Judgment of the Court was delivered by

s.

Shah, J.

l0(2)(xv) of

In proceedings for assessment of tax for the year 1945-46 the Lakshmirattan Cotton Mills--hereinafter called 'the Company'--claimed allowance under the Income-tax Act, 1922, of Rs. 18,90,000 paid by it as compen sation for termination of the managing agency of the finn Behari lal Kailashpat and Rs. 13,300 incurred as expenditure in respect of arbitration proceedings in connection with the determination of compensation. The Income-tax Officer disallowed the claim. The order was confirmed by the Appellate Assistant Commissioner and by the Income-tax Appellate Tribunal. - The lligh Court of Allahabad in a reference under s. 66(2) of the Income-tax Act, 1922, held that ther.~ was material on which the Tribunal could hold that the allowance claimed was not spent wholly and ex clusively for the p!irpose of the company's business.

The facts which give rise to the reference require to be stated in some detail. The Company was incorporated in 1934. The shares of the Company were held in equal moieties by members of two families, who may for the sake of convenience be referred to as "Singhanias" and "Guptas". Under a deed dated August 3. 1934, Singhanias and Guptas formed a partnership to carry on, in the name of Beharilal Kailashpat, several businesses including ~e business of Secretaries, .Treasurers and Agents of the Company. the Company appointed By agreement dated May 2, 1935,

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954

st;PREME COURT REPORTS

(1969] I S.C.R.

Beharilal Kailashpat as its managing agents. The fi!Jil then con sisted of eight partners--four belonging to the family of Singhanias and the other four belonging to the family of Guptas. Under the Articles of Association of the Company two ex-officio directors were to be nominated by Beharilal Kailashpat. Clause 2 of the managing agency agreement read as follows :

"In consideration of the agreement hereinbefore contained on the part of the firm and in further consider ation of the firm having promoted the Company, the Company hereby promise and agree with the Finn and its Members for the time being . -

(a) That the Firm shall be the Agents of the Com pany for a period of ninety-nine years and there after until they shall resign or until they aro thereafter removed from their office as Agents of the Company by a majority of three-fourths of the shareholders of the Company.

( b) The Firm shall receive from the Company a commission at the rate of two per cent on the sale price of all the cotton, yarn and cotton cloth manufactured and sold by the Company and a commission of one per cent on the sale fabrics proceeds of all materials, yams and manufactured from wool, jute, silk and other fabrics, and sold by the Company, and a com mission of ten per cent on the gross profits after deducting all expenses but before deduct ing depreciation, made by the Company from its ginning or pressing operations independently of the usual adat commission, exchange and interest payable to their branch firms or agents and adatias appointed by them outside Cawn pore for purchasing or selling any goods or com modities for or on account of the Company.

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( c) The Company shall defray

the expenses of maintaining a suitable office and such staff as the Firm may deem proper to transact the busi ness of the Firm as Agents of the Company.

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(d) In case the Company shall sell

their Mill the business premises and machinery thereof. the same shall be to the rights and claims of the Finn of the Agents of the Company as provided by this Agreement and the Memorandum and Articles of Associa tion of the Company."

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L, C. MILLS v. C.J.T. (Shah, J.)

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By cl. 3 of the agreement it was provided that in the event of the, Company being wound up the managing agents Beharilal Kail~­ pat shall be entitled to receive compensation for loss of appomt ment as agents a sum equal to the amount earned by the firm during five years preceding the winding up of the Company. Beharilal Kailashpat were under els. 3 (f) and (g) to purchase all cotton, wool, machinery and stores that may from to time be required for the use of the Company Mills and to sell the same and also to sell all loose or baled yarn, and cloth produced or manufactured at the Company's Mills. By cl. (h) the managing agents were to exercise all the powers given to them by the Articles of Association of the Company. It was also provided that if the firm be not dissolved it shall be lawfnl for the firm to change its constitution, name or style from time to time, without thereby in any way affecting their appointment as agents of the Company.

tim"

From time to time the constitution of Beharilal Kailashpat was changed-some members ceased to be partners and new mem bers entered the firm-without affecting the equal representation of Singhanias and Guptas. On February 15, 1943, a fresh deed of partnership of Beharilal Kailashpat was executed under which the four representatives of Singhanias were--( 1) Smt. Ansuiya Devi; (2) Smt. Pushpavati Devi; (3) Vijaipat (minor) and (4) Ajaipat (minor) [Nos. (3) & ( 4) being minor sons of Lala the representatives of Guptas were--( 1) Kailashpat Singhania): Smt. Ramdevi; (2) Smt. Keshobai; (3) Lala Ram Rattan Gupta and ( 4) Lala Ram Prasad Gupta. Each of the family collecti vely held an eight annas share. Under the terms of this part nership deed it was agreed that Lala Ram Rattan Gupta a part ner of the firm will be entitled to carry on business on behalf of the firm. ,

in Disputes arose in 1943 between Singhanias and Guptas regard to the management of the various businesses in which thev were interested. These disputes were referred _for · adjudicatic·n to Thakur Kanhaiya Singh who made and publisbed his award on January 18, 1944. Under the award the arbitrator allotted ·certain businesses exclusively to Singhanias and the rest to Guptas. In regard to the managing agency of the Company, the award directed that the Singhania group do withdraw from the Com pany, and the shares held by them be given to the Gupta group "at the rate of Rs. 2,000 per share" : that Padamoat and his two brothers do resign from the Singhania group be deemed to have retired from the partnership of the managing agency as from 25th January 1944 and that L. ~am Rattan .Gupta alonll' with his members of the group be en titled to continue the said managing agency business : that ~e name of Kailashpat be removed from the firm's name of Beharilal Kailashpat; that the profit and loss account of Beharilal

the Board of Directors,

that

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• 956

SUPREME COURT REPORTS

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[l 969] l S.C.R.

Kailashpat be made up to J?nuary 18, 1944, and that the amount due to either of the groups ascertained after providing for exc.ess profits tax and incol)le..tax liabilities be paid. Pursuant to the award the shares .held by the Singhanias were taken over -by the Guptas, and the name of the managing itgency firm was changed to- Beharilal Ramcharan. On March 31, 1944, the shareholders of the Company approved .of the changes in the constitution of the n1anaging agency firm.

Apparently Singhanias were not satisfie\i with the award made by Thal:;ur Kanhaiya Singh and they commenced an action (Suit No. 31 of 1944) in the Civil Court at Kanpur, and claimed relief in respect of the termination of their interest in Beharilal Kailash pat, and in respect or certain other matters. There was corres pondence between Singhanias and Guptas which it is unnecessary at this stage to refer. On September 19, 1944, at a meeting of the shareholders of the Company the firm of Beharilal Ramcharan which was brougqt into existence under a deed of partnership dated January 27, 1944, were appointed managing agents of the company. The Singhanias insisted that they remained interested in the managing agercy and the Guptas asserted that under the award of Thakur Kanhaiya Singh the Singhania group had ceased to have interest in the managing agency and on retirement of the members of the Singhanias, the name of Beharilal Kailashpat .was changed to Beharilal Ramcharan. The shareholders of the Company at their meeting held on September 19, 1944, also passed a resolution that the managin,g agents be dismissed from the office and the managing agency agreement be terminated with effect from September 30, 1944.

Thereafter the members representing the Singhanias claimed compensation from the Company for wrong.fut termination of the managing agency. The Guptas also made a claim for compen sation and threatened to bring an action against the Company. By agreement dated October 19, 1944, the disputes between the Colllpany and Beharilal Kailashpat were referre9 to the arbitra tion of Mr. K. M. Munshi with authority to decide two ques tions-( l) whether the termination of the managing agency and removal from the office of the managing agents of the firm of Beharilal Kailashpat and/or its alleged successor Beharilal ~am­ cl\aran was wrongful or not; and (2) if it was wrongful, to what compensation, if any, are the ex-managing agents entitled ? Before Mr. Munshi entered upon the reference, the award made by Thakur Kanhaiya Singh was modified by a supplementary award made by Thakur Ka;nhaiya Singh with the consent of the parties. Under the award so modified, it was provided that "Regarding the claim of the retiring partners· for a share in the goodwill of the said finn and in the value of the said Managing Agency the said ' LR.C.M. Co.

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L. C. MILLS v. C.l.T. (Shah, /.)

957.

Ltd. having terminated the said Managing Agency Agreement ·and the Managing Agents having claimed compensation for the said termination which they allege · was wrongful and the dispute arising_ out of such claim having been referred to arbitration, it is agreed 'and awarded that any sum awarded as compensation in the said arbitration shall be paid to and retained by the continuing partners and that irrespective of the result of the said award and in any event they, i.e. the conti- nuing partners shall pay to the retiring partners a sum of Rs. eight lacs as representing their share in the com pensation for the premature and wrongful termination of the Managing Agency Agreement with the said firm. The above payments shall be in full satisfaction and discharge of all claims and demands whatsoever of the retiring partners on and to the assets, goodwill and contracts of the said the Managing Agency Agreement with the L.R.C.M. Co. Ltd., and also in full satisfaction and discharge of the claim made by them against the Lakshmirattan Cotton Mills Co. Ltd., for compensation for the tem1ination of the said Managing Agency."

including

firm

On this modified award a consent decree was obtained in Suit No. 31 of 1944 filed by Singhanias.

Thereafter Mr. Munshi made an award on March 25, 1945,

. directing·-

( 1) That the termination of the managing agency of Mis Beharilal Kai\ashpat and their removal from the office of Managing Agents of the said company i.e. Laxmiratllm Cotton Mills Co. Ltd. was wrongful.

(2) That the said Laxmirattan Cotton Mills Co. Ltd. are liable to pay to the firm of M/s Beharilal Kailashpat a sum of Rs. 18.90,000 only as and by way of compensation for such wrongful c\ismissa\..

(3) That the said Laxmirattan Cotton Mills Co. Ltd. to pay to party of the third part, to say, L. Ramrattan Gupta and Lala Ramprasad Guota sons of L. Beharilal, and Smt. Keshobai: wife of L. Ram- gopal, the said sum of Rs. 18,90,000 only, with interest · thereon at the rate of 3 per cent. per annum from the

that is

date hereof.

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( 4) That the said company do pay the said parties of the 2ncl part and of the 3rd part respective costs ol the reference and the arbitration proceedings (which included fees of Rs. 10,000) to Mr. K. M . Munshi.

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• 958

SUPREME COURT RF.PORTS

( 1969] t S.C.R .

Payment was thereafter made by the Company in pursuance of this award of Rs. 18,90,000 to Beharilal Kailashpat and Rs. 13,300 were .disbursed as expenses of arbitration.

The Income-tax Ollicer rejected the claim of the Company to treat as a permissible allowance under s. IO ( 2) (xv) of the In come-tax Act, 1922, the amount of Rs. 19,03,300. He held that the expenditure incurred was not connected with the busines5 of the Company and in any event it was capital expenditure. In appeal the Appellate Assistant Commissioner held that the pay ment was made "for some improper purpose . . not eon eected with the business". In further appeal before the Tribunal, counsel for the Company urged two arguments in support of the claim for allowance :

( 1) that the main object in terminating the manag ing agency was to save the Company from loss which the the Company would have suffered on account of disputes between the two groups of partners of the managing agency firm; and

( 2) that the Company was by the payment absolv ed from liability to the remuneration of the managing agents for the year of account and for future years also.

The Tribunal held that before the termination of the managing agency agreement the affairs of the Company were administered by Lala Ram Rattan Gupta and Lala Ram Pnt,ad Gupta, that even after the termination of the managing agency Lala Ram Rattan Gupta and Lala Ram Prasad Gupta continued to adminis- ter the affairs of the Company, and that on the materials on re cord it was not proved that the managing agents were performing any service to the Company. The Tribunal therefore held that the payment of the managing agency commission to the managing agents was not expenditure wholly and exclusively incurred for the purpose of the Company·s business. The Tribunal also ob served that the disputes between the two groups could in no way harm or cause hindrance to the "nomrnl day-t<Hlay working" of the Company.

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RefcrrinJ! to the second plea the Tribunal ob~~rved that con sideration for the appointment of the managing agents were-- G (I) promotion of the Company; (2) rendering service to the Company : anything paid for promoting the Company was not admi>sible a' a revenue deduction, and hy making a consolidated payment to ·pay off such a liability the Company did not reduce the future revenue liability of the Company.

The Tribunal in summarising the findings observed :

"These disputes (between Singhanias and Gupta') to

were taken to the Court and (were) also

referred

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L, C. MILLS v. C.I.T. (Shah,/.)

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arbitration. After the first arbitration dated 18-1-1944, the Singhania group was not satisfied. Ultimately · some sort of a settlement was arrived at through an ar bitrator whose supplementary award forms the basis of the consent decree of the Court. Under this award each party had to pay the other large sums. Therefore, a device was adopted to provide funds in the hands of the parties at the expense of the company for the pur- In preparing pose of settling their individual accounts. the scheme the authors had made an effort to reduce the tax liability of the company by claiming the amount as a revenue deduction."

The Tribunal also observed that the firm styled Beharilal Ram charan was brought into existence in place of Beharilal Kailash pat, but it rendered no services as managing agents. The Tri~u­ nal accordingly rejected the claim of the Company for treatrng the compensation paid to the managing agents and the legal ex penses in relation thereto as a permissible deduction in the com- putation of its total income.

The Company submitted an application under s. 66 (1) of the Income-tax Act, 1922, for submitting a statement of case and prayed that seven questions set out in the application be ref.erred to the High Court. The Tribunal rejected the application hold ing that no question of law arose out of the order of the Tribunal, and that the questions sought to be raised by the Company "were pure questions of fact". The Company then moved an applica tion in the High Court of Allahabad requesting that the Tribunal be directed to state a case in respect of two questions :

" ( 1) Whether in the circumstances of the case the expenditure made by the assessee company for the pur pose of getting rid of the Managing Agents was not the expenditure admissible under s. 10 (2) the Income-tax Act ?

(xv) of

(2) whether there was any or sufficient evidence to justify the Tribunal to hold that no services whatever were rendered by Managing Agents to the assessee Company under the Managing Agency Agreement and that therefore nothing was payable to the Managing Agents in respect of such services ?"

Too Hig~ ~ourt dire~ted the Tribunal to state a case on que~tions of law ansmg out of its order. Pursuant to this order the Tribu nal on December 29, 1954, submitted the following q~estion :

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"whether there was material on which the Tribunal could have come to the conclusion that Rs. 19,03,300 were not spent by the assessee company wholly and ex· elusively for the purpose of its business ?"

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SUPREME CQl;RT REPORTS

(1969] I S.C R

The Company was apparently dissatisfied with the question refer- red by the Tribunal and tiled a petition in the High Court pray- ing that certain questions set out in the application be decided along with the question already referred and Income-tax Appellate Tribunal be directed to amend the statement of case and to refer the additional questions also to the High Court for decision. The High Court in purported exercise of the power B under s. 66( 4) of the Indian Income-tax Act. called upon the Tribunal to submit another ;tatement of case on tollowing questions :

the

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•· t. Was the_re any material for the finding--

( a) ·that the managing agents had rendered no ser

vice to th-~ assessec company:

(b) that Lala Ram Rattan (iupta and Lala Ram Prasad Gupta were acting qua their position as Directors and not as partners of the managing company:

( c) that a device '"'-' adopted to provide funds in the hands of parties at the expense of the com pany for the purpose of settling their individual accounts and that th-~ payment of the amount in question was made only as a part of this device;

t d) that the disputes between the partners of the mana~ing agcncv firm could ·not, in any way, have affected the carrying on of the normal business of the company; and

( c) that the company gained nothing by terminat

ing the rn<Jnaging a~cncy a~recmcnt ?

2. Whether the whole or any part of the sum of Rs. 18,90,000 was paid by the company to the manag in~ aµcn1' having promoted the company 0 ·

:1. What was the true nature of the payment of the sum of Rs. 18,90.000 hy the company to the managing the n1anaging a}!.i:nts nn a correct apcncy agrccnient ?

interpretation of

4. Whether the 'Ulll of Rs.

together with the sum of Rs. 13,300 paid as expenses of litiga tion 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?"

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submitted another•

L. C. MILLS V. C.I.T. (Shah, J.)

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the various findings which were sought to be incorporated in the questiens were founded.

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that

( 4) of s. 66 of

At the hearing of the reference the High Court was of the view that the Court had no jurisdiction under s. 66( 4) of the lncorne-tax Act to direct the Tribunal to submit second state ment of case and the questions in addition to the one submittr...d before the Tribunal "could not legally have come before the High ·court", since the earlier ctatement of the case was not quashed, no1 was it returned to the Tribunal; and the Court in calling upon the Tribunal to. submit another statement of case did not act in conformity with the provisions of sub-s. the Income-tax Act. In the view of the High Court a comparison of the question originally framed with the questions referred with the second statement of case by the Tribunal showed the second set of questions were not parts of, or included in, the some of the former question but were substantially different : questions in the view of the High Court were pure questions of fact, some of them were overlapping, and the questions were the application different from the two questions mentioned in under s. 66(2), and that on the application submitted by the Company, even if it be treated as an application for calling for a statement of case under s. 66 (2), the only question that the Court could call upon the Tribunal to refer was Question No. 1 (a) submitted with the second statement of case. The High Court then observed that they were under a duty to refuse to answer questions which did not arise out of the order passed by the Tribunal or were not included in the application under ss. 66(1) and (2). But out of deference to the order previously passed the Court proceeded to consider and set out reasons in support of the answers to the questions referred if those questions were required to be answered. The High Court said that on the question there was evidence that no change had taken place for carrying on the company's busi"ness the agreement. the High Court Questions 1 (b), l(c), l(e) and (2) & observed, were not incorporated in the applications under ss, 66 ( 1 ) & (2) and Question 1 ( d) was not mentioned in the appli cation under s. 66(2), and those questions did not arise out al the order of the Tribunal. Further, the High Court observed, Questions l(b), l(c), l(d), l(e) and (2) could not be answered in favour o[ the assessee, and Question (3) was irrelevant and In the view of the High Court Question need not he considered. ( 4) consisted of the payment of limbs two Rs. 18,90,000 was made for the purpose of the company's busi ness,· and whether the payment for that purpose amounted to revenue expenditure. The first, in the view of the High Court, was a question of fact and the second though a mixed question the first ~f law and fact did not arise for determination unless limb was answered in favonr of the Company, and that in any

termination of

. whether

after the

(3),

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• 962

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[1969]

.C.R.

event if the question were to be reduced to the form whether there A was any material for the finding that the payment was not an ex penditure incurred wholly and exclusively for the purpose of the company's business, the answer must be against the Company.

the After a detailed consideration the High Court held that expenditure in question was not made wholly and exclusively for the pmpose of the company's business, and was by way of distri- im bution of profits, and being wholly gratuitous or "for some proper or oblique purpose outside the course of business manage ment", it could not be treated as a permissible deduction. Against the order recorded by the High Court, this appeal has been pre ferred with special leave.

We propose in the first instance to consider whether th~ High Court acted with jurisdiction in calling for a second statement of case on questions which were not incorporated in the applications under ss. 66 (I) & ( 2) of the Act after the Tribunal had submitted a statement of case in response to the order under s. 66(2). Under s. 66( I) of the Income-tax Act, 1922, the assesscc or the Commissioner may by application in the prescribed form within the period provided require the Appellate Tribunal to refer to the High Court any question of law arising out of such order and the Tribunal is enjoined by law to draw up a statement of case and If on any application made under refer it to the High Court. sub-s. (I) the Appellate Tribunal refuses to state a case on the ground that no question of law ari,;cs, the assessee or the Com missioner may, if he is not satisfied with the correctness of the decision of the Appellate Tribunal make an application the to High Court to require the Appellate Tribunal to state the cao;e receipt of any such and to refer it to the High Court and on requisition the Tribunal shall state the case and refer it. If the High Court is not satisfied with the statement of case referred 1mder sub-s. (1) & (2) of s. 66 and the facts are not sufficient to enable. determination of question raised thereby, the Court may, in exercise of the power under sul:>-s. ( 4), refer the case back to the Appellate Tribunal to make such additions thereto or altera- tions therein as the Court may direct in that behalf. Under sub-s. (5) of s. 66 the High Court upon hearing any such case shall decide the question of law raised thereby.

This Court in New Jehangir Vakil Mills I.rd.

sioner of Income Tax(') observed.

v. Commis

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"It is clear .

. that the only question of law which the assessee or the Commissioner can require the Tribunal to refer to the High Court is 'any question of law arising out of the order of the Tribunal' ..... first ins- Wh3! has. therefore. to be looked at in

the

<'' (1060] I S.CR. 249: 17 J.T.R. 11

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L. C. MILLS V. C.!.T. (Shah, /.)

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the order of

tance is whether the question of law thus required to be referred arises out of the Tribunal. . Section 66 ( 2) which gives the power to the . High Court to require the Tribunal to state the case and refer the question of law to it also proceeds on the same basis and even where the High Court exercises the power under section 66 (2) it can <?nlY require ~e Tribunal to state the case on any question of law ans ing out of such order. The scope and subject-matter of the reference under section 66(2) . is co extensive with that of the reference under section 66 ( 1) of the Act and the High Court has no power or juris diction under section 66(2) the .Section 66 ( 2) comes into ambit of section 66 ( 1). play only when the Tribunal refuses to state the case on the ground that no question of law arises and if the High Court is not satisfied of the correctness of the decision of the Tribunal, it has . . . . the power and jurisdiction to require the Tribunal to state the case· and refer the same to it.

travel beyond

to

. This statement of case which

is based . on the facts which are admitted and/ or found by the Tribunal may not contain sufficient material to enable the High Court to determine the question raised thereby and in that case the High Court under section 66 ( 4) is vested with the jurisdiction to refer the case back lo the Tribunal to make such additions thereto or alterations therein as the Court may direct in- that be half only for the purpose of determining the questions referred it. . . . . . . . . But section 66 ( 4) does not enable the High Court to raise a new question of law which does not arise out of the Tribunal's order and direct the Tribunal to investigate new or further facts necessary to determine this new question which had not been referred to it under section 66 ( 1) or section 66 ( 2) and direct the Tribunal to submit a sup plementary statement of case. This power and jurisdic tion which is vested in the High Court is to be exercised within the four corners of section 66."

to

It is also well settled that in an application under s. 66(2) of the Income-tax Act the High Court cannot order that a case be stated o~ questions which were not included in the application sub It was observed by this Court in Com mitted under s. 66 ( 1). missioner of Income-tax v. Scindia Steam Navigation Co. Ltd.(')

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" . . . . . . the power of the Court to direct a refe rence under section 66(2) is subject to two limitations

(I) 4,2 1.T.R. 589. 609 (S.C.\

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• 964

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[1969] 1 S.C.R .

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-the question must be one which the Tribunal was bound to refer under section 66 (I) and the applicant It must have required the Tribunal to refer it . is, therefore, clear that under section 66 ( 2), the Court cannot direct the Tribunal to refer a question unless it is one which arises out or the order of the Tribi.rnal and was specified hy the applicant in his application under section 66 ( I ) .''

.

The High Court was, therefore, incompetent the Trihunai to submit a statement of case ori ques~ions of fact or questions which were not incorporated in the application under s. 66(1 ).

to call upon

The Company in its application under s. 66 ( 2)

requested that a statement of case be called for in respect of only two ques' tions. Thereafter the Company applied to the High Court for an order that other questions which were neither incorporated in the application under s. 66( I) nor in the application under s. 66(2) he submitted to the High Court. The l·ligh Cou11 had no power. in our judgment, t0 grant that application. The power supplementary under s. 66( 4) may he exercised to call statement only when the Court is satisfied that the statements in a case referred under sub-s. (I) or sub-s. (2) of s. 66 are not sufficien~ to enable it to detem1ine the question that It does not confer a power to raise any additional statement. questions or to call for a statement of case on questions not refer red by the Tribunal. If it happens that the Tribunal makes an inadequate statement of case and docs not submit all the ques tions of law arising out of the order of the Tribunal, the remedy of the aggrieved party is to proceed in the manner su)!gestcd hy Kania. J. in /V. V. K/zandva/a v. (·0111111issio11tr of /11co111e~rax( 1 ):

raised by

for a

"When a statement of case. with the question of law framed bv the Tribunal. is filed in Cnurt for dis posal, if a party is aggrieved and wants to contend that certain further facts ought to be stated, or certain ques tions of law should be raised. he can make an applica tion bv wav of notice of motion. That 'hould be heard ·a!on; with the case stated D\· the Tribunal for the Court's opinion. At that time th.e Court will consider whether the statement of case is complete for the ques tion of law raised by the Tribunal. The Court can also consider whether on the case stated bv the Tribunal the proper question is raised or not."

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The power under s. 66( 4) may be exercised when the High ('ourt is not s:1tisfied that the statements in a case referred arc sufficient to determine the question referred thereby. it cannot be exercised for calling for another statement on questions not •

II

(I) t4 l.T.R. 635. 6ii __ _

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965

referred by the Tribunal. The procedure followed by the High Court in calling for, in exercise of the power under s. 66 ( 4), an additional statement of the case on questions which were not in·· corporated in the applications under ss. 66(1) & (2) was, in our judgment, irregular.

the

Correctness of an order of the High Court calling for a state ment of case may be challenged at the hearing of referenca and the Court may decline to answer the question referred pursu ant to the direction of the Court, if it did not arise out of the order of the Tribunal, or is a question of fact or is academic or could not have been raised because it was not incorporated in the appli cation under s. 66 (1); Commissioner of Income-tax v. Smt. A nusuya Devi('). Counsel for the Company has therefore rightly confined himself to the question which was originally sub mitted by the Tribunal by order date& December 29, 1954, and has raised .his argument on that question only.

the

The Company claims that the expenditure of Rs. 19,03,300 is a pem1issible allowance under s. 10(2) (xv) of Indian lncome-tax Act as expenditure wholly and exclusively incurred for the purpose of the business of the company. The burden of proof lay upon the Company to prove that the expenditure was incurred wholly and exclusively for the business of the Company. In the view of the Tribunal the management of the Company was being carried on by two members of the Gupta group who were acting as ex-officio directors. Even after the termination of the managing agency on September 30, 1944, those two members continued to carry on fue management, and the Company appoint ed no managing. agents till July 194 7, when a private limited Com pany styled B. R. Sons Ltd., of which the members of the Gupta group were shareholders, was brought into existence. Singhanias firm of Beharilal were represented at the relevant time in the Kailashpat by two women and two minors who could not and did not take any effective part in ilie business of the partnership or in the management of the Company's business. The members of the Gupta group were managing the affairs of the Company, not as partners of Beharilal Kailashpat but in their capacity as direc tors of the Company, and there was no evidence that the firm of Beharilal Kailashpat rendered any services to the Company. After the termination of the managing agency, Lala Ram Rattan Gupta and Lala Ram Prasad Gupta were appointed directors of the Com pany and looked after the business of the Company. The Tribunal held that the disputes between

the Singhania group and the Gupta group were real, but the ' disputes were personal to the two fan1i!ies who constituted the firm, and the dis putes did not and could not prejudicially affect ilie business of tl!e Company. The Tribunal also found that the firm Beharilal

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(l) 68 I.T.R. 750.

L!Sup.Cl/69-15

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966

SUPRE:\!E COURT REPORTS

[ 1969] I S.C.R.

Ramcharan who were appointed managing agents on March 31, 1944, were not formally dismissed: . but they merely drew re muneration under the agreement and rendered no service. There was no evidence that any specific functions were entrusted to the managing agents, besides those specified in the managing agency agreement, and it was conceded by the the managing managing agents that after the a.~cncy agreement on September 30, 1944, "no change took place besides that Ram Rattan and Ram Prasad who were the ex-officio directors became ordinary directors". From these facts the Tribunal inferred that the managing agents as such rendered no 'crvice to the Company.

representative of

termination of

the

Counsel for the Company contended that the findings of the Tribunal w~re based upon mere surmises and conjectures and were in any event based on no evidence. He relied upon the last paragraph of the statement of case that the "Tribunal's real find ing" on which the finding relating to the inadmissibility of the expenditure was based was that a device was adopted to provide funds in the hands of the parties at the expense of the Company submitted for settling their individual accounts. Counsel also that there was a mass of evidence which the Tribunal ignored in d.~ciding whether the managing agents rendered any service. Our attention was invited to the terms of the managing agency agree ment and also to assertions made in the correspondence between the Company and the Singhanias, and also to the finding recorded bv the Income-tax Officer who observed that all circumstances p-ointed to the fact that "the managing agents were managing the removed affairs of the Company well. Hence if still they were for from service the inference is clear that they were somt reasons not connected with business".

removed

In reaching its conclusion the Tribunal considered all the relevant evidence. The Tribunal has referred to the order of the Incc1mc-tax Officer, to the terms of the managing agency a?rcc- mcnt and also to the correspondence. The Tribunal primarily relied upon the facts that before and after the termination of the manoµing agency agreement, only two directors Lala Ram Rattan Gupta and Lala Ram Prasad Gupta carried on the business of the Company and no explanation was rendered before the Tribunal about the specific services rendered by the managing agents. They .ibservcd :

"There is nothing on record to show or even to indi cate the nature of the services rendered by them besides nominating . directors to act as ex-officio directors. Whatever may be the functions assigned the ex- ol]icio directors, they were qua their position as direc- failed to tors. We have looked everywhere but we have any indication as to the services rendered by the

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L, C. MILLS v. C.l.T. (Shah, J.)

managing agents. Services are not rendered by merely entering into an agreement with the company to do the functions of the managing agents. There must be some thing more than that and we. have not the least hesita tion in saying that in th.e present case on the facts on record there is nothing to indicate that the managing agents as such rendered any service."

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We are unable to hold that the finding that no services were rendered by the managing agents was based on "surmises and conjectures", or that it was based on no evidence. The burden of proving that services were rendered by the managing agents for earning the remuneration lay upon the Company, and if no reliable evidence was forthcoming, the Tribunal was competent to reach the conclusion it did.

The recitals in the agency agreement which authorised the managing agents to do certain acts could not be a substitute for evidence that those acts were done by the managing agents. Counsel for the Company made no effort to enlighten the Tribunal on how the business of the Company would have suffered by the quarrels between Guptas and Singhanias. Even prior to the termination of the contract of the managing agents of the Com pany, the Singhanias had no effective voice in the management of the firm. No representative of the Singhanias was on the Board If in that of Directors prior to the termination of the contract. state of evidence the Tribunal concluded that quarrels between the Guptas and Singhanias could in no way harm or put hind rance in the normal day to day working of the Company, the find ing could not be again said to be based on surmises and con jectures.

Counsel for the Company invited our attention to the threat by the Singhanias to move the Civil Court to ·appoint a receiver for the management of the Company, and contended that if a receiver was appointed for management of the Company, the affairs of the Company might possibly have been mismanaged. It is difficult to understand that because of the disputes between the two sets of partners of the managing agency firm, a civil court could have appointed a receiver to manage the affairs of the Com pany : a receiver may have been appointed of the remuneration It is not payable by the Company, but not of the management. suggested that the affairs of the Company were mismanaged. The management of the Company was conducted after September 30, 1944, in the same manner and by the same directors as it was originally conducted. A futile threat could not reasonably be taken into consideration, and was not apparently into act:ount, for determining the managing agency agreement. This plea was apparently not even suggested before the Tribunal.

taken

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[l 969) I S.CR .

The burden of proving that the expenditure was

incurred wholly and exclusively for the purpose of the business lay upon the Company and no evidence was led and not even an attempt was made to explain how the affairs 9f the Company would have been prejudiced by the disputes pending between the Singhania> and Guptas.

The remuneration payable under the managing agency agree ment was for a two-fold consideration-( 1) the services rendered by the managing agents in the promotion of the Company; and (2) for rendering services to the Company. Expenditure incur· red for remunerating the persons who had promoted the Company was not in law a revenue expenditure admissible under s. 10(21 (xv) of the Income-tax Act and if no services were rendered by

the managing agents, the remuneration must be regarded as ex·

elusively payable for the services rendered by the managing agents in the promotjon of the Company. TI1e expendiiure could not in the circumstances be said to be mad:~ wholly and exclusively in the interest of the business of the Company.

•

The Tribunal has stated in paragraph 30 of its order

th'1t under the award of Thakur Kanhaiya Singh each party had to pay the other large sums. and a device was adopted to provide funds in the hands of the parties at the expense of the Company for settling their individual accounts; and that "in preparing the sch.~me the authors had made an effort to reduce the tax liability of the Company by claiming the amount as a revenue deduction··. The Tribunal appears to have reached this conclusion from th~ the settlement terms of the award of Thakur Kanhaiya Singh, between Singhanias and Guptas of the civil suit by consent decree dated January 11. 1945, by a supplementary award which pro vided for distribution of compensation which it was expected "would be receivable" for determination of the managin_g agency. and the ultimate award of Mr. K. M. ~lunshi which contained a mere bald decision and no reasons in support thereof. Whether this part of the judgment of the Tribunal is correct need not detai•1 us in this case. If the amount paid was not expenditure incurred wholly and exclusively for the purpose of the business, it is un necessary to consider whether a "device" was adopted to provide funds in the hands of the parties at the expense of the Companv for the purpose o( settling their individual account< ·or for some other reasons. The question raised by the Tribunal for the deci iherc sion of the High Court. it may be recalled. was whether was anv material on which the conclusion of the Tribunal could he justified, and, in our judgment, there wa< ample material on which the conclusion could be founded. The answer recorded by the High Court was, on the question referred by the Tribuaal bv their statement dated December 29, 1954, in our judgment.

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right. The High Court was also right in declining to record for mal answer on the other questions.

No separate argument Wfls advanced in regard to the amount of Rs. 13,300 which was incurred for the costs of the arbitrator and for the arbitraiton proceedings. No argument was also appa rently raised before the High Court supporting the claim for that amount as a permissible allowance even the claim for Rs. 18,90,000 was disallowed.

if

B

The appeal therefore fails and is dismissed with costs.

V.P.S.

Appeal dismissed .

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