1965 (7) TMI 64 - HC - Income Tax

Summary

Issues Involved:
1. Whether there was any material for the finding that the managing agents rendered no service to the assessee-company.
2. Whether Lala Ram Ratan Gupta and Lala Ram Prasad Gupta were acting qua their position as directors and not as partners of the managing company.
3. Whether a device was adopted to provide funds in the hands of parties at the expense of the company for settling their individual accounts.
4. Whether the disputes between the partners of the managing agency firm could have affected the carrying on of the normal business of the company.
5. Whether the company gained anything by terminating the managing agency agreement.
6. Whether the whole or any part of the sum of Rs. 18,90,000 was paid by the company to the managing agents for promoting the company.
7. What was the true nature of the payment of Rs. 18,90,000 by the company to the managing agents on a correct interpretation of the managing agency agreement.
8. 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.

Detailed Analysis:

1. Material for Finding No Service Rendered:
The Tribunal found that there was no evidence to support that the managing agents rendered any service to the assessee-company. The managing agency agreement allowed the managing agents to assign their office and rights, indicating that the agreement was not personal and did not necessarily involve active service. Additionally, the managing agents included minors and females, and there was no change in the business operations of the company after the termination of the agreement. Therefore, the Tribunal concluded that the managing agents rendered no service.

2. Acting as Directors, Not Partners:
The Tribunal found that Lala Ram Ratan Gupta and Lala Ram Prasad Gupta were acting in their capacity as directors rather than as partners of the managing company. The assessee did not provide material evidence to distinguish between the services rendered by these individuals as partners before the termination and as directors after the termination.

3. Device to Provide Funds:
The Tribunal inferred that the payment of Rs. 18,90,000 was a device to provide funds to the parties at the expense of the company. This inference was based on the collusive nature of the arbitration proceedings, the common cause between the Guptas and the Singhanias against the income-tax department, and the fact that the proceedings before the arbitrator were anticipated and appeared to be a mere formality.

4. Disputes Affecting Business:
The Tribunal held that the disputes between the partners of the managing agency firm did not affect the carrying on of the normal business of the company. The disputes were settled by the award of Sri Kanhaya Singh, and the Singhanias had no voice in the management of the company's affairs. The business was carried on by Lala Ram Ratan Gupta, and the disputes did not impact the company's operations.

5. Gain from Terminating the Agreement:
The Tribunal found that the company did not gain anything by terminating the managing agency agreement. The onus was on the assessee to prove that it gained from the termination, but no material evidence was provided. The Tribunal also noted that the termination of the agreement was essentially the company terminating an agreement with itself, as the managing agents were part of the same family controlling the company.

6. Payment for Promoting the Company:
The Tribunal found that part of the remuneration paid to the managing agents was for promoting the company. This finding was based on the managing agency agreement, which stated that the remuneration was partly in consideration of the firm having promoted the company. Consequently, part of the compensation for wrongful termination of the agreement was also for promoting the company and was not a revenue expenditure.

7. True Nature of the Payment:
The Tribunal held that the true nature of the payment of Rs. 18,90,000 was not a revenue expenditure. The payment was made to the partners of Beharilal Ramcharan, not Beharilal Kailashpat, and was not for any service rendered. The Tribunal found that the payment was essentially a distribution of profits and not an expenditure incurred for the purpose of the company's business.

8. Expenditure for Business Purposes:
The Tribunal concluded that the sum of Rs. 18,90,000 together with Rs. 13,300 paid as expenses of litigation was not an expenditure incurred wholly and exclusively for the purposes of the company's business. The payment was found to be of a capital nature, partly for promoting the company, and not for earning profits or carrying on the business. Therefore, it was not an allowable deduction under section 10(2)(xv) of the Income-tax Act.

Conclusion:
The High Court answered the relevant questions against the assessee, holding that the payments made were not deductible as revenue expenditure and were not incurred wholly and exclusively for the purposes of the company's business. The Tribunal's findings were upheld, and the assessee's claim for deduction was rejected.