1971 (11) TMI 46 - HC - Income Tax

Assessee entered into an agreement with another company for financing and managing the company s mills - Certain rights of supervision and management were vested in the other company - Whether the other company can be treated as assessee s manager and remuneration paid to that company is allowable - Whether Tribunal is justified in law in disallowing the claim of the assessee for deduction of Rs. 1,03,547 and Rs. 18,294 from the income as not an admissible business expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922

Issues Involved:
1. Whether Kamala Mills Ltd. was a "manager" as defined under the Companies Act, 1956.
2. Whether the remuneration paid to Kamala Mills Ltd. is deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922.
3. The impact of the assessee's dispute over the liability on the claim for exemption.

Detailed Analysis:

1. Whether Kamala Mills Ltd. was a "manager" as defined under the Companies Act, 1956:

Background:
The assessee, a public limited company, entered into an agreement with Kamala Mills Ltd. for financing and managing its mill. The payments made to Kamala Mills Ltd. were disallowed by tax authorities on the grounds that Kamala Mills Ltd. was the manager as per the Companies Act, 1956, and the payments were illegal under section 384 of the Act.

Legal Provisions:
- Section 384 of the Companies Act, 1956: Prohibits the appointment or continuation of any firm, body corporate, or association as a manager.
- Section 2(24) of the Companies Act, 1956: Defines "manager" as an individual who has the management of the whole or substantially the whole of the affairs of a company, subject to the superintendence, control, and direction of the board of directors.

Court's Analysis:
- The agreement specified that Kamala Mills Ltd. was not subject to the superintendence, control, and direction of the board of directors of the assessee.
- Clause (13) of the agreement explicitly precluded the assessee from exercising powers delegated to Kamala Mills Ltd., indicating that Kamala Mills Ltd. operated independently of the board's control.
- The court concluded that Kamala Mills Ltd. was not a manager within the meaning of section 2(24) of the Companies Act, 1956, because they were not subject to the board's superintendence, control, and direction.

Conclusion:
Kamala Mills Ltd. was not the manager of the assessee as defined under the Companies Act, 1956.

2. Whether the remuneration paid to Kamala Mills Ltd. is deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922:

Background:
The assessee claimed deductions for payments made to Kamala Mills Ltd. under section 10(2)(xv) of the Indian Income-tax Act, 1922. This was disallowed by the tax authorities on the basis that the payments were illegal under the Companies Act, 1956.

Court's Analysis:
- Given the court's finding that Kamala Mills Ltd. was not the manager under the Companies Act, 1956, the payments were not illegal.
- Therefore, the question of whether the payments were wholly and exclusively expended for the purpose of the assessee's business under section 10(2)(xv) became moot.

Conclusion:
The court did not need to examine this issue further due to the finding on the first issue.

3. The impact of the assessee's dispute over the liability on the claim for exemption:

Background:
The assessee had filed a suit against Kamala Mills Ltd. for the return of the remuneration paid, as directed by the Company Law Administration.

Court's Analysis:
- The court noted that the remuneration paid was included in the returns filed by the assessee and Kamala Mills Ltd. had been assessed for this amount.
- The subsequent dispute initiated by the Company Law Administration did not affect the question of whether the amounts were deductible.
- If the amounts are eventually recovered from Kamala Mills Ltd., they can be taxed under section 41(1) of the Income-tax Act, 1961.

Conclusion:
The dispute over the liability did not affect the assessee's claim for exemption.

Final Judgment:
The court answered the question referred in the negative, in favor of the assessee and against the revenue. The assessee was awarded costs of Rs. 250. A copy of the judgment was ordered to be forwarded to the Income-tax Appellate Tribunal, Madras Bench "B".

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