1972 (12) TMI 55 - HC - Companies Law

Summary

Issues Involved:

1. Allowability of salaries paid to the manager under section 10(2)(xv) of the Indian Income-tax Act, 1922.
2. Whether the salary paid to the manager contravened section 348 of the Companies Act, 1956.
3. Justification of the addition of Rs. 93,456 as income from undisclosed sources.

Issue-Wise Detailed Analysis:

1. Allowability of Salaries Paid to the Manager under Section 10(2)(xv) of the Indian Income-tax Act, 1922:

The company claimed allowance for the remuneration paid to the managing agency firm and the salary paid to the manager. The Income-tax Officer allowed the remuneration paid to the managing agency firm but disallowed the salary paid to R. Doraiswamy Naidu, a partner in the managing agency firm, citing that it exceeded the ten percent limit of the net profits set by section 348 of the Companies Act. The Appellate Assistant Commissioner reversed this finding, holding that the payment of salary to the manager was an allowable deduction under section 10(2)(xv) of the Income-tax Act. The Tribunal upheld this view, stating that the salary paid to the manager was an expenditure incurred wholly and exclusively for the purpose of the company's business, and thus deductible under section 10(2)(xv), irrespective of the contravention of section 348 of the Companies Act.

2. Whether the Salary Paid to the Manager Contravened Section 348 of the Companies Act, 1956:

The Tribunal initially found that the salary paid to the manager contravened section 348 of the Companies Act. However, the court analyzed whether the payment of remuneration to R. Doraiswamy Naidu infringed section 348 as it stood before its amendment in 1960. The court concluded that the amendment was not retrospective and that the definition of "managing agent" in section 2(25) did not include a partner in a managing agency firm. The court disagreed with the Bombay High Court's decision in Ramaben A. Thanawala v. Jyoti Ltd., which held that a partner of a managing agency firm was a managing agent. The court held that remuneration paid to a partner in his individual capacity did not infringe section 348 and was allowable under section 10(2)(xv).

3. Justification of the Addition of Rs. 93,456 as Income from Undisclosed Sources:

The Income-tax Officer added Rs. 93,456 as income from undisclosed sources, based on discrepancies between the stock book and stock declarations made to the bank. The Tribunal found that the stock as per the company's books tallied with the declarations made to the Textile Commissioner, Bombay, and that the discrepancy with the bank declarations did not represent excess and undisclosed stock. The Tribunal concluded that the stock declarations to the bank were inflated to obtain a higher overdraft facility and were not accurate representations of the stock. The court upheld the Tribunal's view, finding no error in accepting the company's books as correct and ignoring the bank declarations.

Conclusion:

The court answered the questions in favor of the assessee, affirming that the salaries paid to the manager were allowable expenditures under section 10(2)(xv) of the Indian Income-tax Act, 1922, and that the addition of Rs. 93,456 as income from undisclosed sources was not justified. The assessee was awarded costs, with counsel's fee set at Rs. 250.