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TMI Blog1979 (9) TMI 133X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee against Kamala Mills Ltd, has been reversed or set aside in appeal by the Kerala High Court—a fact which was brought to our notice by the Advocate-on-Record for the assessee communicated to him by his client in a letter dated 22nd August, 1979. However, even if in further appeal the trial court's decree was restored and the assessee were to recover back the remuneration, the assessee can be taxed on the two amounts under section 41(1) of the 1961 Act. - 2001 AND 2002 OF 1972 - - - Dated:- 19-9-1979 - V. D. TULZAPURKAR AND R. S. PATHAK, JJ. V. S. Desai, S. P. Nayar and Miss A. Subhashini for the Appellant. S. T. Desai, N. Sudhakaran and P. K. Pillai for the Respondent. JUDGMENT Tulzapurkar, J These appeals by special leave raise a common question whether on proper construction of the agreement dated November 10, 1955, entered into by the assessee with Kamala Mills Ltd., the latter was the "manager" of the assessee within the meaning of section 384 read with section 2(24) of the Companies Act, 1956, and if so whether the remuneration paid by the assessee to the latter in the two calendar years 1957 and 1958 relevant to the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenses should be allowed since in computing the profits even of illegal business only the net profit was taxed after allowing all the expenses. The AAC was not impressed by these arguments, but he disallowed the deduction mainly on the ground that the assessee by its own conduct had disputed its liability to pay any remuneration to Kamala Mills Ltd. after October 1, 1956, and in that behalf he relied on an admitted fact that the assessee had filed a suit against Kamala Mills Ltd. to recover back such remuneration which had been paid to it in contravention of section 384 on the basis that, since the payment was illegal, Kamala Mills Ltd. was holding such amounts of remuneration in trust for and on behalf of the assessee and in such a situation the deduction could not be allowed. The assessee carried the matter in further appeals to the Tribunal, but the Tribunal confirmed the view of the taxing authorities that under section 384 of the Companies Act, 1956, it was not legal for the assessee to have permitted Kamala Mills Ltd. to continue to work as its manager after October 1, 1956, and that the payment of remuneration after the said date was illegal and could not be considered as v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act. As regards the decree that had been obtained by the assessee against Kamala Mills Ltd., the High Court observed that the appeal filed by Kamala Mills Ltd. against the said decree was still pending in the High Court and if ultimately the appeal was dismissed and the amounts were recovered back from Kamala Mills Ltd., the assessee could be taxed on those amounts under section 41(1) of the Act, but that could not be a valid ground for disallowing the deduction claimed by the assessee. The revenue has challenged in these appeals the view of the High Court that Kamala Mills Ltd. was not the manager of the assessee within the meaning of section 384 read with section 2(24) of the Companies Act, 1956, and the further view that the remuneration paid to Kamala Mills Ltd., during the calendar years 1957 and 1958, was deductible as business expenditure under section 10(2)( xv ) of the Act. Before we consider the principal question relating to the proper construction of the agreement dated November 10, 1955, it will be desirable to note the relevant provisions of the Indian Companies Act, 1913, as also the new Companies Act, 1956, which have a bearing on the question at issue. Since t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will appear clear that though there is an overlapping of the functions of the manager as well as the managing agent of the company the essential distinction seems to be that whereas the manager has to be subject to the superintendence, control and direction of the board of directors the managing agent is not so subject. Section 384 of the Companies Act, 1956, in express terms prohibits, after the commencement of the Act, the appointment of a firm or a body corporate or an association of persons as a manager as also the continuation of such employment after expiry of six months from such commencement. It runs thus : "384. No company shall, after the commencement of this Act, appoint or employ, or after the expiry of six months from such commencement, continue the appointment or employment of, any firm, body corporate or association as its manager." The aforesaid provision positively disqualifies a firm, body corporate or association from being appointed as manager of a company or from continuing the employment of a firm, body corporate or association as manager after the expiry of six months from the commencement of the Act. Obviously, to attract the prohibition or disqualific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the yarn and to enter into contracts in that behalf at such rates and prices as it may deem fair and proper and make payments for all such purchases and incur all expenses incidental thereto; it was also to make purchases of all stores and spares and other materials necessary for the manufacture of yarn ; it was to appoint all staff, technical or non-technical and workers skilled and unskilled as also clerks and other staff necessary for the working of the mill and fix their terms and remuneration and could discharge or dismiss or take disciplinary action against them ; it had to sell and make contracts for sale for immediate or future delivery of yarn, yarn waste or cotton waste or any other material or products of the mill at such rates or prices and on such terms and conditions as it may think fit; it could decide, lay down and change from time to time the programme of manufacture of yarn and other products of the mill and to insure against fire and other risks all cotton, yarn, material, stock in-trade and incur and pay all premia necessary in that behalf; it could pledge, secure and hypothecate all stocks and stores and stock-in-trade with such bank or banks where arrange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imit of Rs. 15,00,000 at any one point of time on the advances and financial assistance to be given by Kamala Mills Ltd. to the assessee and it was provided that if and when sums over and above the said limits become necessary to be advanced, Kamala Mills would be entitled to appropriate and take for itself as owners such quantity of yarn as may be in stock as in value would be equivalent, at cost or market value, whichever was lower, to the sum that it may be obliged to advance over and above Rs. 15,00,000. Clause 13 of the agreement is very important having a crucial bearing on the question at issue and may be set out verbatim. It ran thus : "13. The company (assessee) either represented by its managing agent or board of directors shall not exercise the powers delegated to the managers (Kamala Mills Ltd.) under the foregoing clauses, except by way of general supervision and advice, nor interfere with the discretion of the managers in the exercise of their functions and powers vested in them by virtue of this agreement." Under Clause 14 it was provided that the managers' (Kamala Mills Ltd.) powers were limited in the manner aforesaid and they were not and shall not be deemed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale of yarn and, therefore, the board of directors were in search of a financier who would make available the necessary finances for the running of the mill as also to take active interest in the business of the assessee and when Kamala Mills Ltd. agreed "to assist the company (assessee) with sufficient finance and manage the mill" belonging to the assessee on terms and conditions that were approved by the board of directors of the assessee that the agreement was entered into between the parties ; in other words, it is clear that the dominant object with which the agreement was entered into was that Kamala Mills Ltd. should really act as a financier so that the assessee-mill could run and since heavy finances were to be procured by Kamala Mills Ltd. large powers and functions connected with the working of the mill were entrusted to it. This aspect becomes abundantly clear from Clause 16 of the agreement wherein the parties expressly provided that this agreement for management was by way of and amounted to an agency coupled with interest so far as Kamala Mills Ltd. was concerned and, therefore, revocation of the agreement before the expiry of the five years' period was made depende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two calendar years 1957 and 1958, relevant to the assessment years 1958-59 and 1959-60, could not be regarded as being in violation of section 384 of the Companies Act, 1956, and as such the expenditure incurred by way of paying such remuneration would be deductible as business expenditure under section 10(2)( xv ) of the Indian I.T. Act, 1922. In view of our aforesaid conclusion the aspects whether the assessee had disputed its liability to pay such remuneration to Kamala Mills Ltd. or had filed a suit at the instance of the Company Law Board to recover it back from Kamala Mills Ltd. or had obtained a decree in that behalf against Kamala Mills Ltd. become irrelevant. However, we would like to place on record the fact that the decree obtained by the assessee against Kamala Mills Ltd, has been reversed or set aside in appeal by the Kerala High Court a fact which was brought to our notice by the Advocate-on-Record for the assessee communicated to him by his client in a letter dated 22nd August, 1979. However, even if in further appeal the trial court's decree was restored and the assessee were to recover back the remuneration, the assessee can be taxed on the two amounts under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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