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TMI Blog1968 (9) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... ence under section 66(2) of the Indian Income-tax Act, 1922, held that there was material on which the Tribunal could hold that the allowance claimed was not spent wholly and exclusively for the purpose 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 moities 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 the business of secretaries, treasurers and agents of the company. By agreement dated May 2, 1935, the company appointed Beharilal Kailashpat as its managing agents. The firm then consisted 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise 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 lawful 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. From time to time the constitution of Beharilal Kailashpat was changed--some members ceased to be partners and new members 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) Pushpavati Devi ; (3) Vijaipat (minor) and (4) Ajaipat (minor) [Nos. (3) and (4) being minor sons of Lala Kailashpat Singhania] ; the representatives of Guptas were--(1) Smt. Ramdevi ; (2) Smt. Keshobai ; (3) Lala Ram Rattan Gupta, and (4) Lala Ram Prasad Gupta. Each of the families collectively held an eight annas share. Under the terms of this partnership deed it was agreed that Lala Ram Rattan Gupta, a partner of the firm, will be entitled to carry on business on behalf of the firm. Disputes aros ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nghanias, 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 managing 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 wrongful termination of the managing agency. The Guptas also made a claim for compensation and threatened to bring an action against the company. By agreement dated October 19, 1944, the disputes between the company and Beharilal Kailashpat were referred to the arbitration of Mr. K. M. Munshi with authority to decide two questions --(1) 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 Ramcharan, 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 Kan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt their respective costs of the reference and the arbitration proceedings (which included fees of Rs. 10,000 to Mr. K. M. Munshi). 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 Officer rejected the claim of the company to treat as a permissible allowance under section 10(2)(xv) of the Income-tax Act, 1922, the amount of Rs. 19,03,300. He held that the expenditure incurred was not connected with the business of the company and in any event it was capital expenditure. In appeal the Appellate Assistant Commissioner held that the payment was made " for some improper purpose ... not connected 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 managing agency was to save the company from loss which the company would have suffered on account of the disputes between the two groups of partners of the managing agency firm ; and (2) that the company was by the payment absolved from liability to the remuneratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses in relation thereto as a permissible deduction in the computation of its total income. The company submitted an application under section 66(1) of the Income-tax Act, 1922, for submitting a statment of case and prayed that seven questions set out in the application be referred to the High Court. The Tribunal rejected the application holding 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 application 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 purpose of getting rid of the managing agents was not expenditure admissible under section 10(2)(xv) of the Income-tax Act ? (2) Whether there was any or sufficient evidence to justify the Tribunal to hold that no services whatever were rendered by the managing agents to the assessee-company under the managing agency agreement and that there was nothing payable to the managing agents in respect of such services ? " The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted another statement of the case setting out in detail the materials on which the various findings which were sought to be incorporated in the questions were founded. At the hearing of the reference the High Court was of the view that the court had no jurisdiction under section 66(4) of the Income-tax Act to direct the Tribunal to submit a second statement of case and the questions in addition to the one submitted before the Tribunal " could not legally have come before the High Court ", since the earlier statement of the case was not quashed, nor 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-section (4) of section 66 of 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 that the second set of questions were not parts of, or included in, the former question but were substantially different ; some of the, questions in the view of the High Court were pure questions of fact, some of them were overlapping, and the questions were diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per or oblique purpose outside the course of business management ", it could not be treated as a permissible deduction. Against the order recorded by the High Court, this appeal has been preferred with special leave. We propose in the first instance to consider whether the High Court acted with jurisdiction in calling for a second statement of case on questions which were not incorporated in the applications under section 66(1) and (2) of the Act after the Tribunal had submitted a statement of case in response to the order under section 66(2). Under section 66(1) of the Income-tax Act, 1922, the assessee 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 refer it to the High Court. If on any application made under sub-section (1) the Appellate Tribunal refuses to state a case on the ground that no question of law arises, the assessee or the Commissioner may, if he is not satisfied with the correctness of the decision of the Appellate Tribunal, make an application to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to refer the case back to the Tribunal to make such additions thereto or alterations therein as the court may direct in that behalf only for the purpose of determining the question referred to 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 supplementary statement of case. This power and jurisdiction which is vested in the High Court is to be exercised within the four corners of section 66. " It is also well settled that in an application under section 66(2) of the Income-tax Act the High Court cannot order that a case be stated on questions which were not included in the application submitted under section 66(1). It was observed by this court in Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd. : " ...... the power of the court to direct a reference under section 66(2) is subject to two limitations--- the question must be one which the Tribunal was bound to refer under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt is not satisfied that the statements in a case referred are sufficient to determine the question referred thereby ; it cannot be exercised for calling for another statement on questions not referred by the Tribunal. The procedure followed by the High Court in calling for, in exercise of the power under section 66(4), an additional statement of the case on questions which were not incorporated in the applications under section 66(1) and (2) was, in our judgment, irregular. Correctness of an order of the High Court calling for a statement of case may be challenged at the hearing of the reference and the court may decline to answer the question referred pursuant to the direction of the High 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 application under section 66(1) : Commissioner of Income-tax v. Smt Anusuya Devi. Counsel for the company has, therefore, rightly confined himself to the question which was originally submitted by the Tribunal by order dated December 29, 1954, and has raised his argument on that question only. The company claims that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... became ordinary directors. " From these facts the Tribunal inferred that the managing agents as such rendered no service to the company. Counsel for the company contended that the findings of the Tribunal were 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 finding " (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 for settling their individual accounts. Counsel also submitted that there was a mass of evidence which the Tribunal ignored in deciding whether the managing agents rendered any service. Our attention was invited to the terms of the managing agency agreement and also to assertions made in the correspondence between the company and the Singhanias, and also to the finding recorded by the Income-tax Officer who observed that all circumstances pointed to the fact that " the managing agents were managing the affairs of the company well. Hence if still they were removed from service the inference is clear that they w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at state of evidence the Tribunal concluded that quarrels between the Guptas and Singhanias could in no way harm or put hindrance in the normal day to day working of the company, the finding could not be again said to be based on surmises and conjectures. 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 company : a receiver may have been appointed of the remuneration payable by the company but not of the management. It is not 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 taken into account, for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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