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TMI Blog2000 (1) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... Sri Bharat Ji Agarwal, learned counsel for the assessee, at whose instance this reference has been made and Sri Prakash Krishna, learned standing counsel for the Commissioner-respondent. The facts of the case are that the assessee, Cossul and Company (P.) Ltd. is a private limited company and the matter in issue relates to the assessment years 1972-73 and 1973-74. By an agreement dated October 24, 1963, the assessee-company appointed a partnership firm, Tools Implements and Machinery Distributors, as its sole selling agent with effect from October 1, 1963. The following persons were partners in the said firm : "(1) Smt. Pushpa Khanna, W/o. Shri Nand Lal Khanna, 60% the chairman referred to above. (2) Shri Gokulchand Khanna, S/o. Shri Kishan Narain 7% (3) Shri Ram Kishore Mehra S/o. Shri Kanwar Kishore Mehra 7 1/2% (4) Shri Mahendra Kapoor, S/o. Shri V. C. Kapoor, one of the 25%." directors of the company Out of the aforesaid persons, Smt. Pushpa Khanna was the wife of Shri Nand Lal Khanna who was the chairman of the board of directors of the assessee-company and Shri Mahendra Ka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeding five years at a time : Provided that nothing in this sub-section shall be deemed to prohibit the reappointment, or the extension of the term of office, of any sole selling agent by further periods not exceeding five years on each occasion. (2) After the commencement of the Companies (Amendment) Act, 1960, the board of directors of a company shall not appoint a sole selling agent for any area except subject to the condition that the appointment shall cease to be valid if it is not approved by the company in the first general meeting held after the date on which the appointment is made. (2A) If the company in general meeting as aforesaid disapproves the appointment, it shall cease to be valid with effect from the date of that general meeting." Section 294A provides that a company shall not pay or be liable to pay to its sole selling agent any compensation for the loss of his office in the following cases : "(a) Where the appointment of the sole selling agent ceases to be valid by virtue of sub-section (2A) of section 294." Section 314 then provides that except with the consent of the company accorded by a special resolution, no director of a company shall hold any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther intimation given to the members of the resolution ; (b) the notice required under this Act has been duly given of the general meeting ; and (c) the votes cast in favour of the resolution (whether on a show of hands, or on a poll, as the case may be) by members who, being entitled so to do, vote in person, or where proxies are allowed, by proxy, are not less than three times the number of the votes, if any, cast against the resolution by members so entitled and voting." In the present reference we are concerned with the assessment years 1972-73 and 1973-74 for which the relevant accounting periods were the years ending June 30, 1971, and June 30, 1972. The validity of the contract entered into between the assessee-company and the aforesaid sole selling agent has, therefore, to be seen only for the period referred to above. The Tribunal has found that the initial appointment was authorised by a special resolution adopted in the general meeting of the company held on October 14, 1963, a copy of the said resolution is at page 97 of the paper book and it was in pursuance of this resolution that an agreement was executed between the company and the said sole selling agent on O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such a condition would be void ab initio and it is only a valid appointment made by the board of directors after complying with the conditions mentioned in sub-section (2) that has to be put before the general meeting of the company for its approval. Admittedly, there was no special resolution of the company till May 11, 1972, and the procedure prescribed in section 294 had not been adopted by the board of directors and, therefore, the continuation of the said firm as sole selling agent was invalid. On behalf of the assessee reliance is placed on Parmeshwari Prasad Gupta v. Union of India [1974] 44 Comp Cas 1 (SC), in which the services of an employee were terminated in pursuance of a resolution of the board of directors in a meeting that was invalid, Subsequently, however, the termination was ratified in a valid meeting and the Supreme Court held that the ratification related back to the date of the chairman's order terminating the services. This judgment thus pertains to a different set of facts. The law specifically required the appointment of a sole selling agent in the manner prescribed under section 294 which procedure was not at all followed in this case and, therefore, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y is that they did not get the required permission from the Central Government as per section 352 for paying the remuneration in excess of the limit prescribed in section 348, We are not inclined to hold that any payment in excess of the limit prescribed in section 348 is illegal so as to have it excluded from section 10(2)(xv) and that section 10(2)(xv) only contemplates expenditure which is not prohibited by any statute." This judgment was followed in CIT v. Sree Rajendra Mills Ltd. [1974] 93 ITR 122 (Mad), in which the payment was made to the managing agents in contravention of the provisions of section 360 of the Companies Act and the same was held to be an allowable expenditure. This view has been reiterated by the Madras High Court in Nilgiri Finance and Hire Purchase Pvt Ltd. v. CIT [1995] 213 ITR 384, in which remuneration was paid to its directors in violation of the provisions of the Companies Act. In Central Distillery and Chemical Works Ltd. v. CIT [1955] 27 ITR 100 (All), the assessee-company appointed a firm of partners as its managing agents. Under the Defence of India Rules the Government issued a notification appointing a Controller to control and supervise the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y" and observed as under : "It is of course true that between the person claiming compensation and the person against whom it is claimed some lawful relationship must subsist, for that is the implication of the use of the word 'lawfully' in section 70 ; but the said lawful relationship arises not because the party claiming compensation has done something for the party against whom the compensation is claimed but because what has been done by the former has been accepted and enjoyed by the latter. It is only when the latter accepts and enjoys what is done by the former that a lawful relationship arises between the two and it is the existence of the said lawful relationship which gives rise to the claim for compensation. This aspect of the matter has not been properly brought into the picture when Straight J., laid down the test on which Mr. Sen's argument is based. If the said test is literally applied then it is open to the comment that if one person is entitled by reason of the relationship as therein contemplated to receive compensation from the other section 70 would be hardly necessary. Therefore, in our opinion, all that the word 'lawfully' in the context indicates is that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 294 and section 314(2B) provides that the relative, etc., shall be liable to refund to the company any remuneration received from the company. The provisions of the Companies Act, however, show that they are not prohibitive and are only regulatory. In other words these provisions merely require a special procedure for the appointment of the sole selling agent and the holding of office of profit by the relatives of the directors or the directors themselves, so that the interests of the shareholders are not jeopardised. In the present case, the company only omitted to follow the procedure in the subsequent appointment, although the same was duly followed in the initial appointment made in the year 1963. Therefore, in case the sole selling agent had rendered services to the assessee and the payment of compensation was reasonable, the expenditure or a reasonable portion thereof could have been allowed as a deduction as expenditure laid out wholly and exclusively for the purpose of the business. In view of the above discussions, we answer the said question as under : 1. The Tribunal was right in holding that the appointment of the sole selling agent Tools Implements and Mach ..... X X X X Extracts X X X X X X X X Extracts X X X X
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