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TMI Blog1962 (7) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. in the assessee company, viz., Greaves Cotton Co. Limited. The result was that all the shares of the assessee company came to be held by Thapars and Thapars also became the managing agents of the assessee company. The entire arrangement was completed by 8th of January, 1947. On that day a fresh managing agency agreement was executed by the assessee company in favour of Thapars. The duration thereof was 20 years. The remuneration of the managing agents under the agreement was fixed at 2 per cent. on the value of all goods shipped to India by M/s. James Greaves Company of Manchester to and for or on behalf of the said company or at its order whether the same be for the account of the said company or its constituents. The agreement also provided the mode of calculating the commission. On 19th of October, 1949, the assessee company made an application to the Controller of Capital Issues, Ministry of Finance, Government of India, for permission to increase its share capital. It prayed for sanctioning the issue of 25,000 five per cent. cumulative preference shares of ₹ 100 each and 30,000 ordinary shares of ₹ 100 each. It appears that sanction was accorded by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... report to the board on 16th March, 1951. In this report the subcommittee stated that it was of the opinion that termination of the agreement would be to the benefit of the shareholders, that the termination of the managing agency would not be detrimental to, nor adversely affect, the business of the company, that the termination of the agreement would be likely to instil a greater degree of public confidence in the company and its shares and that the board of directors would be fully competent to carry on the affairs of the company. The compensation suggested to be paid to the managing agents for premature termination of the agreement amounted to ₹ 18,87,620. The committee expressed its opinion that the said amount of compensation could not be paid out of ₹ 17 lakhs in the hands of the company unless sanction therefore was obtained from the Controller of Capital Issues. The committee stated that the compensation must be made from the free profits of the company accruing subsequent to the date on which the application was made to the Controller of Capital Issues. In the report it was also stated that in the event the managing agency agreement was terminated, provision w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions. It appears that the assessee company by its letter dated 3rd April, 1951, informed the managing agents about the said two resolutions passed by the extraordinary general meeting of the shareholders. By their letter of 10th April, 1951, Mr. K.C. Thapar on behalf of the managing agents accepted the termination of the managing agency on payment of compensation of ₹ 18 lakhs. The assessee company, whose system of accounting appears to be mercantile, thereafter had appropriated in its books of account the said amount of ₹ 18 lakhs as compensation payable to the managing agents for termination of their managing agency and in the account year 1951-52 the assessee company claimed deduction of the said amount of ₹ 18 lakhs in computation of its profits as expenditure laid out wholly and exclusively for the purpose of its business under clause (xv) of sub-section (2) of section 10 of the Act. The Income-tax Officer rejected the claim of the assessee company. In his order he, inter alia, observed: The facts of the case appear to show that the termination of the managing agency and the consequent payment of compensation was not done on strictly business consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith, it would follow that efficiency would go down and profits would be reduced. In our opinion, it is not possible to say that the services of the managing agents were terminated solely to make a saving to the company. The company under article 144 took the power to remunerate directors for work done. It appears that as a result of this change, the management of the business was to be conducted by the board itself. We think that the income-tax authorities have given valid reasons for holding that the company's main effort was to put a substantial sum in the hands of the managing agents. The whole affair was nothing short of a farce. It is not a payment made solely to compensate the agents for the loss of employment. The amount cannot be said to have been spent wholly and solely for the purpose of the assessee's business. On an application by the assessee company under sub-section(1) of section 66 of the Act, the Tribunal has drawn up a statement of case and stated the question of law arising out of its order in the following terms: Whether, on the facts and circumstances of this case, the amount of ₹ 18 lakhs paid by the assessee company to the managing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstil a greater degree of public confidence in the company and was in the interest of the company. It is after considering the report of the sub-committee that the board of directors had decided, subject to the approval of the shareholders, the termination of the managing agency on payment of compensation suggested by the committee. The compensation actually paid is even less than that suggested by the committee. Thapars had agreed to it in the best interests of the company. It has not been shown that, after the management was taken over by the board, the affairs of the company have suffered. On the other hand, it has been positively shown by the assessee company that within seven years the assessee company has recouped to the extent of ₹ 16 lakhs out of ₹ 18 lakhs by saving the managing agency commission, which would otherwise have been payable to the managing agents. All these facts, according to Mr. Palkhivala, have not been duly considered by the Tribunal. He placed reliance on the decisions in Anglo-Persian Oil Co. ( India) Ltd. v. Commissioner of Income-tax [1933] 1 ITR 129, P. Orr Sons v. Commissioner of Income-tax [1959] 35 ITR 556 , Cannanore Spinning Weavi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade...... These observations by the Lord Chancellor have been cited with approval by their Lordships of the Supreme Court in Eastern Investments Ltd. v. Commissioner of Income-tax [1951] 2019 ITR 1 (SC). The principles governing such a case are laid down by their Lordships in the following terms: (a) though the question must bedecided on the facts of each case, the final conclusion is one of law; (b) it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned; (c) it is enough to show that the money was expended 'not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business'; and (d) beyond that no hard and fast rule can be laid down to explain what is meant by the word 'solely'. At page 5 their Lordships observed: Most commercial transactions are entered into for the mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business management, we could not regard the deduction as permissible. But no such suggestion can be made even upon the facts found in the case stated and there appears to me to be no reason why we should entertain it. In this view of the matter, the compensation paid was allowed as a revenue expenditure. The facts in P. Orr Sons v. Commissioner of Income-tax [1959] 35 ITR 556 were that one Mr. Smith was in the management of the assessee company ever since its formation. In 1936 it became a public company and the assessee company entered into a managing agency agreement with S. Ltd., which consisted only of Mr. Smith and his wife as shareholders. The managing agency agreement was for a period of twenty years certain from December 24, 1936, to 23rd December, 1956. It appears that, though the company in 1936 had converted itself into a public company, it again reconverted itself into a private company. In 1948, probably with a view to converting the company again into a public company, it desired to terminate the managing agency and the managing ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bona fides has been established by evidence. It has not been alleged that the transaction of the managing agency and the payment of compensation was made by way of distribution of profits. It has been said by the Appellate Assistant Commissioner: It looks to ma, therefore, that the whole transaction of conversion into a public limited company, allotment of shares to H.E.H. the Nizam and removal of the managing agency at the bidding of certain principals of M/s. Greaves Cotton Co. Ltd. was undertaken as associated operations; and was entered into for extra-commercial considerations and for oblique purpose, which looks to be that of securing capital for the company and capital for the managing agents. The Tribunal has generally observed that the reasons given by the income-tax authorities are valid. We have already said that all the circumstances on which reliance has been placed by the income-tax authorities have not been relied upon by Mr. Joshi. Mr. Joshi frankly stated before us that transactions up to the stage and inclusive of the managing agency agreement of May 10, 1950, were all bona fide transactions. It is not his contention that the whole transaction of conversi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o no such evidence Mr. Joshi has drawn our attention. It is next contended by Mr. Joshi that the three members of the sub-committee were not independent members. They were servants of the company and, therefore, were amenable to the influence of Thapars. We hardly find any warrant to accept Mr. Joshi's contention on the material on record. It is true that Messrs. T. Kemp, J. Blezard and N.M. Wagle are employees of the assessee company. But it has to be kept in view that they are highly-paid employees of the company and it cannot generally be said that the employees of the company would be amenable to say anything that their directors want them to say. The material and evidence on record further shows that these three persons were not in the group which was controlled by Thapars. Nor do we find in the orders of any of the income-tax authorities or the Tribunal any finding that these three persons were under the influence of Thapars. It is next urged by Mr. Joshi that there is an intrinsic evidence in the report, which would go to show that decision had already been taken to terminate the managing agency with the object of paying to them the ₹ 17 lakhs which were in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agraph 3 no doubt makes a reference to the question as to whether the available amount could be utilised in paying compensation for termination of the managing agency agreement and legal advice appears to have been taken on this subject, But paragraph 4 of the report makes it clear that that could not be done. In other words, the committee has positively opined that the said amount of ₹ 17 lakhs could not be utilised for payment of compensation. It has to be noted that in spite of this report of the committee that that amount could not be utilised the board of directors of the assessee company had taken a decision to terminate the managing agency. The recommendations of the board of directors have been accepted by the shareholders. It is true that Thapars have controlling interest in the share structure of the assessee company, but it also has to be noticed that it was thought necessary to enlarge the share capital and the Nizam had contributed share capital to the extent of ₹ 50 lakhs. Khan Bahadur Tarapore was also on the board of directors. In these circumstances it cannot be said that, even though Thapars had the controlling interest, they would be in a position to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en trading is relatively good, would materially strengthen the future position of the company and should assist in years when trading may not be so good in maintaining the return to shareholders and the company's financial strength. We are, therefore, of opinion that termination of the agreement on this basis would be to the benefit of the shareholders. Mr. Joshi contends that there is not a word of any commercial expediency in this. The reasoning is all hypothetical and cannot be accepted. The report has to be read as a whole and when so read it would appear that the board of directors wanted the question to be investigated as to whether, if the management is taken over by the board of directors itself instead of being allowed to be managed by the managing agents, it would be more beneficial to the company. It was with this objective that the question was referred to the committee to examine it in all its aspects. In paragraph 1 of the report the committee had reported that the board of directors would be 'fully competent to carry on the affairs of the company and that the termination of the agreement between the company and the managing agents would not be detrimental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in fact it was nearly after 3 years. The other submission that no change had occurred between the new managing agency agreement and its termination also is not correct. During the interval the Nizam had subscribed a share capital to the extent of ₹ 50 lakhs and his nominee, Khan Bahadur Tarapore, had come on the board of directors as his nominee. In the circumstances, Khan Bahadur Tarapore must be having an effective voice in the board of directors. It has not been contended that the amount of compensation paid to Thapars was unreasonable. It has not been shown that the management has in any way suffered by reason of termination of the managing agency agreement. In the circumstances of the case it could not have suffered. K.C. Thapar, who was the managing director of the managing agents, was also the chairman of the board of directors of the assessee company. It has not been shown that after termination of the managing agency agreement, any additional remuneration has been given to any of the directors. In these circumstances and for reasons stated above, in our opinion, this transaction of terminating the managing agency agreement, with a view to taking over the manag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rting with the case, it has, however, to be stated that Mr. Joshi argued before us the second question, which the department wanted the Tribunal to refer to this court and which, according to the Tribunal, was included in the question referred to us. That question, at the risk of repetition, is in the following terms: Whether on the facts and circumstances of the case the assessee is entitled to claim the sum of ₹ 18 lakhs as a deduction under section 10(2)(xv) of the Income-tax Act for the assessment year 1952-53? We are unable to agree with the Tribunal that this question is covered in the question referred to us. The question referred to us is whether the amount of ₹ 18 lakhs is a permissible deduction, while the second question, which the department sought to raise, was on the assumption that it was deductible. The question raised is as to the year in which it would be deductible. Mr. Palkhivala had raised a preliminary objection and contended that no such question was raised before the Tribunal and, therefore, the respondent is not entitled to raise this question before us. In our opinion, the preliminary objection is well founded. We do not find a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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