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TMI Blog1978 (7) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... was made between these two partners and three others, two of them being the sons of Framji and the third one being the son of Kaikhushroo. This agreement provided that the firm shall resign as managing agents of the assessee-company with effect from the 31st day of March, 1958, from which date the partnership also should stand dissolved. There were further provisions regarding the mode of management of the assessee-company after the ending of the managing agency. These provisions need not be set out at this juncture as we shall have occasion to refer to the said agreement in some detail in the later part of this judgment. The company passed the necessary resolution for giving effect to the resignation of the managing agency and for implementing these arrangements. By a subsequent resolution dated 26th June, 1958, it was resolved that Kaikhushroo A. Kooka, one of the directors,shall be a director till his lifetime on a monthly remuneration of Rs. 2,000 from 26th June, 1958. It was further resolved that, after the death of the said Kaikhushroo A. Kooka, his wife, Shirinbai Kooka, should be paid a sum of Rs. 1,000 per month for her life. It was expressly mentioned that this was in vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the Tribunal, therefore, the term to pay a fixed amount to Kaikhushroo's widow could not in these circumstances be taken to be dictated by any extra-commercial considerations and such payment would pass the test laid down in s. 10(2)(xv). According to the Tribunal, therefore, it was allowable as a deduction under the said section. It is from this decision of the Tribunal that the reference has been made to this court at the instance of the Commissioner under s. 66(1) of the Indian I. T. Act, 1922, and the following question has been referred to us for our opinion. " Whether, on the facts and in the circumstances of the case, the amount of Rs. 12,000 paid to Bai, Shirinbai was allowable as a deduction in determining the business profits of the assessee-company under section 10(2)(xv) of the Indian Income-tax Act, 1922 ? " It becomes necessary before considering the rival contentions to note the provisions of the agreement dated 31 st March, 1958. As stated earlier, the agreement is between the two partners of the managing agency firm of M/s. Kooka Sidhwa Co., viz., Kaikhushroo A. Kooka and Framji H. Sidhwa and their sons, Maneck and Dhunjishaw being the sons of Framji, and S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see based on the footing that there was an agreement between Kaikhushroo and the company. It is true that there was an express agreement between the people who controlled the company which embodied certain decisions taken amongst themselves altering the basis of the management of the company after 31st March, 1958, and deciding upon certain amounts being paid as remuneration to themselves and in two specific cases to the widows of two of them, viz., Kaikhushroo and Framji. It was submitted that the Tribunal has found that the payment passed the test laid down in s. 10(2)(xv) and it also found that it was not dictated by any extra-commercial considerations. It was contended that in view of these findings the burden lay on the revenue to show that the payment was made by reason of any extra-commercial considerations. In our opinion, this is not the proper approach to the question under consideration. The proper test to be employed was laid down by the Calcutta High Court in Andrew Yule Co. Ltd. v. CIT [1963] 49 ITR 57 and has been properly set out in the headnote of the decision as follows : " In order to decide whether a particular amount is laid out or expended wholly or excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement and, therefore, the payment could not be regarded as a sort of ex gratia payment. It was to meet the company's contractual liability. An allied aspect of this very proposition may also be indicated which was, (2) that even if the company may not be regarded to be a party as such to the agreement of 31st March, 1958, an overall picture was required to be taken of the entire transaction, viz., the agreement followed by the resolution. The reason for passing, the resolution was to implement the original agreement and the company, therefore, must be properly regarded as carrying out the terms of the earlier agreement. It would appear that this approach found favour with the Tribunal, which also was impressed by the fact that the two, partners had agreed to take remuneration as directors and remuneration for their widows in lieu of what they were entitled to receive as partners of the managing agency firm. (3) The remuneration paid to the widows must be regarded and will have to be justified as part of the remuneration payable to Kaikhushroo and Framji, respectively, a deferred remuneration in view of the fact that they accepted remuneration at a lower figure than what they wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendered to the company by their husbands. It was submitted that Kaikhushroo and Framji, who were getting large amounts from the company as partners in the managing agency firm, agreed to take a lesser amount as wholetime directors and one of the factors which weighed with them for obtaining a lesser amount was the provision for giving lifetime remuneration at the rate of Rs. 1,000 per month to the widows. This will not be a proper way to look at the arrangement. Firstly, the company is not a party to the overall arrangement at all. Further, it is not to be supposed that the company merely pays the amounts either to the managing agents or to, the directors without receiving any return or consideration from them. The managing agents were supposed to manage the company's affairs and for such management they were being paid certain amounts. Hereafter, a new-system of management with perhaps different obligations, rights and liabilities comes into being, viz., management by a board of directors with two joint managing directors, and they are to be paid different amounts. There is no question (in the instant case) of any payment of commission based on a percentage of the net profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the company for the widow of an ordinary employee but a provision made by the company for the widow of its founder director. Considerations as are available in the case of ordinary employees, as were lavished by the Gujarat High Court in CIT v. Laxmi Cement Distributors Pvt. Ltd. [1976] 104 ITR 711, would not be available in the case before us. It is true that Kaikhushroo was long associated with the company. Till 31st March, 1958, he was managing the company as a partner of the managing agency firm of M/s. Kooka Sidhwa Co. After June, 1958, he was to work as a lifetime director of the company and the joint managing directors were to act under the control and supervision of the two lifetime directors, Kaikhushroo and Framji. In a commercial and practical sense, Kaikhushroo and Framji were the company and it would not be proper to regard them as ordinary employees, for whom a special provision is required to be made and which provision can be justified and regarded as allowable as it would induce in the other employees the instinct of giving their best to the company, since the company would look after both the employee and the employees' dependants in case of death of the emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eculiarities of the agreement which have been noted in that decision. The decision, however, does not rest on the peculiarities although it must be stated that it notes them with special emphasis. In the aforesaid decision, it is noted that there is no material brought on record to show that the managing director would not have served the company except for the provision in the contract. It is further observed that a mere term in the contract will not by itself be regarded as sufficient to show that it was an expenditure for the purposes of the company's business within the provisions contained in s. 16(2)(xv). Although there are material differences between the facts in our case and the facts under consideration in N. Sirur Co.'s case [1977] 109 ITR 432 (Bom), there are observations in the said case which would seem to apply and that case must be regarded as being in favour of the revenue. Mr. Dastur, on behalf of the assessee-company, drew our attention to CIT v. Fairdeal Corporation Pvt. Ltd. [1977] 108 ITR 280 (Bom), where the amount was paid by way of gratuity to the widow of the erstwhile managing director. One of the factors which weighed strongly with the court was the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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