COMMISSIONER OF INCOME-TAX, KERALA v. ALAGAPPA TEXTILE (COCHIN) LTD (2)

Citation: [1980] 1 S.C.R. 723

Court: Supreme Court of India

Bench: V.D. TULZAPURKAR, R.S. PATHAK

Case summary

'The Revenue has challenged in these appeals the view of the High Court that Kamala Mills Ltd. 2(24) of the Companies Act, 1956 and if so, whether the remuneration paid by the assessee to the latt~r in the two· calendar years 1957 and 1958 relevant to the assessment years...

Judgment text

723 - COMMISSIONER OF INCOME-TAX, KERALA v. - - ALAGAPPA TEXTILE (COCHIN) LTD. September 19, 1979 [V.. D. TULZAPURKAR' AND R_ S. PATHAK, JJ. ] , ·t Bu. tiness E·xpenditurY! "-section t0(2)(xv) oi the Income-tax Act, 1922- 1 1· /:ether tlze remuneration tOH'arcls the '111a11ager' Kanzala Mills Ltd. . is falling -(~·ithin the 1neaning _of Section 384 read witll s. 2(24) of the Co1npaiiies Act 1a[[c7"A:able as "business expenditure"-Construction of the terms of AgreementlVliether the managing company falls l'. :ithin the meaning of. Section 2(24) of · . the Companies Act, 1956. · Respondent, assessee ("!!. Ifs. Alagappa Textiles (Cochin) Limited company i. vas carrying on business of manufacture and sale of yarn. It entered into an Agreement dated November 10, 1955 with Kamala l\lills Ltd. , Coimbatore for financing and managing the assessee l\fills at A1agappa Na-gar for a reriod of five years. Clause 8 of the Agreement provided that Kama1a ~fills Ltd.

shall be paid for the ser''ices, rendered by it by \-Vay of purchases, sales ·and management, remuneration at the rite of I% on all purchases made by it for the nssessce Mil1s and at half a percent on all sales of yarn, yarn v. --ast~ and cotton waste and othe-. r products of the l\! iIL C1ause 13 of the agreement w~s to the effect that "'the 'company (assessee), either represented by its managing Agent or Board. of Directors shall not exercise the po\-vers delegated 1'. J th·! ! \tanagers (Kamala l\Iills Ltd. ) under the foregoing clauses, except by \Vay of genf. r. il supen'ision and advice nor interfere with discretion of the managers in the exettise of their functions and powers vested in them by virtue of thh Agreement.. , Oause 14, provided that the l\fanagers (Kamala l\lills Ltd. ) po·. vers were limited in the manner aforesaid and shall not· be deem~d to be manager in charge of the _\-vhole affairs of the company within the meaning of section 2(9) of tbe companies Act, 1913.

Clause 16 provided th::it the agreement shalt be in force for a period of five years commencing from the date thereof and that "this Agreement for management being an Agency coupled \vith interest" CQuld be ·revoked before the expiry of the said period of five years by 12 months• notice in writing being given by one party io the other, but if the i~see were to revoke it the a5sessce shall be Ii-able to compensate Kamala His for. the loss of remuneration for. the unwexpired period of the Agreement f1le average rate at which Kamala ~fiIIs Ltd. had been earning by way of nneration under the Agreement till the date of such notice of ':ermination. Ptlrsuant to the aforesaid termi, Kamala 1Iills Ud. drew remuneration to he tune of Rs. 1,03,547/- and Rs. 18,249/- respectively for the calendar year1 1957 and 1958 corresponding to the assessment years 1958-59 and 1959w60. ' 1"be&e &mounts \Vere assessed lo tax in the hands of Kamala ~tills Ltd. Respon- :' dent.

&iSeSsee in its assessment proceedings. for the said two a'5essment years, claimed deduction in respect of the said two amounts as business expenditure unde . available the necessary finances for the running of the mill as also to . take active interest in the. business ot the assessee and when Kamala Mills Ltd. agreed "to assist the company (assessee) with sufficient finance and manage the' mill" belonging to the as~essee on tenn.. and conditions that were approved By the Board of Diiectors 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 -c becomes abundantly clear from cl.

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; therefor! ', revocation of the Agreement before the expiry of the five years' period was made dependent upon 12 months' notice in writing being given by one party to the other and further if such revocation was done by the assessee suit3. ble compensation was made payable to Kamala Mills Ltd. In other words; · managerial functions were incidental and had to be entrusted to Kamala Mills because of the financier'~ role undertaken by it. The large powers and functions entrusted to Kamala Mills Ltd. under the several · sub-<:laii. ses of cl. 1 of the Agreement do show that management of substantially the whole, if. not the whole, of the affairs of the assessee company had been made over to Kamala Mills Ltd.

But the cruciaI question is whether such management was to be done by Kamala Mills Ltd. under "the superintendence, control and direction of the Board of Directors" of the assessee and in that behalf cl. 13 of the Agee-: ment which we have quoted above is very eloquent. In terms it provided that so far as the powers conferred and the functions entrusted to Kamala Mills Ltd. , were concerned, the Board of Directors shall not exercise or perform the same except by way of general supervision and advice and it was further made clear that the Board of Directors shaU not interfere with the discretion of Kamala Mills Ltd. in the exercise of their functions and powers vested in it by virtue of the Agreeinoot. ... · In other words, the general supervision or advice of the Board of Directors was of such character that the Board bad no/ say whatsoever nor could it inte~ere with the discretion of Kamala Mills Ltd.

irt the matter cf the exercise of the powers and the discharge of the functions 'H entrusted to Kamala Mills Ltd. under the Agreement. · It is thus clear to us that the dominant object of the Agreement was . that Kamala l\1ills Ltd. should act as financiers of the assessee mill and in the c. I. T. v. ALAGAPPA TEXTILES (Tulzapurkar, J. ) 735 matter of the exercise of its powers and discharge of its functions Kamala Mills Ltd. was never "subject_ to the superintendence, control or dh:ection" of the Board of directors of the assessee. If this position clearly emerges on true construction of the Agreement in question then it is obvious that Kamala Mills was not acting or working as the "Manager" of the assessee within the meaning of s. 2(24) of the Companies Act, 1956 and as such the illegality of s. 384 of that Act was not attracted. In this view of the matter, the remuneration paid by the assessee to Kamala Mills Ltd.

for th;< two calendar years 1957 and 1958 relev~t to the assessment year~ 1958-59 and 1959-60 could not be regarded as being in violation of s. 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 s. 10(2) (xv) ~f the Income Tax 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 instanc! ' 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 asse! l! lees against Kamala Mills Ltd. has been reversed or set aside in appeal by the Kerala High Court-a fact which w_as brought to our notice by the Advocate-on-Record for the assessee communicated to K him by his client in.

a lettt'(r dated 22nd August, 1979. However, even if in further appeal the trial court's decree were restored and the assessee were to recover back the remuneration the assessee can be taxed on the two amounts under s. 41(1) of the 1961 Act. In our vi~w, therefore, the High Court was right in answering the question in favour of the assessee. The appeals are, therefore, dismissed wlth costs. -r- V. D. K. Appeals dismissed. ,. /