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Lakshmiratan Cotton Mills Co. Ltd. Vs. Commissioner of Income-tax, U. P. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 586 of 1961
Reported in[1966]61ITR744(All)
AppellantLakshmiratan Cotton Mills Co. Ltd.
RespondentCommissioner of Income-tax, U. P.
Excerpt:
- - the relevant terms of the agreement are as follows :the firm will perform the office of the agents of the company faithfully and to the best of its ability. it would be lawful for the firm, or subject to the partnership contract, for any member of the firm, to assign the whole or any portion of the earnings of the firm or the partner without affecting its appointment as agents of the company, for any member of the firm, to assign the whole or any portion of his interest or to withdraw from the firm altogether, without thereby in any way affecting the appointment of the firm as agents, and for the firm to assign its office as agents and all the rights and obligation as agents and in the event of assignments the assignee will be deemed to have been appointed as agents of the company.....m. c. desai c.j. - this statement of case has been submitted by the income-tax appellate tribunal, bombay bench, professedly under section 66(2) of the income-tax act on july 15, 1960, at the instance of the assessee. the questions formulated by the tribunal are these :'1. was there any material for the finding -(a) that the managing agents had rendered no service to the assessee company;(b) that lala ram ratan gupta and lala ram prasad gupta were acting qua their position as directors and not as partners of the managing company;(c) that a device was adopted to provide funds in the hands of parties at the expense of the company for the purpose of settling their individual accounts and that the payment of the amount in question was made only as a part of this device;(d) that the disputes.....
Judgment:

M. C. DESAI C.J. - This statement of case has been submitted by the Income-tax Appellate Tribunal, Bombay Bench, professedly under section 66(2) of the Income-tax Act on July 15, 1960, at the instance of the assessee. The questions formulated by the Tribunal are these :

'1. Was there any material for the finding -

(a) that the managing agents had rendered no service to the assessee company;

(b) that Lala Ram Ratan Gupta and Lala Ram Prasad Gupta were acting qua their position as directors and not as partners of the managing company;

(c) that a device was adopted to provide funds in the hands of parties at the expense of the company for the purpose of settling their individual accounts and that the payment of the amount in question was made only as a part of this device;

(d) that the disputes between the partners of the managing agency firm could not, in any way, have affected the carrying on of the normal business of the company; and

(e) that the company gained nothing by terminating the managing agency agreement.

2. Whether the whole or any apart of the sum of Rs. 18,90,000 was paid by the company to the managing agents having promoted the company ?

3. What was the true nature of the payment of the sum of Rs. 18,90,000 by the company to the managing agents on a correct interpretation of the managing agency agreement ?

4. Whether the sum of Rs. 18,90,000 together with the sum of Rs. 13,300 paid as expenses of litigation or any part thereof was an expenditure incurred wholly and exclusively by the company for purposes of its business and as such it was an allowable deduction ?'

The statement arises out of an order passed by the Tribunal on April 25, 1951, holding that the sum of Rs. 19,03,300 paid by the assessee company to the partners of the partnership, Beharilal Kailashpat, which was its managing agents, was not a revenue or business expenditure within the meaning of section 10(2)(xv) of the Income-tax Act,i.e., an expenditure 'not being in the nature of capital expenditure..... laid out or expanded wholly and exclusively for the purpose of such business.'

The facts, as gathered from the statement of the case and its annexures, are as follows :

The assessee-company was incorporated in 1934 as a private limited company to carry on various business and for other purposes and its 3,000 ordinary shares of Rs. 500 each were held equally by members of two families, (1) the family of Sir Padampat Singhania, and (2) the family of Lala Ram Ratan Gupta. About the same time the firm Beharilal Kailashpat was brought into existence; its partners were eight, four being members of the Singhania family and the other four being members of the Gupta family and the total of the shares held by each family was 8 annas. The memorandum of association of the company, clause 6, provided that M/s. Beharilal Kailashpat were appointed as the secretaries, treasurers and agents of the company upon the remuneration and the terms, with the powers, and for the consideration, set forth in the draft agreement annexed to the memorandum. The articles of association provided that there must be between 3 and 7 directors, including ex-officio directors, that two members named from time to time by M/s. Beharilal Kailashpat must be the ex-officio directors, that the business of the company (except as was by the articles expressly provided to be carried on by the agents) must be managed with the assistance of the agents by the directors and that such of the powers as were entrusted to the agents from time to time must be exercised by them : vide articles 103, 104 and 121. Article 142 dealt with the management of the business affairs of the company will be in the agents of the company and that the agents must be entrusted with, and exercise and perform, the powers and duties of building, erecting and maintaining warehouse, factories, etc., buying machinery and machinery stores, buying and selling cotton, waste, and spinning and weaving the same, selling the yarn and cloth so manufactured, buying and selling raw cotton, wool, etc., for dyeing, spinning, cleaning, weaving and manufacturing the same and selling the same in Kanpur, shipping or consigning for sale to any place goods manufactured by the company, borrowing money, entering into negotiations and contracts, executing and signing agreements, contracts, etc., commencing, instituting, prosecuting and defending actions and suits and generally doing all such other acts and things as are necessarily incidental or conductive to the attainment of all or any of the objects of the company. By article 143 the members for the time being of the firm of Beharilal Kailashpat were appointed agents of the company upon the terms, for the remuneration, and with the powers mentioned in the draft agreement attached as a schedule and it was expressly provided and declared that 'in consideration of the services rendered by them in promoting this company, the appointment of the said firm of Beharilal Kailashpat to the office of the agents of the company shall not be liable to be, at any time hereafter, revoked or cancelled on any ground or for any reasons whatever, save and except their being found guilty of fraud in the management and discharge of their duties as such agents of the company'. On May 2, 1935, the managing agency agreement was executed by the company and the firm, M/s. Beharilal Kailashpat, as provided in the memorandum and the articles of association of the company. The relevant terms of the agreement are as follows :

'The firm will perform the office of the agents of the company faithfully and to the best of its ability. In consideration of this promise and in further consideration of the firm having promoted the company, the company hereby promise and agree with the firm and its members for the time being :

(a) That the firm shall be the agents of the company for a period of ninety-nine years and thereafter until they shall resign or until they are thereafter removed from their office.

(b) The firm shall receive from the company commission at certain rates on sale of various products.

(c) The company shall defray the expenses of maintaining a suitable office of the firm as agents.

(d) In case the company sells its mills, machinery and business the sale will be subject to the rights and claims of the firm as provided by the agreement and the memorandum and the articles of association.

The firm shall keep books of account for the use of the company, shall have the superintendence of all the hands engaged in the companys mills, shall approaches all cotton, wool, machinery and stores required for the use of the companys mills and sell the same, shall sell at the market rate all loose or baled yarn and cloth produced or manufactured in the mills and shall exercise all the powers given to the agents by the articles of association. So long as the firm is not dissolved it shall be free to change its constitution, name or style from time to time, without thereby in any way affecting their appointment as agents of the company. It would be lawful for the firm, or subject to the partnership contract, for any member of the firm, to assign the whole or any portion of the earnings of the firm or the partner without affecting its appointment as agents of the company, for any member of the firm, to assign the whole or any portion of his interest or to withdraw from the firm altogether, without thereby in any way affecting the appointment of the firm as agents, and for the firm to assign its office as agents and all the rights and obligation as agents and in the event of assignments the assignee will be deemed to have been appointed as agents of the company with like powers, authorities, remuneration and emoluments and subject to like terms and conditions.'

The partners of the firm, Beharilal Kailashpat, were changed from time to time and in 1943 they were, (1) Lady Ansuiya Devi (wife of Sri Padampat Singhania), (2) Shrimati Pushpavati Devi (wife of Sri Lakshmipat Singhania), (3) Vijaipat and Ajaikumar (minor sons of Shri Kailashpat Singhania), (4) Srimati Ram Devi (wife of Sri Beharilal Gupta), (5) Lala Ram Ratan Gupta, (6) Lala Ram Prasad Gupta and (7) Shrimati Keshobai (wife of Lala Ramgopal Gupta). The Singhanias held 8 annas share and the Guptas held the remaining 8 annas. In 1943 disputes arose between the members of the two families in respect of the business carried on under the names of the company and the firm and under other names and they were referred to the arbitration of Sri Kanhaya Singh. By his award dated January 18, 1944, he declared as follows :

The company should go exclusively to the members of the Gupta family and the members of the Singhania family should part with all their rights and interests in it. Accordingly, the members of the Singhania family should transfer their shares to Lala Ram Ratan Gupta or his nominees at a certain price. On payment of the said price they will cease to be share-holders of the company and three of them who were directors shall resign and cease to be directors. As a necessary corollary the partners of the firm, Behari Lal Kailashpat, who belonged to the Singhania family should cease to be the partners and are to be deemed to have retired and withdrawn and the remaining partners, namely, Shrimati Ram Devi, Lala Ram Ratan Gupta, Lala Ram Prasad and Shrimati Keshobai will be entitled to continue the said managing agency business, if they so like, in their own partnership or in partnership with others, but they must exclude the name 'Kailashpat' from the name of their firm. The members of the Singhania family will not be entitled to carry on any business in the name of Behari Lal Kailashpat.'

On January 25, 1944, members of the Gupta family paid to the share-holders of the Singhania family of the company the price of the shares held by them. Thereafter, the company consisted entirely of members of the Gupta family and the Singhania family ceased to have any interest in it. under the award itself with effect from January 25, 1944, the rate of payment of the price of the shares to the shareholders of the Singhania family, the members of the Singhania family ceased to be partners of the firm exclusively of members of the Gupta family though with a liability to change in the name by deletion of the word 'Kailashpat'. On January 27, 1944, the firm decided to change the name of Beharilal Ramcharan and drew up a fresh partnership deed and informed the company of the change in its name and its constitution. The company on March 31, 1944, approved of the change in the name and constitution of the firm. On May 25, 1944, the old Singhania partners of the firm wrote to the directors of the company protesting against the recognition of the firm, Beharilal Ramcharan, as its managing agents in the place of Beharilal Kailashpat and contended that the recognition did not bind them or the firm, Beharilal Kailashpat. The directors sent a copy of the letter to Beharilal Ramcharan for its comments and sent an inter in reply to the Singhanias that thy had ceased to have any interest in the firm, Beharilal Kailashpat, and that the remaining partners had changed its name to Beharilal Ramcharan. Beharilal Ramcharan on June 26, 1944, informed the directors of the company that the award of Sri Kanhaya Singh was binding upon the Singhanias, who were parties to it, and that they were not justified in protesting against Beharilal Ramcharan being recognized as the companys managing agents. The directors sent a copy of this reply to the Singhanias in continuation of this interim reply. On July 18, 1944, the Singhanias, as representing Beharilal Kailashpat, wrote to the directors of the company contending that the award was not final and binding and they had filed an objection against it as also against the very reference to the arbitration, that if it still recognized Beharilal Ramcharan as its managing against it would do so at its own risk and would continue to be responsible to Beharilal Kailashpat and its partners for all loss that may accrued to it or them and that Beharilal Ramcharan could not be treated as a continuation of Beharilal Kailashpat because no original partner of Beharilal Kailashpat was a partner of Beharilal Ramcharan. When the partnership, Beharilal Kailashpat, was formed in 1935, none of Ram Ratan Gupta, Ram Prasad, Ram Devi and Keshobai was its partner but that was immaterial. Partners of Beharilal Kailashpat kept on changing and the members Gupta family who are partners in 1935 ceased to be partners and in 1943 the partners representing the Gupta family were Lala Ram Ratan Lal, Ram Prasad, Srimati Ram Devi and Srimati Keshobai and under the award they were entitled to continue the partnership under a changed name. The directors sent a copy of this second letter of the Singhanias to Beharilal Ramcharan on July 27, 1944, and stated that as the validity of the award was vehemently contested in a court of law it would not be safe for the company to recognize anybody other than Beharilal Kailashpat as its managing agents. In reply Beharilal Ramcharan wrote to the directors contending that the award so long as it was not set aside bound all and that the objection that none of the original partners of Beharilal Kailashpat was a partner of Beharilal Ramcharan was without any substance because Lala Ram Ratan Gupta was an original partner. On September 20, 1944, the directors of the company wrote to, (1) Beharilal Ramcharan, and(2) the Singhania partners of Beharilal Kailashpat that the company had decided not to recognize anybody other than Beharilal Kailashpat as its managing agents, that it could not safely continue to interest its management and affairs in the hands of Beharilal Kailashpat and that consequently it had decided to terminate the managing agency agreement with effect from September 30, 1944. The Singhanias replied on September 25, 1944, that the termination of the agreement was mala fide, unjustifiable and wrongful because for 99 years Beharilal Kailashpat could not be removed from the office of managing agents and called upon the directors to revise the decision and restore Beharilal Kailashpat to the managing agency or pay it adequate damages and compensation for the wrongful termination of the agreement. The reply from Beharilal Ramcharan came later on October 5, 1944; it also attacked the termination of the managing agency agreement and removal of the managing agents from office as unjustifiable, improper and wrongful and called upon the directors either to restore it to the office of managing agents or pay Rs. 40,00,000 as compensation for the wrongful termination. On September, 30, 1944, the directors informed the Singhanias that they could not review their decision and that their claim for compensation was misconceived and the agreement had to be terminated on account of quarrels and conflicts among the partners. The Singhanias as partners of Beharilal Kailashpat and that the company was liable to pay Rs. 30,00,000 as compensation to the Singhanias for the wrongful termination of the agreement and removal of Beharilal Kailashpat from the office of managing agents. On October 9, 1944, the company informed (1) the Singhanias, and(2) Beharilal Ramcharan, refuting their claims to compensation and suggesting reference of the dispute to the arbitration of any of the five named persons including Sri K. M. Munshi. The Singhanias and the partners of Beharilal Ramcharan, jointly entered into an agreement on October 19, 1944, referring to the arbitration of Sri K. M. Munshi the dispute whether the termination of the agreement and the removal from the office of Beharilal Kailashpat or its alleged successor, Beharilal Ramcharan, was wrongful and, if it was wrongful, to what compensation, if any, were the ex-managing agents entitled.

The ex-Singhania shareholder of the company brought a suit against the Gupta shareholders for a share in the goodwill of the company. The company itself was not a defendant to the suit and actually it was not a necessary party at all. The suit ended in a compromise between the parties on January 11, 1945. Under the compromise the company was added as a defendant to the suit and it joined in the compromise. All the parties to the suit agreed to modify the award of Sri Kanhaya Singh and it was held to be valid and binding on all. Under the modified award the company also because with retrospective effect a party to the reference. There was no modification in the award as regard the company; there were some modifications as regards Beharilal Kailashpat. The shares in the partnership of Lady Ansuiya Devi, Shrimati Pushpavati Devi, Vijaipat and Ajaikumar were specified and it was declared that they would cease and determine with effect from January 25, 1944, and the Singhania partners would be deemed to have retired and withdrawn from that date and the remaining partners of the Gupta family would be entitled to continue the managing agency business, if they so liked, in their own partnership or in partnership with others but after excluding the name 'Kailashpat' from the firm name. Any sum to be awarded by the arbitrator, Sri K. M. Munshi, as compensation to Beharilal Kailashpat for the wrongful termination of the managing agency agreement should be paid to, and retained, by the continuing partners and irrespective of the result of the arbitration before Sri K. M. Munshi, the continuing partners should pay to the Singhania partners a sum of Rs. 8 lakhs as representing their share in the compensation for the wrongful termination of the managing agency agreement and this payment should be in full satisfaction and discharge of all claims and demands whatsoever of the Singhania partners on and to the assets, goodwill and contracts of Beharilal Kailashpat with the company and also in full satisfaction and discharge of the claim made by them against the company for compensation for the termination of the agreement. An option also was given to Lala Ram Ratan Gupta if he was not in a position to purchase the shares of the Singhania shareholders in the company : this was meaningless because the shares had already been purchased by him on payment of the price.

Shri K. M. Munshi on March 25, 1945, gave the following award in the arbitration between the company, the Singhania ex-partners of Beharilal Kailashpat and Lala Ram Ratan Gupta and other surviving partners of the firm :

'The termination of the managing agency of Beharilal Kailashpat and its removal from the office of managing agents by the company was wrongful and the company must pay to Beharilal Kailashpat Rs. 18,90,000 as compensation for the wrongful removal. Under the compromise decree dated January 11, 1945, the amount of the compensation is to be paid to, and to be retained by, the Gupta partners; consequently, the company must pay to Lala Ram Ratan, Lala Ram Prasad, Srimati Ram Devi and Shrimati Keshobai the sum of Rs. 18,90,000 with interest. The company will pay the Singhania partners and the Gupta partners their costs of the reference and the arbitrators fees and costs.'

The award contains only the directions referred to above and no narration of facts and no discussion of the law applicable to them. Though the arbitrator claimed to have heard arguments on behalf of the company, the Singhanias and the Guptas, there is no reference in the award to the contentions advanced on b behalf of the three parties. The total amount of the costs to be paid by the company for the arbitration came to Rs. 13,300. In compliance with this award the company paid Rs. 18,90,000 compensation to the Guptas and Rs. 13,300 costs and the arbitrators fees and expenses in the accounting year relevant to the assessment year 1946-47.

In the assessment for 1946-47, the company claimed deduction of Rs. 19,03,300 under section 10(2)(xv) of the Income-tax Act from its income in the accounting year. This claim was rejected by the Income-tax Officer the Appellate Assistant Commissioner and the Tribunal, one after another. The view taken by the Income-tax Officer was that Beharilal Kailashpat managed the affairs of the company well and its removal from the office of managing agents was not for any reason connected with the companys business but on the account of party feeling between the Singhanias and the Gupta. The Appellate Assistant Commissioner agreed with the Income-tax Officer about the reason for the termination of the managing agency agreement and observed that the company paid the money to save itself from future disaster on account of the disputes between the Singhanias and the Guptas and thus acquired an enduring and abiding interest in the form of smooth running of the companys affairs by the managing agents. He also, agreeing with the Income-tax Officer, held that the payment was made for the oblique purpose of affecting a partition between the Singhanias and the Guptas in the partnership of Beharilal Kailashpat. Before the Tribunal the company urged two grounds in support of its claim to deduct the amount of Rs. 19 lakhs and odd from its income under section 10(2)(xv)(1) that the company terminated the managing agency to avoid loss to it from the disputes between the Singhania partners and the Gupta partners and(2) that the company was saved from making huge payments to the managing agents on account of their a commission and expenses in the accounting year as well as in the future. The Tribunal rejected both the grounds and found or held as follows :

'The disputes between the Singhanias and the Guptas were real, though they were of a personal nature, and were settled by the compromise decree of January 11, 1945. There was no substance in the contention that the company was saved from the paying heavy commission to Beharilal Kailashpat in future because there were no managing agents of the company only for the period between September 30, 1944, and July 1, 1947, and with effect from July 1, 1947, the company employed B. R. Sons Ltd. as managing agents on onerous terms. B. R. Sons Ltd. consisted of members of the Gupta family and was appointed as managing agents of the company on a monthly remuneration of Rs. 7,500 plus 15% of the net profits, with a minimum of Rs. 1 lakhs. A payment to a managing agent under the managing agency agreement is deductible not as such but under section 10(2)(xv) if it amounts to a revenue expenditure and if no services are rendered by him or if the payment exceeds the reasonable remuneration to be paid for whatever services are rendered by him, the payment, or part of it, cannot be said to be a revenue expenditure. The agreement in the instant case provided that part of the consideration paid to the managing agents was for the promoting the company itself and this part could not be a revenue expenditure at all. No change took place in the carrying on of the companys business and there was no proof of any services rendered by Beharilal Kailashpat, besides nominating the two ex-officio directors. Beharilal Kailashpat rendered no services at all to the company and payment of the commission to it was not a revenue expenditure and the compensation for the wrongful termination of the managing agency agreement could not be a revenue expenditure. Hence, the claim for the deduction failed. The disputes between the two families were of a personal nature and it has not been shown that the business of the company had been affected by them. The fact is that even prior to the termination of the managing agency agreement, the Singhanais had ceased to have any interest in the partnership. They were represented by two minors and two females, who did not appears to have taken any part in managing the affairs of the company. Beharilal Kailashpat had ceased to exist as a result of Sri Kanhaya Singhs award and the consent decree and the Singhanias and the Guptas could not have interfere with the business of the company merely by writing letters, which was all that they had done. There was no evidence about the loss which would have accrued to the company if it had not made the payment and in any case the disputes were settled by the compromise decree of January 11, 1945, before the payment was made. Beharilal Kailashpat was not entitled to any compensation for the termination of the agreement. In view of the compromise decree the termination was not wrongful at all. The payment could not be said to be a consolidated payment of the future revenue liability. It appeared that under the award each of the two families had to pay the other large sums of money and a device was adopted to place funds in the hands of the families at the costs of the company for discharging their liabilities under the award. The orders passed by the Income-tax Officer and the Appellate Assistant Commissioner were correct.'

In the result the Tribunal rejected the claim to the deduction. The assessee applied under section 66(1) for stating the case to this court; it proposed no less than 10 questions. Question No. 1 was about the existence of evidence for the finding that the regeneration paid by the company to Beharilal Kailashpat was not a revenue expenditure, question No. 2 was about the existence of evidence for the finding that the disputes between the Singhanias and the Guptas did not adversely affect the companys business, question No. 3. was whether the Tribunal was justified in its findings about the services rendered by Beharilal Kailashpat and the effect of the disputes between the Singhanias and the Guptas, question No. 4 was about its being justified in raising the question of services rendered by the Beharilal Kailashpat without giving the assessee an opportunity of producting evidence and about the existence of evidence in support of its finding that there was nothing to indicate that it re deride any services, question No. 5 was about the existence of evidence to support the finding that the letters exchanged between the Singhanias and the Guptas and the company were a made-up show, question No. 6 was about the companys claim for the deduction under section 10(2) being admissible, question No. 7 was about the existence of evidence to support the finding that the payment was not a revenue expenditure, question No. 8 was whether a payment made for the purpose of getting rid of a the managing agents who were quarreling among themselves is a revenue expenditure, question No. 9 was whether a payment made for the purpose of getting rid of the managing agents who were quarreling among themselves is a revenue expenditure and question No. 10 was about there being any or sufficient evidence to justify the findings that no services were rendered by Beharilal Kailashpat and that nothing was payable to it on the account of wrongful termination of its agreement. The questions were very badly and unintelligently drafted and involved a good deal of overlapping. Question No. 1 was meaningless and did not arise out of the Tribunals order. The onus lay upon the company to prove that the payment of Rs. 19,03,300 was a revenue expenditure : vide James Snook & Co. Ltd. v. Balsdale and Commissioner of Income-tax v. Calcutta Agency Ltd. So it was for the company to place material before the Tribunal to justify its finding that the payment was a revenue expenditure. If it failed to place sufficient material the Tribunal was justified in finding that the payment was not a revenue expenditure and in disallowing its claim for deduction. There was not question of there being material before the Tribunal to justify the finding that the payment was not a revenue expenditure. If it could not record a positive finding that the payment was a revenue expenditure that was the end of the matter as far as the claim for the deduction was concerned and it did not have to record a finding that it was not a revenue expenditure and did not have to be in possession of material justifying any such finding. No onus lay upon the Commissioner of Income-tax (except in rebuttal) and it was absurd to suggest that he should have produced material to justify the finding that the payment was not a revenue expenditure. The same comments apply to question No. 2; it was for the assessee to show that the disputes between the Singhanias and the Guptas would have adversely affected the companys business. Question No. 3 was a question not of law but of fact, being about discretion. It overlapped with question Nos. 1 and 2. The first part of question No. 4 assumes some facts which are not proved on the record; there is nothing in the Tribunals order to suggest that the company had no opportunity to produce evidence. The whole onus lay upon the company had no opportunity to produce evidence. The whole onus lay upon the company and it could not succeed in its claim unless it proved that Beharilal Kailaspat rendered services to it. The other part is meaningless; it is absurd to inquire whether there is any evidence in support of the finding that 'there is nothing to indicate that the managing agents as such rendered any service'. Question No. 6 was improperly worded; it should have been whether the payment was a revenue expenditure or not. If it was a revenue expenditure nobody disputed that it was to be deducted from the income under section 10(2)(xv). Question No. 7 was meaningless; as I explained earlier, there was no question of there being any evidence in support of the Tribunals finding that the payment was not a revenue expenditure. The Tribunal never found that the payment was between the company and Beharilal Kailashpat was onerous and that the company terminated it on account of the its being onerous. Therefore, question No. 8 did not arise out of its order; it could have arisen only if it had been found as a matter of fact that the agreement was onerous and that the payment was made for getting rid of it on account of its being onerous. Similarly, question No. 9 did not arise out of the Tribunals order because it never found as a matter of fact that the payment was made to bet rid of Beharilal Kailashpat because its partners were quarreling between themselves. Question No.10 is practically same as question No. 3. The Tribunal rejected the application under section 66(1) but its order is not placed before us. The assessee then applied to this court under section 66(2) and proposed only the following two questions on which a statement should be demanded from the Tribunal :

'Q. 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 ?

Q. 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 ?'

This court, without referring to the application made under section 66(1), adversely criticised the questions proposed by the assessee, observed that the onus of proving that the payment was a revenue expenditure (understood in the sense that it was laid out wholly an exclusively for the purpose of the business) was on the assessee, referred to the finding of the Tribunal that the partnership (Beharilal Kailashpat, the managing agents of the assessee-company) had not rendered any service to the company, that there was a genuine dispute between two groups of the partners of the partnership and that the termination of the managing agency by the assessee was device adopted to provide funds in the hands of the partners at the expenses of the company and held that the order of the Tribunal involved questions of law and a statement of the case should be called for the under section 66(2). It did not formulated the question to be referred to the it and left the matter to the Tribunal, though it indicated that one of the questions that arose was of the interpretation of the managing agency agreement between the company and the partnership and that what inferences should be drawn from the proved primary facts was a question of the law. It said that it has been argued on the assessees behalf that some findings of fact recorded by the Tribunal were not based on evidence and that 'it is not necessary to formulated questions to indicate further what questions are to be referred.' The operative portion of its order was that the Tribunal 'shall refer to this court the questions of law that arise out of the appellate order some of some which we have indicated above.'

This order was on February 4, 1954, and in compliance with it the Tribunal submitted a statement dated December 29, 1954. This statement is not placed before us but it formulated only one question, it being :

'Whether there was material on which the Tribunal could have come to the conclusion that Rs. 19,03,300 were not spend by the assessee-company wholly and exclusively for the purpose of its business.'

The assessee then made an application under section 66(4) to this court praying that it should decide not only the question formulated by the Tribunal but also nine more questions or direct the Tribunal to ended the statement and refer those questions also. It did not find any fault with the facts stated by the Tribunal in its statement; it did not allege that it was incomplete or incorrect in any respect. Its criticism was confined only to its failure to formulate the nine questions. Most of the questions proposed by it were about there being no evidence in support of the various findings recorded by the Tribunal, the remaining questions were about the interpretation of the managing agency agreement and about the whole payment being liable to be held to be not a revenue expenditure if the whole was not laid out exclusively for the purpose of carrying on its business. On this application this court on December 4, 1957, passed another order. It blamed the Tribunal for not appreciating the true scope and nature of the duty cast on its under sub-sections (1) and (2) of section 66 and for framing 'one omnibus question under which all possible questions can be said to fall', pointed out that the decision of the question whether the sum of Rs. 19,03,300 was or was not a revenue expenditure depended upon a number of findings of fact, the interpretation of the managing agency agreement and the true nature of the payment and that it had directed in its earlier order that the questions to be formulated by the Tribunal should bring out the contentions advanced on the assessees behalf that some of the findings of facts recorded by the Tribunal were not based on evidence; itself framed the four questions which are reproduced above and remanded the case to the Tribunal 'for drawing up a proper statement of the case, giving full facts necessary for deciding the questions of law framed above'. It was in compliance with this order that the present statement dated July 15, 1960, has been submitted.

A question arose whether the present statement is in addition to the earlier statement or supersedes it. The earlier statement was not quashed by this court and was not returned to the Tribunal. The assessee and the Commissioner have, however, made their submissions on the footing that the present statement supersedes the earlier one.

Under section 66(1) the Tribunal has to draw up a statement of the case and refer it to the High Court which is required thereupon to decide the questions of the law raised by it. The statement should contain the question of law arising out of its order which the applicant wants to be referred by it to the High Court and it is that question that is to be answered by the High Court. The High Court can correct the form of language of the question framed by the Tribunal but cannot add or substitute and answer a new question, e.g., a question involving a dispute not referred to it in the statement. If it refuses to refer a particular dispute the remedy of the applicant is to apply to the High Court under sub-section (2); this remedy is open to him whether it has dismissed his application under sub-section (1) in toto or in part. Merely because it has referred some dispute, it cannot be said that the any further action that can be taken by the High Court is under sub-section (4). Sub-section (4) is meant for quite a different purpose and not for affording a remedy to an applicant whose application has been rejected in toto or in part. It is to be availed of only when the High Court is not satisfied that the statement is sufficient to enable it to determine the question raised thereby. If the statement is incomplete so that whatever questions are raised by it cannot be answered satisfactorily by the High Court, the High Court is empowered to refer the statement back to the Tribunal and to ask it to make additions or alterations to it. It is obvious that it cannot ask it to frame additional questions or refer other disputes; asking it to do so cannot be said to be making the statement sufficient to enable it to determine the questions already raised by it. The insufficiency must be in the narration of facts in orer to attract the applicability of sub-section(4); the High court must find it difficult to answer whatever questions are raised by it without further material from the Tribunal. The law has been explained by the Supreme court in Kamlapat Motilal v. Commissioner of Income-tax. The law laid down by this court in Juggilal Kamlapat v. Commissioner of Income-tax is no longer good law, having been impliedly overruled by the Supreme Court. It cannot, therefore, be said that in the instant case what this court did on December 4, 1957, is in conformity with the provisions of sub-section(4), under which it professed to act. If it be said that the questions that have been framed in the second statement are questions included in the question framed in the first statement what the Tribunal has done now could have been done by this court itself. If what the Tribunal has done amounts to splitting up the question originally framed by it into several questions, the same could have been done by this court and no assistance of any statutory provisions was required at all. A comparison of the question originally framed with the questions now framed by the Tribunal shows that the latter questions are not parts of, or included in, the former question but are substantially different. Further, questions Nos. 2 and 4 are somewhat overlapping. A finding on question No. 4 that the payment of Rs. 19,03,300 was a revenue expenditure involved the findings that no part of its was paid by it to the managing agents for promoting a company is a capital expenditure. Question No. 2 as worded is a pure question of fact and cannot be referred to this court. Question No. 3 is question No. 4 in different language; if the payment was as revenue expenditure, that is the true nature of it. Actually we are not concerned in this case with what the true nature of the payment is; we are concerned in the with the question whether its true nature is that of revenue expenditure. The company could discharge the onus that lay upon it only by the placing sufficient facts before the Tribunal and not merely by advacing arguments and making submissions : see Commissioner of Income-tax v. Calcutta Agency Ltd. If the payment was not proved to be a revenue expenditure, it was irrelevant to consider what was its true nature, because whatever else might have been its true nature, it was not an allowable deduction. The deduction was claimed only under section 10(2)(xv) and could be allowed only if the payment was a revenue expenditure. The Tribunal was, therefore, concerned only with the question whether the payment was proved to be of that nature or not. If it was not, what its other nature was, was wholly irrelevant; the Tribunal did not go into that matter and question No. 3 could not be said to arise out of its order. The assessee in order to discharge the onus placed before the Tribunal the managing agency agreement, the correspondence between it and the managing agents and the partners of the managing agents, it articles of associations etc.; the Tribunal held that all this material did not prove that the payment was of the nature referred to in section 10(2)(xv) and gave reasons in support of its finding. For its disbelieving a statement of fact or rejecting a contention of law it did not disbelieving a possession of any material; what is needed was only reasons or arguments which would appeal to a reasonable person. It could not disbelieve a statement of fact arbitrarily or without any intelligible reasons; but it could disbelieve it even though it had not in its possession any facts proving it to be false. The law regarding onus of proof is that the party on whom the onus of proving that a fact exists lies must produce sufficient evidence and only then the other party has the onus of rebuttal, i.e., that of evidence to prove the fact does not exist. If the former party does not produce sufficient evidence to prove that the fact does not exist. There is a distinction between a finding that a fact is not proved to exist and a finding that it does not exist; the former finding is given when the party does not discharge the onus by producing evidence sufficient to make out a prima facie case; the other finding is given when, after the he has made out a prima facie case, the other party rebuts it by producing other evidence. There is a similar distinction between disbelieving a statement and holding it to be false; for the latter, there must be some evidence to show that it is false but no evidence is required for disbelieving it. Disbelieving a statement involves only a process of reasoning; it is a matter of judgment or discretion. Of course, the reasoning must be based on facts. Consequently, parts of question No. 1 were not appropriate, particularly sub-questions (d) and (e). It was the companys contention that the disputes between the partners of Beharilal Kailashpat affected the carrying on of the normal business of the company and that consequently the company gained by terminating the managing agency agreement; the Tribunal could disbelieve these statements of fact even though it had no facts in its possession to show that they were false. Lastly, this court could not call upon the Tribunal to frame any question which was not included in the application under section 66(2); it could not raise a question on its own. The questions that have now been framed by the Tribunal are essentially different from the two questions mentioned in the applications under section 66(2). Question No. 1 proposed by the assessee is narrower than question No. 4 now framed by the Tribunal. Further, that question cannot be said to arise out of the Tribunals order because the Tribunal never found that the payment was made for the purpose of getting rid of the managing agents. What the Tribunal found was that the payment was not made for that purpose at all and gave the reasons that no service was rendered at all by the managing agents that disputes between the partners of the managing agents did not act the business of the assessee and that that assessee did not gain at all by terminating the managing agency agreement. The Tribunal gave various reasons for rejecting the assessees claim for deduction under section 10(2)(xv) but the assessee challenged, through question No. 2 proposed by it, only as particular reason on the ground that there was no sufficient evidence to justify it. The assessee in its application under section 66(2) did not challenge the other reasons on the ground that they were not supported by facts. Consequently, this court, as was contended at the bar, went beyond its jurisdiction when it directed the Tribunal to frame question No. 1(b), (c), (d) and (e). The result is that on the assessees application under section 66(2), the only question that this court could call upon the Tribunal to refer to it was question No. 1 (a) of the second statement of case. If the onus lay upon the assessee to prove that the managing agents rendered services to it, the Tribunals disbelieving its evidence on this point does not raise any question of law referable to this court because, as I explained earlier, no facts are required for disbelieving the statement of fact. So even question No.1(a) might not be said to be a question which this court could all upon the Tribunal to refer to it but in any case it was the only question that could have been referred to it.

The court has held in Rai Bahadur Lachman Das Mohan Das & Sons v. Commissioner of Income-tax (I.T.R. No. 315 of 1953 decided on 8-4-64) that when answering questions arising out of a statement of case referred to by the Tribunal under section 66(2), the High Court is not bound by the orders passed by it on the application under section 66(2) and can refuse to answer a question, though called for by it, on the ground that it does not arise out of the order passed by the Tribunal or was not included in the applications under section 66(1) and (2). The High Court certainly does not suit in judgment over its previous order but this only means that it cannot give a finding contrary to that given by it earlier. It is not precluded from dealing with a question not dealt with by it earlier at all. For instance, if the High Court on an application under section 66(2) calls upon the Tribunal to refer to it a certain question, without deciding that it arises out of its order and is included in the applications under section 66(1) and (2), the High Court when passing judgment on the statement can refuse to answer it on the ground that it does not arise out of the Tribunals order or that it was not included in the application under section 66(1) or (2). When it gives this ground it does not set aside or reverse anything decided by it previously. This court when calling for the statement did not decide that the questions expressly called for by it arose out of the Tribunals order and that they were mentioned in the assessees application under section 66(1) and (2). We are, therefore, not debarred from issuing to answer any of the questions if it does not arise out of the Tribunals order or was not included in both the applications. Not only are we not precluded but it is our duty to refuse to answer these questions because our jurisdiction is confined to answering only those questions which arise out of the Tribunals order and were included in both the applications.

Before I take up the questions that we have been called upon to answer I must reproduce the essential facts. The payment in dispute (barring the small amount of costs of arbitration and the arbitrators fee) was made by the assessee to the Gupta, e.g., to the partners of Beharilal Ramcharan and in implementation of the compromise decree dated January 11, 1945. Though the payees were also partners, belonging to the Gupta family of Beharilal Kailashpat, the payment was made to them not on account of their being partners of Beharilal Kailashpat but on account of their being partners of Beharilal Ramcharan. The compromise decree made it clear that the payment was to be made to the continuing partners, e.g., the partners of Beharilal Ramcharan. The award of Sri K. M. Munshi directed the payment to be made in accordance with the compromise decree, i.e., to the partners of Beharilal Ramcharan. The Singhanias ceased to be the partners of Beharilal Kailashpat on account of their interest in the partnership having been transferred to the Gupta partners under Sri Kanhaya Singhs award. The Singhanias acquiesced in the transfer of their interest to the Guptas by voluntarily accepting the price of their shares in the assessee-company. The managing agency agreement permitted the transfer of interest by some partners of Beharilal Kailashpat to others and made it clear that in the even of such transfer the reconstituted partnership would be deemed to be the managing agency; consequently, Beharilal Ramcharan became the managing agents of the assessee. The assessee could, and did, recognize not only the change in the name of the partnership but also the change in its constitution. The compromise decree of January 11, 1945, confirmed the validity of Sri Kanhaya Singhs award after certain modifications; the modifications did not touch the transfer of the Singhanias interest in the partnership of the Guptas. Whatever might have been the Singhanias right to challenge to award prior to January 11, 1945, with effect from that the date they became bound by it, i.e., they were deemed to have retired from Beharilal Kailashpat with effect from January 25, 1944, and Beharilal Ramcharan became the legal managing agents of the assessee. The Singhanias ceased to have any interest in the managing agency with effect from January 25, 1944; they ceased to be partners of Beharilal Kailashpat and the partnership itself became Beharilal Ramcharan. They admittedly had no interest in Beharilal Ramcharan. On September 30, 1944, when the assessee purported to terminate the managing agency agreement, the managing agents were Beharilal Ramcharan and not Beharilal Kailashpat. Beharilal Kailashpat, had ceased to exist long before September 30, 1944. If anybody could be aggrieved by the termination of the agreement, it was Beharilal Ramcharan and not Beharilal Kailashpat, e.g., the Guptas and not the Singhanias. As on the September 30, 1944, the managing agents were Beharilal Ramcharan consisting wholly of the Guptas, it could not be said that it was necessary to terminate the agreement on account of quarrels between the Guptas and the Singhanias. The Singhanias had retired from the partnership on January 25, 1944, and whatever might have been the doubt about the validity of this retirements imposed by Sri Kanhaya Singhs award it vanished on January 11, 1945, and the retirement became binding upon the Singhanias. They were, therefore, not hit by the assessees act of terminating the agreement on the September 30, 1944, and were not entitled to any compensation. It they were hit at all, it was by the retirement imposed under Sri Kanhaya Singhs award but they accepted it in the compromise decree and did not challenge it either before Sri K. M. Munshi or before the Tribunal. We have, therefore, to take the retirement as valid and binding upon them. Beharilal Kailashpat ceased to exist on January 27, 1944, and there was no question of its being the assessees managing agents thereafter. Beharilal Ramcharan became the managing agents with effect from January 27, 1944, and the assessee wrongly terminated the managing agency agreement and refused to recognize it as the managing agents, but this was done by the assessee consisting entirely of the Guptas. There was consequently no sense in saying that the Guptas as directors of the company terminated the agreement with themselves as constituting Beharilal Ramcharan for managing the assessees affairs. There was no question of the Guptas paying any compensation to themselves and, therefore, no question of the assessees paying any compensation to Beharilal Ramcharan for the wrongful termination of the agreement. There could not be any genuine dispute between the Guptas as representing Beharilal Ramcharan and the proceedings for arbitration before Sri K. M. Munshi were undertaken with an oblique motive. The compromise decree of January 11, 1945, anticipated a direction by Sri K. M. Munshi in the award that the assessee should pay compensation to Beharilal Kailashpat for the alleged wrongful termination of its managing agency agreement; not only this but it further anticipated that the amount to be awarded was much more than Rs. 8 lakhs (because out of it Rs. 8 lakhs were to be paid by the Guptas to the Singhanias as their share in the compensation). Although Beharilal Kailshpat did not exist after January 26, 1944, and did not suffer by the assessees termination of the agreement on September 30, 1944, Sri K. M. Munshi directed the assessee to pay compensation to Beharilal Kailashpat for the so-called wrongful removal. The award of Sri K. M. Munshi was against the facts and the law applicable to them and the only explanation that can justify such an award is that it was asked for by the parties themselves. Thus the assessee, regardless of the facts and the law applicable to them, itself volunteered to make the disputed payment and the arbitrator was persuaded to accept its offer. No decree was passed on the basis of the Sri K. M. Munshis award and so along as this had not been done ordinarily the assessee was not bound to make the payment.

Now I come to the questions.

Question No. 1(a). - As I explained earlier this question does not arise out of the Tribunals order and was not mentioned in the application under the section 66(1). The onus lay upon the assessee to prove that the remuneration to be paid to the managing agents was for service rendered by them to it; it could be discharged by its producing evidence or placing material, sufficient to show that the remuneration was for service. If it is no evidence, it is a mere statement of fact and in the no sense a finding, to say that there was no evidence. To say that the remuneration was not proved to be for derive is undoubtedly a finding, but not a finding involving any question of law. A question of law is involved in a finding of fact only if the finding is a positive finding or some question of the procedure to be adopted in arriving at the finding is involved. I shall explain this in the detail later. The only question of law that can arise in respect of a negative finding of fact (e.g., a finding 'not proved') is that of procedure only-whether the correct procedure was adopted or not and whether relevant and admissible evidence was not wrongly refused. A statement that there is no evidence can be made when actually there is no evidence at all and also when there is some evidence but it is all disbelieved. In either circumstance does a question of the law arise out of it (unless by the authoritys illegal refusal to receive evidence there has been absence of it). Further this court had no jurisdiction under section 66(4) to direct the Tribunal to submit another statement and this question could not have legally come before us. If still it must be answered, it has to be answered in the affirmative. It must be noticed that the question is whether there was any material for the finding that the question is whether there was any material for the finding that the managing agents rendered no service and neither for whether there is any material for the finding that they rendered service nor whether they rendered service. This court could not be, and has not been, called upon to answer whether they rendered service; this being a pure question of fact was within the exclusive jurisdiction of the Tribunal. What the question means is whether there was some justification for the finding that the managing agents rendered no service or it was an arbitrary finding. The learned Advocate-General has not referred to us any direct evidence produced by the assessee to show that they rendered service to is. If it produced indirect evidence the Tribunals refusal to draw the inference about the rendering of service does not raise any question of law. It is true that render the managing agency agreement the managing agents had certain functions and that the directors of the assessee were prohibited from performing them : vide articles 121 and 142 of the articles of the association and clause 3(c), (d), (e), (f), (g) and (h) of the managing agency agreement, that the Income-tax Officer and the Appellate Assistant Commissioner both found that the managing agents rendered service to the assessee, that in the assessment for 1946-47 of Lala Ram Ratan Gupta, Lala Ram Prasad Gupta, Shrimati Ram Devi and Srimati Keshobai (the Gupta partners of Beharilal Kailashpat) the Tribunal held that the remuneration paid to them by the assessee was for service rendered under the agreement and not for past (e.g., other) service and that it was not the contention of the Commissioner of Income-tax before the Tribunal in this case that the managing agents rendered no service. But, I must repeat, we are not deciding whether they rendered any service or not. In the instant case the Tribunal decided the matter in April, 1951, whereas it disposed of the appeals arising out of the assessment of the four Guptas mentioned above for 1946-47 more than six years later. Further, the Tribunals orders on the appeals were passed on a report received from the Income-tax Officer, i.e., on different materials. Clause 3(m) of the managing agency agreement made it lawful for Beharilal Kailashpat to assign its office as managing agents and all its rights and obligations. Clause 3(1) made it lawful for a partner of the firm to assign his interest in it or to withdraw from it altogether, and clause 2(d) provided that the agreement would bind the successor-in-interest of the assessee; all the provisions were inconsistent with the rendering of service by the managing agents to the assessee. A contract of service is a personal matter and the successor-in-interest of neither party can be bound by it; still the agreement provided for the assessees successor-in-interest as well as the managing agents successor-in-interest being bound by it and this fact is a material for the finding that the managing agents really did not manage at all and were mere dummies. Another material is the fact that Beharilal Kailashpat included minors and females. One more material is that there was not real distinction between the company and the managing agents. Even when Beharilal Kailashpat was the managing agents there was nothing to distinguish it from the company; the shareholders of the company were the Singhanias and the Guptas half and half and the same Singhanias and the same Guptas in equal shares were the partners of the Beharilal Kailashpat. It was meaningless to talk of the Singhania-Gupta combination rendering service (as managing agents) to the same combination (as the company). Then there is the evidence that no change took place in the carrying on of the companys business after the termination of the agreement.

Question No. 1(b) - This question was not mentioned in the applications under section 66(1) and (2). This court had no jurisdiction to call for it from the Tribunal under section 66(4). This court had no jurisdiction to call for it from the Tribunal under the section 66(4). If still it must be answered, it must be answered in the affirmative. The statement of the assessees counsel before the Tribunal that no change took place in the carrying on of the assessee business other than that the Lala Ram Ratan and Lala Ram Prasad became ordinary directors instead of ex-officio directors furnishes the required material. It was for the assessee to produce material to distinguish between the service rendered by these two gentlemen as partners of Beharilal Kailashpat prior to the termination of the agreement and the service rendered by them as directors after the termination. The assessee produced no evidence about the service rendered by them at all; therefore, it could not be said that there was distinction between the service rendered by them as partners and the service rendered by them as directors.

Question No. 1(c) : This question is of only academic interest and cannot be said to arise out of the Tribunals order. That the payment was such device was only the Tribunals inference from the facts but its decision to disallow the deduction was based not upon it but upon its finding that the managing agents rendered no service and that consequently any compensation paid to them for wrongful termination of the managing agency agreement could not be said to be a revenue expenditure. The Tribunals finding that the nature of the payment was not that of a revenue expenditure was enough for disallowing the deduction and it was not called upon to decided what its real nature was. Its finding that its real nature was that of such a device was immaterial and even in its absence the assessee would have failed. Then the question was not mentioned in the applications under section 66(1) and (2); this fact itself barred this courts jurisdiction to call for it under section 66(2). This court had no jurisdiction to call for it under section 66(4); still if it must be answered it must be answered in the affirmative. There was common cause between the Guptas and the Singhanias in respect of the payment by the assessee even though they were fighting with the each other on other matters. Even though they were quarreling with each other they could make a common cause against the income-tax department. There was no distinction between the assessee and Beharilal Ramcharan and yet there was futile correspondence between the two; it was only be way of show. The proceedings before Sri K. M. Munshi were collusive and the end was anticipated more than two months earlier. The Singhanias were not entitled to any compensation and there could be no question of the Guptas (as shareholders of the company) paying compensation to themselves (as partners of Beharilal Ramcharan) for termination of the agreement. These facts supplied enough material for the Tribunals theory that the Guptas had to pay the Singhanias Rs. 8 lakhs on the account of some other consideration and that the so-called payment by the assessee to them of the sum of Rs. 18,90,000 was given the form of compensation so that could discharge their liability and at the same time reduce the assessees taxable income.

Question No. 1(d). - The question was not mentioned in the application under section 66(2), did not arise out of the Tribunals order and could not have been called for by this court under section 66(4). Once it was found that the managing agents rendered no service to the assessee and that consequently they were not entitled to any compensation, it was immaterial whether the disputes between the partners could have affected the carrying on of the business of the assessee or not. The onus lay upon the assessee to prove that the dispute between the partners could have affected the carrying on of its normal business and, if it placed no material before the Tribunal, it could not but hold that the disputes did not affect the carrying on of its business. Further the disputes were settled by the award of Sri Kanhaya Singh. When the Singhanias ceased to be the partners of the firm of the managing agents with effect from January 25, 1944, there remained no disputes among the partners of the managing agents. The agreement was terminated subsequently, i.e., after the disputes had ceased to exist. Even when Behari Lal Kailashpat consisting of the Singhanias and the Guptas was the managing agents, the business of Beharilal Kailashpat was carried on only by Lala Ram Gupta : vide clause 6(c) of the deed of partnership of the Beharilal Kailashpat dated February 15, 1943, and other partners came in the picture only' in special cases'. Consequently for all practical purchases Lala Ram Ratan Gupta managed the affairs of the company on behalf of the partnership and the Singhanias had no voice in the management and the disputes between them and the Guptas could not affect the management of the companys affairs. So there was material on the basis of the which the Tribunal could hold that the disputes between the Singhanias and the Guptas did not affect the carrying on of the normal business of the company. If the question has to be answered, it must be answered in the affirmative.

It was submitted on behalf of the company that the question was not whether the two sets of partners of Beharilal Kailashpat did or did not create trouble but whether was fear of their doing so. It was suggested that they had the potentiality of doing mischief and hampering the smooth working of the partnership. They could apply for receivership of the partnership affairs and the question was what the company thought of the danger. If it thought that its business was likely to suffer it was in its interest to terminate the managing agency of Beharilal Kailashpat. I do not agree with these submissions. The question referred to the court is quite different and the submissions of the assessees counsel should meet the same fate as did the counsels submission in the Supreme Court in the case of the Calcutta Agency Ltd. The Tribunal has not given any finding on the question whether there was any apprehension of the companys interests suffering on account of the disputes between the two families. We have no jurisdiction to go into the question whether the company had any such apprehension or not. We have to take all our facts from the statement of the case submitted to us by the Tribunal.

Question No. 1(e). - This question does not arise out of the Tribunals order, was not mentioned in the applications under section 66(1) and (2) and could not have been called for by this court under section 66(4). It was for the assessee to show that it gained by terminating the agreement and if it placed no material to justify such a finding, the Tribunal could not but say that it had not gained by the termination. It could not possibly have gained by terminating the agreement with its own self. So if the question must be answered, it must be answered in the affirmative.

Question No. 2. - This question is of fact and was not mentioned in the applications under section 66(1) and (2) and could not have been called for by this court either under section 66(2) or under section 66(4). It should, therefore, be left unanswered. It was not disputed that if the remuneration fixed under the managing agency agreement was partly for the managing agents promoting the company, part of the payment made to them for the wrongful termination of the agreement would be for their promoting the company and consequently not a revenue expenditure. Whether a part of the remuneration to be paid to the managing agents was for their promoting the company or not was a pure question of fact, which cannot be answered by this court. It could be answered only by the Tribunal and it has found that a part of the remuneration was for the managing agents promoting the company. The only question of law that could possibly arise from this finding was whether it was supported by any material and even this question would have to be answered against the assessee. It is not correct that Beharilal Kailashpats promoting the company was the consideration only for the term of 99 years fixed for the duration of the agreement and was not the consideration for any other promise made by the assessee. Actually all the promises made by the assessee formed one undertaking and agreement and the whole undertaking and agreement was governed by the words 'in further consideration of the firm having promoted the company', even though the various promises were separated by full stops. The words 'the company hereby promise and agree' have to be read with all the promises made by the assessee, notwithstanding the full stops separating one from the next. Therefore, the entire undertaking consisting of all the promises was partly on account of the firms having promoted the company. As part of the remuneration paid by the assessee to the managing agents was for promoting the company, part of compensation, if paid for the so-called wrongful termination of the agreement, also must be held to be for promoting the company. It is immaterial that the payment was made to the Guptas as representing Beharilal Ramcharan which came into existence after the company had been formed; Beharilal Ramcharan got what Beharilal Kailashpat would have been entitled to. Under the agreement itself, Beharilal Ramcharan took the place of Beharilal Kailashpat as managing agents and Beharilal Ramcharan and the company continued to be governed by the agreement. Consequently, even though Beharilal Ramcharan as such had not be paid to it was for Beharilal Kailashpats promoting the company and part of whatever might have been paid to Beharilal Ramcharan for wrongful termination of the agreement must be held to be for Beharilal Kailashpats promoting the company. It is equally irrelevant that the income-tax authorities had year after year deducted the whole of the remuneration paid by the company to Beharilal Kailashpat as a revenue expenditure from its income because the principle of rest judicata does not apply in taxation matters and it is open to the Commissioner of Income-tax to show that part of it was not a revenue expenditure. Whatever this court said in respect of this matter in Commissioner of Income-tax v. Ram Ratan Gupta did not bar the Tribunals finding that part of the payment was for promoting the company. This court did not find that the promotion of the company by Beharilal Kailashpat was consideration only for the term of 99 years and not for other promises made to it. The question whether part of the remuneration fixed for it was not in consideration of its promoting the company was not discussed by it at all.

Question No. 3. - This question is irrelevant and does not arise out of the Tribunals order, as already explained. It was not mentioned in the applications under section 66(1) and (2). It is, therefore, left unanswered.

Question No. 4. - I shall take up the payment of Rs. 18,90,000 first. The question whether this payment was a revenue expenditure or not is a mixed question of fact and law. Whether it was made for a certain purpose is a question of fact and whether making it for that purpose amounts to a revenue expenditure or not is a question of law. The payment was undoubtedly made and so there must have existed a certain purpose for making it; what that purpose was is a pure question of fact. Every relief claimed under a law involves a question of law; whether the person is entitled to the relief depends upon the law and is a question of law. There is no law that a piece of evidence or a statement of fact must be believed or that on certain evidence or material, a certain finding about the existence of the fact must be given; therefore, no question of law is involved when a piece of evidence or a statement of fact is disbelieved or, in spite of there client to prove the existence of the fact. When the authority disbelieves the evidence or the statement or holds that it is not sufficient to prove the existence of the fact it does not apply any law whatsover. The only question of law that can arise when it finds that the existence of the fact is not proved is in respect of the procedure followed by it; whether it has followed the correct procedure or not in deciding whether the fact is proved or not is a question of law because what procedure it should follow is governed by law. When the authority finds the existence of the fact proved, there are only two possible questions of law that may arise, one regarding the procedure followed by it in the deciding whether the existence of the fact is proved or not and the other being whether the evidence or material on the basis of the which it held the existence of the fact to be proved was capable of justifying the finding. If the required logical connection between the evidence or material and the existence of the fact was missing, it could not possibly say on the basis of the evidence or material that the fact existed and if it still held that it existed it went against the law. That explains why in respect of a positive finding about the existence of a fact the question of law that it raised is whether the evidence or material that was produced before the authority could justify the finding. If the evidence is directs there would be no difficulty and the question of law would be answered in the affirmative (provided no procedural irregularity was committed by the authority in receiving the evidence). The answer would be in the affirmative howsoever unworthy of belief the evidence was or howsoever strong the evidence in rebuttal was because, as I said earlier, believing or disbelieving a piece of evidence is not a matter governed by any law. In the case of the indirect or circumstantial evidence the finding about the existence of the fact involves two findings, one of the existence of certain relevant facts and the other of inferring from them the existence of certain relevant facts and the other of inferring from them the existence of the fact in issue. In respect of the former finding (about the existence of relevant facts) the only questions of law that can possibly arise are, as explained earlier, (1) of the evidence or material to prove the relevant facts, and (2) of the procedure followed in receiving the evidence or material to prove their existence. In respect of the other finding, e.g., of the inference, the only question of law that can arise is whether from the relevant facts the existence of the fact in issue could be inferred at all or not. If the logical connection between the relevant facts and the fact in issue was missing, the existence of the fact in issue could be inferred at all or not. If the logical connection between the relevant facts and the fact in issue was missing, the existence of the fact in issue could not be inferred form the relevant facts and the authority would act arbitrarily and so illegally if it still inferred it. If the logical connection existed and the authority could inter the fact in issue, then it was within its discretion whether in the other circumstances of the case it should inter it or not and no question of law arrow either form its inferring it or from its refusing to infer it. Ordinarily, it can be said that a finding simply involving the question whether a certain piece of evidence should be believed or not is a finding of fact and finding involving the question whether something can be done under the law or not is a finding of law. There cannot be a finding of fact if it involves the consideration of a statutory provision or any other law and no finding which involves only the question of believing or disbelieving a piece of evidence is a finding of law. Whether from certain relevant facts the fact in issue can be inferred or not is a question of law because such an inference is permitted only by section 114 of the Indian Evidence Act. Section 114 simply permits, and the does not compel, an inference; consequently, no question of law is raised b y refusal to draw an inference.

In Commissioner of Income-tax v. S. P. Jain, the Supreme court laid down that whether a payment made to an employee for terminating his employment is a revenue expenditure or not is a question of law because its answer depends upon 'the legal effect of the terms of the agreement or employment, the letter terminating employment and the agreement' under which the payment was made. The question before the Supreme Court was whether the payment was compensation in lieu of past services of the employee, in which case it would be taxable in the employees hands or not and it held that this was a question of law and not of fact. In Atherton v. British Insulated and Helsby Cables Ltd., the House of Lords held that whether a debit item is a revenue or a capital expenditure is a question of fact to be decided by he income-tax authorities upon the evidence brought before them. In Eastern Investments Ltd. v. Commissioner of Income-tax, the Supreme court observed that 'though the question whether a payment is deductible under section 10(2)(xv) must be decided on the facts of each case, the final conclusion is one of law'. Similarly, in the case of James Snook & Co. Ltd. it was held that whether the expenditure was or was not made wholly and exclusively for the purpose of the trade is one of fact. In Indian Copper Corporation Ltd. v. Commissioner of Income-tax the Patna High Court said that the question is a mixed question of fact and law, the question of law being whether the payment comes within the ambit of section 10(2)(xv). In Commissioner of Income-tax v. Chandulal Keshavlal & Co., Kapur J. said at page 610 : 'It is a question of fact in each case whether the amount........... was laid out wholly and exclusively for the purpose of such business and if the fact-finding tribunal comes to the conclusion on evidence which would justify that conclusion on evidence e which would justify that conclusion.... then it will be an admissible deduction.' Whether an assessee should be allowed to deduct a certain expenditure is a question of fact and law both. It is a pure question of fact for what purpose or object the payment was made by him and it is a pure question whether making a payment for that purpose or object is deductible under the law. A payment can be deducted only if the law permits the deduction; therefore a question of law is that it was of a non-capital nature made wholly and exclusively for the purpose of the business. When a deduction is claimed on this ground and alone, it is a question of fact for what purpose the payment was made or whether it was made wholly and exclusively for the purpose of the trade. The answer to the question depends only upon the facts and no consideration of any law is involved in the finding (barring that relating to procedure and admissibility of evidence). There is nothing artificial or technical in the meaning of the words 'laid out and expended wholly and exclusively for the purpose of such business' occurring in section 10(2)(xv) and, therefore, no such question as whether a payment for a certain purpose is an expenditure laid out and expended wholly and exclusively for the porpoise of such business arises. The question whether the payment can be deducted or not certainly raises a question of law but not whether a payment made for a particular purpose is made wholly and exclusively for the purpose of the business. The finding that the payment is made for a particular purpose must necessarily involve the finding that it was or was not made wholly and exclusively for the purpose of the business. Therefore, the finding that a payment was made wholly and exclusively for the purpose of the business is a pure finding of fact. If this finding is arrived at, whether the payment should be deducted or not is a question of law and must be answered in the affirmative on account of the provisions of section 10(2)(xv) if the payment is not of a capital nature. The answer to the question whether a payment made wholly and exclusively for the purpose of a business can be deducted or not is furnished only by the statutory provision contained in section 10(2)(xv). So when some authorities say that it is a finding of fact they mean the finding that the payment was made wholly and exclusively for the purpose of the business and not the finding that it is deductible and when either authorities say that it is a mixed finding of fact and law they mean the finding that the payment was of a non-capital nature made wholly and wholly and exclusively food the porpoise of the business and that consequently it is deductible.

The above discussion makes it clear that the first limb of the question is a pure question of fact and cannot be answered by us and, if it cannot be answered by us, the second limb does not arise.

Even if we were too reduce the question to the question, whether there is any material for the finding that the payment was not an expenditure incurred wholly and exclusively for the purpose of the companys business, the answer would be against the assessee. An expenditure incurred in promoting a company can never be said to be an expenditure incurred for its purpose; the question of a companys incurring an expenditure for its purpose arises only after it has been promoted and constituted. An expenditure incurred earlier cannot be said to be for the purpose of its business. It is a finding of fact that a part of the expenditure was for promoting the company; this means that the expenditure was not wholly and exclusively incurred for the purpose of the companys business. Further, the circumstances of the case already mentioned furnish adequate material for the finding that no part of the expenditure was incurred by the company for the purpose of its business.

What is meant by an expenditure incurred for the purpose of the companys business is that it was made for the purpose of enabling the company to carry on its business and earn profits in the business. It is not enough that the payment is made in the course of, or arises out of, or is connected with, the business it must be made for the purpose of earning profits : see Strong & Co. of Romsey Ltd. v. Woodifield. In Inland Revenue Commissioners v. Anglo-Brewing Co. Ltd. Rowlatt J. said that 'for the purpose of trade going on and of making it pay ' (page 13). It is immaterial if the payment is not made with a view to making profit or if it had the effect of diminishing the assessees taxable income or if it was not necessary for him to enter into it provided that it is manner to the business : see F. E. Dinshaw Ltd. v. Commissioner of Income-tax The cases that come most frequently to courts are of payments made by assessees to get rid of agreement under which they have to pay money for servants or managing agents to whom they have to payment for their services or of payments made for retention of services of existing and future staff and increasing its efficiency or of payments made by way of fine or penalty. Whether these payments are made for the purpose of the assessees business is to be decided on the basis of sound commercial policy. A payment made to get rid of a servant in the interest of its business is a proper deduction as held in B. W. Noble Ltd. v. Mitchell. In Overy v. Ashford Dunn and Co. Ltd. a payment made to a director by way of compensation on his retiring was held to be not deductible because there was no finding that the payment was necessary to induce him to retire and the retirement was not found to be in the best interest of the business. In Bassett Enterprise Ltd. v. Petty, a payment to get rid of a service agreement was held to be not a deductible expenditure because it was made as a part of the an arrangement for the purchase of shares by a certain person; the getting rid of the agreement was not found to be connected with the carrying on of the ground companys business. In G. Scammell & Nephew Ltd. v. Rowles, a payment made to get rid of an agreement of onerous s business. In P. Orr & Sons v. Commissioner of Income-tax, a payment made to get rid of a managing agent, who was working satisfactorily, was found to be for the purpose of the assessees business because it was found necessary to get rid of him in a particular situation which arose in the course of the accounting year. Similarly, in Indian Copper Corporation Ltd. v. Commissioner of Income-tax, compensation paid to directors for their vacating office was held to be deductible. In Commissioner of Income-tax v. Chandulal Keshavlal & Co. an assessees remitting a part of its commission from the managed company, the financial position of which was not satisfactory, was held to be an allowable deduction. The test applied by the Supreme Court was of commercial expediency. Fines or penalties paid for infringement of law are held to be not deductible because infringement of law cannot be said to be in the interest of the business. Every business is expected to be carried on the accordance with law and, consequently, even if an infringement of law is likely to bring in more profit, fringing it is not for the purpose of the business. In the case of Strong & Co. of Romsey Ltd., an assessee had to pay damages to a customer incurred by the fall of a chimney in his premises and the expenditure was held to be not deductible. Though it was connected with the business of the assessee, Lord Loreburn L. C. said that it did not follow that it was to be deducted. He pointed out that only such losses are to be deducted as are connected with the business in the sense that they are really incidental to the business itself; they cannot be deducted if they are mainly incidental to some other business or fall on the businessman in some chairs other than that a businessman. In Farrie v. Hall, an assessee defamed another person, whose policy affected his business, and had to pay damages to him; it was held that the expenditure was not deductible. In Commissioner of Inland Revenue v. E. C. Warnes & Co. Ltd, a payment made as a penalty under the Customs Act as held to be not deductible; Rowlatt J. said that payment of such a penalty is not a business loss. A penalty paid for infingment of law in carrying on the business was held by the Supreme Court to be not deductible in Haji Aziz & Abdul Shakoor Bros. v. Commissioner of Income-tax. Similarly, damages for acting in breach of a contract were held by the Madras High court in Mask & Co. v. Commissioner of Income-tax to be not deductible. In Inland Revenue Commissioners v. Alexander Von Glehn & co., the distinction between a commercial loss in trading and a penalty imposed for breach of a law committed by the trader in the trader in the trading was pointed out and it was observed that the penalty was not deductible. In Madan Gopal Bagla v. Commissioner of Income-tax, he assessee carrying on business in timber had to pay money as a surety for another, who had borrowed money from a bank and failed to repay it, and the Supreme Court held that the payment was not deductible as a business loss as he did not carry on the business of standing security for others.

It is not enough that a payment was made wholly and exclusively for the purpose of the business; it is also essential that the payment is not of a capital nature. A rough criterion laid down by Viscount Cave L. C. in Atheton v. British Insulated and Helsby Cables Ltd. and adopted in many cases subsequently for distinguishing between capital expenditure and income expenditure is that the former 'is a thing which is going to be spent once and for all, an income expenditure is a thing which is going to recur every year.' The test, however, is not decisive as pointed out by the Lord Chancellor himself. If a payment is made once and for all and with a view to bringing into existence an asset or an advantage for the enduring benefit of the trade, in the absence of special circumstances, it is a capital expenditure; for instance, money spent by a brewer for acquiring new licensed premises or by a ship-builder for bringing into existence an asset or an advantage for the enduring bringing into existence an asset or an advantage for the enduring bringing into existence an asset or an advantage for the enduring creating a deep water berth for the facility of vessels. A lump sum payment can be a revenue expenditure and is not necessarily a capital expenditure, as pointed out by Rowlatt J. in the case of Anglo-Persian Oil Co. Ltd. v. Dale. He said that the real question is what is the annual expense that the lump sum payment frees, and observed that a lump payment is a capital expenditure only where the annual expense freed is against capital. In this case the test of fixed or circulating capital was laid down : 'where..... the expenditure is to bring back into the hands of the company a necessary ingredient of their existing business.............. the expenditure ought to be debited to the circulating capital rather than to the fixed capital, which is employed in and sank in the permanent........ assets of the business.' The same test was suggested by Viscount Haldane in John Smith & Son v. Moore. Even if a payment is measured by annual receipts it is not necessarily itself an item of income because 'there is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figures that is arrived at be means of the application of that test' as was observed by Lord Buckmaster in the Glenboig Union Firecly Co. Ltd. v. Commissioner of Inland Revenue, and Lord Macmillan in Van den Berghs Ltd. v. Clark. Even a recording expenditure can be capital expenditure as was found by the Supreme Court in the case of Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax. What is material is the nature is the natur e of the payment, which depends upon the nature of the benefit acquired. If the benefit acquired is of capital asset, such as the right to carry on the business unfetted by any competition from outsiders, the periodical payment is of a capital nature. An expenditure on the acquisition of a concern is capital while that in carrying on the concern is revenue : vide City of London Contract Corporation Ltd. v. Styles. The test laid down by Lord Dunedin in Vallambrosa Rubber Company v. Farmer, was that 'capital expenditure is a thing that it is going to recur every year', but the test has been criticised in Golden Horse Shoe (New) Ltd. v. Thurgood where the court preferred the test of circulating capital as distinct from fixed capital. In In re Benarasidas Jagannath, the Lahore High Court said that an expenditure is deemed to be capital when it was made for the initiation of a business, or for extension of a business, or for a substantial replacement of equipment. A payment made to get rid of a servant is a business expenditure as pointed out in the case of Associated Portland Cement . v. Kerr, and B. W. Noble Ltd. v. Mitchell, but payment made to a retiring director in consideration of his not carrying on similar business after retirement is a capital expenditure as held in the case of Associated Portland Cement . v. Kerr. In the latter case, Lord Greene M. R. distinguished between getting rid of an unsatisfactory servant and buying off a potential outside competitor and between defending assets against the claim of somebody who has no title to them and acquiring a new asset or adding to an existing asset. In the case of Van den Berghs Ltd. v. Clark the payment was made for termination of an agreement, but it was held to be of a capital nature because the agreement was not an ordinary commercial contract made in the course of business but affected the whole conduct of the business. The payment of a periodical protection feed to the Government in consideration of the Governments undertaking not to grant leases to other persons in the area was held by the Supreme Court to be a capital expenditure in the case of Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax. It was immaterial that the payment was recurring; what was material was its nature.

The payment was made to the partners of Beharilal Ramcharan and not to partners of Beharilal Kailashpat. Beharilal Ramcharan was removed from the office of managing agents and not Beharilal Kailashpat and Beharilal Ramcharan always maintained that no compensation was due to anyone. The partners of Beharilal Ramcharan never claimed compensation for its removal from the office. The compensation was not paid to induce any managing agents to retire or to compensate any managing agents for premature termination of the agreement. The payment of the compensation was not the result of any negotiation between the company and any managing agents. It was made wholly on account of an award and without its being made a rule of court. The mere fact that the award declared the removal of Beharilal Kailashpat to be wrongful did not make the money paid under the award compensation for wrongful removal of Beharilal Kailashpat or any other agents. The intervention of an arbitrator did not remove the possibility of collusion because there could be collusion even in the arbitration proceedings. The award of Sri K. M. Munshi was against facts and law and it does not appear from it that there was any dissipate between the Guptas and the Singhanias during the arbitration proceedings. The award contains no argument and no findings and apparently was the result of and agreement between counsel of the two parties. The two parties, through quarreling with each other in respect of certain matters, could combine with each other to defeat payment of Income-tax. The Commissioner of Income-tax was not a party to the arbitration proceedings and a private arrangement between the two parties did not receive any reinforcement from the fact that it was incorporated in the award. The arbitrator was only concerned with the question whether the removal of the managing agents was wrongful or not and to what compensation they were entitled if it was wrongful he was not concerned with the question whether their removal was in the interest of the companys business or not and whether it was necessary to pay them anything in order to induce them to retire. Consequently, the award was irrelevant to the question whether it was in the interest of the company to remove the managing agents and whether it was necessary to pay them the money to induce them to retire or to agree to their removal. Damages paid for wrongful removal of managing agents stands on the same footing as a fine or penalty paid and cannot be said to be an expenditure incurred wholly and exclusively for the purpose of the business. If it is necessary to remove the managing agents in the interest of the business, it may be done with their consent after paying compensation to them and the payment of compensation can be said to be an expenditure wholly and solely incurred for the purpose of the business, but wrongful removal, i.e., removal against the law, a cannot be said to be for the purpose of the business.

For these reasons, I must hold that the payment in question was not made wholly and exclusively for the purpose of the companys business. The facts suggest that it was merely made by way of distribution of profits. If it appears from 'the facts found that the payment was 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 would not regard the deduction as permissible' (Per Rankin C.J. in the case of Anglo Persian Oil Co. (India) Ltd. v. Commissioner of Income-tax).

It might appear that the payment was not of capital nature because by making it the company did not acquire an asset or advantage for the enduring benefit of the business. The annual expense that the payment is supposed to have freed was the payment of the remuneration to the managing agents. If the payment of the remuneration was a revenue expenditure, the payment of the compensation also could be a revenue expenditure. But the real nature of the payment cannot be ascertained because the professed purpose of the payment is not the real purpose and consequently it cannot be said that the payment was not of a capital nature. Further we have found that part of the remuneration to be paid to the managing agents was for promoting the company; part of the payment made to the managing agents, even if by way of compensation for their removal from office, must, therefore, be held to be for their promoting the company, i.e., of capital nature. It was for the company to place materials before the Tribunal to show which part of the payment was for promoting the company and which part for the service to be rendered by them, but it failed to do so. Consequently, it was not possible for the Tribunal to hold that one part of the payment was of capital nature and the other part of revenue nature. The result is that no part of the payment could be said to be not of capital nature and, therefore, deductible.

When it has been found that the payment was not made wholly and solely for the purpose of the companys business, it would be immaterial even if the payment were found to be of non-capital nature; even then it would not have been deductible.

What I have said about the sum of Rs. 18,90,000 applies also in respect of the amount of Rs. 13,300, because the facts of the two amounts must be the same.

In the result question No. 4 must be answered in the negative and against the assessee. Other questions are left behind unanswered.

The Commissioner of Income-tax should get his costs of this reference, which we assess at Rs. 1,000. Counsels fee also is assessed at Rs. 1,000.

I direct that copies of this judgment shall be sent under the seals of the court and the signature of the Registrar to the Income-tax Appellate Tribunal and the Commissioner of Income-tax, U. P., as required by section 66(5) of the Act.

MANCHANDA J. - I agree.


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