1. This is a consolidated reference made under Section 66(1) of the I.T. Act, 1922, by the Income-tax Appellate Tribunal, Delhi Benches, in R.A. Nos. 95 to 98 of 1970-71. There were four reference applications, pertaining to assessment years 1959-60 to 1962-63, filed by M/s. Bharat Ram Charat Ram Pvt. Ltd. (hereinafter referred to as ' the assessed '). Since the reference applications involved some common questions of law the Tribunal made a consolidated reference. Two questions have been referred to us, one of which is common to all the four assessment years and the other to the assessment years 1960-61 and 1961-62.
2. The first question, which is common for all the four assessment years,runs as follows:
' Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in disallowing the sums of Rs. 36,000 in each of the assessment years 1959-60 and 1960-61 and Rs. 35,700 and Rs. 29,700 in the assessment years 1961-62 and 1962-63, respectively, from out of the salaries paid to the director employees of the company '
3. It is not necessary to set out the facts in regard to this question at great length. It is sufficient to state that during the accounting years relevant to the four assessment years in question there were four directors of the assessed-company, Bharat Ram, Charat Ram, Bansi Dhar and Shri Dhar. The ITO disallowed, out of the salaries paid to these four directors, the various amounts referred to in the question, in the assessments for 1959-60 to 1962-63. In making these disallowances, the ITO followed a decision taken in the assessment year 1958-59, that the increase in the salaries of these directors effected on August 1, 1957, deserved to be disallowed for income-tax purposes as having been made on considerations extraneous to business. On appeal, the AAC following the order of the Tribunal in relation to the assessment year 1958-59, confirmed the disallowances made by the ITO. When the matter came up before the Tribunal in relation to the assessment year 1959-60, it was strenuously contended on behalf of the assessed that the decision of the Tribunal in regard to the assessment year 1958-59 should not be followed and that there was material to justify the deduction in full of the entire salaries paid to these directors. The order of the Tribunal on this point was a lengthy one but most of the discussion pertained to a consideration of the assessed.s plea that the Tribunal was not bound to follow the order passed for the earlier assessment year. This contention was repelled by the Tribunal as it found that all the materials relied upon by the assessed had been considered by the Tribunal in the earlier assessment year also and that no new material whatsoever had been brought on record. The Tribunal, thereforee, confirmed the disallowance in 1959-60 and following this, in the subsequent three assessment years as well. Hence, this reference.
4. We have heard the present reference along with I.T.R. No. 55 of 1969 which was the reference made to this court in respect of the assessment year 1958-59 under Section 66(2) of the Act. In our judgment in I.T.R. No. 55 of 1969, we have discussed the matter in detail and we have pointed out that the Tribunal.s decision for that year was vitiated by the non-consideration of some of the material evidence placed before it by the assessed. We have, accordingly, held that the order of the Tribunal upholding the disallowance of Rs. 17,500 out of the salaries paid in that year was unsustainable and that the Tribunal should reconsider the matter in the light of the full and correct facts. So far as the years presently under reference are concerned, the disallowance has been made on the same basis as in the assessment year 1958-59. In that year, the disallowance was only to the extent of Rs. 17,500 because the increase in remuneration (which was disallowed) was effective only for five months in that accounting year. But, for the years presently under reference, those increases are effective throughout the year and hence the larger amounts of disallowance made in these assessment years. Since the Tribunal has, for the years presently under reference, merely followed the order for the assessment year 1958-59, the same answer should be given in this reference as well. We, thereforee, answer the question set out above in the negative and, as has been pointed out in our judgment in I.T.R. No. 55 of 1969, it will be for the Tribunal to reconsider the issue afresh in the light of the correct facts. It will be convenient, as we see it, if the Tribunal will hear afresh the appeals for all the five assessment years 1958-59 to 1962-63 together and dispose of the issue in the light of the observations contained in our judgment in I.T.R. No. 55 of 1969. This question is answered accordingly.
5. The second question which has been referred to us for our decision is :
'Whether the sums of Rs. 2,490 and Rs. 8,196 representing the expenditure incurred by the assessed-company in procuring proxies from some shareholders of the managed company was an admissible deduction under Section 10(2)(xv) of the I.T. Act, 1922 '
6. The assessed incurred an expenditure of Rs. 2,490 in the calendar year 1959 (accounting year relevant for the assessment year 1960-61), for procuring proxies from various shareholders for a meeting of the shareholders of DCM (the managed company) to be held on November 12, 1959. Similarly, in the calendar year 1960 (relevant for the assessment year 1961-62), the assessed incurred an expenditure of Rs. 8,196 for obtaining proxies from several shareholders of DCM for a meeting to be held on October 17, 1960. The question is whether these items of expenditure are allowable deductions or whether, as held by the Tribunal, they are capital in nature and hence disallowable.
7. The material facts are that the assessed was the managing agent of the DCM by virtue of a managing agency agreement dated January 10, 1952. As a result of the enactment of the Companies Act, 1956, it became necessary for the assessed to obtain a reappointment of itself as the managing agents on or before August 15, 1960, if it was to continue in office after that date. One of the items on the agenda of the meeting of the shareholders of the DCM to be held on November 15, 1959, was a proposal for such reappointment. The general meeting of shareholders for October 17, 1960, was to consider, inter alia, a special resolution for sanctioning the assessed a remuneration of 1% by way of, guarantee commission for guaranteeing the due repayment of the loans obtained by the DCM from banks and other parties. The assessed, thereforee, took steps to procure proxies from the shareholders for these meetings in order to ensure that the above proposals were carried without difficulty.
8. So far as the first year is concerned, the view of the Tribunal that the object of the company in incurring the expenditure was to acquire a new source of income is apparently on the basis that the original managing agency terminated on August 15, 1960, and what the assessed intended to secure, as a result of the general meeting, was a fresh appointment for a fresh term. In our opinion, this conclusion of the Tribunal proceeds on a misapprehension as to the true legal effect of the transaction in question. It is not in dispute that the assessed was originally appointed as the managing agent of DCM for a period of 15 years (vide statement of case in I.T.R. No. 55/69) from 1952. In the normal course, the managing agency would have subsisted till January, 1967. But in the meanwhile the Companies Act, 1956, was enacted and this introduced a number of prohibitions and restrictions regarding the appointment of managing agents of companies. We are here concerned with the provisions of Section 330 of the said Act which was in the following terms :
' Where a company has a managing agent at the commencement of this Act, the term of office of such managing agent shall, if it does not expire earlier in accordance with the provisions applicable thereto immediately before such commencement [including any provisions contained in the Indian Companies Act, 1913 (VII of 1913)], expire on the 15th day of August, 1960, unless before that date he is re-appointed for a fresh term in accordance with any provision contained in this Act.' (underlining ours) We think that the clue to the correct position in this case lies in the language of this section. Its impact on the present case is that the term of the managing agency which would have otherwise lasted till 1967 would have expired on August 15, 1960, if the company had not passed a resolution of reappointment but not if the company did. In the present case, it has been found that the company did re-appoint the assessed for a fresh term of five years before August 15, 1960. Since the company did pass a resolution of re-appointment and also secure the Government approval thereforee before the said date, the managing agency was saved from termination on August 15, 1960, and continued not till 1967, as before but only till the expiry of the fresh term provided for in the resolution of re-appointment. Thus, the object of the company in obtaining proxies was to ensure that, by having the appropriate resolution passed in time, the company was able to preserve and protect its existing asset, namely, the managing agency. It is of significance that the fresh term of appointment does not extend beyond the term of the original appointment. All that the company has achieved by the passing of the resolution was to retain the managing agency intact for five more years beyond August 15, 1960, and save it from extinction on that date. In these circumstances, the expenditure incurred by the assessed was laid out, not with the object of acquiring a new source of income but only to preserve the continuance, as far as was permissible in accordance with law, of the existing source of income, namely, the managing agency of the DCM. We are, thereforee, of opinion that, as a result of the expenditure incurred in 1959, the assessed did not acquire, or intend to acquire, any new asset or advantage. This sum should have been allowed as a revenue expenditure.
9. The expenditure in the calendar year 1960 appears to be a simple case of an expenditure incurred in the course of business to increase the extent of income yield from an existing source. The assessed, as managing agent, was giving guarantees in respect of the loans obtained by the managed company from various sources. Previously this was done by the assessed without any specific remuneration thereforee. By the expenditure in question the assessed attempted to get a resolution passed by the shareholders of the company voting a guarantee commission for the services rendered in this regard. We are unable to see how this can be treated as the acquisition of a new source of income. The assessed's source of income was the managing agency agreement. All that the assessed has tried to do was to make the remuneration payable to it under the agreement more comprehensive and to increase the profitability of the existing source of income. This expenditure was, thereforee, revenue in nature and, hence, allowable.
10. We, thereforee, answer the second question referred to us in the affirmative and in favor of the assessed.
11. There will be no order as to, costs in the circumstances of the case.