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Alagappa Textiles (Cochin) Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Reference No. 19 of 1969
Judge
Reported in[1974]93ITR406(Ker)
ActsIncome Tax Act, 1922 - Sections 10(2) and 66(1); Companies Act, 1956 - Sections 2(24) and 384
AppellantAlagappa Textiles (Cochin) Ltd.
RespondentCommissioner of Income-tax
Appellant Advocate T.L. Viswanatha Iyer,; E.R. Venkiteswaran,; N. Sreenivas
Respondent Advocate P.K. Krishnankutty Menon, Adv.
Cases ReferredGibson v. Barton
Excerpt:
.....1958-59 and 1959-60 as not admissible business expenditure under section 10 (2) (xv) - 'x' not manager of assessee under act of 1956 - when there is violation of section 384 assessee entitled to exemption under section 10 (2) (xv) - where amounts recovered from 'x' assessee can be taxed on amounts under section 41 (1) - held, question answered in favour of assessee. - - (1) when a question is raised before the tribunal and is dealt with by it, it is clearly one arising out of its order. ' 20. if we compare the provisions of sections 2(24) and 2(25) of the companies act, 1956, though there is an overlapping of the functions of the manager as well as the managing agent of a company, the essential distinction seems to be that while a manager has to be under the control,..........of the assessee under the companiesact, 1956, during the relevant years. the agreement between kamalamills ltd. and the assessee was executed when the companies act of 1913was in force. the definition of 'manager', according to section 2(9) of thesaid act, is as follows :''manager' means a person who, subject to the control and direction of the directors has the management of the whole affairs of a company, and includes a director or any other person occupying the position of a manager by whatever name called and whether under a contract of service or not.'13. clause (14) of the agreement dated november 10, 1955 (annexure 'a'), reads :'the managers' powers are limited in the manner aforesaid and they (managers) are not and shall not be deemed to be managers in-charge of the whole.....
Judgment:

Krishnamoorthy Iyer, J.

1. This is a common reference under Section 66(1) of the Indian Income-tax Act, 1922, by the Income-tax Appellate Tribunal, Madras Bench 'B', arising out of two applications filed by the assessee, Alagappa Textiles (Cochin) Ltd. The question referred for decision is:

'Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in disallowing the claim of the assessee for deduction of Rs. 1,03,547 and Rs. 18,294 from the income of the assessment years 1958-59 and 1959-60 as not an admissible business expenditure under Section 10(2)(xv) of the Indian Income-tax Act, 1922 ?'

2. The reference relates to the assessment years 1958-59 and 1959-60, the accounting years being the calendar years 1957 and 1958.

3. The assessee is a public limited company carrying on the business of manufacture and sale of yarn and having its registered office at Alagappanagar, Kerala State. The assessee entered into an agreement dated November 10, 1955, with Kamala Mills Ltd., Coimbatore, for financing and managing the assessee's mill at Alagappanagar for a period of five years. A copy of the agreement is annexure 'A'. Kamala Mills Ltd. was paid Rs. 1,03,547 and Rs. 18,294 towards their remuneration for the calendar years 1957 and 1958 by the assessee. The claim of the assessee for deduction of these amounts under Section 10(2)(xv) of the Indian Income-tax Act, 1922, was disallowed by the Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal on the ground that Kamala Mills Ltd. was the manager of the assessee as defined in the Companies Act, 1956, and the payments were illegal being in violation of Section 384 of the Companies Act, 1956.

4. The Companies Act, 1956 (1 of 1956), came into force on April 1, 1956. Section 384 thereof provides that no public company, and no private company which is a subsidiary of a public company, shall, after the commencement of the Act, appoint or employ, or after the expiry of six months from such commencement, continue the appointment or employment of, any firm, body corporate or association as its manager. The amounts in dispute are payments made by the assessee to Kamala Mills Ltd, for the periods after the expiry of six months from the commencement of the Companies Act, 1956. The plea of the assessee before the Appellate Assistant Commissioner was that even though Kamala Mills Ltd. was disqualified to continue as the manager of the assessee the payments were fully justified from the commercial point of view and have to be taken into account in computing the net profits for assessment of tax. The Appellate Assistant Commissioner overruled the plea of the assessee on the ground that the payments were illegal and Kamala Mills Ltd. was bound to restore the same to the assessee and also for the reason that the payments have been disputed by the assessee by filing O. S. No. 21 of 1961 in the Subordinate Judge's Court, Irinjalakuda, against Kamala Mills Ltd. for the return of the amounts. The Tribunal concurred with the decision of the Appellate Assistant Commissioner. At the time of the disposal of the appeals by the Tribunal, O.S. No. 12 of 1961 had been decreed.

5. Counsel for the assessee raised before us two contentions. The first was that Kamala Mills Ltd. is not a 'manager' as denned in the Companies Act, 1956, but only a financier in whom certain rights of management of the mills of the assessee had vested and was, therefore, not disqualified by the terms of Section 384 of the Companies Act, 1956, from continuing as such. The second contention was that, even if there was violation of Section 384 of the Companies Act, 1956. still the remuneration paid to Kamala Mills Ltd., for the relevant assessment years has to be deducted under Section 10(2)(xv) of the Indian Income-tax Act, 1922, as it was wholly and exclusively expended for purposes of the assessee's business.

6. It is seen from annexures 'C' and 'C-1' that the Appellate Assistant Commissioner assumed for both the years that Kamala Hills Ltd. was the manager of the assessee as defined in the Companies Act, 1956. The Tribunal in its order produced as annexure 'F' no doubt observed:

'.........the learned counsel for the assessee sought to argue thatKamala Mills Ltd. was not only managers but were also financiers and that the remuneration paid could be treated as having been made to the financiers. We feel that this is a new case pat forward by the assessee and cannot be permitted.'

7. In spite of the above statement it is seen from annexure 'F' that the Tribunal discussed the several clauses of the agreement and found as follows:

'It is not possible to construe the terms of the agreement as conferring on Kamala Hills Ltd. any power other than as managers and, in our opinion, there is no warrant for taking that they were functioning separately as financiers. It is no doubt true that Kamala Mills Ltd. was appointed as managers so that they may provide financial aid for the running of the mills, but for the purpose of affording financial assistance no separate remuneration or commission was agreed to be paid. The appointment of managers was itself made so that the necessary financial assistance would be available and the consideration for the financial assistance was the appointment of Kamala Hills Ltd. as managers on the stipulated remuneration.'

8. Counsel for the assessee on the above finding submitted that his first contention arises out of the order of the Tribunal and it is, therefore, necessary that this court should decide the same.

9. Section 66(1) of the Indian Income-tax Act, 1922, enables the Tribunal to refer to the High Court any question of law which arises out of its own order. The words 'arising out of such order' in Section 66(1) of the Indian Income-tax Act, 1922, were interpreted by the Supreme Court in Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd., [1961] 42 I.T.R. 589 : [1962] 1 S.C.R. 786 (S.C.) to mean:

' (1) When a question is raised before the Tribunal and is dealt with by it, it is clearly one arising out of its order.

(2) When a question of law is raised before the Tribunal bat the Tribunal fails to deal with it, it must be deemed to have been dealt with by it, and is, therefore, one arising out of its order.

(3) When a question is not raised before the Tribunal but the Tribunal deals with it, that will also be a question arising oat of its Older.

(4) When a question of law is neither raised before the Tribunal nor considered by it, it will not be a question arising out of its order notwithstanding that it may arise on the findings given by it.'

10. According to their Lordships, it is only a question that has been raised before the Tribunal or decided by the Tribunal that could be held to arise out of its order. The Tribunal having decided that Kamala Mills Ltd. was the manager of the assessee during the relevant years as defined in the Companies Act, 1956, the first question raised on behalf of the assessee arises out of the order of the Tribunal.

11. Even if the question had not been specifically decided by the Tribunal because of the broad nature of the question referred to us, it is necessary to decide the status of Kamala Mills Ltd. vis-a-vis the assessee during the relevant years for answering the question. In Bhanji Bagawandas v. Commissioner of Income-tax, [1968] 67 I.T.R. 18; [1968] 1 S.C.R. 17 (S.C.) Ramaswami J. observed :

'All that Section 66(1) requires is that the question of law which is referred to the High Court and which the High Court is to decide must be the question which was in issue before the Tribunal. Where the question itself was under issue, there is no further limitation imposed by the section that the reference should be limited to those aspects of the question which had been argued before the Tribunal, and it will be an over-refinement of the position to hold that each aspect of a question is itself a distinct question for the purpose of Section 66(1) of the Act.'

12. It is now necessary to consider whether Kamala Mills Ltd. was on thebasis of the agreement the manager of the assessee under the CompaniesAct, 1956, during the relevant years. The agreement between KamalaMills Ltd. and the assessee was executed when the Companies Act of 1913was in force. The definition of 'manager', according to Section 2(9) of thesaid Act, is as follows :

''Manager' means a person who, subject to the control and direction of the directors has the management of the whole affairs of a company, and includes a director or any other person occupying the position of a manager by whatever name called and whether under a contract of service or not.'

13. Clause (14) of the agreement dated November 10, 1955 (annexure 'A'), reads :

'The managers' powers are limited in the manner aforesaid and they (managers) are not and shall not be deemed to be managers in-charge of the whole affairs of the company within the meaning of Section 2 of the Indian Companies Act.'

14. In view of the above clause, it may be possible for the assessee to contend that Kamala Mills Ltd. was not the manager of the assessee within the meaning of Section 2(9) of the Indian Companies Act, 1913. The above provision was introduced by the amending Act of 1936 and the definition clause itself is based on the observations of Quain J. in Gibson v. Barton, [1875] L.R. 10 Q.B. 329. Interpreting the term 'manager', the learned judge said:

'The word 'manager', it is admitted on all hands, will not apply to a man who acts once or twice, but he must be a delegate having the control of all the affairs of the company.'

15. It will, therefore, be seen that to satisfy the definition under Section 2(9) of the Indian Companies Act, 1913, a person apart from being in management of the whole affairs of a company has to be subject to the control and direction of the directors. This condition is insisted upon by Section 2, Sub-section (24), of the Companies Act, 1956, which defines the term 'manager'. The said sub-section reads:

''Manager' means an individual (not being the managing agent) who, subject to the superintendence, control and direction of the board of directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, and whether under a contract of service or not.'

16. There is thus a substantial change introduced in Section 2(24) of the Companies Act. To satisfy Section 2(24) of the Companies Act, 1956, a person, apart from being an individual, should have the management of the whole or substantially the whole of the affairs of a company and should also be subject to the superintendence, control and direction of the board of directors.

17. Section 384 of the Companies Act, 1956, reads :

'No company shall, after the commencement of this Act, appoint or employ, or after the expiry of six months from such commencement, continue the appointment or employment of, any firm, body corporate or association as its manager.'

18. The above provision positively disqualifies a firm, body corporate or association from being appointed or from continuing as manager of a company under the Companies Act, 1956. The effect of Section 384 is to prevent a firm, body corporate or association from exercising the functions of a manager mentioned in Section 2(24). To attract Section 384 a firm, body corporate or association should be in management of the whole or substantially the whole of the affairs of a company, subject to the superintendence, control and direction of the board of directors, which are the attributes of a manager in Section 2(24) of the Companies Act, 1956. To this extent Section 2(24) should govern in the interpretation of the term 'manager' in Section 384 of the Companies Act, 1956. When Section 384imposes a disqualification on a firm, body corporate or association to be appointed or continued as manager the said word has only to be understood in the light of the definition clause. There was considerable debate at the bar as to whether on the basis of the several clauses in annexure 'A', Kamala Mills Ltd. can be considered to have been in management of substantially the whole of the affairs of the assessee. In our view, it is not necessary to express a final opinion on the matter in view of our further discussion. Clause (13) of annexure 'A' reads:

'The company either represented by its managing agents or board of directors shall not exercise the powers delegated to the managers under the foregoing clauses except by way of general supervision and advice nor interfere with the discretion of the managers in the exercise of their functions and powers vested in them by virtue of this agreement.'

19. The above clause precludes the assessee from exercising any of the powers in Clauses (1) to (12) of annexure 'A' and also stipulates that in the exercise of those powers Kamala Mills Ltd. is not subject to the superintendence, control and direction of the board of directors of the assessee. A manager, according to Section 2(24) of the Companies Act, 1956, has to be subject to the superintendence, control and direction of the board of directors. Clause (13) in annexure 'A' has been introduced to safeguard the position of Kamala Mills Ltd. as financiers who have undertaken to advance large amounts for the working of the mills of the assessee. Kamala Mills Ltd. were authorised to exercise the powers vested in them quite independent of the control of the board of directors of the assessee and that will be sufficient to hold that Kamala Mills Ltd. were not managers as denned in the Companies Act, 1956. The provision for general supervision and advice by the assessee in Clause (13) of annexure 'A' does not amount to a control by the assessee over Kamala Mills Ltd. in the exercise of its power under the agreement In this connection the definition of 'managing agent' in Section 2(25) of the Companies Act, 1956, is significant. It reads:

''Managing agent' means .any individual, firm or body corporate entitled, subject to the provisions of this Act, to the management of the whole, or substantially the whole, of the affairs of a company by virtue of an agreement with the company, or by virtue of its memorandum or articles of association, and includes any individual, firm or body corporate occupying the position of a managing agent, by whatever name called.'

20. If we compare the provisions of Sections 2(24) and 2(25) of the Companies Act, 1956, though there is an overlapping of the functions of the manager as well as the managing agent of a company, the essential distinction seems to be that while a manager has to be under the control, superintendence and direction of the board of directors in all matters amanaging agent is not to be so. If Section 2(24) does not apply, Kamala Mills Ltd. cannot be said to be managers within the meaning of the Companies Act, 1956. Considering the various clauses in annexure 'A' it is not possible to hold that Kamala Mills Ltd. was under the control, superintendence and direction of the board of directors of the assessee during the currency of the agreement. Further, the assessee also agreed not to exercise any of the powers delegated to Kamala Mills Ltd. This is inconsistent with the position of Kamala Mills Ltd. being a manager of the assessee as defined in the Companies Act, 1956. The fact that Kamala Mills Ltd. was referred to as. manager in annexure 'A' does not lead to the conclusion that they are the managers under the Companies Act, 1956. We, therefore, hold that Kamala Mills Ltd. is not the manager of the assessee within the meaning of Section 384 read with Section 2(24) of the Companies Act, 1956.

21. In view of our finding that Kamala Mills Ltd. is not the manager of the assessee under the Companies Act, 1956, it is not necessary to examine the second submission on behalf of the assessee that even if there was a violation of Section 384 of the Companies Act, 1956, the assessee is entitled to the exemption under Section 10(2)(xv) of the Indian Income-tax Act, 1922.

22. Counsel for the revenue then contended that in view of the institution of O.S. No. 21 of 1961 by the assessee against Kamala Mills Ltd. for the return of the remuneration, the liability in question has been disputed by the assessee and, therefore, the exemption cannot be claimed. The remuneration paid has been included in the returns filed by the assessee and they have also claimed the exemption. It is agreed that the assessee paid the amounts to Kamala Mills Ltd. and it was also agreed that Kamala Mills Ltd. has been assessed for this amount. It was observed by the Tribunal thus in annexure 'F' :

'. . . . the Company Law Administration objected to the payment of remuneration to the Kamala Mills Ltd. and on their direction the assessee filed a suit against the Kamala Mills Ltd. for recovery of the amount paid by way of remuneration to the manager.'

23. The subsequent dispute of liability at the instance of the Company Law Administration by the assessee cannot in our view affect this question. The appeal filed by Kamala Mills Ltd. is still pending in this court and if ultimately the amounts are recovered from Kamala Mills Ltd. the assessee can be taxed on the amounts tinder Section 41(1) of the Income-tax Act, 1961. We, therefore, find no substance in this objection as well.

24. We, therefore, answer the question referred in the negative, that is, in favour of the assessee and against the revenue. The assessee will have their costs of the reference which we fix at Rs. 250.

25. A copy of this judgment will be forwarded to the Income-tax Appellate Tribunal, Madras Bench 'B', under the seal of this court and over the signature of the Registrar.


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