1. In this reference under Section 256(1) of the I. T. Act, 1961, the following question has been referred :
'Whether, on the facts and in the circumstances of the case, Rs. 58,368 paid by the assessee as brokerage to M/s. Merwanjee Bomajee Dalai of Bombay, for arranging for the sale of preference shares issued by M/s. Textool Company Ltd., is to be allowed as a deduction in computing the income for the assessment year 1968-69 '
2. The assessee is a registered firm and was acting as the managing agent of M/s. Textool Co, Ltd. under an agreement dated 14th August, 1965. Under Clause 5 of the said agreement, the assessee-firm agreed that it would, during the period of the agreement, act as the managing agent of the managed company for the remuneration and on the terms and conditions mentioned in it and would use its best endeavours to promote the interest and the business of the company. The remuneration payable to it is to be found in Clause 6 of the agreement which was subject to a minimum of Rs. 50,000 and it was in accordance with the graded scale usually to be found in managing agency agreements, depending on the quantum of the profits earned by the managed company.
3. M/s. Textool Co. Ltd. needed finance for its business. It issued 25,000 preference shares of Rs. 100 each of the total value of Rs. 25 lakhs. The assessee, the managing agent, entered into an agreement with M/s. Merwanjee Bomajee Dalai, a Bombay firm of stock and share brokers, for arranging for the 'sale' of the preference shares. The Textool Co. Ltd. in its letter dated 7th January, 1966, addressed to the brokers authorised them to negotiate for the ' subscription ' of the preference shares of the value of Rs. 10 lakhs at par, and in the same letter it was stated:
' Our managing agency firm, who, in the best interests of the firm, are keen to get the issue fully subscribed will pay a price of 4% for services rendered as financial consultants, advising on condition in the capital market and regarding rules and regulations of the stock exchange. The above remuneration of 4% will be paid as soon as you get the firm acceptance from the subscribers ' (underlining is ours).
4. The brokers arranged for the 'sale' of 7,000 shares to the Life Insurance Corporation of India and 7,590 shares to Indian Guarantee and General Insurance Co. Ltd., Bombay, of the total value of Rs. 14,59,000. In accordance with the terms of the aforesaid letter, the assessee paid to the brokers a sum of Rs. 58,360, representing 4% of the sum of Rs. 14,59,000 being the face value of the shares 'sold' to the Life Insurance Corporation of India and Indian Guarantee and General Insurance Co. Ltd., Bombay.
5. We are concerned with the assessment year 1968-69, the relevant previous year ending on 30th June, 1967. The assessee disclosed in its return for this assessment year a sum of Rs. 2,678 as income. In doing so, it claimed a deduction of Rs. 58,360 paid as brokerage to the brokers.
6. The ITO did not allow this deduction on the ground that it was not part of the assessee's business as managing agents to arrange for the sale of shares issued by the managed company for raising capital. The assessee appealed to the AAC, who held that such expenditure was not allowable as deduction in computing the total income, since it was not part of the assessee's duty to find purchasers for the shares issued by the managed company for raising the capital for its business. He accordingly confirmed the assessment. The assessee, thereafter, preferred an appeal to the Tribunal reiterating the contention that the brokerage of Rs. 58,360 should have been allowed as deduction. The Tribunal, for the reasons stated in para. 8 of its order dated 13th June, 1974, held that the expenditure was incurred for the purpose of the assessee-firm and that the assessee's claim was admissible. The ITO was, therefore, directed to deduct the sum of Rs. 58,368 in computing the total income of the assessee-firm.
7. The actual amount paid to the broker is only Rs. 58,360 and the sum of Rs. 8 represents certain bank charges. Hence, a sum of Rs. 58,368 was the subject of consideration by the Tribunal.
8. The Tribunal has proceeded on the basis that there has been sale of shares by the assessee, the managing agency company. The contract with the Bombay broker is annexed as annex. C to the statement of the case, and in the said contract, which is with the assessee-company, the following statements occur :
'We have this day done by your order and on your account the following transactions.
Securities sold for you for quantityCash against application for kind ofsecurityDelivery rate
7,000New preference shares of TextoolCompany Ltd.Rs. 96
9. The contract was made subject to the rules and regulations of the Bombay Stock Exchange. Though originally the letter addressed to the Bombay broker was written by the managing agent on behalf of the managed company, subsequently the agreement was entered into only between the Bombay broker and the assessee, the managing agent. In entering into the contract, the assessee did not act in its capacity as managing agents.
10. Section 79 of the Companies Act provides :
'79. (1) A company shall not issue shares at a discount except as provided in this section....... '
11. The assessee could not have issued shares at a discount. Sub-section (2) imposes certain conditions under which shares could be issued at a discount. It is common ground that this is not a case where the conditions set out in the provision are satisfied. Therefore, M/s. Textool Co. Ltd. could not itself have issued these shares of the face value of Rs. 100 for a sum of Rs. 96.
12. Section 76 of the Companies Act provides that a company may pay a commission to any person in consideration of-
' (a) his subscribing or agreeing to subscribe, whether absolutely or conditionally, for any shares in, or debentures, of, the company, or
(b) his procuring or agreeing to procure subscriptions, whether absolute or conditional, for any shares in, or debentures of, the company,'
if certain conditions are fulfilled. Five conditions are set out in Sub-section (1) of Section 76. One of those conditions is that the amount or rate percent. of the commission paid or agreed to be paid is in the case of shares offered to the public for subscription disclosed in the prospectus and in the case of shares not offered to the public for subscription, disclosed in the statement in lieu of prospectus or in a statement in the prescribed form signed in like manner as a statement in lieu of prospectus and filed before the payment of the commission with the Registrar. Another condition is that a copy of the contract for the payment of the commission is delivered to the Registrar at the time of delivery of the prospectus or the statement in lieu of prospectus for registration. These conditions have been imposed only for the purpose of ensuring that the company does not discriminate between shareholders or subscribers in the matter of payment of commission. The commission has, therefore, to be uniform.
13. In the present case, as seen already, the company issued 25,000 preference shares of Rs. 100 each. The commission was given only in respect of 14,590 shares. We have no idea as to how and for what value the rest of the shares were issued. The company had not complied with the conditions prescribed in Section 76 of the Companies Act, and that was perhaps the reason why the contract with the Bombay broker was entered into by the assessee, the managing agency company. The managing agent was not bound by the conditions prescribed in Section 76 and, therefore, the commission with respect to these 14,590 shares could be given. The result of the transaction, as it appears from annex. 'C', is that the managing agent got all the 14,590 shares allotted in its own name and sold those shares through the Bombay broker to the two parties mentioned already at a discount of Rs. 4.
14. If the nature of the transaction is one of sale of shares as seen from annex. C, then, unless the assessee is a dealer in shares, it would not have been eligible for the allowance of any loss sustained by it in the said sale. The assessee is not shown to be a dealer in shares. The assessee has, therefore, claimed it as a commission or brokerage paid to the Bombay broker for the purpose of ' sale ' of shares of the managed company.
15. The question for our consideration is whether the said sum of Rs. 58,368 was incurred by the assessee-company as an allowable expenditure in its income-tax assessment. Though no reference has been made in the question to Section 37(1) of the I.T. Act, the claim has actually been made only under the cover of that section. Learned counsel for the assessee contended that under Section 37(1) any expenditure incurred wholly or exclusively for the purposes of the business can be allowed as a deduction in 'computing the income chargeable under the head 'Profits and gains of business or profession'. Learned counsel for the assessee laid great emphasis on the principle laid down by the Bombay High Court in Tata Sons Ltd. v. CIT : 18ITR460(Bom) , in support of his claim for allowance of this amount as deduction.
16. In that case, Tata Sons Ltd. was the managing agent of Tata Iron and Steel Co. Ltd. Under the managing agency agreement, Tata Sons Ltd. was to be paid a commission at a certain rate depending upon the net profits of the managed company. During the relevant year, the assessee paid voluntarily a certain sum as its share of the bonus which the managed company paid to some of its officers. The bonus paid by the managed company was a reasonable bonus and was such that a deduction could be claimed by the managed company under Section 10(2)(x) of the Indian I.T. Act, 1922. The assessee claimed that the deduction of a portion of the bonus was a permissible deduction under Section 10(2)(xv) of the said Act. The claim was accepted. The allowance made in that case has to be taken in the context of the fact that the managing agent, that is Tata Sous Ltd., had borne a part of the similar bonus paid in the accounting years 1939, 1940 and 1941, and had also been allowed. Contented labour would increase its own profits which is a share of the managed company's profits. There was thus a nexus between the assessee and the bonus paid. There is no nexus between the assessee and the payment.
17. The following passage at pages  18 ITR 467 was relied on before us.
' Now, the decided cases show that one has not got to take an abstract or academic view of what is proper expenditure laid out or expended wholly and exclusively for the purposes of one's business. One has got to take into consideration questions of commercial expediency and the principles of ordinary commercial trading and the main consideration that has got to weigh with the court is whether the expenditure was a part of the process of profit-making. If the expenditure helps or assists the assessee in making or increasing the profits, then undoubtedly that expenditure would be expended wholly and exclusively for the purposes of business.' (underlining is ours).
18. In that case, one of the contentions urged in support of the disallowance of the amount was that the assessee had undertaken the payment voluntarily. But the Bombay High Court pointed out that even though the assessee was under no obligation to share the bonus with the managed company, if an expenditure is incurred even by a voluntary act out of considerations of commercial expediency, it would be an expenditure falling within Section 10(2)(xv) of 1922 Act, if it can be shown that it was intended for the purpose of making or increasing the profits of the assessee-company. Whether the payment was due to any compulsion or a voluntary act is thus beside the point. What is required is that it must be bound up with the assessee's business. It is not so bound up here. The assessee did not get the capital. The preference capital went into the coffers of the managed company. The assessee did not get any benefit by the expenditure. The possibility of earning profits with this capital was problematical and remote as far as the assessee is concerned.
19. One of the aspects adverted to in the said decision was that the amount actually paid to the employees would fall squarely within the scope of Section 10(2)(x) of the 1922 Act and would have been allowable as deduction, if the entire amount had been paid by the managed company, that is, Tata Iron and Steel Company.
20. The principle that emerges from this decision is that even a voluntary payment, and not necessarily a payment under any obligation, contractual or otherwise, could be allowed as a deduction if the amount had been incurred out of considerations of commercial expediency or is related to the assessee's business. In considering the question of commercial expediency, the court would have to find out whether the expenditure was such as would fall within the deductible items in the computation of the profits of the managed company. Examined in this light, in the present case, if the managed company itself had paid the amount to brokers, then, unless it satisfied the provisions of Sections 76 and 79 of the Companies Act, it could not have been allowed as a deduction in its income-tax assessment. The reason is that the payment without complying with Sections 76 and 79 would have been illegal. Sections 76 and 79 were not complied with here. The assessee, as managing agent, cannot take over an illegal expenditure of the managed company and claim it as deduction with any success. The fact that in order to get over the restrictions of Sections 76 and 79 of the Companies Act, the contract was entered into between the Bombay broker and the managing agent would not also permit an allowance of what is liable to be disallowed in the hands of the managed company. We have to look to the quality of the payment, and then find, out when it is liable to be allowed as deduction in the hands of the managed company as in the case of Tata Sons Ltd. : 18ITR460(Bom) . It is only if its quality is such that it can be allowed as a deduction in the hands of the managed company, that the managing agent bearing a portion of it would enable him to get a deduction. We were not referred to any authority to the effect that an expenditure incurred for raising share capital was revenue in nature. What would be capital expenditure in the hands of the managed company cannot also be allowed as revenue expenditure in the hands of the managing agent, merely because it chose to incur it.
21. Learned counsel for the assessee drew our attention to CIT v. Chandulal Keshavlal & Co. : 38ITR601(SC) . That decision is not apposite to the facts here. That was a case where the managing agent had, in view of the unsatisfactory position of the managed company, waived a portion of the commission, and the question was whether this waived portion could be allowed as a deduction under Section 10(2)(xv). We are not concerned with any similar object here.
22. We were also referred to the latest decision of the Supreme Court in Sassoonj. David and Co. P. Lid. v. CIT : 118ITR261(SC) . In that case, the shares of the company were held by a group known as Davids. The assets of the company were worth Rs, 155 lakhs as on 31st December, 1955. On 2nd December, 1955. its directors proposed that the services of 22 employees, the managing director and a director be terminated and that they may be paid compensation. The shareholders accepted the directors' proposal on 25th January, 1956. Davids agreed to sell their shares to Tatas for Rs. 155 lakhs. Out of the said amount of Rs. 155 lakhs, the amount payable to the employees and others for the termination of their services was to be deducted. After the take-over, nine of the employees were continued and there was substantial reduction in the wage bill as a consequence of the retrenchment. The company claimed the payments made to the managing director in lieu of six months' notice and the compensation paid for termination of pension allowance, etc., as deduction in its assessment. The provision relied on was Section 10(2)(xv). The Tribunal had held that the expenditure was incurred, not for the purpose of the business, but purely as a result of the change in the shareholding, and that even assuming that the payments were beneficial to the assessee, the amount could not be deducted. The High Court, on a reference, held that only the payments made to the managing director in lieu of six months' notice and as compensation for termination of pension allowance were allowable as a deduction and that the balance paid to the other employees was not allowable as a deduction, since the expenditure had not been incurred by the company for commercial reasons. On appeal, the Supreme Court held that the entire amount was liable to be allowed as deduction. Their Lordships pointed out that the company continued to function even after its control passed on to the hands of Tatas and that the expenditure in question was laid out for the purpose of the company's own trade and not for the trade of Tatas who were only shareholders of the company. As a result of the expenditure in question, the company was in fact benefited and it was possible for it to earn more profits as a consequence of the reduction in the wage bill. But, admittedly, Tatas were not in any way benefited financially because of the reduction in the consideration payable to them for the shares. The same was, therefore, taken to be allowable on grounds of commercial expediency. At page 276, the following passage occurs :
' In the instant, case, it was the case of the company that many of the employees were old and superfluous and the business could be carried on with a smaller number and the only way in which they could reduce the number was to terminate the services of all the employees by paying them compensation and thereafter re-employing some of them only. If the company felt that that was a method which would enure to its benefit, it cannot be said that the payment of compensation was made with an oblique motive and without regard to commercial considerations or expediency.'
23. It is in this view that the entire amount was held to be allowable as deduction. In the present case, as already pointed out, there is nothing to show that there was any commercial expediency in making the payment. Learned counsel for the assessee vehemently contended that by reason of this expenditure, the managed company would benefit by getting further amounts of capital for its use in its business and with the use of the said capital, and would do far better than it did. As already pointed out, its connection with the assessee is too remote to permit allowance.
24. The assessee relied on Clause 5 of the managing agency agreement as authorising the claim. Under that clause, the managing agent would have to use his best endeavour to promote the interests and business of the company. Even without this clause, the managing agent was bound to promote the interests and business of the managed company. If the interpretation placed on this clause is accepted the managing agent can take over any or every expenditure of the managed company. That was not the case of the assessee here. Such an interpretation cannot be accepted.
25. As the assessee has not established that the expenditure had been incurred out of considerations of commercial expediency or on revenue account, the question has to be and is answered in the negative and against the assessee. The Commissioner will be entitled to his costs. Counsel's fee is fixed at Rs. 500.