LexCOMMISSIONER OF INCOME-TAX, KERALA versus ALAGAPPA TEXTILE (COCHIN) LTD.
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COMMISSIONER OF INCOME-TAX, KERALA
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ALAGAPPA TEXTILE (COCHIN) LTD.
September 19, 1979
[V .. D. TULZAPURKAR' AND R_ S. PATHAK, JJ.]
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·t Bu.tiness E·xpenditurY!"-section t0(2)(xv) oi the Income-tax
Act, 1922-
1· /:ether tlze
1 remuneration tOH'arcls the '111a11ager' Kanzala Mills Ltd . . is falling
-(~·ithin the 1neaning _of Section 384 read witll s. 2(24) of the Co1npaiiies Act
1a[[c7"A:able as "business expenditure"-Construction of the terms of Agreement-
lVliether the managing company falls l'.:ithin the meaning of. Section 2(24) of ·
.the Companies Act, 1956.
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Respondent, assessee ("!!.Ifs. Alagappa Textiles (Cochin) Limited company
i.vas carrying on business of manufacture and sale of yarn. It entered into an
Agreement dated November 10, 1955 with Kamala l\lills Ltd., Coimbatore for
financing and managing the assessee l\fills at A1agappa Na-gar for a reriod of
five years. Clause 8 of the Agreement provided that Kama1a ~fills Ltd. shall be
paid for the ser''ices, rendered by it by \-Vay of purchases, sales ·and manage-
ment, remuneration at the rite of I% on all purchases made by it for the
nssessce Mil1s and at half a percent on all sales of yarn, yarn v.--ast~ and cotton
waste and othe-.r products of the l\!iIL C1ause 13 of the agreement w~s to the
effect that "'the 'company (assessee), either represented by its managing Agent
or Board. of Directors shall not exercise the po\-vers delegated 1'.J th·! !\tanagers
(Kamala l\Iills Ltd.) under the foregoing clauses, except by \Vay of genf.r.il
supen'ision and advice nor interfere with discretion of the managers in the
exettise of their functions and powers vested in them by virtue of thh Agree-
ment.., Oause 14, provided that the l\fanagers (Kamala l\lills Ltd.) po·.vers were
limited in the manner aforesaid and shall not· be deem~d to be manager in
charge of the _\-vhole affairs of the company within the meaning of section 2(9)
of tbe companies Act, 1913. Clause 16 provided th::it the agreement shalt be in
force for a period of five years commencing from the date thereof and that
"this Agreement for management being an Agency coupled \vith
interest"
CQuld be ·revoked before the expiry of the said period of five
years by 12
months• notice in writing being given by one party io the other, but if the
i~see were to revoke it the a5sessce shall be Ii-able to compensate Kamala
His for.the loss of remuneration for. the unwexpired period of the Agreement
f1le average rate at which Kamala ~fiIIs Ltd. had been earning by way of
nneration under the Agreement till the date of such notice of ':ermination.
Ptlrsuant to the aforesaid termi, Kamala 1Iills Ud. drew remuneration to
he tune of Rs. 1,03,547/- and Rs. 18,249 /- respectively for the calendar year1
1957 and 1958 corresponding to the assessment years 1958-59
and
1959w60.
' 1"be&e &mounts \Vere assessed lo tax in the hands of Kamala ~tills Ltd. Respon-
:' dent. &iSeSsee in its assessment proceedings. for the said two a'5essment years,
claimed deduction in respect of the said two amounts as business expenditure
unde< section 10(2)(xv) of the Income-tax· Act. The claim was rlisallowed. by
tMi Income Tax Offictr on the ground that under section 384. of the companies
Act, 1'56 which had come i•to_ force on April 1, 1956 the continuation of a
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SUPREME COURT REPORTS
(19£0] l S.C.R.
body corporate as manager was prohibited foi the period beyond .&ix. months
from the comlnz into force of the Act, that the remuneration pa1J to Kamala
1'-Iills Ltd. subsequent to October 1, 1956 \Vas illegal being in violation
of
s. 384. The Appellclte Assistant Commissioner rejected the Appeal ir.ainly"'on
the ground that the assessee by its
own conduct had disputed its liability to
pay any remuneration to Kamala Mills Ltd. as after October 1, 1956 and in
th<it behalf he relied on an admitted fact that the assessee had filed a .;;uit
against Kamala Mills to recover such remuneration which had been paid to
it in contravention of secti6n 384 of the Companies Act on the basis that e. l2e-
tbe payment was illegal Kamala Mills was holding such amounts of remune~a·
tjcn in trust for and on behalf of the assessee. Respondent carried ihe matt~r
in further appeals to the Tribunal; but the Tribunal confirmed the view of the
taxing allthorities.
On a reference, the High Court answered the question in
the negative in favour of the Excerpt shown. Read the full judgment & AI analysis in Lexace.