# LAKSHMIRATIAN COTION MILIS v. COMMISSIONER OF INCOME-TAX, U.P

- **Citation:** [1969] 1 S.C.R. 951
- **Court:** Supreme Court of India
- **Decided:** 1968-09-03
- **Case number:** Civil Appeal No. 2139 of 1966
- **Bench:** J. C. Shah, V. Ramaswami, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/lakshmiratian-cotion-milis-v-commissioner-of-income-tax-u-p-4543
- **Pages:** 19

## Headnote

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Income-tax Act (11 of 1922), ss. !0(2)(xv), 66(1), (2) and (4)-
T ermination of managinJ? agency-No evidence of services
don~
by
managing agent-Payment of compensation fvr termination-If
permissible deduction under s. 10(2) (xv).
Questions not raised in application under s. 6Gf 1) and (2)-:-lurisdiction of High Court to direct Tribunal to state case on such question under
s. 66(4).
The shares in the a·ssessee-company were held in equal moieties by nvo
families.
Four members of each family, together, formed a partnership
firm and by a managing agency agreement the ao;~ss<e appointed the fir!"
as· its managing agent.
In 1943, one of the fatnll!es was represented m
tb.e firm by two women and two minors. The management o~ the asses.see
was carried on by two df the four members of the other farruly who were
the partners in the fi'rm.
Those two members were also directors of the
assessee-company.
Disputes arose between
the two
families
and the
assessee terminated the managing agency with effect from September 30,
1944. Thereupon the members of the two families asserting that they,
as partners of the firm we're interested in the mdD.agiug agency, claimed
compensation from the assessee for wrongful ts1niuation of the agency.
The dispute between the firm and the assessee was referred to arbitration,
and in pursuance of the award the
assessee paid Rs.
18,90,000 to the
firm and Rs. 13,300 were disbW:sed as expenses of arbitration.
The assessee claimed the payment of Rs. 19,03,300 as a permissible
allowance under s. 10(2) (xv) of the Income-ta>. Act,
1922,
but
the
Income-tax Offioer, Appellate Assistant Comm '.ssioner and the Appellate
Tribunal disallowed the claim.
The assessee thcu filed
an application
under s. 66(1) for stating a case for the opinion ot tile High Court, but
the Tribunal rejected the apolication. The assessee then moved the High
Court under s. 66(2) for directing the Tribunal to state a case in respect
of two questions.
On the
direction of the High Court, the Tribunal
referred to the High Court the question :
Whether there was material
on which the Tribunal could haye come to the conclusion that
Rs. 19,03,300 were not spent by the assessee wholly and exclusively for
the purpose of its business. The assessee, thereafter, filed another appli·
cation before the High Court for referring additional
questions
which
were not incorporatqj. in ~he applications under s. 66(1) or (2); and the
High Court, in purported exercise of the power under s. 66( 4) directed
the Tribunal to submit another statement with respect to the additional
questions and the Tribunal complied with the order.
At the hearing of the reference, the High Court was of the view that
it had no jurisdiction under s. 66( 4) to direct the Tribunal to submit the
second st-atement and declined to record format answers on the additional
questions. On the original question, the Hip;h Court held that there was
material on which the Tribunal could hold that the allowance claimed
\ras not spent wholly and exclusively for the purpose of the asS>essee's
businesil and confirmed the Tribunal's order.
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• 952
SUPREME COURT REPORTS
(1969] J S.C.R .
, In appeal
~o this. C"-?ui: •. on !he qu_estions : \I) \V'hcthcr th!! High
C~oun acted vtnhout 1un'id1cllon, 1n calling for 1he second statement of
'?s7; .and (2) ~hether there was material before the Ttihunal h· justify
11 1n 1ls conclu\1on.
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HELD : (I) In an application under s. 66(2). the High C.ourl cannot
cft<lcr rhat a case he stated on auestion<; which \\.·ere not inclu<.!i.!<l ia the
application under s. 66(1).
Po"·er under s. 66(-1l. n1;1y he cxcr~ised lo
call for a supplementary statement only when the t:ourt is :,Jlisl~-:d that
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the !itatcmcnt in 1he cac;e referred under s. 66( 1) or (2) is not '.:1.,;ffic:cnt
to enable it to determine the question raised
by
that
stalcmrnr.
The
power cannot he exercised for calling for anoth\.T ~1:1:..:1n~nt on "-!Uestion~
not referred hy lh·;! ·rribunal.
Therefor

## Text

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LAKSHMIRATIAN COTION MILIS
v.
COMMISSIONER OF INCOME-TAX, U.P.
September 3, 1968
B
(J. C. SHAH, V. RAMASWAMI AND A. N. GROVER, JJ.]
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Income-tax Act (11 of 1922), ss. !0(2)(xv), 66(1), (2) and (4)-
T ermination of managinJ? agency-No evidence of services
don~
by
managing agent-Payment of compensation fvr termination-If
permissible deduction under s. 10(2) (xv).
Questions not raised in application under s. 6Gf 1) and (2)-:-lurisdiction of High Court to direct Tribunal to state case on such question under
s. 66(4).
The shares in the a·ssessee-company were held in equal moieties by nvo
families.
Four members of each family, together, formed a partnership
firm and by a managing agency agreement the ao;~ss<e appointed the fir!"
as· its managing agent.
In 1943, one of the fatnll!es was represented m
tb.e firm by two women and two minors. The management o~ the asses.see
was carried on by two df the four members of the other farruly who were
the partners in the fi'rm.
Those two members were also directors of the
assessee-company.
Disputes arose between
the two
families
and the
assessee terminated the managing agency with effect from September 30,
1944. Thereupon the members of the two families asserting that they,
as partners of the firm we're interested in the mdD.agiug agency, claimed
compensation from the assessee for wrongful ts1niuation of the agency.
The dispute between the firm and the assessee was referred to arbitration,
and in pursuance of the award the
assessee paid Rs.
18,90,000 to the
firm and Rs. 13,300 were disbW:sed as expenses of arbitration.
The assessee claimed the payment of Rs. 19,03,300 as a permissible
allowance under s. 10(2) (xv) of the Income-ta>. Act,
1922,
but
the
Income-tax Offioer, Appellate Assistant Comm '.ssioner and the Appellate
Tribunal disallowed the claim.
The assessee thcu filed
an application
under s. 66(1) for stating a case for the opinion ot tile High Court, but
the Tribunal rejected the apolication. The assessee then moved the High
Court under s. 66(2) for directing the Tribunal to state a case in respect
of two questions.
On the
direction of the High Court, the Tribunal
referred to the High Court the question :
Whether there was material
on which the Tribunal could haye come to the conclusion that
Rs. 19,03,300 were not spent by the assessee wholly and exclusively for
the purpose of its business. The assessee, thereafter, filed another appli·
cation before the High Court for referring additional
questions
which
were not incorporatqj. in ~he applications under s. 66(1) or (2); and the
High Court, in purported exercise of the power under s. 66( 4) directed
the Tribunal to submit another statement with respect to the additional
questions and the Tribunal complied with the order.
At the hearing of the reference, the High Court was of the view that
it had no jurisdiction under s. 66( 4) to direct the Tribunal to submit the
second st-atement and declined to record format answers on the additional
questions. On the original question, the Hip;h Court held that there was
material on which the Tribunal could hold that the allowance claimed
\ras not spent wholly and exclusively for the purpose of the asS>essee's
businesil and confirmed the Tribunal's order.
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• 952
SUPREME COURT REPORTS
(1969] J S.C.R .
, In appeal
~o this. C"-?ui: •. on !he qu_estions : \I) \V'hcthcr th!! High
C~oun acted vtnhout 1un'id1cllon, 1n calling for 1he second statement of
'?s7; .and (2) ~hether there was material before the Ttihunal h· justify
11 1n 1ls conclu\1on.
A
HELD : (I) In an application under s. 66(2). the High C.ourl cannot
cft<lcr rhat a case he stated on auestion<; which \\.·ere not inclu<.!i.!<l ia the
application under s. 66(1).
Po"·er under s. 66(-1l. n1;1y he cxcr~ised lo
call for a supplementary statement only when the t:ourt is :,Jlisl~-:d that
B
the !itatcmcnt in 1he cac;e referred under s. 66( 1) or (2) is not '.:1.,;ffic:cnt
to enable it to determine the question raised
by
that
stalcmrnr.
The
power cannot he exercised for calling for anoth\.T ~1:1:..:1n~nt on "-!Uestion~
not referred hy lh·;! ·rribunal.
Therefore, the t1(ocedurc rollov;c~ by the
l·ligh Court. in exercise of the power under s. 66( 4), ~3iiin2 for ::n additional statement of case on questions which \Vere not 111cor?orat-:d in the
applications umkr s. 66(1) and (2) was irregular. (963 G-H; 964 D.
Il-965 A I
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New f<./wngir Vakil Mil/; Ltd. v. C.l.T. (1960]
I
S.C.R.
249;
37
1.T.R. 11 (S.C.) and c:.1.r. V, Scindia SU!l/11l /\i(lvi;:~tlvfl Co., ·+2 1.·r.R.
589, 609 <S.C.,l followed.
l'hc 1-Jigh Court, at the hearing: of the reference. wa.; jusdli'!d in refu~;
ing to ans.,..'Cr the addit!onal qucs~ions. since, !t may decline to ;1nswc-r a
question referred pu·rsuant to the direction of the Hil!.h C..ourt if the qucsD
tion could not have hecn r:iised because it 'A':t" not inco'rporalcd in the
application under s. 66( I). J965 Il-CJ
CJ.T. v. Smr. A111m1ya Dr•vi, 68 I.TR. 750 (S.C). followed.
(2) (a) The burden of proof 101y upon the ao;scs....;ee to prove that the
expenditure \Vas incurred \i.·holly and exclusivelv for its t1us1nes":>.
In the
present case, the remuneration payable under the manJgi.:H? .l!!Ct~cy agret:-
n1cnt was for a t\VO-fold consideration (i) tor the
service
rendered
in
promoting the a-;sc'iscc:- and (ii) for rendering scrvict!s to the .1s:-.esse~ as
n1anaging agent.
But thcr-.: \Vas no evidence th.'.lt anr spccdic functions
\\·ere entrusted to 1hc m:inaging agent.
A 'recital in tlie n1anaginf ag~ney
agreement authorising the ;lgcnt to do certain actc; woulJ not
b-~ :1 .suhstitute for cvicJcncc
th~1t those ;1cl-. \\'ere done.
·fhc 1n;lnacen1cnt of the
asses.sec 'A'as in fact carried on hy (\l,'O membcr'i of one o.f the farnilics,
hoth hcforc :ind after the termination of the m:in,1~ing agcr.cy; anJ the
mcmh-~rs of the olhcr famih· I \\·omen and niinors) had 110 r.;:!lcclivc voice
in the managc1ncnt.
Even :.he t.,..·o men1hcrs \;:110 \\'Crc 1;1,1na(dn.g lhc
affairs of 1hC ;L'>\Csscc "''ere doing so not as oartncr:; of !hi.! llrn1 hut in
their eapacitv as directors of the asscssec·company l'hcrc \\1<lS no reliable
evidence bcfOrc the ·rribun:il. ;ind the Trihun;1l was justified in reaching the
conclusion thaL the firm did not render any scrv;cc to tile
a'>~.t.:~:>~c
:~s its
n1anaging agent.
Jf no service w;1s in fact ren~crcd by the n1:1naging a<!c.nt
the remuneration mu5t he regarded :i.s cxcl11s1vely pavahle for the service
rendered in pron1oting Iii·:
~1sr,cssce.
But expcn~1;~uf'e in..:urn.:d for rcmu-
·Jlcratin_g per~ons .,..·ho- had t>rornotcd
~1 companv i" not in L:"' a revc~uc
cxpendilurc
admis\ihle under s.
I0(2)(xv).
Therefore.
compensation
r.avablc to the n1anaging a!.!Cllt for tcrn1in<1tion c:I !he m.1n<:gir~ "·!!COL')'
could not he s.aicl to he expenditure incu'rrc<l \vhollv .and c:xdu~:;v~h· i:1 the
interest of the hnsincs<o of 'the ;:sses<>ee. r965 I), f-G: 966 r-G: 967 B-J):
%8 lHlJ
{ h) ·rherc \~·as no evidence ;ind not even an ::ittcmpt
v.·~is rnade
lo
c'<olain hn"- the affairs o; .thl' cn~l~pany \i.·ouhl. have !1~:.=n 11rcjudiccd 1~1
fhc clisrn1tcs hct\vccn the t\vo fan11hes.
The Tribunal found: on .t~e C\rd~n1.:c llCforc ii. that lhc di-;putcs \\'Crc personal 1-0 the i\\10 fa:nihes and
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L. C. MILLS V. C. I. T. (Shah,/.)
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did not and could not prejudicially affect the business of the assessee or
put any hindrance in its normal day to day working? and that the~e was
no necessity for t'erminating the agency and fdr paying wmpensatlon on
that ground. [965 G-H; 968 A-Bl
( c) It was not suggested that the affairs of the u::>Sessee were n1is ..
managed.
Hence, even if one of the families threatened to apply for
the appointment of a receiver for the management of the assessee company no receiver would have been appointed for the management of the
assessee.
Therefore, it was unlikely that :such a futile threat was taken
into account for determining the managing agency, necessitating the payment of compensation. [967 G-H]
There was thus ample material on which the conclusion of the Tribunal
was based,
The Tribunal considered all the relevant
evidence and
its
finding could not be said to be based on mere surmise~ and conjectures.
[968 H]
CIVIL APPELLATE JURISDICTION :
Civil Appeal No. 2139
of 1966.
Appeal by special leave from the judgment and order dated
July 27, 1965 of the Allahabad lligh Court in Income-tax
Reference No. 586 of 1961.
S. T. Desai and J. P. Goyal, for the appellant.
B. Sen, R. N. Sachthey and B. D. Sharma, for the respondent.
The Judgment of the Court was delivered by
Shah, J.
In proceedings for assessment of tax for the year
1945-46 the Lakshmirattan Cotton Mills--hereinafter called 'the
Company'--claimed allowance under s.
l0(2)(xv) of the
Income-tax Act, 1922, of Rs. 18,90,000 paid by it as compensation for termination of the managing agency of the finn Beharilal Kailashpat and Rs. 13,300 incurred as expenditure in respect
of arbitration proceedings in connection with the determination
of compensation.
The Income-tax Officer disallowed the claim.
The order was confirmed by the Appellate Assistant Commissioner
and by the Income-tax Appellate Tribunal. - The lligh Court of
Allahabad in a reference under s. 66(2) of the Income-tax Act,
1922, held that ther.~ was material on which the Tribunal could
hold that the allowance claimed was not spent wholly and exclusively for the p!irpose of the company's business.
The facts which give rise to the reference require to be stated
in some detail.
The Company was incorporated in 1934. The
shares of the Company were held in equal moieties by members of
two families, who may for the sake of convenience be referred to
as "Singhanias" and "Guptas". Under a deed dated August 3.
1934, Singhanias and Guptas formed a partnership to carry on,
in the name of Beharilal Kailashpat, several businesses including
~e business of Secretaries, .Treasurers and Agents of the Company.
By agreement dated May 2, 1935,
the
Company
appointed
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954
st;PREME COURT REPORTS
(1969] I S.C.R.
Beharilal Kailashpat as its managing agents.
The fi!Jil then consisted of eight partners--four belonging to the family of Singhanias
and the other four belonging to the family of Guptas. Under the
Articles of Association of the Company two ex-officio directors
were to be nominated by Beharilal Kailashpat. Clause 2 of the
managing agency agreement read as follows :
"In consideration of the agreement hereinbefore
contained on the part of the firm and in further consideration of the firm having promoted the Company, the
Company hereby promise and agree with the Finn 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 aro
thereafter removed from their office as Agents
of the Company by a majority of three-fourths
of the shareholders of the Company.
( b) The Firm shall receive from the Company a
commission at the rate of two per cent on the
sale price of all the cotton, yarn
and cotton
cloth manufactured and sold by the Company
and a commission of one per cent on the sale
proceeds of all materials, yams and fabrics
manufactured from wool, jute, silk and other
fabrics, and sold by the Company, and a commission of ten per cent on the
gross profits
after deducting all expenses but before deducting depreciation, made by the Company from
its ginning or pressing operations independently
of the usual adat commission,
exchange and
interest payable to their branch firms or agents
and adatias appointed by them outside Cawnpore for purchasing or selling any goods or commodities for or on account of the Company.
( c) The Company shall defray the expenses of
maintaining a suitable office and such staff as
the Firm may deem proper to transact the business of the Firm as
Agents of the Company.
(d) In case the Company shall sell
their Mill
premises and
machinery
and
the
business
thereof. the same shall
be
sold
subject
to
the rights and claims of the Finn of the Agents
of the Company as provided by this Agreement
and the Memorandum and Articles of Association of the Company."
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L, C. MILLS v. C.J.T. (Shah, J.)
9 55 •
By cl. 3 of the agreement it was provided that in the event of the,
Company being wound up the managing agents Beharilal Kail~
pat shall be entitled to receive compensation for loss of appomtment as agents a sum equal to the amount earned by the firm
during five years preceding the winding up of the Company.
Beharilal Kailashpat were under els. 3 (f) and (g) to purchase
all cotton, wool, machinery and stores that may from tim" to
time be required for the use of the Company Mills and to sell the
same and also to sell all loose or baled yarn, and cloth produced
or manufactured at the Company's Mills. By cl. (h) the managing
agents were to exercise all the powers given to them by the Articles
of Association of the Company. It was also provided that if the
firm be not dissolved it shall be lawfnl for the firm to change its
constitution, name or style from time to time, without thereby in
any way affecting their appointment as agents of the Company.
From time to time the constitution of Beharilal Kailashpat
was changed-some members ceased to be partners and new members entered the firm-without affecting the equal representation
of Singhanias and Guptas. On February 15, 1943, a fresh deed
of partnership of Beharilal Kailashpat was executed under which
the four representatives of Singhanias were--( 1) Smt. Ansuiya
Devi; (2) Smt. Pushpavati Devi; (3) Vijaipat (minor) and (4)
Ajaipat (minor) [Nos. (3) & ( 4) being minor sons of Lala
Kailashpat Singhania):
the representatives of Guptas were--( 1)
Smt. Ramdevi; (2) Smt. Keshobai; (3) Lala Ram Rattan Gupta
and ( 4) Lala Ram Prasad Gupta. Each of the family collectively held an eight annas share.
Under the terms of this partnership deed it was agreed that Lala Ram Rattan Gupta a partner of the firm will be entitled to carry on business on behalf of
the firm. ,
Disputes arose in 1943 between Singhanias and Guptas in
regard to the management of the various businesses in which thev
were interested.
These disputes were referred _for · adjudicatic·n
to Thakur Kanhaiya Singh who made and publisbed his award on
January 18, 1944. Under the award the arbitrator allotted ·certain
businesses exclusively to Singhanias and the rest to Guptas. In
regard to the managing agency of the Company, the award
directed that the Singhania group do withdraw from the Company, and the shares held by them be given to the Gupta group
"at the rate of Rs. 2,000 per share" : that Padamoat and his two
brothers do resign from
the Board of Directors, that the
Singhania group be deemed to have retired from the partnership
of the managing agency as from 25th January 1944 and that L.
~am Rattan .Gupta alonll' with his members of the group be entitled to continue the said managing agency business : that
~e name of Kailashpat be removed from the firm's name of
Beharilal Kailashpat; that the profit and loss account of Beharilal
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SUPREME COURT REPORTS
[l 969] l S.C.R.
Kailashpat be made up to J?nuary 18, 1944, and that the amount
due to either of the groups ascertained after providing for exc.ess
profits tax and incol)le..tax liabilities be paid. Pursuant to the
award the shares .held by the Singhanias were taken over -by the
Guptas, and the name of the managing itgency firm was changed
to- Beharilal Ramcharan.
On March 31, 1944, the shareholders
of the Company approved .of the changes in the constitution of
the n1anaging agency firm.
Apparently Singhanias were not satisfie\i with the award made
by Thal:;ur Kanhaiya Singh and they commenced an action (Suit
No. 31 of 1944) in the Civil Court at Kanpur, and claimed relief
in respect of the termination of their interest in Beharilal Kailashpat, and in respect or certain other matters. There was correspondence between Singhanias and Guptas which it is unnecessary
at this stage to refer.
On September 19, 1944, at a meeting of
the shareholders of the Company the firm of Beharilal Ramcharan
which was brougqt into existence under a deed of partnership
dated January 27, 1944, were appointed managing agents of the
company. The Singhanias insisted that they remained interested
in the managing agercy and the Guptas asserted that under the
award of Thakur Kanhaiya Singh the Singhania group had ceased
to have interest in the managing agency and on retirement of
the members of the Singhanias, the name of Beharilal Kailashpat
.was changed to Beharilal Ramcharan. The shareholders of the
Company at their meeting held on September 19,
1944, also
passed a resolution that the managin,g agents be dismissed from
the office and the managing agency agreement be terminated with
effect from September 30, 1944.
Thereafter the members representing the Singhanias claimed
compensation from the Company for wrong.fut
termination of
the managing agency. The Guptas also made a claim for compensation and threatened to bring an action against the Company. By
agreement dated October 19, 1944, the disputes
between the
Colllpany and Beharilal Kailashpat were referre9 to the arbitration of Mr. K. M. Munshi with authority to decide two questions-( l) whether the termination of the managing agency and
removal from the office of the managing agents of the firm of
Beharilal Kailashpat and/or its alleged successor Beharilal ~am
cl\aran was wrongful or not; and (2) if it was wrongful, to what
compensation, if any, are the ex-managing agents
entitled ?
Before Mr. Munshi entered upon the reference, the award made
by Thakur Kanhaiya Singh was modified by a supplementary
award made by Thakur Ka;nhaiya Singh with the consent of the
parties.
Under the award so modified, it was provided that
"Regarding the claim of the retiring partners· for a
share in the goodwill of the said finn and in the value
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of the said Managing Agency the said ' LR.C.M. Co.
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L. C. MILLS v. C.l.T. (Shah, /.)
Ltd. having terminated the said Managing Agency
Agreement ·and the Managing Agents having claimed
compensation for the said termination which they allege
· was wrongful and the dispute arising_ out of such claim
having been referred to arbitration, it is
agreed 'and
awarded that any sum awarded as compensation in the
said arbitration shall be paid to and retained by the
continuing partners and that irrespective of the result
of the said award and in any event they, i.e. the continuing partners shall pay to the retiring partners a sum
of Rs. eight lacs as representing their share in the compensation for the premature and wrongful termination of
the Managing Agency Agreement with the said firm.
The above payments shall be in full satisfaction and
discharge of all claims and demands whatsoever of the
retiring partners on and to the
assets,
goodwill and
contracts of the said firm
including the Managing
Agency Agreement with the L.R.C.M. Co. Ltd.,
and
also in full satisfaction and discharge of the claim made
by them against the Lakshmirattan Cotton Mills Co.
Ltd., for compensation for the tem1ination of the said
Managing Agency."
957.
On this modified award a consent decree was obtained in
Suit
No. 31 of 1944 filed by Singhanias.
Thereafter Mr. Munshi made an award on March 25, 1945,
E . directing·-
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( 1) That the termination of the managing agency
of Mis Beharilal Kai\ashpat and their removal from
the office of Managing Agents of the said company i.e.
Laxmiratllm Cotton Mills Co. Ltd. was wrongful.
(2) That the said Laxmirattan Cotton Mills Co.
Ltd. are liable to pay to the firm
of M/s Beharilal
Kailashpat a sum of Rs. 18.90,000 only as and by way
of compensation for such wrongful c\ismissa\..
(3) That the said Laxmirattan Cotton Mills Co.
Ltd. to pay to party of the third part, that is to say,
L. Ramrattan Gupta and Lala Ramprasad Guota sons
of L. Beharilal, and Smt. Keshobai: wife of L. Ramgopal, the said sum of Rs. 18,90,000 only, with interest
· thereon at the rate of 3 per cent. per annum from the
date hereof.
( 4) That the said company do pay the said parties
of the 2ncl part and of the 3rd part their respective
costs ol the reference and the arbitration proceedings
(which included fees of Rs.
10,000) to Mr. K. M .
Munshi.
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• 958
SUPREME COURT RF.PORTS
( 1969] t S.C.R .
Payment was thereafter made by the Company in pursuance of
this award of Rs.
18,90,000 to Beharilal Kailashpat and
Rs. 13,300 were .disbursed as expenses of arbitration.
The Income-tax Ollicer rejected the claim of the Company to
treat as a permissible allowance under s. IO ( 2) (xv) of the Income-tax Act, 1922, the amount of Rs. 19,03,300. He held that
the expenditure incurred was not connected with the busines5 of
the Company and in any event it was capital expenditure.
In
appeal the Appellate Assistant Commissioner held that the payment was made "for some improper purpose .
. not eoneected with the business". In further appeal before the Tribunal,
counsel for the Company urged two arguments in support of the
claim for allowance :
( 1) that the main object in terminating the managing agency was to save the Company from loss which
the Company would have suffered on account of the
disputes between the two groups of partners of the
managing agency firm; and
( 2) that the Company was by the payment absolved from liability to the remuneration of the managing
agents for the year of account and for future years also.
The Tribunal held that before the termination of the managing
agency agreement the affairs of the Company were administered
by Lala Ram Rattan Gupta and Lala Ram Pnt,ad Gupta, that
even after the termination of the managing agency Lala Ram
Rattan Gupta and Lala Ram Prasad Gupta continued to administer the affairs of the Company, and that on the materials on record it was not proved that the managing agents were performing
any service to the Company. The Tribunal therefore held that the
payment of the managing agency commission to the managing
agents was not expenditure wholly and exclusively incurred for
the purpose of the Company·s business.
The Tribunal also observed that the disputes between the two groups could in no way
harm or cause hindrance to the "nomrnl day-t<Hlay working" of
the Company.
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RefcrrinJ! to the second plea the Tribunal ob~~rved that consideration for the appointment of the managing agents were--
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(I) promotion of the Company; (2) rendering service to
the
Company : anything paid for promoting the Company was not
admi>sible a' a revenue deduction, and hy making a consolidated
payment to ·pay off such a liability the Company did not reduce
the future revenue liability of the Company.
The Tribunal in summarising the findings observed :
"These disputes (between Singhanias and Gupta')
were taken to the Court and (were) also
referred to
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959 •
arbitration. After the first arbitration dated 18-1-1944,
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the Singhania group was
not satisfied.
Ultimately
· some sort of a settlement was arrived at through an arbitrator whose supplementary award forms the basis of
the consent decree of the Court.
Under this award
each party had to pay the other large sums. Therefore,
a device was adopted to provide funds in the hands of
the parties at the expense of the company for the purpose of settling their individual accounts. In preparing
the scheme the authors had made an effort to reduce
the tax liability of the company by claiming the amount
as a revenue deduction."
The Tribunal also observed that the firm styled Beharilal Ramcharan was brought into existence in place of Beharilal Kailashpat, but it rendered no services as managing agents. The Tri~u
nal accordingly rejected the claim of the Company for treatrng
the compensation paid to the managing agents and the legal expenses in relation thereto as a permissible deduction in the computation of its total income.
The Company submitted an application under s. 66 (1) of
the Income-tax Act, 1922, for submitting a statement of case and
prayed that seven questions set out in the application be ref.erred
to the High Court. The Tribunal rejected the application holding that no question of law arose out of the order of the Tribunal,
and that the questions sought to be raised by the Company "were
pure questions of fact".
The Company then moved an application in the High Court of Allahabad requesting that the Tribunal
be directed to state a case in respect of two questions :
" ( 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 the
expenditure admissible under s. 10 (2)
(xv)
of the
Income-tax Act ?
(2) whether there was any or sufficient evidence to
justify the Tribunal to hold that no services whatever
were rendered by Managing Agents to the assessee
Company under the Managing Agency Agreement and
that therefore nothing was payable to the Managing
Agents in respect of such services ?"
Too Hig~ ~ourt dire~ted the Tribunal to state a case on que~tions
of law ansmg out of its order. Pursuant to this order the Tribunal on December 29, 1954, submitted the following q~estion :
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"whether there was material on which the Tribunal
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could have come to the conclusion that Rs. 19,03,300
were not spent by the assessee company wholly and ex·
elusively for the purpose of its business ?"
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SUPREME CQl;RT REPORTS
(1969] I S.C R
The Company was apparently dissatisfied with the question referA
red by the Tribunal and tiled a petition in the High Court praying that certain questions set out in the application be decided
along with the question already referred
and
the
Income-tax
Appellate Tribunal be directed to amend the statement of case
and to refer the additional questions also to the High Court for
decision.
The High Court in purported exercise of the power
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under s. 66( 4) of the Indian Income-tax Act. called upon the
Tribunal to submit another ;tatement of case on
the
tollowing
questions :
•· t. Was the_re any material for the finding--
( a) ·that the managing agents had rendered no service to th-~ assessec company:
(b) that Lala Ram Rattan (iupta and Lala Ram
Prasad Gupta were acting qua their position as
Directors and not as partners of the managing
company:
( c) that a device '"'-' 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 th-~ payment of the amount
in question was made only as a
part of this
device;
t d) that the disputes between the partners of the
mana~ing agcncv firm could ·not, in any way,
have affected the carrying on of the
normal
business of the company; and
( c) that the company gained nothing by terminating the rn<Jnaging a~cncy a~recmcnt ?
2. Whether the whole or any
part of the sum of
Rs. 18,90,000 was paid by the company to the managin~ aμcn1' having promoted the company 0
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:1. What was the true nature of the payment of the
sum of Rs. 18,90.000 hy the company to the managing
a}!.i:nts nn a correct
interpretation of
the
n1anaging
apcncy agrccnient ?
4. Whether the 'Ulll of Rs.
I R,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
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its business and as such it was an allowable deduction?"
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The Trilo·.11tal complied with the order and
submitted
another•
""tement of the case ~elling out in detail the materials on which
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L. C. MILLS V. C.I.T. (Shah, J.)
9€ 1 •
the various findings which were sought to be incorporated in the
questiens were founded.
At the hearing of the reference the High Court was of the
view that the Court had no jurisdiction under s. 66( 4) of the
lncorne-tax Act to direct the Tribunal to submit second
statement of case and the questions in addition to the one submittr...d
before the Tribunal "could not legally have come before the High
·court", since the earlier ctatement of the case was not quashed,
no1 was it returned to the Tribunal; and the Court in calling upon
the Tribunal to. submit another statement of case did not act in
conformity with the provisions of sub-s.
( 4) of s.
66 of the
Income-tax Act. In the view of the High Court a comparison of
the question originally framed with the questions referred with
the second statement of case by the Tribunal showed that the
second set of questions were not parts of, or included in, the
former question but were substantially different : some of the
questions in the view of the High Court were pure questions of
fact, some of them were overlapping,
and the questions were
different from the two questions mentioned in
the application
under s. 66(2), and that on the application submitted by the
Company, even if it be treated as an application for calling for a
statement of case under s. 66 (2), the only question that the Court
could call upon the Tribunal to refer was Question No.
1 (a)
submitted with the second statement of case.
The High Court
then observed that they were under a duty to refuse to
answer
questions which did not arise out of the order passed by the
Tribunal or were not included in the application under ss. 66(1)
and (2). But out of deference to the order previously passed the
Court proceeded to consider and set out reasons in support of the
answers to the questions referred if those questions were required
to be answered. The High Court said that on the question there
was evidence that no change had taken place for carrying on the
company's busi"ness
after the termination of the
agreement.
Questions 1 (b), l(c), l(e) and (2) & (3), the High Court
observed, were not incorporated in the applications under ss,
66 ( 1 ) & (2) and Question 1 ( d) was not mentioned in the appli
cation under s. 66(2), and those questions did not arise out al
the order of the Tribunal. Further, the High Court observed,
Questions l(b), l(c), l(d), l(e) and (2) could not be answered
in favour o[ the assessee, and Question (3) was irrelevant and
need not he considered. In the view of the High Court Question
( 4) consisted of two limbs
.
whether the payment of
Rs. 18,90,000 was made for the purpose of the company's business,· and whether the payment for that purpose amounted to
revenue expenditure. The first, in the view of the High Court,
was a question of fact and the second though a mixed question
~f law and fact did not arise for determination unless the first
limb was answered in favonr of the Company, and that in any
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962
SUPREME COURT REPORTS
[1969]
.C.R.
event if the question were to be reduced to the form whether there
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was any material for the finding that the payment was not an expenditure incurred wholly and exclusively for the purpose of the
company's business, the answer must be against the Company.
After a detailed consideration the High Court held that the
expenditure in question was not made wholly and exclusively for
the pmpose of the company's business, and was by way of distriB
bution of profits, and being wholly gratuitous or "for some improper or oblique purpose outside the course of business management", it could not be treated as a permissible deduction. Against
the order recorded by the High Court, this appeal has been preferred with special leave.
We propose in the first instance to consider whether th~ High
Court acted with jurisdiction in calling for a second statement of
case on questions which were not incorporated in the applications
under ss. 66 (I) & ( 2) of the Act after the Tribunal had submitted
a statement of case in response to the order under s.
66(2).
Under s. 66( I) of the Income-tax Act, 1922, the assesscc or the
Commissioner may by application in the prescribed form within
the period provided require the Appellate Tribunal to refer to the
High Court any question of law arising out of such order and the
Tribunal is enjoined by law to draw up a statement of case and
refer it to the High Court. If on any application made under
sub-s. (I) the Appellate Tribunal refuses to state a case on the
ground that no question of law ari,;cs, the assessee or the Commissioner may, if he is not satisfied with the correctness of the
decision of the Appellate Tribunal make an application to the
High Court to require the Appellate Tribunal to state the cao;e
and to refer it to the High Court and on receipt of any such
requisition the Tribunal shall state the case and refer it. If the
High Court is not satisfied with the statement of case referred
1mder sub-s. (1) & (2) of s. 66 and the facts are not sufficient to
enable. determination of question raised thereby, the Court may,
in exercise of the power under sul:>-s. ( 4), refer the case back to
the Appellate Tribunal to make such additions thereto or alterations therein as the Court may direct in that behalf. Under sub-s.
(5) of s. 66 the High Court upon hearing any such case shall
decide the question of law raised thereby.
This Court in New Jehangir Vakil Mills I.rd.
v.
Commissioner of Income Tax(') observed.
"It is clear .
. that the only question of law
which the assessee or the Commissioner can
require
the Tribunal to refer to the High Court is 'any question
of law arising out of the order of the Tribunal' .....
Wh3! has. therefore. to be looked at in
the first ins-
<'' (1060] I S.CR. 249: 17 J.T.R. 11
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L. C. MILLS V. C.!.T. (Shah, /.)
tance is whether the question of law thus required to be
referred arises out of the order of the Tribunal.
.
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. . Section 66 ( 2) which gives the power to the
High Court to require the Tribunal to state the case
and refer the question of law to it also proceeds on the
same basis and even where the High Court exercises
the power under section 66 (2) it can <?nlY require ~e
Tribunal to state the case on any question of law ansing out of such order. The scope and subject-matter
of the reference under section 66(2)
. is coextensive with that of the reference under section 66 ( 1)
of the Act and the High Court has no power or jurisdiction under section 66(2)
to travel beyond the
ambit of section 66 ( 1). .Section 66 ( 2) comes into
play only when the Tribunal refuses to state the case
on the ground that no question of law arises and if the
High Court is not satisfied of the correctness of the
decision of the Tribunal, it has . . . . the power and
jurisdiction to require the Tribunal to state the case·
and refer the same to it.
. This statement of case which is based
. on the facts which are admitted and/ or found
by the Tribunal may not contain sufficient material to
enable the High Court to determine the question raised
thereby and in that case the High Court under section
66 ( 4) is vested with the jurisdiction to refer the case
back lo the Tribunal to make such additions thereto or
alterations therein as the Court may direct in- that behalf only for the purpose of determining the questions
referred to it. . . . . . . . . But section 66 ( 4) does
not enable the High Court to raise a new question of
law which does not arise out of the Tribunal's order
and direct the Tribunal to investigate new or further
facts necessary to determine this new question which
had not been referred to it under section 66 ( 1) or
section 66 ( 2) and direct the Tribunal to submit a supplementary statement of case. This power and jurisdiction which is vested in the High Court is to be exercised
within the four corners of section 66."
It is also well settled that in an application under s. 66(2) of the
Income-tax Act the High Court cannot order that a case be stated
o~ questions which were not included in the application submitted under s. 66 ( 1). It was observed by this Court in Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd.(')
" . . . . . . the power of the Court to direct a refe
rence under section 66(2) is subject to two limitations
(I)
4,2 1.T.R. 589. 609 (S.C.\
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• 964
SLl'REME COURT RF.PORTS
[1969] 1 S.C.R .
-the question must be one which the Tribunal
was
bound to refer under section 66 (I) and the applicant
must have required the Tribunal to refer it . .
It
is, therefore, clear that under section 66 ( 2), the Court
cannot direct the Tribunal to refer a question unless it
is one which arises out or the order of the Tribi.rnal and
was specified hy the applicant in his application under
section 66 ( I ) .''
The High Court was, therefore, incompetent
to call
upon
the
Trihunai to submit a statement of case ori ques~ions of fact or
questions which were not incorporated in the application under
s. 66(1 ).
The Company in its application under s.
66 ( 2)
requested
that a statement of case be called for in respect of only two ques'
tions.
Thereafter the Company applied to the High Court for
an order that other questions which were neither incorporated in
the application under s. 66( I)
nor in
the
application
under
s. 66(2) he submitted to the High Court.
The l·ligh Cou11 had
no power. in our judgment, t0 grant that application. The power
under s. 66( 4) may he exercised to call
for
a
supplementary
statement only when the Court is satisfied that the statements in
a case referred under sub-s. (I) or sub-s. (2) of s. 66 are not
sufficien~ to enable it to detem1ine the question
raised by
that
statement.
It does not confer a power to raise
any additional
questions or to call for a statement of case on questions not referred by the Tribunal.
If it happens that the Tribunal makes an
inadequate statement of case and docs not submit all the
questions of law arising out of the order of the Tribunal, the remedy
of the aggrieved party is to proceed in the manner su)!gestcd hy
Kania. J. in /V. V. K/zandva/a v. (·0111111issio11tr of /11co111e~rax( 1 ):
"When a statement of case.
with the
question of
law framed bv the Tribunal. is filed in Cnurt for disposal, if a party is aggrieved and wants to contend that
certain further facts ought to be stated, or certain questions of law should be raised. he can make an application bv wav of notice of motion.
That
'hould
be
heard ·a!on; with the case stated D\· the Tribunal for the
Court's opinion.
At that time th.e Court will consider
whether the statement of case is complete for the question of law raised by
the
Tribunal.
The Court can
also consider whether on the case stated bv the Tribunal
the proper question is raised or not."
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The power under s. 66( 4) may be exercised when the High
('ourt is not s:1tisfied that the statements in a case referred arc
sufficient to determine the question referred thereby. it cannot be
exercised for calling for another statement
on
questions
not •
(I) t4 l.T.R. 635. 6ii __ _
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L. C. MILLS v. C.I.T. (Shah, /.)
965
referred by the Tribunal.
The procedure followed by the High
Court in calling for, in exercise of the power under s. 66 ( 4), an
additional statement of the case on questions which were not in··
corporated in the applications under ss. 66(1) & (2) was, in our
judgment, irregular.
Correctness of an order of the High Court calling for a statement of case may be challenged at the hearing of the referenca
and the Court may decline to answer the question referred pursuant to the direction of the Court, if it did not arise out of the order
of the Tribunal, or is a question of fact or is academic or could
not have been raised because it was not incorporated in the application under s. 66 (1); Commissioner of Income-tax
v.
Smt.
A nusuya Devi(').
Counsel for the Company has
therefore
rightly confined himself to the question which was originally submitted by the Tribunal by order date& December 29, 1954, and
has raised .his argument on that question only.
The Company claims that the expenditure of Rs.