1979 (9) TMI 133 - SC - Companies Law

Whether on proper construction of the agreement dated November 10 1955 entered into by the assessee with Kamala Mills Ltd. the latter was the manager of the assessee within the meaning of section 384 read with section 2(24) of the Companies Act 1956 and if so whether the remuneration paid by the assessee to the latter in the two calendar years 1957 and 1958 relevant to the assessment years 1958-59 and 1959-60 cannot be allowed as business expenditure under section 10(2)(xv) of the Indian I.T. Act 1922 ? Held that - Appeal dismissed. The High Court was right in answering the question in favour of the assessee. The aspects whether the assessee had disputed its liability to pay such remuneration to Kamala Mills Ltd. or had filed a suit at the instance of the Company Law Board to recover it back from Kamala Mills Ltd. or had obtained a decree in that behalf against Kamala Mills Ltd. become irrelevant. However we would like to place on record the fact that the decree obtained by the assessee against Kamala Mills Ltd has been reversed or set aside in appeal by the Kerala High Court a fact which was brought to our notice by the Advocate-on-Record for the assessee communicated to him by his client in a letter dated 22nd August 1979. However even if in further appeal the trial court s decree was restored and the assessee were to recover back the remuneration the assessee can be taxed on the two amounts under section 41(1) of the 1961 Act.

Summary

Issues Involved:
1. Whether Kamala Mills Ltd. was the "manager" of the assessee within the meaning of section 384 read with section 2(24) of the Companies Act, 1956.
2. Whether the remuneration paid by the assessee to Kamala Mills Ltd. in the calendar years 1957 and 1958 could be allowed as business expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Detailed Analysis:

1. Whether Kamala Mills Ltd. was the "manager" of the assessee within the meaning of section 384 read with section 2(24) of the Companies Act, 1956.

The core issue was the interpretation of the agreement dated November 10, 1955, between the assessee (M/s. Alagappa Textiles (Cochin) Ltd.) and Kamala Mills Ltd. The agreement was for financing and managing the assessee's mills. The definition of "manager" under the Indian Companies Act, 1913, and the Companies Act, 1956, was crucial. Under the 1956 Act, a "manager" must be an individual managing the whole or substantially the whole of a company's affairs under the superintendence, control, and direction of the board of directors.

The agreement described Kamala Mills Ltd. as "managers," but the court emphasized that mere nomenclature was not decisive. The agreement's clauses showed that Kamala Mills Ltd. was entrusted with extensive powers to manage the mill, but Clause 13 specifically stated that the board of directors could not interfere with Kamala Mills Ltd.'s discretion except by way of general supervision and advice. This indicated that Kamala Mills Ltd. was not subject to the board's superintendence, control, or direction, a key requirement for being classified as a "manager" under section 2(24) of the Companies Act, 1956.

Thus, Kamala Mills Ltd. was not the "manager" of the assessee within the meaning of the Companies Act, 1956, and the prohibition under section 384 was not applicable.

2. Whether the remuneration paid by the assessee to Kamala Mills Ltd. in the calendar years 1957 and 1958 could be allowed as business expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Since Kamala Mills Ltd. was not the "manager" under section 2(24) of the Companies Act, 1956, the remuneration paid to them did not violate section 384. The remuneration was for services rendered, which were justified by commercial expediency. Therefore, the expenditure was deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922.

The High Court had ruled in favor of the assessee, stating that Kamala Mills Ltd. was not the "manager" under the Companies Act, 1956, and hence, the remuneration paid was allowable as business expenditure. The Supreme Court upheld this view, affirming that the remuneration paid to Kamala Mills Ltd. for the calendar years 1957 and 1958 was deductible as business expenditure.

Conclusion:
The Supreme Court concluded that Kamala Mills Ltd. was not the "manager" of the assessee within the meaning of section 2(24) of the Companies Act, 1956. Consequently, the remuneration paid to Kamala Mills Ltd. was not in violation of section 384 and was allowable as business expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. The appeals were dismissed with costs, and the High Court's decision was upheld.