TMI Blog2004 (10) TMI 350X X X X Extracts X X X X X X X X Extracts X X X X ..... present reference are as follows: The assessment year involved is 1973-74. The respondent-assessee is a Private Limited Company, hereinafter referred to as the Company. Its previous year for the assessment year 1973-74 commenced on 1st July, 1971 and ended on 30th June, 1972. It paid selling agency commission to its selling agents as follows: 1.M/s. Techno Sales CorporationRs. 1,02,361 2.M/s. Kumar Wires ConductorsRs. 16,992 The Company has been manufacturing galvanized iron wire, mild steel wire on barbed wire from the previous year corresponding to assessment year 1968-69. On 9th August, 1968, it entered into a selling agency agreement with a firm styled as M/s. Techno Sales Corporation, Swarup Nagar, Kanpur whereby the said firm got the selling agency right for sale of mild steel wires, galvanized wires and other wire products manufactured by the Company for the State of Uttar Pradesh. The said firm was to convass and secure orders for the products manufactured by the Company to the best of its ability and experience and for rendering these services, the firm was to be paid a commission of 1 per cent on all sales effected by the company of the goods manufactured by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he aforesaid goods it appointed M/s. Kumar Wires and Conductors as its selling agent for the state of Uttar Pradesh on 1st April, 1972 pursuant to an agreement. For the services rendered by the said agent, Company was to pay a commission at the rate of 1 per cent on all sales of aluminium conductors either to market parties or to the Government Departments. Even this selling agency agreement was not put up by the Company for the approval of its 1st Annual General Body Meeting held immediately after the execution of the said contract or even thereafter till the assessment for the year was completed by the Income-tax Officer. It was placed before the General Body Meeting for its approval in its meeting held on 28th June, 1975. The Board of Directors had, however confirmed the appointment of the said agency vide resolution dated 25th January 1972. The following persons were the partners of M/s. Kumar Wires and Conductors: 1.Shri H.K. Sarraf. 2.Smt. Sushila Devi Agarwal 3.Shri Vijai Kumar 4.Saroj 5.Shri Sudershan Kumar 6.Smt. Harmukhi Devi 3.1 It may be mentioned here that M/s. Techno Sales Corporation were doing business of selling agents not only for Company but ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Act, 1956, the payments made to them could not be allowed as legitimate business expenditure under section 37 of the Act. Feeling aggrieved by the said order, the Revenue as well as the assessee preferred separate appeals before the Tribunal. Before the Tribunal the two Members differed in their opinion and, therefore, the matter was referred to the Third Member, who after going to the various clauses of the agreement had held that the selling agency agreement in question was not a sole selling agency agreement. According to the third member the provisions of sub-section (2) of section 294 of the Companies Act had not been violated by the Company and they were also not violative of section 314 of the Companies Act, 1956. Apart from the fact that the Third Member had held that the agreement in question was not sole selling agency agreement nor was violative of section 314 of the Companies Act, he was of the opinion, that if the agreements were held to be sole selling agency agreements they would be void and of no effect following the decision of the Bombay High Court in the case of Arantee Mfg. Corpn. v. Bright Bolts (P.) Ltd. [1967] 2 Comp. L.J. 54. The Tribunal in conformi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave vacated their offices of sole selling agents under section 314 on the dates next to the date of the first General Meeting held after the dates of the respective agreements as their appointments were not approved therein, and that later ratification of the agreements by the General Body Meeting on 28th June, 1975 was of no avail for what was void ab initio could not be validated by a subsequent act of ratification. 7.That for determining the total income of the Company, theIncome-tax Officer could enquire whether certain payments contravened the provisions of the Companies Act and whether or not they were expenses in fact, incurred by the company and whether the same were incurred as a trader or otherwise, and while doing so, the Income-tax Officer was not bound to consult the Registrar, Joint Stock Companies or any other authority under the Companies Act, for it was the sole prerogative of the Income-tax Officer to determine the assessee s total income." In support of his submissions he relied upon the following decisions: 1. Godavari Sugar Mills Ltd. v. CIT [1963] 49 ITR 206 (Bom.). 2. Arantee Mfg. Corpn. v. Bright Bolts (P.) Ltd. AIR 1967 Bom. 440. 3. Nawab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the principle of quantum merit worked against the Company and it could not recover the payments made to the selling agents even if it was held that the said contracts were invalid for it had accepted the services rendered by the agents and had made payments therefor. 7. Having heard the learned counsel for the parties, we find that in the agreement entered by the Company with M/s. Techno Sales Corporation on 9th August, 1968, M/s. Techno Sales Corporation has been appointed as its selling agent for the sale of mild steel wire, galvanized iron wire and other wire products in the state of Uttar Pradesh. One of the terms and conditions of the agreement was that the said agency shall be paid by the Company a commission of 1 per cent on all sales effected by the Company of the goods manufactured by them either to market parties or to the Government Department. The relevant clauses (1) and (5) of the said agreement are reproduced below: "(1) The Principal hereby appoint the Agent to be its Selling Agent for the Sale of Mild Steel Wires, Galvanized Wires and other Wire Products manufactured by the Principal, for the State of U.P. and the agent hereby agrees to act as such selling a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bit the re-appointment, or the extension of the term of office, of any sole selling agent by further periods not exceeding five years on each occasion. (2) After the commencement of the Companies (Amendment) Act, 1960, the Board of Directors of a company shall not appoint a sole selling agent for any area except subject to the condition that the appointment shall cease to be valid if it is not approved by the company in the first general meeting held after the date on which the appointment is made. (2A) If the company in general meeting as aforesaid disapproves the appointment, it shall cease to be valid with effect from the date of that general meeting." 9. Section 314 of the Companies Act, 1956 provides that except with the consent of the company accorded by a special resolution a director shall not hold any office or place of profit. Section 314(1) of the Companies Act, 1956 is reproduced below for ready reference: "314. Director, etc. not to hold office or place of profit. (1) Except with the consent of the company accorded by a special resolution, ( a )no director of a company shall hold any office or place of profit, and ( b )no partner, or relative of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit except with the consent of the company accorded by a special resolution. The phrase sole selling agent has not been defined under the Companies Act, 1956. In common parlance and in ordinary sense it would mean that the exclusive and sole right to sell all the products of the Principal to the exclusion of all others. In the present case two things under the separate agreements have been described as selling agents and not sole selling agents. Further, they have not been given exclusive right to sell all the products. Specific mention of the word "for any area" and omission to mention "any goods" make it abundantly clear that there can be only one sole selling agent in an area in respect of all the goods dealt with by the company. It may be mentioned here that under sub-section (6) of section 294 of the Companies Act, 1956, the Central Government has been empowered to call for information from the Company where there are more than one selling agents in a particular area and to declare any one of them to be a sole selling agent of the Company for such area or any of such areas. There is nothing on record to show or suggest that the Central Government had declared any one of afor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Synthetic Chemicals Ltd. [1971] 41 Comp. Cas. 377 . As in the present case the two firms which have been appointed as the selling agents consist of either the directors or the relatives as their partners, a special resolution was required to be passed by the company for their appointment in the absence of which they would not have been appointed. 13. In the case of Godavari Sugar Mills Ltd. ( supra ) the Bombay High Court has held that where the amount payable as dividends by the public companies was restricted by the Public Companies (Limitation of Dividends) Ordinance, 1948, the company was not able to declare the percentage of dividends as required by section 23A of the Indian Income-tax Act, 1922. The court has further held that if a restriction is imposed by any law on a company in respect of declaration of dividends at a particular point of time, then that restriction would equally be applicable to the Income-tax Officer, if by his order, he is creating a legal fiction of notional distribution of dividends at that particular point of time. 14. In the case of Nawabganj Sugar Mills Co. Ltd. ( supra ) the Apex Court has held that the Appellate Tribunal has t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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