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TMI Blog1967 (5) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... the managing agents also paid a sum of Rs. 50 lakhs as purchase price of all the shares held by Messrs. Greaves Cotton & Co. in the respondent-company. The result was that all the shares of the assessee company came to be held by the managing agents. The entire arrangement was completed on January 8, 1947. A fresh managing agency agreement was executed on the same day by the respondent-company in favour of the managing agents. The duration of the agreement was fixed under clause 1 to be a period of 20 years. Under clause 2 of the agreement the remuneration of the managing agents was fixed at 21% on the value of all goods shipped to India by Messrs James Greaves & Co. of Manchester to and for or on behalf of the respondent-company or its constituents. The mode of calculating the commission was also provided in the agreement. The respondent-company made an application on October 19, 1949, to the Controller of Capital Issues, Ministry of Finance, Government of India, for permission to increase its share capital. It was prayed that sanction should be accorded for the issue of 25,000 five per cent. cumulative preference shares of Rs. 100 each and 30,000 ordinary shares of Rs. 100 each. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid to the managing agents for premature termination of the agreement. The sub-committee also considered that the amount of compensation could not be paid out of Rs. 17 lakhs in the hands of the company unless sanction therefor was obtained from the Controller of Capital Issues. The committee therefore, suggested that compensation must be made from the free profits of the company accruing subsequent to the date on which the application was made to the Controller of Capital Issues. In the report it was also said that in the event the managing agency agreement was terminated, provision will have to be made in the articles of association of the company for remuneration in the form of commission payable to the company's non-working directors. The board of directors at their meeting held on March 17, 1951, considered the report of the sub-committee and it was decided that compensation should be made in three equal instalments on April 15, 1951, April 15, 1952, and April 15, 1953. An extraordinary general meeting of the members of the respondent-company was convened on March 31, 1951, for the purpose of considering and passing the following resolutions as extraordinary resolutions : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of his order ; "I agree with the Income-tax Officer that the whole transaction of termination of the managing agency and payment of the compensation of Rs. 18 lakhs is only a made up show. Though the ostensible reason given is 'in the interest of the company', in the context and surrounding circumstances of the appellant's case, I am satisfied that the expenditure of the 18 lakhs of Rupees--ostensibly paid for the termination of the managing agency--cannot be held to be an expenditure wholly and exclusively laid out for the purposes of the business within the meaning of section 10(2)(xv)." The respondent-company took the matter in further appeal to the Income-tax Appellate Tribunal which dismissed the appeal in a short order. The reasons given by the Appellate Tribunal are set out in paragraph 5 of that order as follows : "We have carefully considered the various aspects of the case. We cannot understand how by any stretch of imagination the sum of Rs. 18 lakhs paid to the managing agents can be styled as compensation for the loss of office or money spent wholly and solely for the purpose of the assessee's business. Committee were appointed not in the interest of business, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct recorded by the Appellate Tribunal that the termination of the managing agency agreement was not a bona fide transaction but the termination was effected for extra-commercial consideration and was done for an improper or oblique purpose. It was pointed out for the appellant that the finding of the Appellate Tribunal that the transaction was not bona fide was supported by sufficient material on the record. It was said : (1) that the managing agents had the controlling interest in the respondent-company and since they were also its managing agents there was a conflict between their interest and duty, (2) the members of the sub-committee were not independent persons but they were the employees of the respondent-company, (3) that the subject of the cancellation of the managing agency agreement was not on the agenda of the meeting of the board of directors, but nevertheless the board considered it at its meeting, (4) the report of the sub-committee was submitted on March 16, 1951, and the very next day the directors met and decided to terminate the managing agency agreement and no objection, whatsoever, was raised by the managing agents to such termination, and (5) on May 10, 1950, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0(2)(xv) of the Income-tax Act was a mixed question of fact and law and the High Court did not act beyond its jurisdiction in appraising the evidence given by the parties before the Appellate Tribunal on this question. It is true that the question referred to the High Court was a mixed question of fact and law. In Eastern Investments Ltd. v. Commissioner of Income-tax it was held by this court that the question whether an expenditure was incurred solely for the purpose of carrying on the business of the assessee and was made on the ground of commercial expediency was not a pure question of fact but was a mixed question of fact and law which was subject to review by the High Court. Similarly, in a later case, Commissioner of Income-tax v. Royal Calcutta Turf Club this court reiterated the principle that though the question whether an item of expenditure was wholly and exclusively laid out for the purpose of the assessee's business must be decided on the facts of each case, the final conclusion was one of law because it involved the interpretation of the scope and meaning of the statute. To put it differently, the question whether the expenditure was laid out or expended wholly or ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 1947 agreement and if such an agreement was to be terminated, reasonable compensation had to be paid to the managing agents. It was urged that the respondent-company wanted to manage its affairs by its board of directors and for that purpose they bona fide desired to terminate the managing agency agreement. No collusion was alleged between the respondent-company and the managing agents. The respondent-company has not acted in a secret way but an independent sub-committee was appointed to go into the question. It was not shown that after the management was taken over by the board of directors the affairs of the respondent-company had suffered. On the other hand, it was positively shown that the respondent-company had within seven years recouped to the extent of Rs. 16 lakhs out of Rs. 18 lakhs by saving the managing agency commission which would otherwise have been payable to the managing agents. Reference was also made to the affidavit of Mr. Parelwalla dated January 8, 1959, which was filed before the Appellate Tribunal. It was alleged that a statement was filed before the Appellate Assistant Commissioner disclosing that for the period of seven years up to March 31, 1958, there ..... X X X X Extracts X X X X X X X X Extracts X X X X
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