TMI Blog2004 (10) TMI 73X X X X Extracts X X X X X X X X Extracts X X X X ..... .- The Income-tax Appellate Tribunal, Allahabad, has referred the following two questions of law under section 256(1) of the Income-tax Act, 1961, hereinafter referred to as "the Act", for opinion to this court: "1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was legally justified in its opinion that the firms, M/s. Techno Sales Corporation and M/s. Kumar Wire and Conductors were not sole selling agents of the company and, therefore, the provisions of section 294(2) were not attracted? 2. Whether, on the facts and circumstances of the case, the Tribunal was legally correct in holding that the provisions of section 314(1)(b) of the Companies Act, 1956, were not applicable?" Briefly stated the facts giving rise to the 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 July 1, 1971, and ended on June 30,1972. It paid selling agency commission to its selling agents as follows: 1. M/s. Techno Sales Corporation Rs. 1,02,361 2. M/s. Kumar Wires and C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing agency of the respondent-company. However, the proposal of the appointment of the aforesaid firm as selling agent was passed in the meeting of the board of directors of the company held on January 10, 1969. It may be mentioned here that the payment of commission of the aforesaid selling agency, namely, M/s. Techno Sales Corporation, by the company in the previous years corresponding to the assessment years 1970-71, 1971-72 and 1972-73 was not objected to by the Income-tax Officer during the course of the said assessment proceeding. However, he raised objection to the payment of commission in the course of assessment proceedings under consideration. During the previous year relevant to the assessment year in question, the company also started manufacturing aluminium conductors styled AAC and ACSR. For promoting the sales of the aforesaid goods, it appointed M/s. Kumar Wires and Conductors as its selling agent for the State of Uttar Pradesh on April 1, 1972, pursuant to an agreement. For the services rendered by the said agent, the 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 departme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 294 of the Companies Act, 1956. 3. That the agreement was also hit by the provisions of section 314(1)(b) of the Companies Act, and, 4. That, therefore, the payments to the selling agents were not allowable as business expenditure under section 37 of the Income-tax Act, 1961. The company feeling aggrieved, preferred an appeal before the Appellate Assistant Commissioner, who after examining the evidence on record, gave the finding that the selling agency firms were rendering services to the respondent-company but nevertheless he held that the payments in question were not allowable deductions because the said selling agents were, in fact, sole selling agents and inasmuch as the agreement entered into with them were violative of the provisions of sub-section (2) of section 294 and sub-section (1)(b) of section 314 of the Companies 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 ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er different products; one of steel wire simpliciter, the other being aluminium conductors. They were not only made of different metal; their use and nature were also different. 5. That the selling agency agreements were covered by the extended definition of 'office or place of profit' as given in sub-section (3) of section 314 of the Companies Act. In support of the above proposition, reliance was placed on the following observations at page 577 of Second Edition of Dutta's Company Law: 'The appointment of managing director or a director of company or his relative as sole selling agent is to be regarded as office of profit under the company within the meaning of section 314 of the Act and requires a special resolution according to the consent of the company for such appointment.' 6. That, in view of the above position, M/s. Techno Sales Corporation and M/s. Kumar Wires and Conductors have to be deemed to have 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to uphold the disallowance of the commission paid by the Income-tax Officer merely on the ground that the agreements in question had not been ratified by the general body meeting earlier. 5. That, section 314 of the Companies Act, 1956, did not cover the case of a selling agent who did not derive a monthly remuneration nor did it hold any office or place of profit under the company. Reference was made to a circular issued by the Company Law Board. In view of the above instructions of the Company Law Board, it was urged that it would be wrong to apply section 314 to the selling agency agreements. 6. That the Income-tax Officer could not exercise any powers under the Companies Act, 1956, and, therefore, could not hold that the company had violated any of the provisions of the Companies Act. This could be done only by the Company Law Board under section 10C of the Companies Act or by the competent courts under section 10 of the said Act. 7. That the principle of quantum meruit 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 agen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r payment of commission at the rate of 1 per cent, of sales of all such products within the State of Uttar Pradesh either effected by the agents or by the company. Section 294 of the Companies Act, 1956, prohibits the appointment of sole selling agent for any area for a term exceeding five years at a time. Sub-section (2) provides that the appointment of the sole selling agents for any area shall cease to be valid if it is not approved by the company in its first general meeting held after the date on which the appointment is made. Section 294 of the Companies Act, 1956, in so far as it is relevant for the purposes of the present reference is reproduced below: "294. Appointment of sole selling agents to require approval of company in general meeting.-(1) No company shall, after the commencement of the Companies (Amendment) Act, 1960, appoint a sole selling agent for any area for a term exceeding five years at a time: Provided that nothing in this sub-section shall be deemed to prohibit the reappointment, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the first instance to an office or place of profit and to every subsequent appointment to such office or place of profit on a higher remuneration not covered by the special resolution, except where an appointment on a time-scale has already been approved by the special resolution." From a conjoint reading of the provisions of sections 294 and 314 of the Companies Act, 1956, it will be seen that a company cannot appoint a sole selling agent for any area for a term exceeding five years at a time and the agreement for appointment of sole selling agent has to be got ratified/approved by the company in its first general meeting held after the date on which the appointment is made failing which it shall cease to be valid with the date of first general meeting and further a director or any of his relative where such director or the relative is a partner in the firm cannot hold any office or place of profit 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e two agreements M/s. Techno Sales Corporation as well as M/s. Kumar Wires and Conductors have not been appointed sole selling agents and were only distributors/selling agents in respect of the specified goods, their appointment does not come within the purview of section 294(2) of the Companies Act, 1956. Even otherwise, as held by the Bombay High Court in the case of Arantee Mfg. Corporation v. Bright Bolts P. Ltd. [1967] 37 Comp Cas 758, as the agreement in question did not contain a clause that the agreement shall cease to be valid if it is not approved by the company in general meeting held after the date on which the appointment is made, it is void ab initio. The words "office or place of profit" occurring in sub-section (1) of section 314 do include selling and buying agents receiving commission and/or salary. The sole selling agency has been held to be an office of profit by the Bombay High Court in the case of Firestone Tyre and Rubber Co. v. Synthetics and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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