Civil Appeals Nos
2001 2002 of 1978
Appeals by Special Leave from the Judgment and order dated 14 12 1971 of the Kerala High Court in Income Tax Reference No 19 of 1969
V section Desai section P Nayar and Miss A Subhashini for the Appellant section T Desai N Sudhakaran and P K Pillai for the Respondent
The Judgment of the Court was delivered by TULZAPURKAR J
These appeals by special leave raise a common question 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 224 of the 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 195859 and 1959 60 cannot be allowed as business expenditure under section 102 xv of the Indian Income Tax Act 1922 The facts giving rise to the question may briefly be stated as follows The assessee Ms Alagappa Textiles Cochin Ltd is a public limited company carrying on business of manufacture and sale of yarn and has its registered office at Alagappa Nagar in Kerala State
It entered into an Agreement dated November 10 1955 with Kamala Mills Ltd Coimbatore for financing and managing the assessee mills at Alagappa Nagar for a period of five years
Clause 8 of the Agreement provided that Kamala Mills Ltd shall be paid for the services rendered by it by way of purchases sales and management remuneration at the rate of 1 on all purchases made by it for the assessee mills and at half a per cent on all sales of yarn yarn waste and cotton waste and other products of the mill
Pursuant to the aforesaid term Kamala Mills Ltd drew remuneration to the tune of Rs 103547 and Rs 18294 respectively for the calendar years 1957 and 1958 727 corresponding to the assessment years 1958 59 and 1959 60
These amounts were assessed to tax in the hands of Kamala Mills Ltd The assessee in its assessment proceedings for the said two assessment years claimed deduction in respect of the said two amounts as business expenditure under section 102 xv of the Act
The claim was disallowed by Income Tax officer on the ground that under section 384 of the new  which had come into force on April 1 1956 the continuation of a body corporate as manager was prohibited for the period beyond six months from the coming into force of the Act that remuneration paid to Kamala Mills Ltd subsequent to October 1 1956 was illegal being in violation of section 384 and therefore the deduction claimed in respect of such payment for the calendar years 1957 and 1958 could not be allowed
In the appeals preferred by the assessee against the decision of the Income Tax officer it was contended that though the payment of remuneration to a body corporate as Manager after October 1 1956 was illegal under section 384 the payments were for services rendered and were fully justified by commercial expediency and as such the same should be allowed under section 102 xv of the Act
It was also urged that even if the expenses incurred were in violation of the statute such expenses should be allowed since in computing the profits even of illegal business only the net profit was taxed after allowing all the expenses
The Appellate Assistant Commissioner was not impressed by these arguments but he disallowed the deduction mainly on the ground that the assessee by its own conduct had disputed its liability to pay any remuneration to Kamala Mills Ltd after October 1 1956 and in that behalf he relied on an admitted fact that the assessee had filed a suit against Kamala Mills Ltd to recover such remuneration which had been paid to it in contravention of section 384 on the basis that since the payment was illegal Kamala Mills Ltd was holding such amounts of remuneration in trust for and on behalf of the assessee and in such a situation the deduction could not be allowed
The assessee carried the matter in further appeals to the Tribunal but the Tribunal confirmed the view of the taxing authorities that under section 384 of the it was not legal for the assessee to have permitted Kamala Mills Ltd to continue to work as its Manager after October 1 1956 and that the payment of remuneration after the said date was illegal and could not be considered as valid expenditure for the purpose of Income Tax Act
fn this behalf the Tribunal relied on two decisions in CIT vs Haji Aziz and Abdul Sakoor Bros and Raj Woollen Industries vs CIT An argument was raised before the Tribunal that Kamala 728 Mills Ltd was not only a manager but also a financier and that the remuneration should be treated as having been paid to the financier While observing that it was a new case put forward by the assessee the Tribunal negatived the contention holding on construction of the Agreement that it was by virtue of its position as Manager that Kamala Mills Ltd was allowed to carry on the financial affairs of the assessee and the remuneration was payable to it as Manager and in no other capacity
The Tribunal also held that the claim for deduction was in respect of a disputed liability inasmuch as the assessee had not merely filed a suit to recover the amount but had in the meantime obtained a decree against Kamala Mills Ltd and therefore the amounts could not be lawfully claimed as permissible deduction
At the instance of the assessee the following question was referred to the High Court for its opinion Whether on the facts and in the circumstances of the case the Tribunal was justified in law in disallowing the claim of the assessee for deduction of Rs 103547 and Rs 18294 from the income of the assessment years 1958 59 and 1959 60 as not an admissible business expenditure under sec
102xv of the Indian Income Tax Act 1922  The High Court answered the question in the negative in favour of the assessee and against the Department
The High Court on construction of the Agreement dated November 10 1955 took the view that since in the matter of the exercise of its powers and the discharge of its functions thereunder Kamala Mills Ltd could not be said to be subject to the superintendence control and direction of the Board of Directors of the assessee Kamala Mills Ltd was not a manager of the assessee within the definition given in section 224 of the  and therefore the illegality under section 384 was not attracted and as such the remuneration paid by the assessee to Kamala Mills Ltd for services rendered during the calender years 1957 and 1958 was allowable as a business expenditure under section 102 xv of the Act
As regards the decree that had been obtained by the assessee against Kamala Mills Ltd the High Court observed that the appeal filed by Kamala Mills Ltd against the said decree was still pending in the High Court and if ultimately the appeal was dismissed and the amounts were recovered back from Kamala Mills Ltd the assessee could be taxed on those amounts under section 411 of the 1961 Act but that could not be a valid ground for disallowing the deduction claimed by the assessee
The Revenue has challenged in these appeals the view of the High Court that Kamala Mills Ltd was not the Manager of the 729 assessee within the meaning of section 384 read with section 224 of the and the further view that the remuneration paid to Kamala Mills Ltd during the calendar years 1957 and 1958 was deductible as business expenditure under section 102 xv of the Act
Before we consider the principal question relating to the proper construction of the Agreement dated November 10 1957 it will be desirable to note the relevant provisions of the Indian Companies Act 1913 as also the new  which have a bearing on the question at issue
Since the Agreement between the assessee on the one hand and the Kamala Mills Ltd On the other was entered into at a time when the Indian Companies Act 1913 was in force it will be proper first to refer to the definition of Manager  given in section 29 of the said Act
Section 29 ran thus 29 manager means a person who subject to the control and direction of the directors has the management of the whole affairs of a company and includes a director or any other person occupying the position of a manager by whatever name called and whether under a contract of service or not
It will be clear that to satisfy the aforesaid definition a person which could include a firm body corporate or an association of persons apart from being in management of the whole affairs of
a company had to be subject to the control and direction of the directors
This definition has undergone a substantial change under the 
Under this Act section 224 defines the expression manager thus
224 manager means an individual not being the managing agent who subject to the superintendence control and direction of the Board of directors has the management of the whole or substantially the whole of the affairs of a company and includes a director or any other person occupying the position of a manager by whatever name called and whether under a contract of service or not In this definition three conditions are required to be satisfied a the manager must be an individual which means that a firm or a body corporate or an association is excluded and cannot be a manager a fact which is expressly made clear in section 384 b he should have the management of the whole or substantially the whole affairs of the company and c he should be subject to the superintendence control and directions of the Board of Directors in the matter of managing the affairs of the company
Subject to the changes made in the aspects 730 covered by a and b in both the definitions the aspect that a manager has to work or exercise his powers under the control and directions of the Board of Directors is common and essential
In fact it is this aspect which distinguishes Manager  from Managing Agent 
If the definition of Manager  as given in section 224 is compared with that of Managing Agent  as given in section 225 it will appear clear that though there is an overlapping of the functions of the manager as well as the managing agent of the company the essential distinction seems to be that whereas the manager has to be subject to the suprintendence control and direction of the Board of directors the managing agent is not so subject
Section 384 of the in express terms prohibits after the commencement of the Act the appointment of a firm or a body corporate or an association of persons as a manager as also the continuation of such employment after expiry of six months from such commencement
It runs thus 384
No company shall after the commencement of this Act appoint or employ or after the expiry of six months from such commencement continue the appointment or employment of any firm body corporate or association as its manager
The aforesaid provision positively disqualifies a firm body corporate or association from being appointed as manager of a company or from continuing the employment of a firm body corporate or association as manager after the expiry of six months from the commencement of the Act
Obviously to attract the prohibition or disqualification contained in section 384 a firm body corporate or association must be a manager within the meaning of section 224 that is to say it should be in management of the whole or substantially the whole of the affairs of a company and should be under superintendence control and direction of the Board of directors of the company
It was not seriously disputed that under the terms and conditions contained in the Agreement dated November 10 1955 Kamala Mills Ltd could be said to be in management of substantially the whole of the affairs of the assessee mills but the question is whether it was working under the superintendence control and direction of the Board of directors of the assessee so as to be its Manager  within section 224 of the Act Turning now to the Agreement in question it may be stated that at the commencement of the deed the parties thereto have been described in a particular manner namely the assessee has been described 731 and referred to as the Company while Kamala Mills Ltd has been described and referred to as the Managers throughout the document
Then follow two recitals which make very clear the object or purpose with which the Agreement was entered into according to these recitals the assessee was not having sufficient finance to carry on its business of manufacture and sale of yarn and the Board of directors thought it proper of find out a financier who was agreeable to help the assessee monetarily and take active interest in its business and that since Kamala Mills Ltd agreed to assist the assessee with sufficient finance and to manage the assessee s mill on certain terms and conditions which the Board of Directors had approved the Agreement was executed between the parties
Then follow the operative parts of the deed setting out the terms and conditions on which Kamala Mills Ltd agreed to provide sufficient finance as also to manage the business of the assessee
Clause 1 enlisted in sub clauses b to m the powers and functions which were to be exercised and performed by Kamala Mills Ltd during the period of five years for which the Agreement was to operate such powers were conferred and functions entrusted for the purpose of managing and running the mill of the assessee inter alia Kamala Mills Ltd was to make purchases of all cotton staple fibre or any other raw material for the manufacture of the yarn and to enter into contracts in that behalf at such rates and prices as it may deem fair and proper and make payments for all such purchases and incur all expenses incidental thereto it was also to make purchases of all stores and spares and other materials necessary for the manufacture of yarn it was to appoint all staff technical or non technical and workers skilled and unskilled as also clerks and other staff necessary for the working of the mill and fix their terms and remuneration and could discharge or dismiss or take disciplinary action against them it had to sell and make contracts for sale for immediate or future delivery of yarn yarn waste or cotton waste or any other material or products of the mill at such rates or prices and on such terms and conditions as it may think fit it could decide lay down and change from time to time the programme of manufacture of yarn and other products of the mill and to insure against fire and other risks all cotton yarn material stock in trade and incur and pay all premia necessary in that behalf it could pledge secure and hypothecate all stocks and stores and stock in trade with such bank or banks where arrangements for overdrafts shall have been completed by the Board of Directors and it could claim demand realise and sue for all goods materials and amounts due to the assessee in the exercise and carrying out of any or all of the powers conferred under sub cls
a to k
Clause 2 of the Agreement stipulated that Kamala Mills Ltd shall 732 provide funds or arrange for finance necessary for exercising the powers of purchase of cotton stores and other materials and for payment of wages salaries commissions and allowances and for meeting all expenses incidental to manufacture and sale of yam and other pro ducts of the mill
Under clause 3 the assessee was to open a separate Current Account and an overdraft Account for a limit not exceeding Rs 3000000 with such bankers as Kamala Mills may require with power to Kamala Mills to operate on the said accounts exclusively by itself and in the name of the assessee and it was to have power to receive endorse sign transfer and negotiate all bills cheques drafts etc
that may be received in the name of the assessee in the course of the management of the mill and it was specifically agreed that no one except Kamala Mills shall have power to operate on the said accounts
Clause 4 entitled Kamala Mills Ltd to charge the assessee interest at the rate of 75 per annum with half yearly rests on all advances made by it and funds provided for the purposes set out in clause 2
Clause 5 gave Kamala Mills Ltd a first and prior charge on all the stocks and stores and stock in trade for all the moneys and amounts that may be advanced by it to the assessee except to the extent of any charge or security of such stocks and stores and stock in trade that may be created in favour of the banks for the overdraft account and such charge in favour of Kamala Mills was to be a possessory charge
Clause 8 quantified the remuneration payable to Kamala Mills Ltd for services rendered by way of purchases sales and the management of the mill at the rate of 1  on all purchases made by it for the assessee mill and at 05 on all sales of products effected for and on behalf of the assessee
Clause 10 required Kamala Mills Ltd to maintain proper accounts in respect of all purchases sales and expenses commissions and remunerations due to it etc
and submit to the assessee monthly statements of accounts
Clause 11 put the outer limit of Rs 1500000 at any one point of time on the advances and financial assistance to be given by Kamala Mills Ltd to the assessee and it was provided that if and when sums over and above the said limits become necessary to be advanced Kamala Mills would be entitled to appropriate and take for itself as owner such quantity of yarn as may be in stock as in value would be equivalent at cost or market value whichever was lower to the sum that it may be obliged to advance over and above Rs 1500000 
Clause 13 of the Agreement is very important having a crucial bearing on the question at issue and may be set out verbatim
It ran thus 13
The Company assessee either represented by its Managing Agent or Board of Directors shall not exercise the powers delegated to the Managers Kamala Mills Ltd 733 under the foregoing clauses except by way of general supervision and advice nor interfere with the discretion of the Managers in the exercise of their functions and powers vested in them by virtue of this Agreement
 Under cl 14 it was provided that the Managers  Kamala Mills Ltd powers were limited in the manner aforesaid and they were not and shall not be deemed to be managers in charge of the whole affairs of the company within the meaning of section 29 of the Indian  a significant provision showing the intention of the parties that Kamala Mills Ltd was not to be regarded as a Manager  under the Indian Companies Act 1913
Clause 16 is significant and it provided that the Agreement shall be in force for a period of five years commencing from the date thereof and that this Agreement for management being an Agency coupled with interest it could be revoked before the expiry of the said period of five years by 12 months notice in writing being given by one party to the other but if the assessee were to revoke it the assessee shall be liable to compensate Kamala Mills for the loss of remuneration for the unexpired period of the Agreement at the average rate at which Kamala Mills Ltd had been earning by way of remuneration under the Agreement till the date of such notice of termination
A modification by introducing one additional term
in the Agreement was made on November 21 1955 but the additional term is not material for our purposes
On a perusal of the aforesaid clauses of the Agreement in question two or three things stand out very clearly
It is true that at the commencement of the deed Kamala Mills Ltd has been described and referred to as the Managers of the assessee throughout the document but mere label or nomenclature given to a party in the document will not be decisive
It is also true that the
several powers and functions were entrusted to Kamala Mills Ltd under cl 1 of the Agreement to enable it to manage or run the mill of the assessee
But simply because powers and functions were given to Kamala Mills Ltd for the purpose of managing and running the mills of the assessee it would not follow that Kamala Mills Ltd was in truth and substance a manager  of the assessee within the meaning of section 224 of the 1956 Act
For this purpose the Agreement will have to be read as a whole and the Court will have to decide that was the true intention of the parties in entering into such agreement
The two recitals clearly indicate the object with which and the purpose for which the Agreement was entered into
It does appear that the assessee was in financially straightened circumstances and on that account was utterly unable to carry on its business of manufacture and sale of yarn and therefore 734 the board of directors were in search of a financier who would make available the necessary finances for the running of the mill as also to take active interest in the business of the assessee and when Kamala Mills Ltd agreed to assist the company assessee with sufficient finance and manage the mill belonging to the assessee on terms and conditions that were approved b y the Board of Directors of the assessee that the Agreement was entered into between the parties in other words it is clear that the dominant object with which the Agreement was entered into was that Kamala Mills Ltd should really act as financier so that the assessee mill could run and since heavy finances were to be procured by Kamala Mills Ltd large powers and functions connected with the working of the mill were entrusted to it
This aspect becomes abundantly clear from cl 16 of the Agreement wherein the parties expressly provided that this Agreement for management was by way of and amounted to an Agency coupled with interest so far as Kamala Mills Ltd was concerned and therefore revocation of the Agreement before the expiry of the five years  period was made dependent upon 12 months  notice in writing being given by one party to the other and further if such revocation was done by the assessee suitable compensation was made payable to Kamala Mills Ltd In other words managerial functions were incidental and had to be entrusted to Kamala Mills because of the financier s role undertaken by it
The large powers and functions entrusted to Kamala Mills Ltd under the several sub clauses of cl 1 of the Agreement do show that management of substantially the whole if not the whole of the affairs of the assessee company had been made over to Kamala Mills Ltd But the crucial question is whether such management was to be done by Kamala Mills Ltd under the superintendence control and direction of the Board of Directors of the assessee and in that behalf cl 13 of the Agreement which we have quoted above is very eloquent
In terms it provided that so far as the powers conferred and the functions entrusted to Kamala Mills Ltd were concerned the Board of Directors shall not exercise or perform the same except by way of general supervision and advice and it was further made clear that the Board of Directors shall not interfere with the discretion of Kamala Mills Ltd in the exercise of their functions and powers vested in it by virtue of the Agreement
In other words the general supervision or advice of the Board of Directors was of such character that the Board had not say whatsoever nor could it interfere with the discretion of Kamala Mills Ltd in the matter of the exercise of the powers and the discharge of the functions entrusted to Kamala Mills Ltd under the Agreement
It is thus clear to us that the dominant object of the Agreement was that Kamala Mills Ltd should act as financiers of the assessee mill and in the 735 matter of the exercise of its powers and discharge of its functions Kamala Mills Ltd was never subject to the superintendence control or direction of the Board of directors of the assessee
If this position clearly emerges on true construction of the Agreement in question then it is obvious that Kamala Mills was not acting or working as the Manager of the assesses within the meaning of section 224 of the and as such the illegality of section 384 of that Act was not attracted
In this view of the matter the remuneration paid by the assessee to Kamala Mills Ltd for the two calendar years 1957 and 1958 relevant to the assessment years 1958 59 and 1959 60 could not be regarded as being in violation of section 384 of the and as such the expenditure incurred by way of paying such remuneration would be deductible as business expenditure under section 10 2 xv of the Income Tax Act
In view of our aforesaid conclusion 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 assessees 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 7 if in further appeal the trial court s decree were restored and the assessee were to recover back the remuneration the assessee can be taxed on the two amounts under section 411 of the 1961 Act
In our view therefore the High Court was right in answering the question in favour of the assessee
The appeals are therefore dismissed with costs
VDK Appeals dismissed


Summary:
Respondent assessee Ms Alagappa Textiles Cochin Limited company was carrying on business of manufacture and sale of yarn
It entered into an Agreement dated November 10 1955 with Kamala Mills Ltd Coimbatore for financing and managing the assessee Mills at Alagappa Nagar for a period of five years
Clause 8 of the Agreement provided that Kamala Mills Ltd shall be paid for the services rendered by it by way of purchases sales and management remuneration at the rate of 1 on all purchases made by it for the assessee Mills and at half a percent on all sales of yarn yarn waste and cotton waste and other products of the Mill
Clause 13 of the agreement was to the effect that the company assessee either represented by its managing Agent or Board of Directors shall not exercise the powers delegated to the Managers Kamala Mills Ltd under the foregoing clauses except by way of general supervision and advice nor interfere with discretion of the managers in the exercise of their functions and powers vested in them by virtue of this Agreement Clause 14 provided that the Managers Kamala Mills Ltd powers were limited in the manner aforesaid and shall not be deemed to be manager in charge of the whole affairs of the company within the meaning of section 29 of the companies Act 1913
Clause 16 provided that the agreement shall be in force for a period of five years commencing from the date thereof and that this Agreement for management being an Agency coupled with interest could be revoked before the expiry of the said period of five years by 12 months  notice in writing being given by one party to the other but if the assessee were to revoke it the assessee shall be liable to compensate Kamala Mills for the loss of remuneration for the unexpired period of the Agreement at the average rate at which Kamala Mills Ltd had been earning by way of remuneration under the Agreement fill the date of such notice of termination Pursuant to the aforesaid terms Kamala Mills Ltd drew remuneration to the tune of Rs 103547 and Rs 18249 respectively for the calendar years 1957 and 1958 corresponding to the assessment years 1958 59 and 1959 60
The amounts were assessed to tax in the hands of Kamala Mills Ltd Respondent Assessee in its assessment proceedings for the said two assessment years claimed deduction in respect of the said two Amounts as business expenditure under section 102xv of the Income tax Act
The claim was disallowed by the Income Tax officer on the ground that under section 384 of the companies Act
1956 which had come into force on April 2 1956 the continuation of a 724 body corporate as manager was prohibited for the period beyond six months from the coming into force of the Act that the remuneration paid to Kamala Mills Ltd subsequent to October 1 1956 was illegal being in violation of section 381
The Appellate Assistant Commissioner rejected the Appeal mainly on the ground that the assessee by its own conduct had disputed its liability to pay any remuneration to Kamala Mills Ltd as after October 1 1956 and in that behalf he relied on an admitted fact that the assessee had filed a suit against Kamala Mills to recover such remuneration which had been paid to it in contravention of section 384 of the on the basis that since the payment was illegal Kamala Mills was holding such amounts of remuneration in trust for and on behalf of the assessee
Respondent carried the matter in further appeals to the Tribunal but the Tribunal confirmed the view of the taxing authorities
On a reference the High Court answered the question in the negative in favour of the assessee and against the Revenue
The High Court held that Kamala Mills could not be said to be subject to the superintendence control and directions of the Board of Directors of the respondent and therefore was not a manager of the assessee within the meaning of section 214 of the  so as to attract the illegality under section 384 ibid
and b that in view of the provisions of section 411 of the Income tax Act the pendency of an appeal against the Judgment the suit for recovery could not be a valid ground for disallowing the deduction permissible under  section 102xv of the Income tax Act
Dismissing the appeal by Revenue by special leave the Court  HELD 1
Section 384 of the in express terms prohibits after the commencement of the Act the appointment of a firm or a body corporate or an association of persons as manager as also the continuation of such employment after expiry of six months from such commencement
To attract the prohibition or disqualification under this section a firm body corporate or association must be a manager within the meaning of section 224 that is to say it should be in management of the whole or substantially the whole of the affairs of a company and should be under superintendence control and direction of the Board of Directors of the company 730 C D E F 2
Section 224 of the requires three conditions to be satisfied a the Manager must be an individual which means that a firm or body corporate or an association is excluded and cannot be a Manager a fact which is expressly made clear in section 384
b he should have the management of the whole or substantially the whole affairs of the company and c he should be subject to the superintendence control and directions of the Board of Directors in the matter of managing the affairs of the company
Subject to the changes made in the aspect covered by a and b in both the definitions section 29 of 1913 Act and section 224 of the 1956 Act the aspect that a Manager has to work or exercise his powers under the control and directions of the Board of Directors is common and essential
In fact it is this aspect which distinguishes Manager  from Managing Agent
A comparison of the definition of Manager as given in s 224 of the 1956 Act with that of Managing Agent in section 225 makes it clear that though there is an overlapping of the functions of the Manager as well as the Managing Agent of the company the essential distinction is that whereas the 725 Manager has to be subject to the superintendence control and direction of the Board of Directors the managing Agent is not so subject
729 G H 730 A C 3
On a perusal of the clauses and in particular clauses 8 13 11 and 16 of the Agreement dated November 10 1955 in the instant case two or three things stand out very clearly
It is true that at the commencement of the deed Kamala Mills Ltd has been described and referred to as the Managers of the asses see throughout the document but mere label or nomenclature given to a party in the document will not be decisive
It is also true that the several powers and functions were entrusted to Kamala Mills Ltd under clause 1 of the Agreement to enable it to manage or run the Mill of the assessee
But simply because powers and functions were given to Kamala Mills Ltd for the purpose of managing and running the Mills of the assessee it could not follow that Kamala Mills Ltd was in truth and substance a manager  of the assessee within the meaning of section 224 of the 1956 Act
For this purpose the Agreement will have to be read as a whole and the Court w ill have to decide what was the true intention of the parties in entering into such Agreement
733 E G 4
The dominant object with which the Agreement was entered into was that Kamala Mills Ltd should really act is a financier so that the assessee Mill could run and since heavy finances were to be procured by Kamala Mills Ltd large powers and functions connected with the working of the mill were entrusted to it
This aspect become abundantly clear from cl 16 of the Agreement wherein the parties expressly provided that this Agreement for management was by way of and amounted to an Agency coupled with interest so far as Kamala Mills Ltd was concerned and therefore revocation of the Agreement before the expiry of five years  period was made dependent upon 12 months  notice in writing being given by one party to the other and further if such revocation was done by the assessee suitable compensation was made payable to Kamala Mills Ltd In other words managerial functions were incidental and had to be entrusted to Kamala Mills because of the financier s role undertaken by it
The large powers and functions entrusted to Kamala Mills Ltd under the several sub clauses of cl 1 of the Agreement do show that management of substantially the whole if not the whole of the affairs of the assessee company had been made over to Kamala Mills Ltd 734 B E 5
Clause 13 of the Agreement which is very eloquent
provided that so far as the powers conferred and the functions entrusted to Kamala Mills Ltd were concerned the Board of directors shall not exercise or perform the same except by way of general supervision and advice and it was further made clear that the Board of Directors shall not interfere with the discretion of Kamala Mills Ltd in the exercise of their functions and powers vested in it by virtue of the Agreement
In other words the general supervision or advice of the Board of directors was of such character that the Board had no way whatsoever nor could it interfere with the discretion of Kamala Mills Ltd in the matter of the exercise of the powers and the discharge of the functions entrusted to Kamala Mills Ltd under the Agreement
It is thus clear that the dominant object of the Agreement was that Kamala Mills Ltd should act as financiers of the assessee Mill and in the matter of the exercise of its powers and discharge of its functions Kamala Mills Ltd was never subject to the superintendence control or direction of the Board of 726 directors of the assessee
This is the position which clearly emerges on true construction of the Agreement
734 F H 735A 6
Therefore Kamala Mills Ltd was not acting or working as the Manager of the assessee within the meaning of section 224 of the and as such the illegality of section 384 of the Act was not attracted
In this view of the matter the remuneration paid by the assessee to Kamala Mills Ltd for the two calendar years 1957  1958 relevant to the assessment years 1958 59 and 1959 60 could not be regarded as being in violation of section 384 of the companies Act 1956 and as such the expenditure incurred by way of paying such remuneration would be deductible as Business Expenditure under section 102xv of the Income tax Act 1922
735A D