Case: Lakshmiratan Cotton Mills Company Limited Vs. Commissioner of Income Tax, Uttar Pradesh

entering into an agreement with the company to do the functions of the managing agents. There must be something more than that and we have not the least hesitation in saying that in the present case on the facts on record there is nothing to indicate that the managing agents as such rendered any service."24. We are unable to hold that the finding that no services were rendered by the managing agents was based on "surmises and conjectures", or that it was based on no evidence.The burden of proving that services were rendered by the managing agents for earning the remuneration lay upon the Company, and if no reliable evidence was forthcoming the Tribunal was competent to reach the conclusion it did.25. The recitals in the agency agreement which authorised the managing agents to do certain acts could not be a substitute for evidence that those acts were done by the managing agents. Counsel for the Company made no effort to enlighten the Tribunal on how the business of the Company would have suffered by the quarrels between Guptas and Singhanias. Even prior to the termination of the contract of the managing agents of the Company the Singhanias had no effective voice in the management of the firm. No representative of the Singhanias was on the Board of Directors prior to the termination of the contract. If in that state of evidence the Tribunal concluded that quarrels between the Guptas and Singhanias could in no way harm or put hindrance in the normal day to day working of the Company, the finding could not be again said to be based on surmises and conjectures.26. Counsel for the Company invited our attention to the threat by the Singhanias to move the Civil Court to appoint a receiver for the management of the Company, and contended that if a receiver was appointed for management of the Company, the affairs of the company might possibly have been mismanaged. It is difficult to understand that because of the disputes between the two sets of partners of the managing agency firm, a Civil Court could have appointed a receiver to manage the affairs of the Company: a receiver may have been appointed of the remuneration payable by the Company but not of the management. It is not suggested that the affairs of the Company were mismanaged. The management of the Company was conducted after September 30, 1944, in the same manner and by the same directors as it was originally conducted. A futile threat could not reasonably be taken into consideration, and was not apparently taken into account, for determining the managing agency agreement. This plea was apparently not even suggested before the Tribunal. "27. The burden of proving that the expenditure was incurred wholly and exclusively for the purpose of the business lay upon the Company and no evidence was led and not even an attempt was made to explain how the affairs of the Company would have been prejudiced by the disputes pending between the Singhanias and Guptas.28. The remuneration payable under the managing agency agreement was for a two-fold consideration -- (1) the services rendered by the managing agents in the promotion of the Company; and (2) for rendering services to the Company.Expenditure incurred for remunerating the persons who had promoted the Company was not in law, a revenue expenditure admissible under Section 10 (2) (xv) of the lncome-tax Act and if no services were rendered by the managing agents, the remuneration must be regarded as exclusively payable for the services rendered by the managing agents in the promotion of the Company. The expenditure could not in the circumstances be said to be made wholly and exclusively in the interest of the business of the Company.29. The Tribunal has stated in paragraph 30 of its order that under the award of Thakur Kanhaiya Singh each party had to pay the other large sums, and a device was adopted to provide funds in the hands of the parties at the expense of the Company for settling their individual accounts; and that "in preparing the scheme the authors had made an effort to reduce the tax liability of the Company by claiming the amount as a revenue deduction." The Tribunal appears to have reached this conclusion from the terms of the award of Thakur Kanhaiya Singh, the settlement between Singhanias and Guptas of the civil suit by consent decree dated January 11, 1945, by a supplementary award which provided for distribution of compensation which it was expected "would be receivable" for determination of the managing agency, and the ultimate award of Mr. K. M. Munshi which contained a mere bald decision and no reasons in support thereof. Whether this part of the judgment of the Tribunal is correct need not detain us in this case. If the amount paid was not expenditure incurred wholly and exclusively for the purpose of the business, it is unnecessary to consider whether a "device" was adopted to provide funds in the hands of the parties at the expense of the Company for the purpose of settling their individual accounts or for some other reason. The question raised by the Tribunal for the decision of the High Court, it may be recalled, was whether there was any material on which the conclusion of the Tribunal could be justified, and in our judgment there was ample material on which the conclusion could be founded. The answer recorded by the High Court was, on the question referred by the Tribunal by their statement dated December 29, 1954, in our judgment right. The High Court was also right in declining to record formal answer on the other questions.30. No separate argument was advanced in regard to the amount of Rs.13,300/which was incurred for the costs of the arbitrator and for the arbitration proceedings. No argument was also apparently raised before the High Court supporting the claim for that amount as a permissible allowance even if the claim for Rs. 18,90,000/- was disallowed.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]16. It is also well settled that in an application under Section 66 (2) of theAct the High Court cannot order that a case be stated on questions which were not included in the application submitted under Section 66High Court was, therefore, incompetent to call upon the Tribunal to submit a statement of case on questions of fact or questions which were not incorporated in the application under Section 66 (1).17. The Company in its application under Section 66 (2) requested that a statement of case be called for in respect of only two questions. Thereafter the Company applied to the High Court for an order that other questions which were neither incorporated in the application under Section 66 (2) nor in the application under Section 66 (2) be submitted to the High Court.The High Court had no power, in our judgment, to grant that application. The power under Section 66 (4) may be exercised to call for a supplementary statement only when the Court is satisfied that the statements in a case referred underion (2) of Section 66 are not sufficient to enable it to determine the question raised by that statement. It does not confer a power to raise any additional questions or to call for a statement of case on questions not referred by thepower under Section 66 (4) may be exercised when the High Court is not satisfied that the statements in a case referred are sufficient to determine the question referred thereby, it cannot be exercised for calling for another statement on questions not referred by the Tribunal.The procedure followed by the High Court in calling for, in exercise of the power under Section 66 (4), an additional statement of the case on questions which were not incorporated in the applications under Section 66 (1) and (2) was, in our judgment, irregular.19.Correctness of an order of High Court calling for a statement of case may be challenged at the hearing of the reference and the Court may decline to answer the question referred pursuant to the direction of the High Court, if it did not arise out of the order of the Tribunal, or is a question of fact or is academic or could not have been raised because it was not incorporated in the application under Section 66 (1) :Commissioner ofv. Smt. Anusuya Devi, 68 ITR 750   = (AIR 1968 SC 779  ). Counsel for the Company has, therefore rightly confined himself to the question which was originally submitted by the Tribunal by order dated December 29, 1954, and has raised his argument on that question only.We are unable to hold that the finding that no services were rendered by the managing agents was based on "surmises and conjectures", or that it was based on no evidence.The burden of proving that services were rendered by the managing agents for earning the remuneration lay upon the Company, and if no reliable evidence was forthcoming the Tribunal was competent to reach the conclusion it did.25. The recitals in the agency agreement which authorised the managing agents to do certain acts could not be a substitute for evidence that those acts were done by the managing agents. Counsel for the Company made no effort to enlighten the Tribunal on how the business of the Company would have suffered by the quarrels between Guptas and Singhanias. Even prior to the termination of the contract of the managing agents of the Company the Singhanias had no effective voice in the management of the firm. No representative of the Singhanias was on the Board of Directors prior to the termination of the contract. If in that state of evidence the Tribunal concluded that quarrels between the Guptas and Singhanias could in no way harm or put hindrance in the normal day to day working of the Company, the finding could not be again said to be based on surmises andis difficult to understand that because of the disputes between the two sets of partners of the managing agency firm, a Civil Court could have appointed a receiver to manage the affairs of the Company: a receiver may have been appointed of the remuneration payable by the Company but not of the management. It is not suggested that the affairs of the Company were mismanaged. The management of the Company was conducted after September 30, 1944, in the same manner and by the same directors as it was originally conducted. A futile threat could not reasonably be taken into consideration, and was not apparently taken into account, for determining the managing agency agreement. This plea was apparently not even suggested before the Tribunal. "27. The burden of proving that the expenditure was incurred wholly and exclusively for the purpose of the business lay upon the Company and no evidence was led and not even an attempt was made to explain how the affairs of the Company would have been prejudiced by the disputes pending between the Singhanias and Guptas.28. The remuneration payable under the managing agency agreement was for a) the services rendered by the managing agents in the promotion of the Company; and (2) for rendering services to the Company.Expenditure incurred for remunerating the persons who had promoted the Company was not in law, a revenue expenditure admissible under Section 10 (2) (xv) of theAct and if no services were rendered by the managing agents, the remuneration must be regarded as exclusively payable for the services rendered by the managing agents in the promotion of the Company. The expenditure could not in the circumstances be said to be made wholly and exclusively in the interest of the business of the Company.29. The Tribunal has stated in paragraph 30 of its order that under the award of Thakur Kanhaiya Singh each party had to pay the other large sums, and a device was adopted to provide funds in the hands of the parties at the expense of the Company for settling their individual accounts; and that "in preparing the scheme the authors had made an effort to reduce the tax liability of the Company by claiming the amount as a revenue deduction." The Tribunal appears to have reached this conclusion from the terms of the award of Thakur Kanhaiya Singh, the settlement between Singhanias and Guptas of the civil suit by consent decree dated January 11, 1945, by a supplementary award which provided for distribution of compensation which it was expected "would be receivable" for determination of the managing agency, and the ultimate award of Mr. K. M. Munshi which contained a mere bald decision and no reasons in support thereof. Whether this part of the judgment of the Tribunal is correct need not detain us in this case. If the amount paid was not expenditure incurred wholly and exclusively for the purpose of the business, it is unnecessary to consider whether a "device" was adopted to provide funds in the hands of the parties at the expense of the Company for the purpose of settling their individual accounts or for some other reason. The question raised by the Tribunal for the decision of the High Court, it may be recalled, was whether there was any material on which the conclusion of the Tribunal could be justified, and in our judgment there was ample material on which the conclusion could be founded. The answer recorded by the High Court was, on the question referred by the Tribunal by their statement dated December 29, 1954, in our judgment right. The High Court was also right in declining to record formal answer on the other questions.30. No separate argument was advanced in regard to the amount of Rs.13,300/which was incurred for the costs of the arbitrator and for the arbitration proceedings. No argument was also apparently raised before the High Court supporting the claim for that amount as a permissible allowance even if the claim for Rs. 18,90,000/