Case: Commissioner of Income Tax, Kerala Vs. Alagappa Textile (Cochin) Limited

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 m ills" of the assessee, it would not follow that Kamala Mills Ltd. was in truth and substance a manager of the assessee within the meaning o f s. 2(24) 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, 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. a greed "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 procure d 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 financiers 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 Direct ors" 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 o f 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 Mill s 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 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 s. 2(24) of the Companies Act , 1956 and as such the illegality of s. 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 s. 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 s. 10 (2) (xv) of the Income Tax Ac t. 1922.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 se t 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 courts decree were restored and the assessee were to recover back the remuneration the assessee can be taxed on the two amounts under s. 41(1) of the 1961 Act.10.

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

Explanation:
0[ds]On a perusal of the aforesaid clauses of the Agreeme nt 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 m ills" of the assessee, it would not follow that Kamala Mills Ltd. was in truth and substance a manager of the assessee within the meaning o f s. 2(24) 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, 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. a greed "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 procure d 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 Millsother words, managerial functions were incidental and had to be entrusted to Kamala Mills because of the financiers 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 Direct ors" 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 o f 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 Mill s 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 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 s. 2(24) of the Companies Act , 1956 and as such the illegality of s. 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 s. 384 ofthe Companies Act, 1956 and as such the expenditure incurred by way of paying such remuneration would be deductible as business expenditure under s. 10 (2) (xv) of the Income Tax Ac t. 1922.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 se t 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 courts decree were restored and the assessee were to recover back the remuneration the assessee can be taxed on the two amounts under s. 41(1) of the 1961 Act.