Greaves Cotton and Co. Ltd. vs Commissioner of Income Tax

Tambe, J.—This is a reference under sub-section(1) of section 66 of the Indian income tax Act (hereinafter referred to as the Act). Facts giving rise to this reference in brief are: The assessee company, M/s. Greaves Cotton & Co. Ltd., Bombay, was incorporated as a private limited company sometime in the year 1922. A partnership firm of M/s. Greaves Cotton & Co. was appointed the managing agents of the assessee company and the managing agents continued to manage the assessee company till the date of their resignation in January, 1947. In 1947 M/s. Karamchand Thapar & Bros. Limited (hereinafter referred to for brevity''s sake as Thapars), a private limited company, were appointed managing agents of the assessee company. Thapars paid their predecessors-in-office, viz., M/s. Greaves Cotton & Co., a sum of Rs. 27,34,325 for securing the managing agency. It appears that Thapars also paid Rs. 50,00,000 and took over all the shares held by M/s. Greaves Cotton & Co. in the assessee company, viz., Greaves Cotton & Co. Limited. The result was that all the shares of the assessee company came to be held by Thapars and Thapars also became the managing agents of the assessee company. The entire arrangement was completed by 8th of January, 1947. On that day a fresh managing agency agreement was executed by the assessee company in favour of Thapars. The duration thereof was 20 years. The remuneration of the managing agents under the agreement was fixed at 21/2 percent on the value of all goods shipped to India by M/s. James Greaves & Company of Manchester to and for or on behalf of the said company or at its order whether the same be for the account of the said company or its constituents. The agreement also provided the mode of calculating the commission. On 19th of October, 1949, the assessee company made an application to the Controller of Capital Issues, Ministry of Finance, Government of India, for permission to increase its share capital. It prayed for sanctioning the issue of 25,000 five percent cumulative preference shares of Rs. 100 each and 30,000 ordinary shares of Rs. 100 each. It appears that sanction was accorded by the Controller of Capital Issues on 25th April, 1950. The assessee company then converted itself from a private limited company to a public limited company on 8th May, 1950. On 10th May, 1950, a fresh managing agency agreement was arrived at between the assessee company, which had by then converted itself into a public limited company and the Thapars for a period of 20 years. Under this agreement, the remuneration of the managing agents was fixed in the following manner:

(a) A sum at the rate of rupees five thousand per month as office allowance payable on the last day of each month for and in connection with the general supervision of the business of the company and the maintenance and upkeep of the managing agents'' office in Calcutta including the payment of the rent of the managing agents'' office premises in Calcutta.

(b) A commission of 10 percent of the net profits of the assessee company was agreed to be paid to the managing agents.

Since that day Thapars managed the company under the new managing agency agreement of 10th May, 1950.

It appears that sometime between the 8th of May, 1950, and 28th of February, 1951, H.E.H. the Nizam had purchased shares worth Rs. 50 lakhs and the said amount had been received by the assessee company. About Rs. 33 lakhs out of the said amount had been utilised by the assessee company and about Rs. 17 lakhs in cash had remained in the hands of the assessee company.

At the meeting of the board of directors of the assessee company held on 28th February, 1951, the question of cancellation of the aforesaid managing agency agreement of 10th May, 1950, was considered and it was resolved that the sub-committee consisting of Messrs. T. Kemp, J. Blezard and N.M. Wagle be appointed and instructed to submit a report with their recommendations to the board of directors for submission to the members. It appears that in the agenda mentioned. in the notice issued for calling that board meeting, there was no item relating to consideration of the question of the cancellation of the managing agency agreement, but the subject appears to have been taken up for consideration under the residuary item "any other subject with the permission of the chairman". It may also be mentioned that the said three members of the committee were executive directors of the assessee company. The said sub-committee submitted its report to the board on 16th March, 1951. In this report the subcommittee stated that it was of the opinion that termination of the agreement would be to the benefit of the shareholders, that the termination of the managing agency would not be detrimental to, nor adversely affect, the business of the company, that the termination of the agreement would be likely to instill a greater degree of public confidence in the company and its shares and that the board of directors would be fully competent to carry on the affairs of the company. The compensation suggested to be paid to the managing agents for premature termination of the agreement amounted to Rs. 18,87,620. The committee expressed its opinion that the said amount of compensation could not be paid out of Rs. 17 lakhs in the hands of the company unless sanction therefore was obtained from the Controller of Capital Issues. The committee stated that the 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 stated that in the event the managing agency agreement was terminated, provision will have to be made in the articles of association of the company providing for remuneration in the form of. commission payable to the company''s non-working directors. The said report of the sub-committee was considered by the board in its meeting held on 17th March, 1951, and at the said meeting it was discussed that compensation be paid in three equal instalments on 15th April, 195L, 15th April, 1952, and 15th April, 1953. Khan Bahadur C.B. Tarapore, the nominee-director of H.E.H. the Nizam, stated that he was in general agreement with the sub-committee''s report and did not consider the compensation to be unreasonable, but he felt that the managing agents might in the general interest of the shareholders be persuaded to reduce the total amount of compensation payable to a sum of Rs. 18 lakhs. Mr. K.C. Thapar, who was one of the nominee-directors of the managing agents, on behalf of the managing agents, stated at the said meeting that if the company terminated their employment as managing agents, they would agree to the amount of Rs. 18 lakhs payable in three annual instalments of Rs. 6 lakhs each. With this modification the board accepted the sub-committee''s report and it was resolved that, provided all members agreed to the calling of a meeting for this purpose at short notice, an extraordinary general meeting of the members of the company be convened for 4-30 p.m. on March 31, 1951, for the purpose of considering and, if thought fit, passing with or without modification, the following resolutions as extraordinary resolutions:

"(1) That in the interests of the company the managing agents, Messrs. Karam Chand Thapar and Bros. Ltd., be removed from their office as such and that notice be given to them terminating the managing agency agreement dated 10th May, 1950, whereby they were appointed managing agents of the company for a period of twenty years from 8th May, 1950, with effect from 31st March, 1951.

(2) That the managing agents, Messrs. Karam Chand Thapar & Bros. Ltd., be offered as compensation for loss of office as such the sum of Rs. 18,00,000 payable by instalments of Rs. 6,00,000 on 15th April, 1951, Rs. 6,00,000 on 15th April, 1952, and Rs. 6,00,000 on 15th April, 1953."

The extraordinary general meeting of the shareholders held on 31st March, 1951, after due notice adopted the aforesaid two resolutions. It appears that the assessee company by its letter dated 3rd April, 1951, informed the managing agents about the said two resolutions passed by the extraordinary general meeting of the shareholders. By their letter of 10th April, 1951, Mr. K.C. Thapar on behalf of the managing agents accepted the termination of the managing agency on payment of compensation of Rs. 18 lakhs. The assessee company, whose system of accounting appears to be mercantile, thereafter had appropriated in its books of account the said amount of Rs. 18 lakhs as compensation payable to the managing agents for termination of their managing agency and in the account year 1951-52 the assessee company claimed deduction of the said amount of Rs. 18 lakhs in computation of its profits as expenditure laid out wholly and exclusively for the purpose of its business under clause (xv) of sub-section (2) of section 10 of the Act.

The income tax Officer rejected the claim of the assessee company. In his order he, inter alia, observed:

"The facts of the case appear to show that the termination of the managing agency and the consequent payment of compensation was not done on strictly business considerations.... It appears to me that the termination of the managing agency was effected in order to give M/s. Karam Chand Thapar & Bros. Ltd., capital receipt of Rs. 18 lakhs and to claim revenue deduction of like amount in the hands of the assessee company. The amount of Rs. 18 lakhs claimed and the legal expenses connected therewith is disallowed."

The assessee took an appeal to the Appellate Assistant Commissioner. In discussing the said appeal, he observed:

"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 interests 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) on the following facts:...."

The Appellate Assistant Commissioner had referred to ten circumstances, but it is not necessary to summarise them here because Mr. Joshi appearing for the revenue has not placed reliance on all of them. The circumstances and facts on which he has placed reliance we will deal with in due course. The assessee took a further appeal to the income tax Appellate Tribunal but the Tribunal dismissed the appeal writing a very short order. The reasons given by the Tribunal in its words are:

"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 purposes of the assessee''s business. Committees were appointed not in the interest of business, but as desired by the interested parties. The appointment of the managing agents had only been made a few months before they were removed from the office. Managing agency commission is payment for services rendered. How can it be said that the dismissal of the managing agents is wholly and solely for the purpose of the business, unless of course they are inefficient or corrupt? If services of efficient managing agents are dispensed with, it would follow that efficiency would go down and profits would be reduced. In our opinion, it is not possible to say that the services of the managing agents were terminated solely to make a saving to the company. The company under article 144 took the power to remunerate directors for work done. It appears that as a result of this change, the management of the business was to be conducted by the board itself."

"We think that the income tax authorities have given valid reasons for holding that the company''s main effort was to put a substantial sum in the hands of the managing agents. The whole affair was nothing short of a farce. It is not a payment made solely to compensate the agents for the loss of employment. The amount cannot be said to have been spent wholly and solely for the purpose of the assessee''s business."

On an application by the assessee company under sub-section(1) of section 66 of the Act, the Tribunal has drawn up a statement of case and stated the question of law arising out of its order in the following terms:

"Whether, on the facts and circumstances of this case, the amount of Rs. 18 lakhs paid by the assessee company to the managing agents on the termination of their managing agency agreement dated May 10, 1950, was an admissible deduction u/s 10(2)(xv) of the income tax Act?"

It appears that on behalf of the department the Tribunal was requested to frame further two questions:

"1. Whether, on the facts and circumstances of the case, there was any evidence before the Tribunal to hold that the payment of Rs. 18 lakhs was not a payment solely to compensate the agents for the loss of employment?

Whether, on the facts and circumstances of the case, the assessee is entitled to claim the sum of Rs. 18 lakhs as a deduction u/s 10(2)(xv) of the income tax Act for the assessment year 1952-53?"

In dealing with this submission of the department, the Tribunal in its statement of case has observed that they considered that the question as framed by them was comprehensive enough to include the aforesaid two questions.

Mr. Palkhivala, appearing for the assessee, firstly contends that there is absolutely no evidence whatsoever in support of the Tribunal''s conclusion that the said expenditure of Rs. 18 lakhs was not laid out solely and exclusively for the purpose of the business. Secondly, he contends that the material evidence on record has not been considered by the Tribunal. It is his argument that the circumstances, which the Tribunal should have considered, were that the managing agency agreement was a very valuable asset acquired by Thapars on payment of Rs. 27 lakhs. The managing agency agreements of 1947 and 1950 were bona fide agreements executed for the purpose of the business. Thapars had accepted the 1950 agreement even though it was detrimental to the interest of Thapars, the remuneration payable there under being much less than that provided in the 1947 agreement. Thapars had accepted the 1950 agreement in the best interests of the company. If such an agreement was to be terminated, reasonable compensation had to be paid to Thapars. The assessee company wanted to manage the company by its board of directors and for that purpose they bona fide desired to terminate the managing agency. No collusion was alleged between the assessee company and the Thapars. The company has not acted in a secret way but an independent sub-committee was appointed. In the opinion of the said committee termination of the managing agency would be likely to instill a greater degree of public confidence in the company and was in the interest of the company. It is after considering the report of the sub-committee that the board of directors had decided, subject to the approval of the shareholders, the termination of the managing agency on payment of compensation suggested by the committee. The compensation actually paid is even less than that suggested by the committee. Thapars had agreed to it in the best interests of the company. It has not been shown that, after the management was taken over by the board, the affairs of the company have suffered. On the other hand, it has been positively shown by the assessee company that within seven years the assessee company has 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. All these facts, according to Mr. Palkhivala, have not been duly considered by the Tribunal. He placed reliance on the decisions in ANGLO-PERSIAN OIL CO. (INDIA), LTD. Vs. COMMISSIONER OF Income Tax., , P. Orr and Sons Vs. Commissioner of Income Tax, Madras, , CANNANORE SPINNING and WEAVING MILLS LTD. Vs. COMMISSIONER OF Income Tax., and Eastern Investments Ltd. Vs. Commissioner of Income Tax, West Bengal, .

Mr. Joshi for the revenue contended that the whole affair was only brought out at the instance of K.C. Thapar; Thapars held controlling interest in the assessee company and they were also the managing agents. Out of the newly subscribed capital Rs. 17 lakhs were in hand and the assessee company wanted to dispose of it by paying it to Thapars ostensibly as remuneration for termination of their managing agency agreement so that Thapars should get it free from payment of income tax and the company should get it as a permissible deduction u/s 10(2)(xv). It is for this purpose that a show was made of appointing a committee; it was not an independent committee but the members were the employees of the assessee company. The subject was not on the agenda and yet in its meeting the board considered the question of cancellation of the managing agency agreement. This was done at the instance of Mr. Thapar. The report was made on 16th March, 1951, What the terms of reference to the sub-committee were, are not available. The minutes of the sub-committee are also not available. On the very next day the report was made, the directors met and decided to terminate the managing agency agreement subject to the approval of the shareholders. A meeting of the shareholders was convened and the resolutions have been passed. These being the circumstances which the Tribunal had before it, it cannot be said that there was no evidence on which the Tribunal could legitimately come to a finding that the expenditure of Rs. 18 lakhs was not laid out wholly and exclusively for the purpose of the business. He referred us to two decisions in B.W. Noble Limited v. Mitchell [1926] 11 Tax Cas. 372 and Union Cold Storage Company Limited v. Jones [1924] 8 Tax Cas. 725.

We are hereby dealing with an expenditure incurred by a company voluntarily and the question that has to be considered is whether the expenditure is laid out wholly and exclusively for the purpose of the business. In Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 Tax Cas. 155 Viscount Cave L.C. said at page 191:

"...a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade...."

These observations by the Lord Chancellor have been cited with approval by their Lordships of the Supreme Court in Eastern Investments Ltd. v. Commissioner of income tax [1951] 20 19 ITR 1 (SC). The principles governing such a case are laid down by their Lordships in the following terms:

"(a) though the question must be decided on the facts of each case, the final conclusion is one of law;

(b) it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned;

(c) it is enough to show that the money was expended ''not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business''; and

(d) beyond that no hard and fast rule can be laid down to explain what is meant by the word ''solely''."

At page 5 their Lordships observed:

"Most commercial transactions are entered into for the mutual benefit of both sides, or at any rate each side hopes to gain something for itself. The test for present purposes is not whether the other party benefited, nor indeed whether this was a prudent transaction which resulted in ultimate gain to the appellant, but whether it was properly entered into as a part of the appellant''s legitimate commercial undertakings in order indirectly to facilitate the carrying on of its business... The only question is whether this was done in the ordinary course of business for the purposes we have already pointed out however mistaken the directors and shareholders of the company may have been."

We are here dealing with termination of the managing agency by the managed company ostensibly with the object of taking over the management and conducting the management of the managed company by its board of directors. Can it in these circumstances be said to be a transaction, which ordinarily does not occur in due course of business? The decisions on which reliance is placed by Mr. Palkhivala indicate that payment of compensation to the managing agents for terminating their services prior to the expiry of the managing agency agreement would, on the ground of commercial expediency, be allowable as an expenditure laid out wholly and solely for the purpose of the business.

In ANGLO-PERSIAN OIL CO. (INDIA), LTD. Vs. COMMISSIONER OF Income Tax., the facts were: The assessee, Anglo-Persian Oil Company, was a company incorporated in England. The company was carrying on business of selling fuel oil in India. The business commenced sometime in 1921 and for the conduct of its business in India it had appointed Messrs. Shaw Wallace and Company as its agents. In 1928 the managed company, viz., the Anglo-Persian Oil Co., decided to appoint the Burmah Shell Oil Storage and Distributing Company of India as its agents for conduct of its business in India. They, therefore, terminated the managing agency agreement of Messrs. Shaw Wallace & Co. on payment of certain amount as compensation. It was contended on behalf of the revenue that payment was not shown to have been made solely for purposes of earning profits and, therefore, was not allowable as a deduction. The learned Chief Justice repelling the contention observed:

"...no doubt, if it appeared from the assessee''s own case or the facts found that the payment was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business management, we could not regard the deduction as permissible. But no such suggestion can be made even upon the facts found in the case stated and there appears to me to be no reason why we should entertain it."

In this view of the matter, the compensation paid was allowed as a revenue expenditure.

The facts in P. Orr and Sons Vs. Commissioner of Income Tax, Madras, were that one Mr. Smith was in the management of the assessee company ever since its formation. In 1936 it became a public company and the assessee company entered into a managing agency agreement with S. Ltd., which consisted only of Mr. Smith and his wife as shareholders. The managing agency agreement was for a period of twenty years certain from December 24, 1936, to 23rd December, 1956. It appears that, though the company in 1936 had converted itself into a public company, it again reconverted itself into a private company. In 1948, probably with a view to converting the company again into a public company, it desired to terminate the managing agency and the managing agency agreement was ultimately terminated on payment of certain amount by way of compensation. It was contended on behalf of the department that it was not an allowable expenditure. It was held that the payment was made to secure termination of the managing agency and its attendant recurring annual liability to the company and was an allowable deduction. It was observed that judged by the test of business expediency the amount was expended wholly and exclusively for the business of the assessee company; the quantum of payment was wholly reasonable from a businessman''s point of view. In this view of the matter the assessee''s claim was allowed. Similar also is the view taken in CANNANORE SPINNING and WEAVING MILLS LTD. Vs. COMMISSIONER OF Income Tax., .

The ratio deducible from these decisions, in our opinion, is that the transaction of termination of managing agency agreement before the expiry of its period by the managed company with a view of get ting rid of its recurring liability in the matter of payment of managing agency commission and/or taking over the management by its board of directors would be a transaction in the ordinary course of its business in order indirectly to facilitate the carrying on of its business. In such a case compensation paid by the managed company to the managing agents in lieu of termination of the managing agency agreement would, therefore, in the absence of any evidence that it was an arrangement by way of distribution of profits or that the payment was wholly gratuitous or that the termination was brought about for some improper or oblique purpose, outside the course of business management, be an expenditure wholly and exclusively laid out for the purposes of business.

Mr. Joshi, however, contends that these cases would have no application to the facts of the present case because in neither of them the bona fide s of the transaction had been doubted. Here, according to Mr. Joshi, the income tax Officer has held that the transaction was not bona fide and, therefore, these decisions would have no application to the facts of the present case.

It is true that it appears from the order of the income tax authorities that they have entertained certain doubts about the bona fide s of the transaction. But then the question is not whether the bona fide s have been challenged but the question is whether lack of bona fide s has been established by evidence. It has not been alleged that the transaction of the managing agency and the payment of compensation was made by way of distribution of profits. It has been said by the Appellate Assistant Commissioner:

"It looks to ma, therefore, that the whole transaction of conversion into a public limited company, allotment of shares to H.E.H. the Nizam and removal of the managing agency at the bidding of certain principals of M/s. Greaves Cotton & Co. Ltd. was undertaken as associated operations; and was entered into for extra-commercial considerations and for oblique purpose, which looks to be that of securing capital for the company and capital for the managing agents."

The Tribunal has generally observed that the reasons given by the income tax authorities are valid. We have already said that all the circumstances on which reliance has been placed by the income tax authorities have not been relied upon by Mr. Joshi. Mr. Joshi frankly stated before us that transactions up to the stage and inclusive of the managing agency agreement of May 10, 1950, were all bona fide transactions. It is not his contention that the whole transaction of conversion into public limited company, allotment of shares to H. E. H. the Nizam and the termination of the managing agency were part and parcel of the same transaction. It is, however, his contention that on 10th May, 1950, the assessee company had been able to secure an agreement favourable to itself. The company had not even functioned for seven months. What had happened during those seven months, which would make it commercially expedient for the company to terminate the managing agency agreement? On the other hand, the only thing that appears to have happened is that additional capital to the tune of Rs. 50 lakhs was subscribed by the Nizam. The assessee company was able to utilise Rs. 33 lakhs out of it and Rs. 17 lakhs were on hand. The assessee company was controlled by Thapars. They wanted to utilise for themselves these Rs. 17 lakhs avoiding the liability to pay income tax. This plan was, therefore, mooted out to pay this amount as compensation for termination of the managing agency, which would in that event be capital receipt in the hands of the managing agents and would be allowable as a deduction in the hands of the assessee company. In support of his contentions, he first referred us to the fact that in the agenda for the meeting of 28th February, 1951, there was no item of consideration of the question of cancellation of the managing agency agreement, and yet it was considered and a sub-committee was appointed. Mr. K.C. Thapar, who is a managing director of the managing agents, is also a director of the assessee company, and the Thapars held controlling interest in the managed company. It is Thapars who had appointed the subcommittee. It appears that in the agenda for the meeting of 28th February, 1951, though consideration of cancellation of the managing agency agreement was not mentioned as an item, yet it was taken up for consideration. But that fact, in our view, cannot cast any doubt on the genuine nature of the consideration of the question in the absence of any indication or proof that the said question was taken up for consideration with a view to take advantage of the absence of some of the directors. In other words, in the absence of any evidence that there was any ulterior objective in considering that question at that meeting without it being on the agenda, we would not be justified in arriving at such a conclusion, and to no such evidence Mr. Joshi has drawn our attention.

It is next contended by Mr. Joshi that the three members of the sub-committee were not independent members. They were servants of the company and, therefore, were amenable to the influence of Thapars. We hardly find any warrant to accept Mr. Joshi''s contention on the material on record. It is true that Messrs. T. Kemp, J. Blezard and N.M. Wagle are employees of the assessee company. But it has to be kept in view that they are highly-paid employees of the company and it cannot generally be said that the employees of the company would be amenable to say anything that their directors want them to say. The material and evidence on record further shows that these three persons were not in the group which was controlled by Thapars. Nor do we find in the orders of any of the income tax authorities or the Tribunal any finding that these three persons were under the influence of Thapars.

It is next urged by Mr. Joshi that there is an intrinsic evidence in the report, which would go to show that decision had already been taken to terminate the managing agency with the object of paying to them the Rs. 17 lakhs which were in the hands of the assessee company. He referred us to paragraphs 1, 3, 4, 6 and the latter part of 8. In the first paragraph the sub-committee had stated that they were of opinion that the board of directors would be fully competent to carry on the affairs of the company and the termination of the agreement between the company and the managing agents would not be detrimental to, nor adversely affect, the business of the company. We fail to see how any inference can be drawn from this paragraph that the final decision to terminate the managing agency was reached before the appointment of the sub-committee. In clause (3) it has been observed:

"On October 19, 1949, the company sought sanction of the Controller of Capital Issues to the issue of Rs. 55 lakhs additional capital for cash and for certain specific purposes. This sanction was accorded by the Controller of Capital Issues: vide his letter dated April 25, 1950, and since that date Rs. 41 lakhs additional capital has been subscribed for cash exclusive of the premium on the ordinary shares. The question arises as to whether any portion of the proceeds of the new capital could be utilised in paying compensation to the managing agents without the prior consent of the Controller of Capital Issues. We have sought legal advice on this point. It is clear that the sanction given by the Controller of Capital Issues is conditional (vide Condition 4) on the proceeds of the issue of capital being utilised only for those objects described in the application unless the consent of the Central Government is obtained for other use.

It follows, therefore, that unless consent of the Central Government is so obtained, then any payment of compensation to the managing agents in consideration of termination of the agreement must be made from the free profits of the company accruing subsequent to the date of the application to the Controller of Capital Issues for sanction to the issue of additional capital."

Great stress was laid by Mr. Joshi on these two clauses in support of his contention that the object was to pay the Rs. 17 lakhs available in the hands of the company to the managing agents and avoid taxation and that getting rid of the recurring liability of payment to the managing agents by terminating the managing agency in the interest of business was not the real object of the assessee company. Paragraph 3 no doubt makes a reference to the question as to whether the available amount could be utilised in paying compensation for termination of the managing agency agreement and legal advice appears to have been taken on this subject, But paragraph 4 of the report makes it clear that that could not be done. In other words, the committee has positively opined that the said amount of Rs. 17 lakhs could not be utilised for payment of compensation. It has to be noted that in spite of this report of the committee that that amount could not be utilised the board of directors of the assessee company had taken a decision to terminate the managing agency. The recommendations of the board of directors have been accepted by the shareholders. It is true that Thapars have controlling interest in the share structure of the assessee company, but it also has to be noticed that it was thought necessary to enlarge the share capital and the Nizam had contributed share capital to the extent of Rs. 50 lakhs. Khan Bahadur Tarapore was also on the board of directors. In these circumstances it cannot be said that, even though Thapars had the controlling interest, they would be in a position to do whatever they liked. Apart from it, as we have said that, in spite of the report of the committee that the sum of Rs. 17 lakhs could not be utilised for payment of compensation, the managing agency agreement had been terminated. In the absence of evidence to the effect that by some other means or subterfuge that object was achieved, it is not possible to accept Mr. Joshi''s argument that the real object in terminating the managing agency agreement was to pay the amount of Rs. 17 lakhs to Thapars out of the surplus of subscribed capital.

In paragraph 6 the committee has stated:

"We have considered and sought legal opinion on the question as to whether or not any payment of compensation for termination of the agreement would be allowed as a revenue deduction in the company''s assessments. We are advised that the case law on the subject points to the conclusion that such payments would be so allowed and we think this is a reasonable assumption."

We are also unable to infer any mala fide s of the transaction from these observations. The report related to the question as to whether in the interest of the company the managing agency agreement should be terminated and, if so, what amount should be paid as compensation. It was in the nature of things that, when nearly 19 years of the period of the agreement had still to run, the amount of compensation would be large. Any businessman, in these circumstances, would seek advice and find out whether the payment made would be allowable as a deduction. If it was not allowed as a deduction, then the real expenditure to the company would be much more than the amount of compensation paid by it to the managing agents. It would, on the other hand, be the said amount plus tax thereon.

Lastly, Mr. Joshi referred to us the following observations of the concluding part of paragraph 8:

"Although the return to the shareholders would be reduced in the year or years in which any compensation payable is paid, it would, if our assumption under (6) above is correct, be reduced only to the extent of the sum paid as compensation less tax thereon and in all subsequent years the saving would be to the full extent of the emoluments which would otherwise be payable to the managing agents. We consider that to meet the charge involved in the payment of compensation to the managing agents at this stage, in years when trading is relatively good, would materially strengthen the future position of the company and should assist in years when trading may not be so good in maintaining the return to shareholders and the company''s financial strength. We are, therefore, of opinion that termination of the agreement on this basis would be to the benefit of the shareholders."

Mr. Joshi contends that there is not a word of any commercial expediency in this. The reasoning is all hypothetical and cannot be accepted. The report has to be read as a whole and when so read it would appear that the board of directors wanted the question to be investigated as to whether, if the management is taken over by the board of directors itself instead of being allowed to be managed by the managing agents, it would be more beneficial to the company. It was with this objective that the question was referred to the committee to examine it in all its aspects. In paragraph 1 of the report the committee had reported that the board of directors would be ''fully competent to carry on the affairs of the company and that the termination of the agreement between the company and the managing agents would not be detrimental to, nor adversely affect, the business of the company. These two aspects read together with the recommendations of the sub-committee: "We are, therefore, of opinion that termination of the agreement on this basis would be to the benefit of the shareholders", in our opinion, would constitute commercial expediency. Paragraph 8 enumerates the other benefits which the members of the sub-committee expected to ensue. We are, therefore, unable to accept the contention of Mr. Joshi that this report is nothing but a got-up report for the purpose of achieving the objective of utilising the said amount of Rs. 17 lakhs for payment to the managing agents as compensation for termination of the managing agency agreement or that there is in the report any intrinsic evidence leading to such a conclusion.

It was next urged by Mr. Joshi that the proceedings of all the meetings would show that there was no opposition at all on the part of Thapars in respect of the termination of the managing agency agreement. Therefore, the transaction could not have been in the normal course of business. It has to be kept in view that Thapars also had considerable stake in the assessee company and, what they would lose by way of termination of the managing agency, they would stand to gain as shareholders of the assessee company. Considering these various aspects on which reliance was placed by Mr. Joshi singly as well as cumulatively, it is not possible for us to hold that the assessee company was actuated by any oblique purpose in terminating the managing agency agreement of Thapars. The other contention of Mr. Joshi that the fact that the managing agency agreement was terminated within a few months of the managing agency agreement without any cause or without anything happening, is not in our view a correct submission. The managing agents in fact were appointed in the year 1947. The remuneration under that agreement was not in consonance with the provisions of the Companies Act. The new agreement, therefore, appears to have been entered into in the year 1950, so as to bring it in consonance with the provisions of the Companies Act, because the assessee company, which was a private limited company till that time, was converted into a public limited company. The termination of the managing agency, therefore, cannot be said to be within a few months of the managing agency agreement, but in fact it was nearly after 31/2 years. The other submission that no change had occurred between the new managing agency agreement and its termination also is not correct. During the interval the Nizam had subscribed a share capital to the extent of Rs. 50 lakhs and his nominee, Khan Bahadur Tarapore, had come on the board of directors as his nominee. In the circumstances, Khan Bahadur Tarapore must be having an effective voice in the board of directors.

It has not been contended that the amount of compensation paid to Thapars was unreasonable. It has not been shown that the management has in any way suffered by reason of termination of the managing agency agreement. In the circumstances of the case it could not have suffered. K.C. Thapar, who was the managing director of the managing agents, was also the chairman of the board of directors of the assessee company. It has not been shown that after termination of the managing agency agreement, any additional remuneration has been given to any of the directors.

In these circumstances and for reasons stated above, in our opinion, this transaction of terminating the managing agency agreement, with a view to taking over the management by the board of directors, was an ordinary commercial proposition gone through in an ordinary commercial way and is, therefore, justifiable on the ground of commercial expediency. The cases on which reliance is placed by Mr. Joshi are, in our view, not of any assistance to the department.

The facts in B.W. Noble Ltd. v. Mitchell [1926] 11 Tax Cas. 372 were that differences arose between one of the directors and the other directors and that director was paid a certain sum by way of compensation for ceasing to be a director. The company claimed as deduction from its profits the amount payable to the director. The question arose whether that amount should be allowed as a deduction or not and it was held that it was allowable as a deduction in arriving at the profits of the company for income tax purposes. Mr. Joshi referred us to the following observations at page 413 of the report:

"I think that in the ordinary case a payment to get rid of a servant, when it is not expedient to keep him in the interests of the trade, would be a deductible expense."

Mr. Joshi contends that this is the test and it has not been shown that it was not expedient to keep the managing agents and, therefore, the compensation paid for terminating the managing agency was not allowable. In our view the observations do not mean that that is the sole test in determining the question. The observations have been made in the context of the facts of that case. Mr. Joshi has referred us to the following observations at page 741 in Union Cold Storage Co. v. Jones [1924] 8 Tax Cas. 725:

"In these cases in following Usher''s case (supra) you must look at what is the direct concern and direct purpose for which the money is laid out, and I do not think that you can go to the remoter or indirect results for which it may be possibly useful to lay out money."

We have already said that the inference drawn on the material on record is that the managing agency agreement had been terminated with the object of taking over its management by the board of directors and there is no evidence which will lead to an inference that it was done with the oblique motive or oblique purpose of securing the payment of the said amount of Rs. 17 lakhs to the managing agents.

For reasons stated above, our answer to the question is in the affirmative, i.e., in favour of the assessee.

Before parting with the case, it has, however, to be stated that Mr. Joshi argued before us the second question, which the department wanted the Tribunal to refer to this court and which, according to the Tribunal, was included in the question referred to us. That question, at the risk of repetition, is in the following terms:

"Whether on the facts and circumstances of the case the assessee is entitled to claim the sum of Rs. 18 lakhs as a deduction u/s 10(2)(xv) of the income tax Act for the assessment year 1952-53?"

We are unable to agree with the Tribunal that this question is covered in the question referred to us. The question referred to us is whether the amount of Rs. 18 lakhs is a permissible deduction, while the second question, which the department sought to raise, was on the assumption that it was deductible. The question raised is as to the year in which it would be deductible.

Mr. Palkhivala had raised a preliminary objection and contended that no such question was raised before the Tribunal and, therefore, the respondent is not entitled to raise this question before us.

In our opinion, the preliminary objection is well founded. We do not find any such contention raised before the Tribunal. We would, therefore, not be justified in proceeding to record our answer to this question at this stage. Commissioner to pay the costs of the assessee.