ALAGAPPA TEXTILES (COCHIN) LTD. Vs. THE CIT, ERNAKULAM

JUDGEMENT

(1.) This is a common reference under S.66(1) of the Indian Income Tax Act, 1922 by the Income tax Appellate Tribunal, Madras Bench 'B' arising out of two applications filed by the assessee, Alagappa Textiles (Cochin) Ltd. The question referred for decision is:

(2.) The assessee is a public limited company carrying on the business of manufacture and sale of yarn and having its registered office at Alagappanagar Kerala State. The assessee entered into an agreement dated 10-11-1955 with Kamala Mills Ltd., Coimbatore for financing and managing the assessee's mill at Alagappanagar for a period of five years. A copy of the agreement is annexure 'A'. Kamala Mills Ltd., was paid Rs. 1,03,547 and Rs. 18,294 towards their remuneration for the calendar years 1957 and 1958 by the assessee. The claim of the assessee for deduction of the amounts under S.10(2)(xv) of the Indian Income tax Act, 1922 was disallowed by the Income Tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal on the ground that Kamala Mills Ltd., was the manager of the assessee as defined in the Companies Act, 1956 and the payments were illegal being in violation of S.384 of the Companies Act, 1956.

(3.) The Companies Act, 1956 (Act I of 1956) came into force on 1-4-1956. S.384 thereof provides that no public company, and no private company which is a subsidiary of a public company, shall, after the commencement of the 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 amounts in dispute are payments made by the assessee to Kamala Mills Ltd., for the periods after the expiry of six months from the commencement of the Companies Act, 1956. The plea of the assessee before the Appellate Assistant Commissioner was that even though Kamala Mills Ltd., was disqualified to continue as the manager of the assessee the payments were fully justified from the commercial point of view and have to be taken into account in computing the net profits for assessment of tax. The Appellate Assistant Commissioner overruled the plea of the assessee on the ground that the payments were illegal and Kamala Mills Ltd., was bound to restore the same to the assessee and also for the reason that the payments have been disputed by the assessee by filing O.S. 21 of 1961 in the Subordinate Judge's Court, Irinjalakuda against Kamala Mills Ltd., for the return of the amounts. The Tribunal concurred With the decision of the Appellate Assistant Commissioner. At the time of the disposal of the appeals by the Tribunal O.S. 21 of 1961 had been decreed.