STEEL CONTAINERS LTD Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) This is a reference under Section 256(1) of the Income-tax Act, 1961. This reference relates to the assessment years 1962-63 and 1963-64, the relevant previous years for which were calendar years 1961 and 1962, respectively. It appears that there was a company known as Indian Galvanizing Co (1926) Ltd., which has been referred to briefly by the Tribunal as I.G., and we shall follow the same pattern. It was a subsidiary of Balmer Lawrie & Co. Ltd., which has been referred to shortly as B.L, B.L. held 1,95,722 out of 3,69,459 ordinary shares of I.G. and was carrying on business in the manufacture of steel containers and drums in the factories at Bombay and at Calcutta. B.L. were its managing agents appointed as such under an agreement dated 8th December, 1926. This agreement of managing agency expired on the 14th January, 1957, but by an agreement dated the 11th March, 1957, I.G. reappointed B.L. as managing agents for a period of 10 years as and from 15th January, 1957. In the year 1958, the remuneration that was paid by I.G. to B.L, for acting as managing agent was Rs. 40,000 and the directors' remuneration was Rs. 8,000. In the calendar year 1959, I.G.'s profits were Rs. 90,167. The remuneration that was paid to B.L. amounted to the same figure of Rs. 40,000, while the directors' remuneration came to Rs. 8,600. It has to be mentioned that the sum actually paid to B.L. in these years was the minimum remuneration as per Clause 5 of the said managing agency agreement. Some time in 1958, the management of I.G. appears to have decided to start three new concerns, i.e., the assessee-company took over the factory of I.G. at Bombay, a company called Industrial Containers Ltd. to take over its Calcutta factory and a third company known as Hopes Metal Windows (India) Ltd- to start a new business in metal windows. In pursuance of the aforesaid desire the assessee-company was incorporated in Calcutta on the 16th June, 1958, with a share capital of Rs. 14,00,070 comprised of 1,40,007 shares of Rs. 10 each. A company known as Industrial Containers was also formed. The assessee-company in pursuance of the scheme took over with effect from 1st January, 1959, the factory of I G. at Bombay in consideration of which the assessee was allotted 1,40,000 ordinary shares of I.G. and thus became a subsidiary of I.G. and hence of B.L. The Industrial Containers took over the Calcutta organisation of I.G. and allotted 31,000 out of 31,014 shares to I.G. in consideration thereof. The business of metal windows, however, did not materialise. On the 30th December, 1960. I.G. went into voluntary liquidation. In 1961, out of its assets some of the shares held by it in the assessee-company and in the Industrial Containers were distributed to B.L. 76,942 shares of the assessee-company came into the hands of B.L. and the assessee directly became a subsidiary of B.L. It may incidentally be mentioned that in the relevant years with which we are concerned, the assessee had not actually become the subsidiary of B.L. but for all practical purposes that does not make any material difference in this case. As a result of winding up, B.L. ceased to be the managing agents of I.G. The assessee-company commenced business on the 1st January, 1959. For the two years the assessee-company had no secretaries or managing agents though it was claimed on behalf of the assessee that B.L. was looking after its affairs as the assessee was one of its subsidiaries. On the 29th December, 1960, the board of directors of the assessee-company passed a resolution approving the execution of the agreement appointing B.L. as secretaries of the company for a period of five years from 1st January, 1961. It would be necessary to refer to some of the relevant provisions of the said agreement :

(2.) It appears that under Clause 6 of the said agreement B.L. became entitled to remuneration of Rs. 10,000 per month and under Clause 7 of the reimbursement of the expenses incurred by them on behalf of the assessee. In accordance with the agreement the assessee paid Rs. 1,20,000 each in the calendar years 1961 and 1962, and these items were included as part of debit of Rs. 3,68,946 and Rs. 4,76,025 shown in the assessee's balance-sheet for the two years against the head " Miscellaneous expenses ". In addition to the above remuneration the assessee paid to B.L. sums of Rs. 41,319 and Rs. 38,991, respectively, for the aforesaid two previous years by way of reimbursement of expenses in respect of various services rendered by them to the asses see-company.

(3.) The Income-tax Officer in making the assessment for the relevant assessment years 1962-63 and 1963-64 was of the opinion that the entire remuneration paid to B.L. should be disallowed in view of the provisions of Section 37 as well as Section 40(c)(i) of the Income-tax Act, 1961. He held, inter alia :