2000 (1) TMI 20 - HC - Income Tax

Court rules on appointment of selling agent, commission deductibility under Company & Income-tax Acts

Cossul And Co. (P.) Ltd. Versus Commissioner Of Income-Tax

The court upheld that the appointment of the sole selling agent violated sections 294 and 314 of the Companies Act, 1956 due to lack of required special ... Business Expenditure, Commission Issues Involved:1. Validity of the sole selling agency agreement under sections 294 and 314 of the Companies Act, 1956.2. Allowability of the commission paid to the sole selling agent as a business expenditure under section 37 of the Income-tax Act, 1961.3. Whether the sole selling agency agreement was a sham device or a genuine agreement.Issue-wise Detailed Analysis:1. Validity of the Sole Selling Agency Agreement:The Tribunal held that the appointment of the firm as the sole selling agent was in violation of sections 294 and 314 of the Companies Act, 1956. Section 294 mandates that the appointment of a sole selling agent must be approved by the company in a general meeting, and section 314 requires a special resolution for holding any office or place of profit by a relative of a director. The initial appointment of the sole selling agent was authorized by a special resolution in 1963, but subsequent appointments were not validated by the required special resolutions until May 11, 1972. The Tribunal relied on precedents such as Shalagram Jhajharia v. National Co. Ltd. and Arantee Manufacturing Corporation v. Bright Bolts Private Ltd., which emphasized strict compliance with section 294. Thus, the Tribunal concluded that the appointments made by the directors without special resolutions were invalid.2. Allowability of the Commission Paid as Business Expenditure:Despite the invalidity of the agreement, the court considered whether the commission paid could still be allowed as a business expenditure under section 37 of the Income-tax Act, 1961. The court referred to various judgments, including CIT v. Ramakrishna Mills (Coimbatore) Ltd., which held that payments infringing other statutes could still be allowed as business expenditures if they were laid out wholly and exclusively for the purpose of the business. The court also cited Shahzada Nand and Sons v. CIT, which stated that the existence of a contract was not necessary for allowing the expenditure if it was in the interest of the business. The court concluded that if the sole selling agent had rendered services and the payment was reasonable, the expenditure could be allowed as a deduction.3. Sham Device or Genuine Agreement:The Tribunal did not record a finding on whether the sole selling agency agreement was a sham device or a genuine agreement. The court noted that the Tribunal had initially stated that this point was argued at length but failed to provide a conclusive finding. The court emphasized that this aspect needed to be addressed to determine the allowability of the commission paid.Conclusion:The court upheld the Tribunal's finding that the appointment of the sole selling agent was in contravention of sections 294 and 314 of the Companies Act. However, it disagreed with the Tribunal's conclusion that the commission paid was not an admissible deduction without a finding on whether the agreement was a sham or genuine and whether the commission paid was reasonable and commensurate with the services rendered. The court directed that an authenticated copy of the judgment be transmitted to the Appellate Tribunal for further action.