Managing-agent remuneration and stock discrepancy treatment: pre-amendment restrictions were not extended to every partner, and book stock prevailed.

Pre-amendment section 348 of the Companies Act, 1956 was construed as applying to the managing agent entity and not automatically to every partner of a managing agency firm; the 1960 deeming amendment was treated as prospective. On that construction, salary paid to a partner in his individual capacity as manager did not attract the statutory bar, and the expenditure was also described as business-related, reasonable, and wholly and exclusively incurred for the business, supporting deductibility under section 10(2)(xv) of the Indian Income-tax Act, 1922. In the stock-discrepancy matter, book entries aligned with textile return filings, while bank declarations were treated as inflated estimates for overdraft purposes, so the addition as undisclosed income was held unjustified.

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Issues: (i) Whether salary paid to a manager who was also a partner of the managing agency firm was hit by section 348 of the Companies Act, 1956 and, if so, whether it was deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922. (ii) Whether the addition of Rs. 93,456 as undisclosed income based on stock discrepancies with the bank declarations was justified.

Issue (i): Whether salary paid to a manager who was also a partner of the managing agency firm was hit by section 348 of the Companies Act, 1956 and, if so, whether it was deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis: The pre-amendment scheme of section 348 was held not to treat every partner of a managing agency firm as a managing agent. The definition of managing agent in section 2(25) was construed as referring to the firm or other entity entitled to manage the company, and not automatically to each partner individually. The 1960 amendment introducing a deeming fiction was treated as prospective, not retrospective. On that construction, salary paid to the partner in his individual capacity as manager did not infringe section 348. Independently, the expenditure was found to have been incurred for business reasons, to be reasonable, and to be wholly and exclusively for the business.

Conclusion: The salary was not disallowed on the ground of section 348, and in any event it remained deductible under section 10(2)(xv); the issue was answered in favour of the assessee.

Issue (ii): Whether the addition of Rs. 93,456 as undisclosed income based on stock discrepancies with the bank declarations was justified.

Analysis: The stock entries in the books matched the returns filed with the Textile Commissioner, while the bank declarations were treated as inflated estimates given for overdraft purposes. The Tribunal's acceptance of the books and rejection of the bank declarations as the true basis of stock was upheld as a reasonable factual conclusion.

Conclusion: The addition of Rs. 93,456 was unjustified and was rightly deleted; the issue was answered in favour of the assessee.

Final Conclusion: The reference was answered against the revenue and the assessee succeeded on both the deduction claim and the undisclosed-income addition.

Ratio Decidendi: A pre-amendment restriction on managing-agent remuneration cannot be extended, by construction, to treat every partner of a managing agency firm as the managing agent, and an expenditure incurred wholly and exclusively for business does not cease to be deductible merely because it may conflict with another statutory restriction.

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