TaxTMI 
TaxTMI 
1979 (9) TMI 133
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....ted company carrying on business of manufacture and sale of yarn and has its registered office at Alagappa Nagar in Kerala State. It entered into an agreement dated November 10, 1955, with Kamala Mills Ltd., Coimbatore, for financing and managing the assessee-mills at Alagappa Nagar for a period of five years. Clause 8 of the agreement provided that Kamala Mills Ltd. shall be paid, for the services rendered by it by way of purchases, sales and management, remuneration at the rate of 1% on all purchases made by it for the assessee-mills and at half a per cent. on all sales of yarn, yarn waste and cotton waste and other products of the mill. Pursuant to the aforesaid term, Kamala Mills Ltd. drew remuneration to the tune of Rs. 1,03,547 and Rs. 18,294, respectively, for the calendar years 1957 and 1958 corresponding to the assessment years 1958-59 and 1959-60. These amounts were assessed to tax in the hands of Kamala Mills Ltd. The assessee in its assessment proceedings for the said two assessment years claimed deduction in respect of the said two amounts as business expenditure under section 10(2)(xv) of the Act. The claim was disallowed by the ITO on the ground that under section 38....
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....ibunal that Kamala Mills Ltd. was not only a manager but also a financier and that the remuneration should be treated as having been paid to the financier. While observing that it was a new case put forward by the assessee, the Tribunal negatived the contention holding, on construction of the agreement, that it was by virtue of its position as manager that Kamala Mills Ltd. was allowed to carry on the financial affairs of the assessee and the remuneration was payable to it as manager and in no other capacity. The Tribunal also held that the claim for deduction was in respect of a disputed liability inasmuch as the assessee had not merely filed a suit to recover the amount but had in the meantime obtained a decree against Kamala Mills Ltd., and, therefore, the amounts could not be lawfully claimed as permissible deduction. At the instance of the assessee, the following question was referred to the High Court for its opinion : "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in disallowing the claim of the assessee for deduction of Rs 1,03,547 and Rs. 18,294 from the income of the assessment years 1958-59 and 1959-60 as not an admissibl....
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....thus : "2. (9) 'manager' means a person who subject to the control and direction of the directors has the management of the whole affairs of a company, and includes a director or any other person occupying the position of a manager by whatever name called and whether under a contract of service or not." It will be clear that to satisfy the aforesaid definition a person, which could include a firm, body corporate or an association of persons, apart from being in management of the whole affairs of a company had to be "subject to the control and direction of the directors". This definition has undergone a substantial change under the Companies Act, 1956. Under this Act, section 2(24) defines the expression "manager" thus : "2. (24) 'manager' means an individual (not being the managing agent) who, subject to the superintendence, control and direction of the board of directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, and whether under a contract of service or not." In this definition three conditions are required to be satisfied:....
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....e board of directors of the company. It was not seriously disputed that under the terms and conditions contained in the agreement dated November 10, 1979, Kamala Mills Ltd. could be said to be in management of substantially the whole of the affairs of the assessee-mills but the question is whether it was working under the superintendence, control and direction of the board of directors of the assessee so as to be its "manager" within section 2(24) of the Act ? Turning now to the agreement in question it may be stated that at the commencement of the deed the parties thereto have been described in a particular manner, namely, the assessee has been described and referred to as the "company" while Kamala Mills Ltd. has been described and referred to as the " managers " throughout the document. Then follow two recitals which make very clear the object or purpose with which the agreement was entered into, according to these recitals the assessee was not having sufficient finance to carry on its business of manufacture and sale of yarn and the board of directors thought it proper to find out a financier who was agreeable to help the assessee monetarily and take active interest in its bus....
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....ed that Kamala Mills Ltd. shall provide funds or arrange for finance necessary for exercising the powers of purchase of cotton, stores and other materials and for payment of wages, salaries, commissions and allowances and for meeting all expenses incidental to manufacture and sale of yarn and other products of the mill. Under Clause 3 the assessee was to open a separate current account and an overdraft account for a limit not exceeding Rs. 30,00,000 with such bankers as Kamala Mills may require with power to Kamala Mills to operate on the said accounts exclusively by itself and in the name of the assessee and it was to have power to receive, endorse, sign, transfer and negotiate all bills, cheques, drafts, etc., that may be received in the name of the assessee in the course of the management of the mill and it was specifically agreed that no one except Kamala Mills shall have power to operate on the said accounts. Clause 4 entitled Kamala Mills Ltd. to charge the assessee interest at the rate of 7½% per annum with half-yearly rests on all advances made by it and funds provided for the purposes set out in Clause 2. Clause 5 gave Kamala Mills Ltd. a first and prior charge on a....
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....nificant and it provided that the agreement shall be in force for a. period of five years commencing from the date thereof and that " this agreement for management being an agency coupled with interest", it could be revoked before the expiry of the said period of five years by 12 months' notice in writing being given by one party to the other but if the assessee were to revoke it, the assessee shall be liable to compensate Kamala Mills for the loss of remuneration for the unexpired period of the agreement at the average rate at which Kamala Mills Ltd. had been earning by way of remuneration under the agreement till the date of such notice of termination. A modification by introducing one additional term in the agreement was made on November 21, 1955, but the additional term is not material for our purposes. On a perusal of the aforesaid clauses of the agreement in question two or three things stand out very clearly. It is true that at the commencement of the deed, Kamala Mills Ltd. has been described and referred to as the "managers" of the assessee throughout the document but mere label or nomenclature given to a party in the document will not be decisive. It is also true that th....
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....ncier's role undertaken by it. The large powers and functions entrusted to Kamala Mills Ltd. under the several sub-clauses of Clause 1 of the agreement do show that management of substantially the whole, if not the whole, of the affairs of the assessee-company had been made over to Kamala Mills Ltd. But the crucial question is whether such management was to be done by Kamala Mills Ltd. under "the superintendence, control and direction of the board of directors" of the assessee and in that behalf Clause 13 of the agreement which we have quoted above is very eloquent. In terms it provided that so far as the powers conferred and the functions entrusted to Kamala Mills Ltd. were concerned, the board of directors shall not exercise or perform the same except by way of general supervision and advice and it was further made clear that the board of directors shall not interfere with the discretion of Kamala Mills Ltd. in the exercise of their functions and powers vested in it by virtue of the agreement. In other words, the general supervision or advice of the board of directors was of such character that the board had no say whatsoever nor could it interfere with the discretion of Kamala M....