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2004 (10) TMI 73
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....s: The assessment year involved is 1973-74. The respondent-assessee is a private limited company, hereinafter referred to as the company. Its previous year for the assessment year 1973-74 commenced on July 1, 1971, and ended on June 30,1972. It paid selling agency commission to its selling agents as follows: 1. M/s. Techno Sales Corporation Rs. 1,02,361 2. M/s. Kumar Wires and Conductors Rs. 16,992 The company has been manufacturing galvanised iron wire, mild steel wire on barbed wire from the previous year corresponding to the assessment year 1968-69. On August 9, 1968, it entered into a selling agency agreement with a firm styled as M/s. Techno Sales Corporation, Swarup Nagar, Kanpur, whereby the said firm got the selling agency right for the sale of mild steel wires, galvanised wires and other wire products manufactured by the company for the State of Uttar Pradesh. The said firm was to canvass and secure orders for the products manufactured by the company to the best of its ability and experience and for rendering these services, the firm was to be paid a commission of 1 per cent, on all sales effected by the company of the goods manufactured by them either to marke....
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....onsideration. During the previous year relevant to the assessment year in question, the company also started manufacturing aluminium conductors styled AAC and ACSR. For promoting the sales of the aforesaid goods, it appointed M/s. Kumar Wires and Conductors as its selling agent for the State of Uttar Pradesh on April 1, 1972, pursuant to an agreement. For the services rendered by the said agent, the company was to pay a commission at the rate of 1 per cent. on all sales of aluminium conductors either to market parties or to the Government departments. Even this selling agency agreement was not put up by the company for the approval of its first annual general body meeting held immediately after the execution of the said contract or even thereafter till the assessment for the year was completed by the Income-tax Officer. It was placed before the general body meeting for its approval in its meeting held on June 28, 1975. The board of directors had, however, confirmed the appointment of the said agency vide resolution dated January 25, 1972. The following persons were the partners of M/s. Kumar Wires and Conductors: 1. Shri H.K. Sarraf 2. Smt. Sushila Devi Agarwal 3. Shri Vij....
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....lling agents were, in fact, sole selling agents and inasmuch as the agreement entered into with them were violative of the provisions of sub-section (2) of section 294 and sub-section (1)(b) of section 314 of the Companies Act, 1956, the payments made to them could not be allowed as legitimate business expenditure under section 37 of the Act. Feeling aggrieved by the said order, the Revenue as well as the assessee preferred separate appeals before the Tribunal. Before the Tribunal, the two members differed in their opinion and, therefore, the matter was referred to the third member, who after going to the various clauses of the agreement, had held that the selling agency agreement in question was not a sole selling agency agreement. According to the third member, the provisions of sub-section (2) of section 294 of the Companies Act had not been violated by the company and they were also not violative of section 314 of the Companies Act, 1956. Apart from the fact that the third member had held that the agreement in question was not a sole selling agency agreement nor was it violative of section 314 of the Companies Act, he was of the opinion, that if the agreements were held to b....
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....of profit under the company within the meaning of section 314 of the Act and requires a special resolution according to the consent of the company for such appointment.' 6. That, in view of the above position, M/s. Techno Sales Corporation and M/s. Kumar Wires and Conductors have to be deemed to have vacated their offices of sole selling agents under section 314 on the dates next to the date of the first general meeting held after the dates of the respective agreements as their appointments were not approved therein, and that later ratification of the agreements by the general body meeting on June 28, 1975, was of no avail for, what was void ab initio could not be validated by a subsequent act of ratification. 7. That, for determining the total income of the company, the Income-tax Officer could enquire whether certain payments contravened the provisions of the Companies Act and whether or not they were expenses, in fact, incurred by the company and whether the same were incurred as a trader or otherwise, and while doing so, the Income-tax Officer was not bound to consult the Registrar, Joint Stock Companies, or any other authority under the Companies Act, for it was the sole....
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.... That the Income-tax Officer could not exercise any powers under the Companies Act, 1956, and, therefore, could not hold that the company had violated any of the provisions of the Companies Act. This could be done only by the Company Law Board under section 10C of the Companies Act or by the competent courts under section 10 of the said Act. 7. That the principle of quantum meruit worked against the company and it could not recover the payments made to the selling agents even if it was held that the said contracts were invalid for it had accepted the services rendered by the agents and had made payments therefor. Having heard learned counsel for the parties, we find that in the agreement entered into by the company with M/s. Techno Sales Corporation on August 9, 1968, M/s. Techno Sales Corporation has been appointed as its selling agent for the sale of mild steel wire, galvanised iron wire and other wire products in the State of Uttar Pradesh. One of the terms and conditions of the agreement was that the said agency shall be paid by the company a commission of 1 per cent. on all sales effected by the company of the goods manufactured by them either to market parties or to the....
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....vant for the purposes of the present reference is reproduced below: "294. Appointment of sole selling agents to require approval of company in general meeting.-(1) No company shall, after the commencement of the Companies (Amendment) Act, 1960, appoint a sole selling agent for any area for a term exceeding five years at a time: Provided that nothing in this sub-section shall be deemed to prohibit the reappointment, or the extension of the term of office, of any sole selling agent by further periods not exceeding five years on each occasion. (2) After the commencement of the Companies (Amendment) Act, 1960, the board of directors of a company shall not appoint a sole selling agent for any area except subject to the condition that the appointment shall cease to be valid if it is not approved by the company in the first general meeting held after the date on which the appointment is made. (2A) If the company in general meeting as aforesaid disapproves the appointment, it shall cease to be valid with effect from the date of that general meeting." Section 314 of the Companies Act, 1956, provides that except with the consent of the company accorded by a special resolution,....
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....oved by the company in its first general meeting held after the date on which the appointment is made failing which it shall cease to be valid with the date of first general meeting and further a director or any of his relative where such director or the relative is a partner in the firm cannot hold any office or place of profit except with the consent of the company accorded by a special resolution. The phrase "sole selling agent" has not been defined under the Companies Act, 1956. In common parlance and in ordinary sense, it would mean that the exclusive and sole right to sell all the products of the principal to the exclusion of all others. In the present case, two things under the separate agreements have been described as selling agents and not sole selling agents. Further, they have not been given exclusive right to sell all the products. Specific mention of the words "for any area" and omission to mention "any goods" makes it abundantly clear that there can be only one sole selling agent in an area in respect of all the goods dealt with by the company. It may be mentioned here that under sub-section (6) of section 294 of the Companies Act, 1956, the Central Government has be....
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....eral meeting held after the date on which the appointment is made, it is void ab initio. The words "office or place of profit" occurring in sub-section (1) of section 314 do include selling and buying agents receiving commission and/or salary. The sole selling agency has been held to be an office of profit by the Bombay High Court in the case of Firestone Tyre and Rubber Co. v. Synthetics and Chemicals Ltd. [1971] 41 Comp Cas 377. As in the present case, the two firms which have been appointed as the selling agents consist of either the directors or the relatives as their partners, a special resolution was required to be passed by the company for their appointment in the absence of which they would not have been appointed. In the case of Godavari Sugar Mills Ltd. [1963] 49 ITR 206, the Bombay High Court has held that where the amount payable as dividends by the public companies was restricted by the Public Companies (Limitation of Dividends) Ordinance, 1948, the company was not able to declare the percentage of dividends as required by section 23A of the Indian Income-tax Act, 1922. The court has further held that if a restriction is imposed by any law on a company in respect....