1. This reference, under Section 256(2) of the Income-tax Act, 1961, relates to the assessment year 1964-65, The assessee-company was floated on October 27, 1960, with the object of acquiring the managing agency of India Forge & Drop Stampings Ltd., hereinafter referred to as "the managed company ". The managed company was floated on June 27, 1960. One Sri Baldev Raj was appointed by the managed company as an employee on a salary of Rs. 2,000 per month with effect from 1st July, 1960. The said Baldev Raj was a relation of the two directors of the assessee-company. Hence, when the assessee-company took over the managing agency of the managed company, the said Baldev Raj became an associate within the meaning of that expression used in Section 360 of the Companies Act. The managed company, however, obtained permission from the Central Government for payment of remuneration of Baldev Raj for the years 1961 and 1962. The managed company, however, failed to secure the sanction of the Central Government for the continuation of the employment of Baldev Raj with effect from 22nd February, 1963, and, therefore, the managed company withdrew a resolution from its extraordinary general meeting regarding the continuation of his appointment.
2. The assessee-company, however, on February 25, 1964, passed a special resolution in its extraordinary general meeting appointing Baldev Raj as its employee from 27th February, 1963, to 31st October, 1963. In the said meeting another resolution was passed by the assessee-company to pay the managed company the sums that were payable by Baldev Raj to the managed company which were paid to him by the managed company in contravention of Section 360 of the Companies Act, 1956, In terms of that resolution, the assessee-company paid Rs. 16,482 to the managed company being the sum payable by Baldev Raj to the managed company. The assessee-company has also paid Rs. 4,000 to Baldev Raj as his salary for working under the assessee-company for the subsequent period.
3. The Income-tax Officer has disallowed the deduction claimed by the assessee in respect of this total sum of Rs. 20,482 on the ground that since the managed company has paid Rs. 16,482 to Baldev Raj in contravention of Section 360 of the Companies Act, 1956, the said sums paid by the assessee-company to the managed company was an illegal expenditure. The Income-tax Officer was also of the opinion that Rs. 4,000 paid to Baldev Raj by the assessee-company was in contravention of Section 360 of the Companies Act and, therefore, this payment was also an illegal payment.
4. The first appeal filed by the assessee was dismissed by the Appellate Assistant Commissioner on the ground that the employment of Baldev Raj required the prior approval of the Government of India under the Companies Act, and since such sanction was not granted his continuance in the service of the managed company was illegal and that the assessee-company being a party to the infraction of law was not entitled to this deduction. The second appeal filed by the assessee-company has, however, been allowed by the Appellate Tribunal in whose opinion the managed company has committed no illegality and, in any event, the assessee-company was not a party to any such illegality. It has also been held by the Tribunal that these sums have been expended by the assessee-company for the purpose of its business and these expenditures were revenue expenditures. The Tribunal has also rejected the application made by the Commissioner under Section 256(1) of the Act and, thereafter, at the instance of the Commissioner, the court has framed the following question under Section 256(2) of the Act for its determination :
" Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 20,482 was allowable as business expenditure ? "
5. Mr. B. L. Pal, the learned counsel for the revenue, has contended before us that the assessee has paid the aforesaid two sums in contravention of Section 314 and Section 360 of the Companies Act, 1956, and, therefore, the said payments were illegal and as such the assessee was not entitled to any deductions. In this connection he has cited the decision of the Supreme Court in the case of Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax . He also placed reliance on an observation of the Supreme Court in the case of Commissioner of Income-tax v. Malayalam Plantations Ltd. , of the report.
6. Mr. J. C. Pal, the learned counsel for the assessee, has disputed the above contentions and has placed reliance on a decision of the Madras High Court in the case of Commissioner of Income-tax v. Sree Rajendra Mills Ltd. . It is his submission that a mere contravention of a statutory provision is not an illegality. It is also his submission that the assessee has not contravened Section 314 and Section 360 of the Companies Act, and, therefore, the question of illegality in the instant case can never arise.
7. Now, when the managed company appointed Baldev Raj, the assessee-company did not even come into existence. Therefore, the initial appointment of Baldev Raj is not hit by Section 360 of the Companies Act. But, when the assessee-company took over the management of the managed company, Baldev Raj became " an associate " and the sanction of the Central Government became essential under Section 360(1)(a)(ii) of the Companies Act, 1956, and such sanction was granted for two years and, thereafter, no such sanction could be obtained by the managing agents. Hence, in these circumstances, the appointment of Baldev Raj became invalid so far as and as far as the managed company was concerned and under Section 363 of the Companies Act, 1956, Baldev Raj became liable to refund the remuneration which he had received from the managed company.
8. The assessee-company, however, appointed Baldev Raj with effect from the date already mentioned. Under Section 314 of the Companies Act, no sanction of the Central Government was necessary for such appointment. Therefore, the appointment of Baldev Raj under the assessee-company was a valid appointment and the assessee-company was liable to pay the remuneration of Baldev Raj with effect from the date of his appointment. But Baldev Raj was not entitled to receive salary from both the companies. In these circumstances, the assessee-company, which was liable to pay the salary of Baldev Raj, has paid the said sum to the managed company, which was entitled to receive the same from Baldev Raj, and, therefore, the question of contravention of Section 360 can never arise so far as Baldev Raj and the assessee-company are concerned. And further, the managed company, having received this sum from the assessee-company, was no longer legally entitled to realise the same from Baldev Raj in view of the facts and circumstances of the case stated by the Tribunal.
9. Moreover, as already stated, Section 360 of the Companies Act cannot have any application so far as Baldev Raj and the assessee-company are concerned and, therefore, payment made by the assessee-company to the managed company cannot be an illegal payment as rightly held by the Tribunal. That apart, Section 360 of the Companies Act has not abrogated or in any way affected Section 62 of the Indian Contract Act, and its illustration (a) is a complete answer to the contentions of Mr. B. L. Pal.
10. Reliance on Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax was misplaced, for in that case the
expenditure incurred by the assessee was not necessary for the purpose of carrying on of its business. Now, in Commissioner of Income-tax v. Malayalam Plantations Ltd. , it has been observed by the Supreme Court as follows ;
" The expression ' for the purpose of the business' is wider in scope than the expression ' for the purpose of earning profits'. Its range is wide : it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery ; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business ; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory ; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business."
11. Mr. B. L. Pal has placed reliance on the portion underlined* by me in support of his contention that the expression " for the purpose of the business " does not include a " voluntary or a statutory " payment, but it does not apply to the assessee-company before us, for it has been found by the Tribunal that these two sums have been spent by the assessee-company for the purpose of its business. This finding has not been challenged by the revenue and it is not even contended before us that the conditions laid down by the Supreme Court in Commissioner of Income-tax v. Malayalam Plantations Ltd. have not been fulfilled by the assessee-company. Moreover, the contention raised by Mr. B. L. Pal as to agency does not arise out of the order of the Tribunal and he is not entitled to make out a new case for the revenue before us.
12. The Tribunal, after considering all the relevant facts and the circumstances of the case and by applying the legal principles involved in the concept of trade, has come to the conclusion in favour of the assessee. Nothing has been shown by Mr. B. L. Pal to compel us to differ from the Tribunal. That apart, the law laid down by the Madras High Court in the case of Commissioner of Income-tax v. Sree Rajendra Mills Ltd. supports the contention made on behalf of the assessee.
13. In this view of the matter, we overrule the contentions of Mr. B.L. Pal and return our answer in the affirmative and in favour of the assessee. In the facts and circumstances of this case, we do not propose to make any order as to costs.
14. I agree.