Law:

Section:

Section 10(2)(xv) of the indian income-tax act, 1922 [corresponding to section 37(1) of the Income-tax Act, 1961]-Business expenditure-Assessment years 1958-59 and 1959-60-Assessee-company paid to managing company remuneration for services for financing and managing-Under the Companies Act, 1956, company could not act as manager under section 2(24) and remuneration payable violated section 384 of the companies act-ITO disallowed remuneration paid on grounds of illegality-Disallowance upheld by AAC and tribunal but deleted by high court-Whether high court was right in law in holding that the mills was not assessee's "manager" and whether impugned remuneration deductible as business expenditure under section 10(2)(xv)-Held, yes Facts The assessee is a public limited company carrying on business of manufacture and sale of yarn. It entered into an agreement with Kamala Mills Ltd. (hereinafter called "Mills") for financing and managing the assessee for a period of five years. The Mills was to be paid remuneration at certain specified percentages for its services, by way of purchases, sales and management. The agreement sets out the powers and functions vested with the Mills for its operational management. Clause 13 thereof stipulated that the assessee either by its managing agent or Board of Directors shall not exercise powers delegated to the Mills (manager) except by way of general supervision and advice nor interfere with the discretion of the Mills in exercise of their powers and functions. The Mills was paid, in terms of the agreement, remuneration to the tune of Rs. 1,03,547 (for the assessment year 1958-59) and Rs. 18,294 (for the assessment year 1959-60) and suffered tax thereon in its respective income-tax assessments. In its Income-tax assessment proceedings for the assessment years 1958-59 and 1959-60, the assessee claimed deduction of the said remuneration as a business expenditure under section 10(2)(xv ). The ITO disallowed the claim holding (i) that section 384 of the Companies Act, 1956 (operative from 1-4-1956) prohibited the continuation of a body corporate as manager for a period beyond six months (after 1-4-1956), and (ii) that remuneration paid…

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