Holding

Kamala Mills Ltd. was not a "manager" within the meaning of section 2(24) of the Companies Act, 1956, so section 384 did not apply and the remuneration was deductible as business expenditure under section 10(2)(xv).

Summary

Alagappa Textile (Cochin) Ltd. entered into a five‑year financing and management agreement with Kamala Mills Ltd., under which Kamala Mills received remuneration for purchases, sales and management of the mill. The assessee claimed the remuneration as a deductible business expense under section 10(2)(xv) of the Income‑Tax Act, 1922. The Revenue argued that Kamala Mills was a "manager" within the meaning of section 2(24) of the Companies Act, 1956, making the payments illegal under section 384 and therefore non‑deductible. The Supreme Court examined the definition of "manager" and the terms of the agreement, concluding that Kamala Mills acted as a financier and managing agent, not as a manager subject to the Board’s control, and thus section 384 did not apply. Consequently, the remuneration was allowable as a business expense. The Court also held that the pending suit for recovery of the amounts did not affect the deduction, though any eventual recovery could be taxed under section 41(1) of the 1961 Act. The revenue’s appeal was dismissed.

Issues considered

Whether Kamala Mills Ltd. qualified as a "manager" of Alagappa Textile within the meaning of section 2(24) of the Companies Act, 1956 (and section 2(9) of the Companies Act, 1913) thereby attracting the prohibition of section 384.
Whether the remuneration paid to Kamala Mills Ltd. is disallowable as business expenditure under section 10(2)(xv) of the Income‑Tax Act, 1922.
Whether the existence of a pending suit/decree for recovery of the remuneration impacts its deductibility under section 41(1) of the Income‑Tax Act, 1961.

Legislation cited

Companies Act, 1913s. 2(9)
Companies Act, 1956s. 2(24), s. 2(25), s. 384
Income Tax Act, 1922s. 10(2)(xv)
Income Tax Act, 1961s. 41(1)

Subjects

business expendituremanager definitionCompanies Act 1956section 384income‑tax deductionagency coupled with interestfinancing agreementsection 10(2)(xv)section 41(1)manager vs managing agent

Judgment

723 -

COMMISSIONER OF INCOME-TAX, KERALA A
v.
- -
ALAGAPPA TEXTILE (COCHIN) LTD.
September 19, 1979
[V .. D. TULZAPURKAR' AND R_ S. PATHAK, JJ.] ,B
·t Bu.tiness E·xpenditurY!"-section t0(2)(xv)
1
oi the Income-tax Act, 1922-
1· /:ether tlze remuneration tOH'arcls the '111a11ager' Kanzala Mills Ltd. .is falling
-(~·ithin the 1neaning _of Section 384 read witll s. 2(24) of the Co1npaiiies Act
1a[[c7"A:able as "business expenditure"-Construction of the terms of Agreement-
lVliether the managing company falls l'.:ithin the meaning of. Section 2(24) of ·
.the Companies Act, 1956. · C

Respondent, assessee ("!!.Ifs. Alagappa Textiles (Cochin) Limited company
i.vas carrying on business of manufacture and sale of yarn. It entered into an
Agreement dated November 10, 1955 with Kamala l\lills Ltd., Coimbatore for
financing and managing the assessee l\fills at A1agappa Na-gar for a reriod of
five years. Clause 8 of the Agreement provided that Kama1a ~fills Ltd. shall be
paid for the ser''ices, rendered by it by \-Vay of purchases, sales ·and manage- D
ment, remuneration at the rite of I% on all purchases made by it for the
nssessce Mil1s and at half a percent on all sales of yarn, yarn v.--ast~ and cotton
waste and othe-.r products of the l\!iIL C1ause 13 of the agreement w~s to the
effect that "'the 'company (assessee), either represented by its managing Agent
or Board. of Directors shall not exercise the po\-vers delegated 1'.J th·! !\tanagers
(Kamala l\Iills Ltd.) under the foregoing clauses, except by \Vay of genf.r.il
supen'ision and advice nor interfere with discretion of the managers in the E
exettise of their functions and powers vested in them by virtue of thh Agree-
ment.., Oause 14, provided that the l\fanagers (Kamala l\lills Ltd.) po·.vers were
limited in the manner aforesaid and shall not· be deem~d to be manager in
charge of the _\-vhole affairs of the company within the meaning of section 2(9)
of tbe companies Act, 1913. Clause 16 provided th::it the agreement shalt be in
force for a period of five years commencing from the date thereof and that
"this Agreement for management being an Agency coupled \vith interest" F
CQuld be ·revoked before the expiry of the said period of five years by 12
months• notice in writing being given by one party io the other, but if the
i~see were to revoke it the a5sessce shall be Ii-able to compensate Kamala
His for.the loss of remuneration for. the unwexpired period of the Agreement
f1le average rate at which Kamala ~fiIIs Ltd. had been earning by way of
nneration under the Agreement till the date of such notice of ':ermination.
G
Ptlrsuant to the aforesaid termi, Kamala 1Iills Ud. drew remuneration to
he tune of Rs. 1,03,547/- and Rs. 18,249 /- respectively for the calendar year1
1957 and 1958 corresponding to the assessment years 1958-59 and 1959w60.
' 1"be&e &mounts \Vere assessed lo tax in the hands of Kamala ~tills Ltd. Respon-
:' dent. &iSeSsee in its assessment proceedings. for the said two a'5essment years,
claimed deduction in respect of the said two amounts as business expenditure
unde< section 10(2)(xv) of the Income-tax· Act. The claim was rlisallowed. by
H
tMi Income Tax Offictr on the ground that under section 384. of the companies
Act, 1'56 which had come i•to_ force on April 1, 1956 the continuation of a

'
724 SUPREME COURT REPORTS (19£0] l S.C.R.

A body corporate as manager was prohibited foi the period beyond .&ix. months
from the comlnz into force of the Act, that the remuneration pa1J to Kamala
1'-Iills Ltd. subsequent to October 1, 1956 \Vas illegal being in violation of
s. 384. The Appellclte Assistant Commissioner rejected the Appeal ir.ainly"'on
the ground that the assessee by its own conduct had disputed its liability to
pay any remuneration to Kamala Mills Ltd. as after October 1, 1956 and in
th<it behalf he relied on an admitted fact that the assessee had filed a .;;uit
B against Kamala Mills to recover such remuneration which had been paid to
it in contravention of secti6n 384 of the Companies Act on the basis that e. l2e-
tbe payment was illegal Kamala Mills was holding such amounts of remune~a·
tjcn in trust for and on behalf of the assessee. Respondent carried ihe matt~r
in further appeals to the Tribunal; but the Tribunal confirmed the view of the
taxing allthorities. On a reference, the High Court answered the question in
the negative in favour of the assessee and against the Revenue. The High Court
c held that Kamala 1fills could not be said to be "subject to the superinten-
dence, control and directions of the Board of Directors" of the respondent and
therefore wa.S not a "manager'' of the assessee within the meaning of section
2(14) of the Companies Act, so as to attract the illegality under section 384
ibid. and (b) that in view of the provisions of section 41 ( 1) of the Income-
tax. Act, the pendency of an appeal against the Judgment the suit for recovery
could not be a valid ground for disallowing the deduction permissible under· •
D section 10(2) (xv) of the Income-tax Act.

Dismissing the appeal by Revenue by special leave, the Court
'
HEID: 1. Section 384 of ·the Companies Act, 1956 in express· terms
prohibits, after ·the commencement of the Act, the appointment Of a firm or
a body corporate or an association of persons as manager as also the conti-
E nuation of such employment after expiry of six months from such commence-
ment. To attract the piohibition or disqualification, under this section, a
firm, body corporate or association must be a "manager" within the meaning
of section 2(24), that is to say, it should be in management of the whole or
substantially the whole of the affairs of a company and should be under
superintendence, control and direction of the Board of Directors of the
company. [730 C·D, E·F)
F
2. Section 2(24) of the Companies Act requires three conditionS to be
satisfied: (a) the Manager must be an individual~ '\Vhich means that a·· furn
or body corporate or an association is excluded and cannot be a· Mana·~
(a fact which is expressly made clear in section 3_84), (b) he should hav.~ '
management of the whole or substantially the whole affairs of the companY;_~
(c) he should be subject to the superintendence, control arid direction3"
G. the Board of Directors in the matter of managing the affairs of the comp
Subject to, the changes made in the aspect covered by (a) and (b), in b -
the definitions [s. 2(9) of 1913 Act and s. 2(24) of the 1956 Act], the aspe
that a itanager has to work or exercise , his powers under !he· control an
directions of the Board of Directors is common ·and essential. In · fact. it
i~ this aspect which distinguishes '1Ianager' from "Managing Agent":.. A
comparison of the defin:tion of "~Ianager" as given in s. 2(24) of the ·1956
H Act with that of "Managing Agent" in s. 2(25) makes it clear that though
there is an ovedapping of the functions of the Manager as well as the
Managing · Agent of the company the essential distinctioil 'is that whereas the
CJ.T. v. ALAGAPPA TEXTILl!S (Tulzapurkar, !.) 725

Mana&er has to be subject to the superintendence, conlrol and direction of the A
Board of Directors, the managing Agen~ is, not so •ubject. [729 G-H, 730 A-Cl
•
3. On a perusal of the clauses and in particulax clauses 8, 13, 14 and 16 oi
the Agreement dated November 10, 1955 in the instant case, two or three things
statid out very clearly. It is true that-at the commencexnent of the deed Kan1ala.
Mills Ltd. has been described and referred to as the "Managers" of the asses~
.sec throughout the document but mere label or nomenclature given to a party
in thC document will not be decisive. It is also true that the several powers
......:md functions were entrusted to Kamala Mills Ltd. under clause 1 of the
t Agreelrient to enable it "to manage or run the Mill" of the assessee. But
simply because powers and functions ~rere given to Kamala Mills Ltd. for
the purpose of "managing and running the ~fills" of the assessee, it could not
follow that Kamala. Mills Ltd. was in truth .and substance a 'manager' of the
assessee within the meaning of s. 2(24) of the 1956 Act. For this purpose
the Agreement will have to be read as a ~·hole and the Court will have to
c
decide what was the· true· intention· of· thC partieS ·in entering into such
Agreement. [733 E-Gl

4. The dominant object \Vith which the Agreement was entered into \vas
thaf K:aTnala Mills Ltd. should really act as a :tin3-ncier so that the assessee Mill
could• :n;i.n and since heavy finances were to be procured by Kamala Mills Ltd. D
large powers and functions connected 'Yith. the wor~ing of the mill were en-
trusted to it. This aspect become abundantly clear from cl. 16 of the Agree-
ment. wherein the parties expressly provided .that this Agreement for manage-
ment. was. by way of and amounted to an Agency coupled with interest so far
as K~inala Mills Ltd. was concerned and, therefore, revocation of the Agree-
ment before the expiry of five years' period was made dependent upon 12
months' notice in writing being given by one party to the other and further if E
such .revocation was done· by the assessee suit~ble compensation Was made
payable to Kamala Mills Ltd. In other words, managerial functions were
incidental and had to be entrusted to Kamala Mills because of the financier's
role undertaken by it. The large powers and functions entrusted to Kamala
Mills Ltd. under the several sub-clauses of cl.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 lllills Ltd. l734 B-EJ F

5. Clause 13 of the Agreement which is very eloquent, provided that so
r far as the poweis conferred and the functions entrusted to Kamala Mills Ltd.
were concerl,led, 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
Kemala Mills Ltd in the exercise of their functions and powers vested in G
it ~ virtue of the Agreement. In other words, the general supervisiob or
advice of· the Board of directors was o:f such character that the Board had no
way. whatsoever nor could .it interfere with the . dis.cretion of . Kamala Mills
Ltd. in the matter of the exercise of the powers and the discharge of the
function~ elltrusted to Kamala Mills Ltd. under the Agreement. It is thus
olear that the dominant object of the Agreement was that Kamala Mills
ltd. •sliould act as financiers Of the assessee !llill antl in the matter of the B
exerc.ise. ·of _its powers and discharge of its functions Kaniala Mills Ltd. was
uc¥er .- "stJ.bject to the superintendence; control· or direction" of the Board of
10-625 SCI/79
726 SUPREME COURT l\EPORTS [1980] 1 ~.c.a.

• A directors of the assessee. This ls the position which clearly emerges 011 true
construction of the Agreement. [734 F-H, 73SAJ

6. Therefore, Kamala Mills Ltd. was no/ acting or working as the
"Manager" pf the assessee within the me.'Uling of s. 2(24) of the Companies
Act, 1956 and as such the illegality of section 384 of the Act was not attracted.
In this view of the matter, the remuneration paid by the assessee to Kamala
1J Mills Ltd. for the two calendar years 1957 & 1958 relevant to the assessment
years 1958-59 and 1959-60 could not be rejlllrded as being in violation of s. 384
of the companies Act,· 1956 and as such the expenditure incurred by way of
paying such remuneration would be deductible as "Business Expenditure"
under section 10(2) (xv) of the Income-tax Act, 1922. (735 A-DI
CIVIL APPELLATE JURISDICTION :' Civil Appeals Nos. 2001-2002
C of 1978.
Appeals by Special Leave from the Judgment and Ordec dated
14-12-1971 of the Kerala High Court in Income Tax Reference No.
19 of 1969.
V. S. Desai, S. P. Nayar and Miss A. Subhoshini for the Appellant.
D S. T. Desai, N. Sudhxzkaran and P. K. Pillai for the Respondent.
The Judgment of the Court vlas delivered by
TuLZAPURKAR, J. These appeals by special leave raise a collll!IOn
question whether on proper coostruction of the Agreement dated
November 10, 1955, entered ,into by the assessee with Kamala 'Mills
E Ltd., the latter was the "maaager" of the assessee within the meaning
of s. 384 read with s. 2(24) of the Companies Act, 1956 and if so,
whether the remuneration paid by the assessee to the latt~r in the two·
calendar years 1957 and 1958 relevant to the assessment years 1958-
59 and 1959-60 cannot be allowed as business expenditure under
s. 10(2) (xv) of the Indian Income-Tax Act, 1922?
F The facts giving rise to the question may briefly be stated as follows :
·Tue assessee (M/s Alagappa Textiles (Cochin) Ltd.) is a public.
limited company carrying on bus.iness 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
. "'
G
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, remunera-
tion at the rate of 1 % oil all purchases made by it for the assessee
mills and at half a per cent on alJ sales of yarn, yarn waste and cotton
H waste and other products of the mill. Pursuant to the aforesaid teem
Kamala Mills Ltd. drew remuneration to the tune of Rs. 1,03,547/"
and Rs. 18,294/- respectively for the calendar years 1957 and 19SS
C.l.T. v. ALAGAPPA TEXTILES (Tulzapurkar, !.) 727

corresponding to the assessment years 1958-59 and 1959-60. These A '
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 s. 10(2) (xv) of. the Act. The claim was disallowed
by the _Income-Tax Officer on tbe ground that under s. 384 of the
ilew Companies Act, 1956, which had come into force on April 1, B
1956, the continuation of a body corporate as manager was prohibited
for tbe period beyond six months from the coming into force of the
Act, that remuneration paid to Kamala Mills Ltd. subsequent to
October 1, 1956, was illegal being in violation of s. 384 and, therefore,
the deduction claimed in respect of such payment for the calendar
years 1957 and 1958 could not be allowed. In the appeals preferred
c
by the assessee against the decision of the Income Tax Officer, it was
contended that though the payment of remuneration to a body corpo-
rate as Manager after October 1, 1956 was illegal under s. 384, the
payments were for services rendered and were fully justified by com-
mercial expediency and as ~uch the same should be allowed under D
s. 10(2) (xv) of the Act. It was also urged that even if the expenses
in.curred were in violation of the statute such expenses should be
'allowed since in computing the profits even of illegal business only the
net profit was taxed after allowing all the expenses. Tile Appellate
Assistant Commissioner was not impressed by these arguments; but he
disallowed the deduction mainly on .the ground that the assessee by its E
own conduct had disputed its liability to pay any remuneration to
Kamala Mills Ltd. after October I, 1956 and in that behalf he relied
on an admitted fact that the assessee had filed a suit against Kamala
Mills Ltd. to recover such remuneration which had been paid to
it in contravention of s. 384 on the basis that since the payment was
F

.
)
illegal Kamala Mills Ltd. was holding such amounts of remuneration
in trust for and on behalf of the assessee and in such a si!Uation the
deduction could not be allowed. The assessee carried the matter in
further appeals to the Tribunal, but the Tribunal confirmed the view
,,. of the taxing authorities that under s. 384 of the Companies Act, 1956
it was not legal for the assessee to have permitted Kamala Mills Ltd.
G
to continue to work as its Manager after October 1, 1956 and that the
payment of remuneration after the said date was illegal and could not
be con~idered as valid expenditure for the purpose of Income Tax Act.
ln this behalf the Tribunal relied on two decisions in C.l.T. v. liaji
Aziz and Abdul Sakoor Bros.(') and Raj Woollen Industries v.
C.l.T. ('). An argument was raised before 'the Tribunal that ·.Kamala H
(1) 28 I. T. R. 266.
(2) 43 I. T. R, 36. '
728 SUPREME COURT REPORTS [1980] 1 s.c.R.

•• Mills Ltd. was not orily 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 iu the meantime
obtained a decree against Kamala Mills Ltd., and, therefore, the
amounts could not be lawfully claimed as permissible deduction.
c
At the instance of the assessee the following question was referred
to the High Court for its opinion :
"Whether ou the facts and in the circumstances of the
case, the Tribunal was justified in law iu disallowing the
claim of the assessee for deduction of Rs. 1,03,547 /- and
D Rs. 18,294/- from the income of the assessment years 1958-
59 and 1959-60 as not an admissible business expenditure
under sec. 10(2) (xv) of the Indian Income Tax Act,
1922 ·"
The High Court answered the question in the negative in favour of the
assessee and against the Department. The High Court, on construction
of the Agreement dated November 10, 1955, took the view that since
in the matter of the exercise of its powers and the discharge of its
functions thereunder Kamala Mills Ltd. could not be said to be
"subject to the superintendence control and direction of the Board of
Directors" of the assessee, Kamala Mills Ltd,, was not a "manager'' of
F
the assessee within the definition given in s. 2(24) of the Companies
Act, 1956, and, therefore, the illegality under s. 384 was not attracted
and as such the remuneration paid by the assessee to Kamala Mills Ltd ..
for services rendered during the calender years 1957 and 1958 was
allowable as a business expenditure under s. 10(2) (xv) of the Act. As
G regards the decree that had been obtained by the assessee against
Kamala Mills Ltd. the High Court observed that the appeal filed by
Kamala Mills· Ltd. against the said decree was still pending .in the
High Court and if ultimately the appeal was dismissed and the amounts
were recovered back from Kamala Mills Ltd., the assessee could be
taxed on those amounts under s. 41(1) of the 1961 Act, but that
B could not be a valid ground for disallowing the deduction claimed by
the assessee. 'The Revenue has challenged in these appeals the view of
the High Court that Kamala Mills Ltd. was not the Manager of the
C.I.T. v. ALAGAPPA TEXTILES (Tulzapurkar, !.) 729

assessee within the meaning bf s. 384 read with s. 2(24) of the A ,
Companies Act, 1956 and t!Je further view that the remuneration paid
to Kamala Mills Ltd. during the calendar years 1957 and 1958 was
deductible as business expenditure, under s. 10(2) (xv) of the Act.
Before we consider the principal question relating to the proper
construction of the Agreement dated November 10, 1955, it will be B
desirable to note the relevant provisions of the' Indian Companies Act,
1913 as also the new Companies Act, 1956, which have a bearing on
the question at issue. Since the Agreement between the assessee on the
one hand and the Kamala Mills Ltd. on the other was entered into at
a time when the Indian Companies Act, 1913 was in force it will be
proper first to refer to the definition of 'Manager' given in s. 2(9) C •
of the said Act. Section 2(9) ran thus :
"2(9) "manager" means a person who, subject to the
control and direction of the din~ctors 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 D
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
E
definition has undergone a substantial change under the Companies
Act, 1956. Under this Act s. 2(24) defines the expression "manager"
thus:
2(24) "manager means an individual (not being the
managing agent) who, subject to the superintendence, control F
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 occu-,
.pying the position of a manager, by whatever name called,
and whether under a contract of service or not."
G
In this definition three.conditions are required to be satisfied: (a) the
manager must be an individual, which means that a firm or a body
corporate or an association is excluded and 'cannot be a manager
(a fact which is expressly made clear ins. 384), (b) he should have
the management of the whole or substantially the whole affairs of the
company and ( c) he should be subject to the superintendence, control b
and directions ,of the Board of Directors _in the matter of managing the
affairs of the company. Subject to the changes made in the aspects
730 · SUPREME COURT REPORTS [1980] l S.C.R.
'A covered by (a) and (b), in both the definitiohs the aspect that a
~a~er has to work or exercise his powers under the control and
directmns of the Board of Directors is common and essential. In fact
it is this aspect which distinguishes 'Manager' from 'Managing Agent'.
If the definition of 'Managei;' as given in s. 2(24) is compared with
. that of 'Managing Agent' as given in s. 2(25) it will appear clear that
9 though there is an overlapping of the functions of the manager as well
as the managing agent of the company the essential distinction seems
to be that whereas the manager has to be subject to the superin-
tendence, control and direction of the Board of directors the managing
agent is not so subject.
c Section 384 of the Companies Act, 195.6 in express tenns prohi-
bits, after the commencement of the Act, the appointment of a firm or
a body corporate or an association of persons as a manager as also
the continuation of such employment after expiry of six months from
such commencement. It runs thus :

D "384. No company shall, after the commencement of this
Act, appoint or employ, or after the expiry of six months
from such commencement, continue the appointment or
employment of, any finn, body corporate or association as
its manager."

The aforesaid provision positively disqualifies a firm, body
corporate or association from being appointed as manager of a
company or from continuing the employment of a firm, botly corpo-
rate or association as manager after the .expiry of six months from the
commencement of the Act. Obvionsly, to .attract the prohibition or

, disqualification contained in s. 384, a firm, body corporate or asso-
ciation must be a "manager" within the meaning of s. 2(24), that is
to say, it should be in management of the whole or substantially the
whole of the affairs of a company, and should be under superinten-
dence, control and direction of the B'oard of directors of the company.
It was not seriously disputed that under the terms and conditions
contained in the Agreement dated November 10, 1955, Kamala Mills
G 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 s. 2 (24)
of the Act?
Turning now to the Agieement in question it may be stated that
at the commebo~ment of the deed the parties thereto have been des-
cribed in a particular manner, nawely, the assessee has been described
C.I.T. v. ALAGAPPA TEXTILES (Tulzapurkar, !.) 731

and 1eferred to .as the "Company" while Kamala Mills Ltd. has been A
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 of find out a financier who wa5 agreeable to help the assessee B
-411 monetarily and take active interest in ils business and that since Kamala

•
Mills Ltd. agreed to assist the assessee with sufficient finance and to
I
manage the assessee's mill on certain terms and conditions which the
Board of Directors had approved, the Agreement was executed bet-
ween the parties. Then follow the operative parts of the deed setting c
out the terms and conditions on which Kamala Mills Ltd. agreed to
provide sufficient finance as also to manage the business of the
assessee. Clause 1 enlisted in sub-clauses (b) to (m) the powers and
functions which were to be exercised and performed· by Kamala Mills
Ltd. during the period of five years for which the Agreement was to
operate; such powers were conferred and functions entrusted for the D
purpose of "managing and running the mill" of the assessee; inter alia,
Kamala Mills Ltd. was to make purchases of all cotton, staple fibre or
any othoc raw material for the manufacture of the yarn and to enter
into contracts in that behalf at such rates and prices as it may deem
fair and proper and make payments for all such purchases and incur
all expenses incidental thereto; it was also to make purchases of all E
stores- and spares and other materials necessary for the manufacture
of yarn; it was to appoint all staff, technical or non-technical and
workers skilled and unskilled as also clerks and other staff necessary
for the working of the mill and fix their terms and remuneration and
could discharge or dismiss or take disciplinary action against them; it
had to sell and make contracts for sale for immediate or future
F
delivery of yam, yarn waste or cotton waste or any other material or
prodocts of the mill at such rates or prices and on such terms and
conditions as it may think fit; it could decide, lay down and change
from time to time the programme of manufacture of yarn and other
products of the mill and to insure• against fire and other risks all G
cottdn, yam, material, stock-in-trade and incur and pay all premia
necessary in that behalf; it could pledge, secu~2 and hypothecate all
J.. stocks and stores and stock-in-trade with such bank ot banks where
ammgements for overdrafts shall have been completed by the Board
of Directors; and it could claim, demand, realise and sue for all goods,
ll!lif$ials and amounts due to the assessee in. the exercise and carrying H
out of any or all of the powers conferred under sub-els. (a) to (k).
Cla\is~ 2 of the Agreement stipulated that Kamala Mills Ltd. shall
732 SUPREME COURT REPORTS [1980] 1 s.c.a.

A provide funds or arrange for finance necessary for exercising· the
powers of purchase of cotton, stores and other materials and for pay- ·
ment of wages, salaries, commissions and allowances and for meeting
all expenses incid~ntal to manufacture and sale of yarn :ind other pro-
ducts of the mill. Under clause 3 the assessee was to open a separate
Current Account and an Overdraft Account for a limit not exceeding
B 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
c 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 7:!% per annum with half-yearly rests
on all advances made by it and funds provided for the purposes set 1,.
out in clause 2. Clause 5 gave Kamala Mills Ltd. a first and prior
D charge on all the stocks and stores and stock-in-trade. for all the
moneys and amounts that may be advanced by it to the assessee except
to the extent of any charge or security of such stocks and stores and
stock-in-trade that may be created in favour of the banks for the
overdraft account and such charge in favour of Kamala Mills was to
be a possessocy charge. Clame 8 quantified the remuneration payable
E to Kamala Mills Ltd. for services rendered by way of purchases, sales,
and the management of the mill at the rate of 1 % on all purchases
made by it for the assessee mill and at 1/2% on all sales of products
effected for and on behalf of the assessee. Clanse 10 required Kamaia
Mills Ltd. to maintain proper accounts in respect of all purchases, sales
aJ1d expenses, commissions and remunerations due 'to it etc. and 'sub-
F mit to the assessee monthly statements of accounts. Clause 11 put the ·
outer limit of Rs. 15,00,000/- at any one point of time on file
advances and financial assistMoe to be given by Kamala Mills Ltd.
to the assessee and it was provided that if and when sums over 'and
above the said limits become necessary to be advanced, Kamala Mills
would be entitled to appropriate and take for itself as . owner ' lllCb
G quantity of yam as may be in stock as in value would be equivalent,
at cost or market value whichever was lower, to the sum that it may
be obliged to advance over and above Rs. 15,00,000/~. Clause 13 ·Of
the Agreement is very importllnt having a crucial bearing on·.; the
question at issue and may ~ set out verbatim. It ran thus :
"13. The Company (Ql!SCS!!ee) either represented by its ·
" Managing Agent or Board of Directors sha!I not. exercise the.· .
powers delegated to the Managers (Kamala Mills Ltd.)'"'·'·'
.,If:
c.I.T. v. ALAGAPPA TEXTILES (Tulz(Jpurkar, !.) 733

under the foregoing clauses, except by way of general super- A
vision and advice, nor interfere with the discretion of the
Managers in the exercise of their functions and powers
vested in th~m by virtue of this Agreement."

Under cl. 14 it was provided that the Managers' (Kamala Mills Ltd.)
powers were limited in the manner aforesaid and they were not and B
--.., shall not be deemed to be managers in charge of the. whole affairs
of the company within the meaning of s. 2(9) of the Indian Companies
Act, a significant provision showing the intention of the parties that
Kamala Mills Ltd. was not to be regarded as a 'Manager' under the
Indian Companies Act, 1913. Clause 16 is significant and it provided
that the Agreement shall be in force for a period of five years com- c
mencing from the date thereof and that "this Agreement for manage-
ment 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 D
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 addi-
tional term in the Agreement was made on November 21, 1955 but
the additional term is not material·for our purposes; E
On a perusai of the aforesaid clauses of the Agreement in question
two or three things stand out very clearly. It is true that at the com-
.
mencement of the deed Kamala Mills Ltd. has been described -
referred to as the "Managers" of the assessee throughout the document
and

but ·mere label or nomenclature given to a party in the document will
F
not be decisive. It is also true that the several powers and functions
were entrusted to Kamala Mills Ltd. under cl. 1 of the Agreement to
enable it "to manage or run the mill" of the assessee. But &imply
because powers and functions were given to Kamala Mills Ltd. for
the purpose of "managing_ and running the mills" of the assessee, it
would not follow that Kamala Mills Ltd. was in truth and substance G
a 'manager' of the assessee within thel meaning of s. 2(24) o~ the 1959
Act. For this purpose·the Agreement will have to be read as a whole
and the Court will have to decide that was the true intention of the
parties in entering into· such agreement. The two recitals clearly indicate
the object with which and the purpooe for which the Agreement was
eri't'erlid' into. It does appear that the · assessee was in financially
straightened circumstances and on that account was utterly unable to
cahy on its business of manufacture and sale of yarn and, therefore,
734 SUPREME COURT REPORTS [1980) 1 S.C.R.
I
A the board of directors were in search of a financier· who would make>.
available the necessary finances for the running of the mill as also to .
take active interest in the. business ot the assessee and when Kamala
Mills Ltd. agreed "to assist the company ( assessee) with sufficient
finance and manage the' mill" belonging to the as~essee on tenn.. and
conditions that were approved By the Board of Diiectors of the assessee
B that the Agreement was entered into between the parties; in other
words, it is clear that the dominant object with which the Agreement
was entered into was that Kamala Mills Ltd. should really act as a
financier so that the assessee mill could run and "since heavy finances
were to be procured by Kamala Mills Ltd. large powers and functions
-c connected with the working of the mill were entrusted to it. This aspect
becomes abundantly clear from cl. 16 of the Agreement wherein the
parties expressly provided that this Agreement for management was
by way of and amounted to an Agency coupled with interest so far
as Kamala Mills Ltd. was concerned and; therefor!', revocation of the
Agreement before the expiry of the five years' period was made depen-
D dent upon 12 months' notice in writing being given by one party to the
other and further if such revocation was done by the assessee suit3.ble
compensation was made payable to Kamala Mills Ltd. In other words;
· managerial functions were incidental and had to be entrusted to Kamala
Mills because of the financier'~ role undertaken by it. The large
powers and functions entrusted to Kamala Mills Ltd. under the several
E · sub-<:laii.ses of cl. 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 cruciaI
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 cl. 13 of the Agee-:
F ment which we have quoted above is very eloquent. In terms it pro-
vided 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 shaU
G not interfere with the discretion of Kamala Mills Ltd. in the exercise
of their functions and powers vested in it by virtue of the Agreeinoot. ...
· In other words, the general supervision or advice of the Board of
Directors was of such character that the Board bad no/ say whatsoever
nor could it inte~ere with the discretion of Kamala Mills Ltd. irt the
c
matter cf the exercise of the powers and the discharge of the functions
'H entrusted to Kamala Mills Ltd. under the Agreement. · It is thus clear
to us that the dominant object of the Agreement was . that Kamala
l\1ills Ltd. should act as financiers of the assessee mill and in the
c.I.T. v. ALAGAPPA TEXTILES (Tulzapurkar, J.) 735

matter of the exercise of its powers and discharge of its functions A
Kamala Mills Ltd. was never "subject_ to the superintendence, control
or dh:ection" of the Board of directors of the assessee. If this position
clearly emerges on true construction of the Agreement in question then
it is obvious that Kamala Mills was not acting or working as the
"Manager" of the assessee within the meaning of s. 2(24) of the Com-
panies Act, 1956 and as such the illegality of s. 384 of that Act was B
not attracted. In this view of the matter, the remuneration paid by the
assessee to Kamala Mills Ltd. for th;< two calendar years 1957 and
1958 relev~t to the assessment year~ 1958-59 and 1959-60 could not
be regarded as being in violation of s. 384 of the Companies Act, 1956
and as such the expenditure incurred by way of paying such remune-
ration would be deductible as business expenditure under s. 10(2) (xv)
c
~f the Income Tax Act, 1922.

In view of our aforesaid conclusion the aspects whether the assessee
had disputed its liability to pay such remuneration to Kamala Mills
Ltd. or had filed a suit at the instanc!' of the Company Law Board to
recover it back from Kamala Mills Ltd. or had obtained a decree in D
that behalf against Kamala Mills Ltd. become irrelevant. However, we
would like to place on record the fact that the decree obtained by the
asse!l!lees against Kamala Mills Ltd. has been reversed or set aside in
appeal by the Kerala High Court-a fact which w_as brought to our
notice by the Advocate-on-Record for the assessee communicated to
K
him by his client in. a lettt'(r dated 22nd August, 1979. However, even
if in further appeal the trial court's decree were restored and the
assessee were to recover back the remuneration the assessee can be
taxed on the two amounts under s. 41(1) of the 1961 Act.
In our vi~w, therefore, the High Court was right in answering the
question in favour of the assessee. The appeals are, therefore, dismis- F
sed wlth costs.

-r- V.D.K. Appeals dismissed.
,./