Judgment

RAMASWAMI, J.:- These appeals are brought by special leave from the judgment of the Allahabad High Court dated July 10, 1962 in Income Tax Miscellaneous Cases Nos. 255 and 256 of 1955.

2. The appellant, M/s. Juggi Lal Kamlapat, hereinafter called the assessee was a registered partnership firm having the following constitution:

Names of the partners Shares

1. Shri S. M. Bashir . . . 49 per cent

2. Sri Padampat Singhania . . 17 per cent

3. Sri Lakshmipat Singhania . 17 per cent

4. Sri Kailaspat Singhania . . 17 per cent.

Total . . 100 per cent

The share-holding of the three Singhania brothers was 51 per cent, constituting a majority of the share holding in the partnership firm. The partners of the said firm floated a company, namely, M/s. J. K. Iron and Steel Company Ltd., the constitution of which was that the three Singhania brothers and their wives had 166 shares while Sri S. M. Bashir and his wife had 42 shares. In consideration of the fact that the assessee firm promoted the company the assessee was appointed the managing agent of M/s. J. K. Iron and Steel Company Ltd. for a period of 25 years under a Managing Agency agreement dated December 15, 1938. It was provided in this agreement that the assessee will continue to be the managing agent until it resigned or it was removed from its office of managing agency by a majority of 3/4th of the share-holders of the managed company. According to the terms of the agreement the Managing Agent s remuneration was Rs. 1500/- per month and a commission of 10 per cent on net profit of the company after deducting all expenses and after charging depreciation. There was no provision in the Articles of Association of the managed company for terminating the managing agency except in the case of the managed company being wound up in which case the managing agents were to receive compensation for loss of appointment. There was also the exception provided under the general law in case of fraud or gross negligence on the part of the managing agents. The relevant terms of the managing agency agreement were as follows:

"Para 2 (m). It shall be lawful for the firm to assign their office as Agents and all the rights and obligations as such agents and in the event of Assignment, the assignee or assignees shall be deemed to have been appointed Agents of the company with like powers and authorities remuneration and emoluments and subject to like terms and conditions as are herein contained . . . . . . ."

"Para 2 (c). The firm may at their option from time to time lend and advance to and for the use of the Company, money on interest to any extent as they may like the same to run at a minimum rate of five per cent per annum provided that if the bank rate prevailing at the date of advance is higher than five per cent the firm may charge interest at one per cent above the bank rate."

On August 12, 1943, a meeting of the Board of Directors of the managed company was held. The Directors present were: (1) Sri Padampat Singhania, (2) Sri Lakshmipat Singhania and (3) Sri S. M. Bashir with Sri Padampat Singhania in the chair. At this meeting a letter dated August 3, 1943 from M/s. Juggilal Kamlapat Bankers, the financiers of the managed company asking for repayment of advances made by the financier to the company exceeding Rs. 5 lacs was discussed. Sri S. M. Bashir pointed out that the managing agents were under no obligation to provide finance for the company at the latter s direction. It was the option of the firm to provide or not to provide finance and also to determine the extent of the advance. Sri Padampat Singhania, thereupon pointed out that even though the matter of providing finance might be at the discretion of the managing agents but "it was the usual practice with companies under the management of the managing agents to obtain their finance from the managing agents". Accordingly the meeting decided to ask the assessee to arrange for advance of such sums of moneys as would be necessary to pay