Judgment

HDGDE, J.:- These are appeals by special leave. They arise from a reference under Section 66 (1) of the Indian Income-tax Act, 1922. In order to properly appreciate the decision of the High Court, it would be convenient to set out the material facts at the very outset.

2. The assessee, an individual, derived during the accounting years ending on October 21, 1949 and November 9, 1950 - the relevant assessment years being 1950-51 and 1951-52 - considerable income from various sources in Hyderabad as well as in other places. In 1935, the assessee had promoted a public limited company called Dhanraj Mills ltd. at Bombay. The assessee was appointed as its managing agent for a period of 50 years. He was also appointed as a permanent director and chairman of the Board of Directors. In 1937, the company got into financial difficulties. Hence the assessee invited the assistance of one Ramgopal Ganpatrai, who agreed to bring in the necessary finance. A tripartite agreement was entered into between the assessee, the company and the said Ramgopal Ganpatrai. Under that agreement it was provided that the assessee show give up the managing agency and the company should appoint Ramgopal Ganpatrai or his nominee as the new managing agent. A selling agency agreement was also to be entered into between the company and the Ramgopal Ganpatrai or his nominee. As per that agreement the assessee was to be paid certain office allowance and a share in the managing agency commission by way of compensation. Under that agreement, he also became entitled to 3/8th share of the selling agency commission as many accrue under the proposed selling agency agreement. It was further provided that in case either the managing agency agreement or the selling agency agreement or the selling agency agreement came to be terminated, the assessee, at his option, would be entitled to resume the managing agency as well as the selling agency. In pursuance of the aforementioned tripartite agreement, the managing agency agreement and the selling agency agreement were executed by the company. Accordingly, Ramgopal Ganpatrai became the managing agent as well as the selling agent of the company. This position continued for some years. In 1943 Ramgopal Ganaptrai floated two private limited companies and assigned the managing agency and selling agency respectively to those two companies. The assessee s consent thereto was also obtained, as stipulated in the agreement. In 1946 Ramgopal Ganpatrai moved a resolution for the removal of the assessee as the Chairman of the Board of Directors of the company on the ground that he had committed offences under Section 88-F of the Indian Companies Act. That resolution was accepted and the assessee was removed from his office of the Chairman of the Board of Directors. In 1947 the selling agency was surrendered by the private company floated by Ganpatrai, but it did not revert to the assessee as provided in the original tripartite agreement. The assessee thereupon instituted a civil suit seeking his reinstatement as the Chairman of the Board of Directors of the company. In that suit he also sought to establish his right to the selling agency. Therein he alleged that the company had in collusion with Ramgopal Ganpatrai sought to oust him from his office of the Chairman of the Board of Directors and further prevented him from getting the selling agency. During the pendency of that suit, the assessee lodged a complaint with the police alleging misappropriation of the company s funds as well as other fraudulent acts on the part of Ramgopal Ganpatrai, while managing the company. He also made other allegations with which we are not concerned in this case. In pursuance of that complaint, the Government instituted a criminal case against Ramgopal Ganpatrai. After obtaining the permission of the Court and with the consent of the Government the assessee employed his own lawyers to prosecute that case. The prosecution culminated in the conviction