COMMISSIONER OF INCOME-TAX, KERALA v. ALAGAPPA TEXTILE (COCHIN) LTD

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 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 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· 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· 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 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 company. [730 C·D, E·F) A B c D E 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" 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 In · fact. it directions of the Board of Directors is common ·and essential. '1Ianager' from "Managing Agent":.. A i~ this aspect which distinguishes comparison of the defin:tion of "~Ianager" as given in s. 2(24) of the ·1956 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 G. H 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 • t

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 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 decide what was the· true· intention· of· thC partieS Agreement. [733 E-Gl ·in entering

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. 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 such .revocation was done· by the assessee suit~ble compensation Was made In other words, managerial functions were payable to Kamala Mills Ltd. 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 c D E F r

5. Clause 13 of the Agreement which is very eloquent, provided that so 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 "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. S. T. Desai, N. Sudhxzkaran and P. K. Pillai for the Respondent. D 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 G H The facts giving rise to the question may briefly be stated as follows : is a public. ·Tue assessee (M/s Alagappa Textiles (Cochin) Ltd.) 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 Alagappa Nagar for a period of five years. Clause 8 of the Agreement provided that Kamala Mills Ltd. shall be paid, 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 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, !.) 7 2 7 B c subsequent 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, 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. 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 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 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 own conduct had disputed its liability to pay any remuneration 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 it in contravention of s. 384 on the basis that since the payment was 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 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. 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 D G E F H (1) 28 I. T. R. 266. (2) 43 I. T. R, 36. ' .. ) ,,. •• c D F G B 728 SUPREME COURT REPORTS [1980] 1 s.c.R . Mills Ltd. was not orily a manager but also a financier and 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 Agreement, that it was by virtue of its position as Manager 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, amounts could not be lawfully claimed as permissible deduction. 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 claim of the assessee for deduction of Rs. 1,03,547 /- 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 to be functions thereunder Kamala Mills Ltd. could not be said "subject to the superintendence control and direction of the Board of Directors" of the assessee, Kamala Mills Ltd,, was not a "manager'' of 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 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 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 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 .in C.I.T. v. ALAGAPPA TEXTILES (Tulzapurkar, !.) 729 assessee within the meaning bf s. 384 read with s. 2(24) of 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. the A , 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) of the said Act. Section 2(9) ran thus : C • "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 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 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 managing agent) who, subject to the superintendence, control 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." D E F 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 the aspects affairs of the company. Subject to the changes made in 9 c D 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 though there is an overlapping of the functions of the manager as well as the managing agent of the company the essential distinction seems the superin to be that whereas the manager has to be subject tendence, control and direction of the Board of directors the managing agent is not so subject. 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 : "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." , G 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 Ltd. could be said to be in management of substantially the whole of it was the affairs of the assessee mills but the question is whether 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 the business of and 1eferred to .as the "Company" while Kamala Mills Ltd. has been 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 monetarily and take active interest in ils business and that since Kamala Mills Ltd. agreed to assist the assessee with sufficient finance and 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 out the terms and conditions on which Kamala Mills Ltd. agreed to provide sufficient finance as also to manage 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 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 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 future 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 cottdn, yam, material, stock-in-trade and incur and pay all premia necessary in that behalf; it could pledge, secu~2 and hypothecate all 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 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 immediate or A B c D E F G H -411 I • J.. 732 SUPREME COURT REPORTS [1980] 1 s.c.a. A B c D E F G for exercising· the provide funds or arrange for finance necessary 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 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 . receive, endorse, sign, transfer and negotiate all bills, cheques, drafts etc. that may be received in the name of the assessee course of the management of the mill and it was specifically agreed that no one except Kamala Mills shall have power to operate on said accounts. Clause 4 entitled Kamala Mills Ltd. to charge 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 out in clause 2. Clause 5 gave Kamala Mills Ltd. a first and prior charge on all the stocks and stores and stock-in-trade. for all 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 overdraft account and such charge in favour of Kamala Mills was be a possessocy charge. Clame 8 quantified the remuneration payable 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 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 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 : 1,. " "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 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 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 Kamala Mills Ltd. was not to be regarded as a 'Manager' under 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 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 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; - . 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 and referred to as the "Managers" of the assessee throughout the document but ·mere label or nomenclature given to a party in the document will 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 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 financially straightened circumstances and on that account was utterly unable to cahy on its business of manufacture and sale of yarn and, therefore, A B c D E F G 734 SUPREME COURT REPORTS [1980) 1 S.C.R. A B -c D E F G c 'H I 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 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 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 as Kamala Mills Ltd. was concerned and; therefor!', revocation of the Agreement before the expiry of the five years' period was made depen 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 powers and functions entrusted to Kamala Mills Ltd. under the several · 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-: 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 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. 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 matter cf the exercise of the powers and the discharge of the functions 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 other words, the general supervision or advice of it. The ... c.I.T. v. ALAGAPPA TEXTILES (Tulzapurkar, J.) 735 matter of the exercise of its powers and discharge of functions 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 "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 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) ~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 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 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 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- sed wlth costs. A B c D K F V.D.K. -r- ,./ Appeals dismissed.