COMPANY LAW (JUDGEMENTS) KOMAL KALRA

B.COM, B.A LLB 6TH SEM

New Horizons Ltd vs. Union of India on 9 November, 1994

1995 SCC (1) 478
ISSUE OF FACTS:- whether Experience of a holding company is considered as an experience of a
subsidiary company?
Doctrine of lifting the corporate veil was applicable.
Facts of the Case:- An Advertisement published in various newspapers on 22- 4-1993 the
Department of Telecommunications, Telecom District, Hyderabad invited sealed tenders from
competent agencies for printing, binding and supply of specified number of telephone directories
in English for three annual issues commencing from 1993. The tenderer was required to supply,
free of cost, the telephone directories to General Manager, Hyderabad Telecommunications at the
specified distribution points. The tenderer was also required to specify the royalty amount for
each issue offered by him. It was mentioned that the successful tenderer will be permitted to
procure on his own classified advertisements and cover page advertisements.
The tenderer was required to remit a sum of Rs 5,00,000 by way of non-refundable earnest money
deposit. The terms and conditions and specifications etc., for the total job were contained in the
tender document 1 (1993) 1 SCC 445 which was required to be obtained for the purpose of
submitting the tender. The last date for submission of tender was 14-5-1993.
Five persons, including appellant 1, M/s New Horizons Ltd. (for short 'NHL), and M/s M&N
Publications Limited (Respondent 4 herein) submitted their tenders. The tenders were opened on
14-5-1993 at 3.30 p.m
The offers were considered by the Tender Evaluation Committee. The offer of M/s M & N
publications Ltd (Respondent 4) was accepted. The Assistant General Manager (OP), Department
of Telecommunications, Telecom District, Hyderabad, by his letter dated 3-8-1993, informed NHL
that its offer could not be considered. The said letter did not indicate the reason for non-
consideration of the offer of the NHL.
The appellants filed a writ petition in the Delhi High Court under Articles 226 and 227 of the
Constitution of India seeking a writ, order or direction in the nature of Certiorari for quashing the
award of contract by Respondent 3 to Respondent 4 for the printing, binding and supply of
telephone directories for Hyderabad and also a writ, order or direction in the nature of Mandamus
directing Respondent 3 to accept the tender offer of the appellants. In the counteraffidavit filed in
reply to the said writ petition filed on behalf of Respondents 1 to 3 the reason for non-consideration
COMPANY LAW (JUDGEMENTS) KOMAL KALRA
B.COM, B.A LLB 6TH SEM

of the offer of NHL was disclosed. It was stated that the offer of NHL was not considered because
the appellants did not submit any evidence to show that they have in their name undertaken
compiling, printing and supply of telephone directories for large telephone systems with the
capacity of more than 50,000 lines.
(i) NHL is a joint venture company established by Thomson Press (India) Limited (TPI),
Living Media (India) Limited (LMI), World Media Limited (WML) and Integrated
Information Pvt. Ltd, (IIPL), a wholly-owned subsidiary of Singapore Telecom
wherein 60% of shares are held by Mr Aroon Purie, TPI, LMI, WML and other
companies in the same group and 40% of shares are held by IIPL;
(ii) The joint venture has received approval of the Government of India and is currently in
operation;
(iii) NHL has been established as an information and database management company with
expertise in database processing, publishing, sales/marketing and the dissemination of
related information; and
(iv) In addition to its projected strength, NHL has access to the benefit of the complete
resources and strength of its parent/owning companies, each of which is a recognized
market leader.
This will lend a unique credibility and public recognition to the joint venture, as well as its
products.
In the counter-affidavit filed on behalf of Respondents 1 to 3 in the High Court it was stated that
as per the averments in the writ petition TPI and LMI had printed and bound the telephone
directories for respective parties who had been awarded the contract for Delhi and Bombay and
that the appellants did not produce any evidence to show that they have in their name undertaken
compiling, printing, binding and supply of telephone directories of large telephone systems
with a capacity of more than 50,000 lines and further that telephone directory of Delhi 1992
issue was published by Sterling Computers Limited on behalf of United Data Base (India) Pvt.
Ltd. and it was printed and bound at Navneet Publications (India) Ltd., Gandhinagar, and the
telephone directory of Bombay 1992 issue does not indicate any publisher's or printer's name.
It was also stated that NHL was converted into a joint venture company in 1992 and have no
experience whatsoever in their own name for compiling, printing, binding and supply of telephone
directories of telephone systems of more than 50,000 lines capacity. It was further stated that the
COMPANY LAW (JUDGEMENTS) KOMAL KALRA
B.COM, B.A LLB 6TH SEM

appellants had submitted the directories of Delhi and Bombay only to show the capability of
printing facilities of TPI and LMI and it does not substantiate their experience of a full job of
compiling, printing and supply of telephone directories as stipulated in the tender notice/document.
In the counter- affidavit it was also stated that the royalty and other aspects of the tender were not
considered since the appellants did not meet the primary requirement of experience as above.
Decision of Delhi High Court:- The High Court has proceeded on the assumption that the
shareholders of NHL have all the experience in compiling and printing the telephone directories
but has observed that that it is not at all job requirement. According to the High Court it is one
thing to say that shareholders of a company have vast experience in the publication of telephone
directories with yellow pages and it is entirely another thing if the company itself has that
experience. The approach of the High Court is that a company is an independent person distinct
from its members and that NHL is carrying on its business independently from that of the
shareholders. The High Court has held that the experience of a shareholder cannot be the
experience of the company nor is NHL the agent of its shareholders. Referring to the principle of
lifting of corporate veil in modem company law the High Court has observed that so far as NHL
is concerned, it cannot invoke the said principle either as a ground of attack or as a ground of
defence. In the view of the High Court it could not be said that the authorities had failed in their
duty to look behind the facade of corporateness of NHL and that it was none of their duty and they
rightly examined the experience, etc. of NHL and came to the conclusion that it did not satisfy the
eligibility conditions and that there was no error in the said approach of the authorities. Dealing
with the contention that NHL is a joint venture the High Court has observed that a joint venture is
a one-time grouping of two or more persons in a business undertaking and unlike a partnership, a
joint venture does not entail a continuing relationship among the parties and on that view the High
Court has held that there is no joint venture as such and there is only a certain amount of equity
participation by a foreign company in NHL. The High Court rejected the contention urged on
behalf of the appellants regarding the absence of reasons for rejecting the tender of NHL on the
ground that the non- communication of reasons is not fatal in all circumstances and that in the
present case the reasons existed on the record of the authorities that the tender submitted by NHL
was not in conformity with the condition of the tender and NHL was found ineligible for award of
the tender and its offer could not have been accepted. The High Court further held that since the
bid of the appellants was rejected at the threshold the authorities could not consider the question
COMPANY LAW (JUDGEMENTS) KOMAL KALRA
B.COM, B.A LLB 6TH SEM

of higher amount of royalty offered by NHL and that higher bid could not be a substitute for
eligibility conditions.
Supreme Court Decision :- Appeal to the SC, and Appellants, has submitted that the High Court
was in error in considering whether NHL fulfilled the condition regarding experience contained in
the tender notice and that the authorities should have taken into consideration the experience of the
constituents of NHL which is a joint venture company duly approved by the Government of India
in which 40% equity is owned by IIPL (a wholly-owned subsidiary of Singapore Telecom) and the
remaining 60% equity is held by Indian group of companies consisting of TPI, LMI, WML and
Mr Aroon Purie, and that the constituents of NHL had expertise and experience in publishing
yellow page directories as well as telephone directories and had necessary resources for that
purpose. Shri Sorabjee has also submitted that it is a fit case in which the authorities should have
lifted the corporate veil and if they had done so they would have seen the reality. Shri Sorabjee has
emphasised that there is a difference of more than three and a half crore rupees between the amount
of royalty offered by NHL and that offered by Respondent 4 to whom the contract has been
awarded.
The appeal against the judgment and order of the Delhi High Court is set aside and the Writ Petition
filed by the appellant is disposed of with the direction that the award of the contract for printing
and publishing the telephone directories for Hyderabad for the years 1993, 1994 and 1995 is set
aside to the extent it relates to the directory for the year 1995. The appeal filed against the order of
the Delhi High Court dismissing for interim relief is dismissed as infructuous. No order as to costs.
 Supreme Court of India
Lakshmanaswami ... vs Life Insurance Corporation on 11 December, 1962
Equivalent citations: 1963 AIR 1185, 1963 SCR Supl. (2) 887

Insurance Company-Donation by Directors-If ultra vires- Shareholders' Dividend

AccountProprietary right; if in shareholders - Memorandum of Association - Conatruction-
Liability of Directors-Life Insurance Corporation Act, 1956 (31 of 1956), 8. 15.

Facts of the case:- On July 15, 1955, at an Extraordinary General Meeting of the shareholders of
the United India Life Assurance Company Ltd., a resolution was passed, among other matters
sanctioning a donation of Rs. 2 lakhs from out of the Share. holders' Dividend Account to a Trust
proposed to be formed with the object inter alia of promoting technical or business knowledge,
including knowledge in insurance.
On July 1, 1956, the Life Insurance Corporation Act came into force by the provisions of which
on the appointed day all the assets and liabilities appertaining to the controlled business of an
insurer vested in the Life Insurance Corporation. BY s. 15(l)(a) of the Life Insurance Corporation
Act power was given to the Corporation to apply to the Tribunal for relief in respect of payments
made by the insurers, during the five years preceding the date of vesting, not reasonably necessary
for the purpose of the controlled business. The Corporation applied to the Tribunal for relief in
respect of the payments of Rs. 2 lakhs by the Company to the appellants on the ground that the
said payment was ultra vires the powers of the company and was not reasonably necessary for the
purpose of the controlled business. The Tribunal ordered the appellants to restore the sum of Rs. 2
lakhs to the Corporation.
On appeal by special leave. Held, that the Shareholders' Dividend Account provided for by the
Articles did not confer any proprietary interest on 888 the shareholders, though if was charged for
the purpose of paying dividends to the shareholders and that the mere description of the dividend
account as the exclusive property of the shareholders did not thereby create a proprietary interest
in the shareholders. The right to dividend depends upon the recommendation to be made by the
Directors with. out which the shareholders acquire no right to. the fund or any part thereof.
Parminder Pindu
Company Law notes
Decision of the Court:”- Where a Company does an act which is ultra vires, no legal
relationship or effect ensues there from. Such an act is absolutely void and cannot be ratified
even if all the shareholders agree. Re. Birkback Permanent Benefit Building Society (1). The
payment made pursuant to the resolution was therefore unauthorised and the trustees acquired no
right to the amount paid by the Directors to the trust.
The only question which remains to be considered is whether the appellants were personally
liable to refund the amount paid to them. Appellants 2 and 4 were at the material time Directors
of the Company and they took part in the meeting held under the Chairmanship of the fourth
appellant in which the resolution, which we have held ultra vires, was passed. As office bearers
of the Company who were responsible for passing the, resolution ultra vires the Company, they
will be personall liable to make good the amount belonging to the Company which was
unlawfully disbursed in pursuance of the resolution. Again by s. 15 of the Life Insurance
Corpora- tion Act, 1956 the Life Insurance Corporation is entitled to demand that any amount
paid over to any person without consideration, and not reasonably necessary for the purposes of
the controlled business of the insurer be ordered to be refunded, and by sub-section (2) authority
is conferred upon the Tribunal to make such order against any of the parties to the application as
it thinks just having regard to the extent to which those parties were respectively responsible for
the transaction or benefited from it and all the circumstances of the case. The trustees as
representing the trust have benefited from the payment. The amount was, it is common ground,
not disposed of before the Corporation demanded it from the appellants, and if with notice of the
infirmity in the resolution, the trustees proceeded to deal with the fund to which the trust was not
legitimately entitled, in our judgment, it would be open to the Tribunal to direct the trustees
personally to repay the amount received by them and to which they were not lawfully entitled.

The appeal therefore fails and is dismissed with costs. Appeal dismissed.
 Supreme Court of India
Bajaj Auto Ltd vs N. K. Firodia & Anr. Etc on 4 September, 1970
Equivalent citations: 1971 AIR 321, 1971 SCR (2) 40

Acts deal with:-

Section 111 in The Companies Act, 1956

The Companies Act, 1956
M/S. Harinagar Sugar Mills Ltd vs Shyam Sundar Jhunjhunwala And ... on 25 April, 1961
Section 111(3) in The Companies Act, 1956
Section 640B in The Companies Act, 1956Complete Act
Central Government Act
Article 52 in The Constitution Of India 1949[Constitution]
Facts of the case:- The Firodia group lodged in different lots 3643 shares of the appellant for being
transferred to different names. Jaya Hind Industries Private Ltd. applied for transfer of 1500 shares
in their names. Firodia applied for transfer of 30 shares in his name. The other transfers were in
the names of associates, nominees and friends of the Firodia group. The Board of the appellant
refused to register transfer of the said shares at the Board meetings held on 23 May, 1968 in respect
of 2532 shares and on 24 June, 1968 in respect of 1111 shares. The appellant communicated the
said refusal to transfer the shares in the month of June, 1968. Thereafter, in the month of August,
1968 338 appeals were filed before the Company Law Board in respect of refusal of the appellant
to transfer 3643 shares. The Company Law Board by its letter dated 16 January, 1969 asked the
appellant to disclose the reasons for refusal to register transfer of shares.

In the course of an appeal by the F group of respondents to the Company Law Board against the
refusal, and upon being asked by that Board to disclose the reasons for the refusal, the appellant
company gave three reasons : First, that F, who was the company's Chief Executive had written to
the Company Law Board against the extension of the term of the company's managing agents and
had thus acted in a treacherous fashion against the interest of the company; it was therefore evident
that F's design was to create mischief; secondly, the transfer of shares applied for was part of a
design of the F group to acquire interest in the company which was likely to result in a threat to
the smooth functioning of the management of the company, and to vote down the passing of any
special resolution required for the management of the company; thirdly, the purchase of shares by
the F group was not with a view to a bona fide investment but was with a mala fide purpose and
evil design. The Company Law Board allowed the appeal and directed the appellant company to
register the transfer of the shares.

On appeal Court HELD, dismissing the appeal : (i) in refusing to register the transfers, the
Directors did not act bona fide nor did they act in the general interest of the company. On the
contrary, they acted upon a wrong principle and for the oblique motive of squeezing out F. On the
facts, the inescapable conclusion was that the Directors acted arbitrarily and with the collateral and
corrupt motive of keeping their own group in control of the company.
It was apparent that F. wrote to the Company Law Board against the appointment of the Managing
Agents in the larger interest of the company. He was justified in opposing their re-appointment
without a specific resolution of the shareholders of the company and without a
public notice to the shareholders to represent their views in the matter.
There are well recognised safeguards as to notice and consent for passing a special resolution.
Special resolutions are for limited purpose, and are not matters of daily occurrence or of daily
routine administration. The mere apprehension that special resolutions will not be passed was not
a legitimate reason.
There was no evidence that the transferees belonged to a rival concern. Equally, there was no
evidence that the F group ever obstructed in the management of the company. On the contrary they
advanced large sums of money and F was largely responsible for the gradual growth and prosperity
of the company. It was therefore an abuse of the fiduciary power of the Directors to refuse to
register the transfers of the shares.
(ii) Although the company's Articles of Association provided that the Directors might at their
absolute and uncontrolled discretion decline to register any transfer of shares, such discretion does
not mean a bare affirmation or negation of a proposal. Discretion implies just and proper
consideration of the proposal in the facts and circumstances of the case.
In the exercise of that discretion the Directors will act for the paramount interest of the company
and for the general interest of the shareholders because the Directors are in a fiduciary position
both towards the company and towards every shareholder. The Directors are therefore requited to
act bona fide and not arbitrarily and not for any collateral motive. If the Articles permit the
Directors to decline to register transfer of shares without stating the reasons, the
Court would not draw un-favourable inferences against the Directors because they did not give
reasons. Where however the Directors give reasons the Court would consider whether they were
legitimate and whether the Directors proceeded on a right or wrong principle. As a result of the
introduction of section 111(5A) in the Companies Act, 1956, two consequences follow. First, if
the Articles permit the Directors not to disclose reasons for declining to register a transfer, the
statute confers power to interrogate the Directors and disclose the reasons. Secondly, if the
Directors do not disclose reasons, presumption can be drawn against the Directors for
nondisclosure of reasons in spite of being called upon to do go.
 In Re: Standard General Assurance ... vs Unknown on 15 May, 1964
Equivalent citations: AIR 1965 Cal 16

Acts and Sections Deals :-

The Insurance Act, 1938

Section 17 in The Companies Act, 1956
Section 17(3)(a) in The Companies Act, 1956
Section 17(6) in TheCompanies Act, 1956
Section 27 in The Insurance Act, 1938
Facts of the Case:-
This was an application under Section 17 of the Companies Act 1956, for confirmation of the
alterations of the memorandum of association of the applicant company in terms of the special
resolution passed at on extraordinary general meeting of the company on July 12, 1963.

The company was incorporated in 1943 under the Indian Companies Act, 1913. The objects of the
company, inter alia, were as follows: To carry on all kinds of insurance, guarantee and indemnity
business. The insurance business was to include Life Assurance, Fire Insurance, Marine and Aerial
Insurance, Transit Insurance, Accident Insurance and other varieties of Insurance business, set out
under paragraph 3 of the petition. Among the other objects were the purchase of and dealing in and
lending on life, reversionary and other interest in property of all kinds, to act as agent for the Issue
of bills, bonds, debentures stock and to guarantee the subscription of any such shares or securities
and act as trustees, executors or administrators. One among the other objects of the company of
which mention should be made is to carry on business as capitalist, financiers, concessionaries and
merchants and to undertake and carry on and execute all Kinds of financial, trading and other
operations. Notice should be taken of another object clause whereby the objects specified in each
paragraph of the memorandum of association was to be in nowise limited or restricted by reference
to or inference from the terms of any other paragraph or the name of the company, except where
otherwise expressed in such a paragraph. This provision in the memorandum makes each object
an independent object and not a subsidiary of any other object.
On July 12, 1963, a special resolution was passed at an extraordinary general meeting of the
company whereby subject to confirmation by this court, it was resolved to alter the memorandum
of association of the company as set out under paragraph 6 of the petition. The net effect of the
resolution is that the company seeks to abandon insurance business of all kinds and to acquire the
following new objects;
(1) to carry on business as manufacturers of and dealers in chemicals, petro-chemicals, drugs,
essences, acids etc., (2) to carry on business of engineers, metallurgists, iron, steel and brass
founders, metal makers, moulders etc., (3) to execute contracts for supply or use of any machinery
and to carry out ancillary or other works comprised in such contracts, (4) to carry, on business of
Importers, exporters, merchants, ship owners and charterers of ships and transport and haulage
contractors etc., (5) to render pecuniary or other assistance for helping settlement of industrial or
labour problems or the promotion of industry or trade and to oppose legislation which may seem
disadvantageous to the company, (6) to subscribe for any purpose which has a political object.
In the petition it is alleged that in the opinion of the directors and share-holders of the company,
the general insurance business of the company declined for various reasons including uncertain
conditions of insurance market, and due to such shrinkage in such business the share-holder would
not get a sufficient return. The company therefore ceased to carry on any insurance business from
May 1, 1963, and reinsurance business from May 31, 1963. The company, it is claimed, is
developing its investment, financing and other businesses which the company is authorised to carry
on. Decision of the Court:-
In this case P.B. Mukharji, J. construed the words 'some business' in Section 17(1)(d) of the Act
and held that 'some business' meant a business which was not already there under the existing
memorandum, and such new business could be introduced by alterations provided it could be
conveniently and advantageously combined with the business of the company under the existing
circumstances. It was further held that in considering whether a new business could be
conveniently or advantageously combined with the existing business, foremost regard should be
given to the views of the shareholders. As to what 'some business' means P.B. Mukharji, J. held at
p. 596 of the report as follows :-
"The word 'some business' in that clause apparently includes business other than the business which
is already being carried on under the existing memorandum. Therefore, the addition of
'some business' may be the addition of a business which is entirely a new departure from the
business already carried on. The only requirement of the statute law in India is that such business
must be (1) one which can conveniently or advantageously be combined with the business of the
company and (2) that this must be so under the existing circumstances and not under the
hypothetical circumstances. So long as these two limits are observed, I shall think that the
shareholders and the management of the company should be left free to add to or reduce their
business by suitable alterations in their memorandum".
The other case to be referred to is . This was also an application for alterations of the object clauses
of the company to enable it to contribute or subscribe to national, charitable, benevolent, political
public or other useful funds. The alterations proposed were confirmed by the Court, but on certain
terms and it was held that the court had the power to impose terms on the company. when a
company seeks to alter its objects with a view to carry on some new business, if the company's
position is financially sound, if the alterations are fair to all classes of members of the company
and If the rights of creditors are in no way prejudiced, such alterations should be confirmed
provided the requirement of the statute is complied with. It is not a matter for the court to determine
as to what business the company should carry on. If the directors and members of a company
propose to alter its objects, and if there; is no objection from the creditors or if their position is not
prejudiced by the proposed alteration, this court should not stand in the way of the company's
seeking new objects to enable it to embark on a new venture. But there are certain obvious
limitations which have been dealt with in the several decisions discussed by me above. The new
business must not be destructive of or inconsistent with the existing business. There must be some
existing business which the company should be carrying on at the time when it passes the resolution
for altering its objects and such business must be carried on under its existing object clauses. The
company's financial position must be sound, to enable it to carry on the new business.
Subject to limitations mentioned, the wisdom of the directors and members of the company in
regard to the decision to carry on the new business proposed under the altered object must prevail.
This is the view taken by this court so far, and I propose to adhere to and follow the same. In a
trading company, whose aim is to earn profits for the benefit of share-holders, the directors and
share-holders of the company are the best judges of the trading policy of the company and so long
as the requirements of the statute are complied with and the policy pursued by the company through
the object clauses in its memorandum is not fraudulent or unfair to any class of its members and
does not violate the statutory provisions, the court should not easily or lightly interfere, with the
decision of the share-holders and directors of the company and also of creditors, if any. But the
decision of the share-holders, creditors and directors, is not final and it is for the court to see if the
statutory requirement has been complied with and the alterations sought for are not contrary to or
inconsistent with the object clauses in the memorandum as they stand.
The doctrine of paramount object or main, object of the company which have received judicial
notice in several cases, is a matter, which in my view, is material for consideration in applications
for an order for winding up of the company on the just and equitable ground or in other
applications, where the question of winding up is material, for instance, in an application under
Section 397 of the Act. This is the view which has been taken in all the cases discussed above, in
which the question was whether the company should be wound up on the just and equitable ground.
\If the substratum of the company is gone, that may be a good ground for making an order for
winding up of the company on the just and equitable ground. But the loss of substratum of the
company is not by itself a ground on which this court should decline to confirm alterations in the
memorandum of association of a company, if the conditions mentioned above are fulfilled.

The extraordinary general meeting of the company held on July 12, 1963, for passing the Special
Resolution proposing alterations in the memorandum of association, was attended only by 5 share-
holders. It was argued further that the minutes do not indicate how many shares were held by the
5 share-holders who attended the meeting. A handful of share-holders appeared to have supported
the Special Resolution.
The resolution was passed unanimously by the share-holders present at the meeting. From the
affidavit of Keshab Prosad Goenka affirmed on January 21, 1964, it appears that notices were sent
to all the share-holders of the company. In spite of such notices no other share-holders came
forward to oppose the Special Resolution. Then again advertisements were issued in two
newspapers setting out the date and time of the meeting and also the proposed alterations. No
creditors or share-holders have come forward to oppose the proposed alterations. The special
Resolution therefore has been passed according to the requirement of the Companies Act, 1956.
The non-attendance of a larger number of share-holders at the extraordinary general meeting is no
ground for contending that the resolution has not been passed as required by law. In my opinion
the Special Resolution passed at the extraordinary general meeting of the company held on July
12, 1963, fulfils the requirement of the Companies Act, 1956.
For the reasons mentioned above there should be an order confirming the alterations of the
memorandum of association of the company in terms of the Special Resolution passed at the
extraordinary general meeting of the company held on July 12, 1963. The applicant should
take steps to change its name so as to indicate the new business it will be entitled to carry on
under the alterations in the object clauses of its memorandum of association confirmed by
this order. The order confirming the alteration in the object clauses of the memorandum of
association will not take effect until the applicant's name has been changed. There will be no
order for costs except that the applicant should pay the costs of the Registrar of Companies.
 Supreme Court of India
Juggi Lal Kamlapat vs Commissioner Of Income-Tax, U.P. on 4 September, 1968
Equivalent citations: AIR 1969 SC 932, 1969 73 ITR 702 SC, 1969 1 SCR 988

Acts deal with:-The Income- Tax Act, 1995

Section 34 in The Income- Tax Act, 1995
Section 66 in The Income- Tax Act, 1995
Companies Act

Facts of the case:- These appeals are brought by special leave from the judgment of the a
Allahabad High Court dated July 10, 1962, in Income tax Miscellaneous Cases Nos. 255 and 256
of 1955.
The appellant, M/s. Juggilal Kamlapat, hereinafcter called the "assessee", was a registered
partnership firm having the following constituents :
--------------------------------------------------------------------- Names
of the partners shares
----------------------------------------------------------------------
1. Shri S. M. Bashir 49 per cent.
2. Sri Padampat Singhania 17 per cent.
3. Shri Lakshmipat Singhania 17 per cent.
4. Sri Kailashpat Singhania 17 per cent.
---------------
Total 100 per cent.

The shareholding of the three Singhania brothers was 51 per cent. constituting a majority of the
shareholding in the partnership firm. The partners of the said firm floated a company, namely, M/s.
J. K. Kron 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 firm its officer of managing
agency by a majority of 3/4th of the shareholders of the managed company. According to the terms
of the agreement the managing agent's remuneration was Rs. 1,500 per month and a commission
of 10 per cent on net profits 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 officer as agents and all the rights and
obligation 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, for M/s.
Juggilal Kamlapat, Bankers, the fanciers of the managed company, asking for repayment of
advances made by the financier to the company exceeding Rs. 5 lakhs 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 ever though the matter of providing finance might be at the discretion of the managing agents
"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 off the loan of the
financiers M/s. Juggilal Kamlapat Banker and also to equip the company with working capital. A
resolution was accordingly passed at the meeting to that effect. On August 19, 1943, the company
addressed a letter to the assessee informing it of the resolution and asking it to make immediate
arrangement for an amount which would not only reduce the account of M/s. Juggilal Kamlapat
Bankers to a figure of Rs. 5 lacs but must also provide the company with working capital. The
assessee replied to this communication by a letter dated August 31, 1943 in which the assessee
pointed out that under the terms of the managing agency agreement it was not obligatory upon it
to make advances to the managed company. The assessee stated that it had been specially
constituted to act as the managing agent of the managed company and had no capital of its own. It
had no assets also on the security of which it could raise a sum of Rs. 30 lacs which would be
necessary to reduce the amount of M/s. Juggilal Kamlapat Bankers to the limit required by the
managed company and to equip the company with working capital. The letter of the assessee was
considered by the managed company at the meeting of its Board of Directors on September 2,
1943. Sri Lakshmipat Singhania, one of the Directors of the managed company reported in the
meeting that a new floated company under the name and style of J. K. Commercial Corporation
was willing to make advance provided it was appointed the managing agent of the company. Sri
Bashir pointed out that the managed company had reached a stage when it would make substantial
profits and enable the assessee to earn better remuneration and that it would be unjust to ask the
assessee to relinquish office on a ground which did not constitute a term of the contract between
the assessee and the managed company. Sri Padampat Singhania who presided over the meeting
recognised that the assessee would be adversely affected and he therefore suggested that the
company should pay a fair compensation in consideration of the premature termination of the
managing agency. A compensation of Rs. 2 lacs was worked out and Sri Bashir agreed to accept
the amount for the termination of the managing agency on behalf of the assessee. It was decided
that the sum of Rs. 2 lacs should be paid as soon as an agreement was arrived at with the J. K.
Commercial Corporation for taking over the managing agency of the company. The managing
agency of the assessee was thereafter terminated with effect from November 1, 1943 and M/s. J.
K. Commercial Corporation were appointed the managing agents with effect from that date.

Decision of the Case:- On behalf of the appellant it was said by Mr. Sukumar Mitra that a mere
intention on the part of the assessee to evade income-tax will not nullify an otherwise lawful
transaction. But we have already shown that the Appellate Tribunal has found in the present case
that the transaction of termination of the managing agency contract was sham transaction and was
stage-managed merely with a view to evade income- tax and the real intention was that the three
Singhania brothers should continue to carry on the managing agency in a dominant capacity in the
guise of a limited company and there was in fact no loss of office or destruction of profit yielding
apparatus. Reference should be made in this connection to the following observations of Lord
Greene M. R. in Lord Howard De Walden v. Commissioners of Inland Revenue (25 T.C. 121, 134)
: "But even if the only alternative to Mr. Tucker's construction is the second of the three
constructions, we are not prepared to say that it is necessarily as unjust as he contends. The section
is a penal one and its consequences whatever they may be, are intended to be an effective deterrent
which will put a stop to practices which the Legislature considers to be against the public interest.
For years a battle of manoeuver has been waged between the Legislature and those who are minded
to throw the burden of taxation off their own shoulders on to those of their fellow subjects. In that
battle the Legislature has often been worsted by the skill, determination and resourcefulness of its
opponents, of whom the present Appellant has not been the least successful. It would not shock us
in the least to find that the Legislature has determined to put an end to the struggle by imposing
the severest of penalties. It scarcely lies in the mouth of the taxpayer who plays with fire to
complain of burnt figures."
The Court therefore reject the argument of Appellant on this point For the reasons
expressed, we hold that the judgment of the Allahabad High Court dated July 10, 1962, is
correct and these appeals must be dismissed with costs-one set of hearing fee. Appeals
dismissed.
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