K. M. S. Reddy, Commissioner of Income. Tax, Kerala (Coimbatore), Ernakulam v. the West Coast Chemicals and Industries Ltd. (in Liquidation), Alleppy

Judgment

Mah1raj Joeat Bahadur Smgti Badri Pratad Stth Dos J. A1arch :?0, to that testimony, the lcarne<l District Judge rightly came to the conclusion that cl. (iii) of s.1.1(:!) (a) of the Act was not attracted to the Catie. For these rea.sons we have com!i to the conclusion that there is no merit in the appeal whi~h i~ accordingly dismissed with costs. AppP,al dismissed. K. M. S. REDDY, CO:\fi\HSST01\ER OF INCOME. TAX, KERALA (CODIBATORE), EHNAKl1LA.Jl THE WEST COAST CHEMICALS AND JN"DUS- TIUES LTD. (I!\ LIQCIDATION"), ALLEPPX (S. JC DAS, :VT. HrnAYATULLAH and .J.C. SHAH, .TJ.) lncomr Tax-lri11dirig up of bu.sine . .;s-Rra[isation of r1ssf:fs-~)'afe rlurin(f loinding up, if an l'lt;,t of lradi'tl'}-l'rofits an'si1;q out of sale--Lial1ili1y to lox. The respondent cornpany \\·as incorportrd in primarily with the object of acqnirini:r and \\·orkinga match factorv. Under the 1nr.morandun1 of as-;oc:iation the company \\·as a·tso empo\\'Cred, inter a/ia, to rnanufacture and deal in chemicals.

The business of rnanufa.cturing 1natches \\':lS carri<~rl on hy the company till 1941. Thercaf1cr thr. prr.•fits hccame less and less due to y,:ar conditions. On ~1a.y 9, 19-lJ, the company rntere:d into an agreement with a third party for th~ sale of the land-.. buildings. plant ancl machinery of it~ match factory for Rs . .i,75,000. It ,vas agreed that this price \\'oulci not include manufacturrd roods, cttn1irab ancl CJtb<r 1a,,· 1naterials or any other asset not shown in the agrc~ment of ~le. J.ater, a fresh a~TTce1n~nt ,..,as entered into on .J\11g11.-.t 9, 19-13, under which the sale includeci chernical~ and paper for rnanufacture \vhich had not hecn sold in the first instance an<l the price \\'as Rs. 7,'.~5.000. In a report to thr. sharcholdc:rs dated ..-\ugust l, 1944, the Direc.tof!C stated t!1at the price obtained had shown a capita) appreciation of about six tinH:>s the cost price and that the sale of chemicals harl resulle<l in substantial profit.

In proceedings for assessing income which had escaped a'isessment the income·tax authorities, relying upon the memorandum of association \\"hic:h allowed the ::!S.C.R. colnpany to manufacture and sell chemicals and on the Directors' report, held that the profit from the sale of the chemicals and other raw materials was liable to income-tax on profit of Rs. 2,00,000 which wu reduced later to Rs. !, 15,259. The company claimed that the stock of raw materials was sold not ·in the course of ordinary trading but only in a realisation sale after th~ company had qeen wound up. The evidence showed that the clause in the memorandum of association giving power to the company to sell chemicals was seldem used and that prior to the sale of chemicals to the purchaser, two. transactions of sale of chemicals for small alnonnts in 1943 were too petty in themselves to afford e~i<lence of trading in chemicals.

Held, that though under the second agreement dated August 9, 1943, more price was paid, the transaction was still a winding up sale and no part of this slump price was identifiahle as the price of the chemicals and other raw materials . There was no eVidence. that before the winding 1up the company had sold chemicals as part of its business, and the two instances cited were too petty in them:5elves to afford evidence of a continued or sustained trading in chemicals. A winding up salf" is not "trading or doing business" and the sale of the raw materials including the chemicals was not part of any busine!';s done. Accordingly, the sum of Rs. 1, 15,259 was not liable to tax. Dou.ghly v Commi8sioner of Taxes, (1927) A. C. 327, discussed and relied on. Case Jaw revie\ved. CrvrL APPELLATE .JURISDICTION: Civil Appeal No. 286 of 1961. Appeal from the judgment and order dated January 27, 1960, of the Kerala High Court in I. T. R. Case No. 14 of 1955. K. N. Ra,iar;opal Sastri and D. Gupta, for the Appellant.

S. T. De.sai, J. B. Dadachan,ii, 0. o: Math1~r and Ravinder Narain, for the respondent. 1962. March 20. The Judgment of the Court was delivered by '1962 K.M S, Reddy, Commiss• 00"1er of lncomt·tax, Ktraf Tht West Coas' Chemieals an~' Industries I.Id_ HrnAYATULLAH, J.- In this a1 peal 1 y the HidayatullahJ, ('< nwiF8icr.rr d hcc n.e·tn:. Kernle, filcd with ICM.s. lltdd1" Cornmis.siontr ~1/ Inccmt-loY, Kt,ala 'l'lit IVtsJ Cc"-'' Cl.nnicols 0111/ lnd1otri1s l.td. llida!1Dft1lioh J, 9G2 SUPREME COURT REPORT~[l962] SUPP, certificate cf the High Court of Kcrala, an impor. tant question vf law was raised be fort> the High Court, which was answered against the Dcparment. It arose in the following circumstances. The res. pon<lent, the West Coast'Chcmicals and Industries, Ltd. (referi<>d to as the asscssce Company) was incorporated in rn:n primarily with the object of acquiring and working the rights, title and interest in a match factory belonging to one A. Y. Thomas at :IIu<l ical.

The J[emcrandum of Associatic·n of the asses;;ee Company, however, empower<'d the Comp;iny to manufacture and deal in acidR, alkalis and other chemicals. The assessec Company carrie1l on itH bm.incss ofma1Jufact.uring matelws till the account year ending on April 30, I 941. Ther<'after, the profits fr<•m the business became less and less due to \Var conditions, and the asses. see Company began to ma1mfactnre plywood chests for k:i, paints and lt-mongra~s oil. These were contemplated by cl. \3) of the Memorandum of A8weiation. On 111ay, 9, 1943, the aSSeEsee Company entered into an agreement with one Hao Sahib Natesa Iyer for the sale of tho lands, buildings, plant and machinery of its match factory for Rs. 5, 75,000. It was agreed that the price would not include manufactured good~, chemicals and other raw materials or anv ot"her asset uot shown in the agreement of sile. The purchasp,r was allowed sixty days for the payment of the balance of the price, H.s.

57,500 having been already paid at the time the agreement was entered into. The purchaser made a default in payment, and on August !l, 1943, a fresh agreement was cnkrcd into by the parties, this time for a consideration of Re. 7,35,000, and the sale included cbt mica.Is and paper for manufacture whkh had not been sold in the first i11stance. In a eonfidentiid repmt made on August I, 19'11, to the shareholders, the 3S.C.R. Directors statrd that the price obtained had shown a capital appreciation of about six timfs the cost price, and the sale of chemicals had also resulted in a substantial profit. Meanwhile, the assessment of the Company fur the account year ending April 30, 1944, had been completed by the Deputy Commissioner of Income-tax, and the assessee Company had been assessed on an income of Rs. 36,498-6 4. The Deputy Commissioner of Income-tax then issued a notice under s.

25 of the Travancore Incom,tax Act to the Company's Liquidator on the ground that the profits from the sale of the chemicals and p>iper for manufacture had escapecl assessment. The Official Liquidator took up the position that the match manufacturing had been stopped, and that businPsS had been wound up, and there was thus only an appreciation of the capital assets and not a busine:is profit, which was liabie to assessment. The Deputy Commissioner,· however, relying upon thA Memorandum of Association, which allowed the asses8ee Company to manufacture and sell chell)icals, and on the Directors' report, held that the assessee Company was liable to incometax on a profit of Rs. 2 lakhs arising from this sale. The Commissioner of Income-tax on appeal, however, reduced the assessable profits to Rs. 1,15,25\1. Before the Gommissioner, the Liciuidator admitted that the profit from the sale of the chemicals was Rs. I, 15,259.

An appeal was then filed before the Incometax Appellate Tribunal at Trivandrum, and the assessee Company contented that a stock-in-trade could only be that which was the subject of trade, and that the stock of raw materials was not sold in the oourse of ordinary trading but in a realisation sale after the Company had been wound up. The Tribunal found that the business had not J9'i2 K .iVf.R. Re<ldy, Commissioner of Income-tax, Kera/a The West Coajt Chemicals and, Industries Ltd. ifld~~atul!ah .J, · K .. '>f.S. Rtddy, Commissioner of lncomr;-~ x, Kerola TM West Coa1t Chemi.ais and /11d11llrir.J l.td. H;dayat,~llah .1. SUPRE~IB COURT REPORTS [1962) SUPP. completcl,v cea~ed to exist, since the assessee Company was carrying on manufacturing on behalf of the purchaser, 11nd the sale could not be regarded ns a reali~ation sale after the Company was wound up, but had the characteristics of a trading sale.

At the request of th<.> asRessee Company, however, the Tribunal referred two questions to the High Court for its deciAion, and they were: "( 1) whPther the transaction of s:ile of the rnw materials along with the business, incluciing machinery, plant and premises is a revenue sale, and whethrr in the facts and circumstances of t.ht' casn, the Rum of ns. I, I .~.25!1 ha.s lJ.,en rightly charger! to in~ome.tax; and (2) whether the decision that the sale of match, machinery and premises, was distinct from the sale of chemicals iR legally warranted and whether there was legally a single transaction of the entire match factory inclusive of raw mawrials~" It may be pointed out that prior to the sale of chemicals to the purchaser, the only evidence of sale of chPmicals by the ass~ssec Company was of two transactions .. In the first transaction, there was a sale of chemicals on .Tuly 24, l!J4a, to an educational institution for Rs. 50 and another sah, on October 30, l!J43, to a stranger for Rs. 7-12·0 . .

The High Court held that by th1> sale no business was done, and that. the amount obtainNI was only hy way of realisation sa.l<>, and was not, therefore, liable to tax. The argument of the Department (also raised hefore the High Court) proceeds in this way. The Department reforn to the llfrmorandum of Association under which the assessee Company was to carry on the h1rnines~ of manufacturing and selling chemicals, that in the past it had sold chemicals, that in the first sale of its assets it had ex- . eluded chemicals and some other raw materials necessary for the manufacture of matches and had sold the concern for a lesser price, that later it included chemicals and raw materials and obtained a larger price, "and that admittedly there was an identifiable profit of Rs. l, 15,259 on the sale of the chemcials and raw materials. The Department, therefore, contends that the amount of Rs. l,15,259 was properly brought to tax as a trading profit.

The question, therefore, is whether there can be said to be a· sale in the carrying on of the business in respect of the chemicals and other raw materials. This qu~stion is not one easy to decide, specially with the assistance of rulings, in which the facts were different. There is a great danger of extracting a principle· from the reported cases, divorced from the facts. In Halsbury's Laws of 1£ngland, 3rd Edn., Vol. 20, pp. 115-117, there is a list in the footnotes of the cases which have been decided on one side or the other of the dividing line. In the text, the law, as summarised from the cases, is stated as follows :- "210. Mere realisation of assets is not trading; but the completion of outstanding contracts after the dissolution of a firm, the commencement of liquidation of a company, or the winding up of the affairs of a trader, has been held to be trading ..... . 21 l. ..

The cases illustrating the question arising in such circumstances can be divided .into two categories, first, those where the sales formed part of trading activities, and, second, those where the realisation was not an act of trading". This distinction, in our opinion, is a sound one. The only difficulty is in deciding whether a particular K.M .S. lleddy, Commin:onrr of. Income-tax, Kerala The West Co.it Chemicals and Industries Ltd. Hida_yafollah J. J9G2 K JJ .S. lidd7, Comtnissicmtr of [11coma-tax, Ktra(a Tht H't.sf Coajt Clum icalJ a11d lndu1tri1s l..Jtl, Hida71ttdi.h J, ca.se belong• to one category or the other. In this, much support cannot be derived from ol>scrvations made by learned ,Judges pertaining to the factH of a case, but they do guide one in a true appraisement of tho case in hand. In the well-knuwn case of Californiun Cuppu Syndicate v. Harri,, (1), the difference betwceu the purchase price and the value of the shares for which the property was cxch inged was considered as profiL assessable to income-tax.

Thern, the company was formed for the purpose of acquiring and rt'Helling mining properties, and though what it had acquired had all been sold or exchanged, the transaction was considerod a l>usiness transaction falliug within the avowed objects, of the ·company. The case has l>ecu accepted as decided on these uarrow facts, in 'l'ebraii (Johore) Jiubber Syndicate Ltd. v. Funner ('), in which a different conclusion· was reached o:i slightly different facts. There also, the Company was· formed with tho objoct of acquiring rubl>er estates a.nd for developing them. Under the Memorandum, the Company had the power to sell its properties. Two properties having l>ccn acquin·d aud the funds having run out, they were sold but at a profit. This profit was considered as an appreciation of capital and uot as assessable profit.

The differonee botween these two cases is that whereas in the formor, though the whole of the prope1 ty was sold, it was sold as a part of trading, in the letter, the property was sold not as part ot trading out on a winding up sale. The Department relics upon Californian Copper Sy1uiicate v. Harris ('), while the assessee Compauy relies upon 1'ebrau (Julwre) Rubber Syndiwte Ltd. v. Parmer ('). These caseH were also considered and applied by the Privy C~uneil in. Doughty ,., Commissioner of Taxes('), which 1s relied upon l>y . (I) [190·1] S T.C. 159. :2) [ 1910] S T.C. 658. (3) [1927] A.G. 327. 3 S.C.R • SUPl~EME COURT REPORTS both sides, in view of certain observations of the Pl'ivy Council, tu which we shall presently refer. In that case, th~re were two partners carryin,g on busi· ness in New Zealand .as general merchants. They sold the partnership to a limited company, of which they were the only shareholders.

The sale was of the entire assels including the good will, and the price was payable in the shape of fully paid shares in the new company. The nominal value of the shares was more then the capital account as shown in the last balance sheet, and the partners 'prepared a new balance sheet in which a larger value was placed upon the stock-in-trade. The Income-tax authorities in New Zealand treated the difference between the value placed on the stock-in-trade in the old balance sheet and that placed in the new balance sheet as a profit liable to tax. The Privy Council held that this was wrong, pointing out that for profit to arise, there must be a trading, and that a mere alteration of a book-keeping entry was not evidence that there was profit. It also held that the sale was of the entire assets, and that the price represented a payment for the entire business without a separate sale or valuation of this stock-in· trade for purposes of sale.

It referred to two cases decided respectively by the Supreme Court of New Zealand and the High Court of Australia, in which sales by pastora· lists of their flock of sheep had taken place. In the New Zealand case, the excess obtained over the book value was treated as assessaMe profit, but in . the Australian case, it was not. Bot,h the sales were of the entire stock. The Privy Council approved of the Austra.!ian case, and though it . did not ex· pressly dissent from the New Zealand case, it indicated that it found it difficult to appreciate the decision. These two cases from New Zealand and Australia were, of oourse, relied upon by the rival parties before us, and we shall consider them. K.Jf .S. Reddy, Commissioner 'f lncome .. tax1 Kira/a The WtSt Coas1 Chemicals and Industries Ltd. Hida~atullah J, K.M S. R,JJr, C-0'11f11issi-OntT of Income-tax, Kera/a 1·hr 1VeJt Co1;1 ChernUal and l11d1otrie1 Ltd, lli""oyatul/ah J. The Australian case is Commissio-11er of 'l'a:i.ntion (W. A.) v. Newman (1).

A persn11 who carried on business in WPst.ern Australia as a pastoralist sold his propctry including all live.stock and plant, ·as a going <'Oncern. The Commissioner of Taxation for the State apportioned the purchn.~e money in respect of the livc·stoek, and assessed the n.mount which was "received in excess, as income derived from carryir,g on a business. The High Court held that the transaction was not during tho carrying on of the business or even for the purpose of carrying on the business, but was for the purpose of putting an end to the business, and that thus the exccsB represented a capitid appreciation and nut a trading profit. The Now Zealand case is Anson v. Co1mni;;sioner of 'l'cixes ('). Ia that ca.Ile also, a sheep farmer sold his entire stock of Hheep. He had the practice of plaoing on his sheep at the begi11ning and cud uf each year an arbitrary value without referenco to the actual market value.

When he sold his entire stock, a nominal profit of i 5,000 ud<l appeared, and ho was assessed on it. Tho Supreme Court held that i_t .wa8 not an accretion to t'apital but a pr"tlt uu the sale of the appellant's 8tock-in-tra<lc. ::iir John :Salmond, who delivered the judgment of Court, observed that the holding of a sheep farmer waA not a capital holding, but his sheep represented a stuckin-trade, and since every appreciation of a stock-intrade represented a profit assessable to income-tax, it mattered not that the stock-in-trade was sold at once or from time to time, Of this case, the Privy Counoil in Daw.;hty's case C) <lid not say mucl1, but enough to cast a doubt upon it. This iH what the Privy Council said at p. 3:l5. "It would he difficult to arrive at tho profit in this way if it were the case uf a (l) [1921] 29 C.L.R 484. (2) [1922'. N.7.L.R. 330. (3) [192i] A. C. 327. l farmer in England; bnt the trade of a pastora- Jist is one with which the New Zealand Courts would be familiar, and which it would be more easy for the New Zealand Judges than for their Lordships to appreciate."

The Privy Council made a distinction between a sale of the entire stock as a part of trading and a sale of the same stock, as a winding up sale. It observed that if the business be one of purely buying and selling, "a profit made by the sale of the whole of the stock, if it stood by itself, might.well be assessable to income-tax". It observed that in Doughty's case (1) the sale was a slump transaction, and was a winding up of the business rather than a trading. The Privy Council further pointed out that there is a difficulty in decidiug cases of a business, which involve breeding of sheep for the purpose of selling wool. This is quite tme, because the sheep may be regarded as the capital, with which the wool, which is sold, is produced, or the sh3ep with the wool on them may be regarded as the stock-in-trade.

Such, a question, fortunately, does not arise in the present case, which can be decided onthe narrow ground whether the business wa; being wound up and the sale, a realisation sale, or whether trading was going on in spite of the winding up, so as to attraut tax on profits made. Before we answer this question in relation to the facts of this case, we wish to refer to a few more cases, which were cited before us. In J. & R. O'Kane & Go. v. 1'he Commissioners of Inland Revenue ( tbe appellants carried on business as wine and spirit merchants. They then wished to retire from the business and sent a circular letter to their customers. During the year, they sold their whole stock to diverse customers, and the question was whether they were still carrying on their trade during that period, and whether the profits were thus made in the (1) (1927] A.C. 327. (2) (1922] 12 T.C. 303. K.M .8 - Reddy, Commissioner of lncome~tax, Kera/a The Wes I Coast Ch1micals and lnduJtrics Ltd, Hidayalullah J. 136?

1:.M .>. 11,dJy, Commisdor.tr nf ,r,co11tr•:ax, hr•ala Jiu lfrs! Co:ut Chemicals ar.d J11duJ11irJ Lid. 070 SUPRE~fE COURT REP0l{T5 (1962] SUPP. onJinary course of trade. It was held by the King's Bench Division of the High Court of Justice in Ireland that the sales were not in the ordinarv couf'se of trad~ but wore part of the realisation ,;f the trading stock and winding up of the business, and thus not liable to tax. The Court of AppC'al in Ireland unanimously re,·ersed the decision of the High Court. Honan, L. J., pointed out that though the taxpayer had retired from busirress and had decided not to pu rchaso any more stock,. he was still carrying on the busi- 11css of trading in wines and spirits till his existing stocko were exhamted, and, therefore, the excess obtained by him represented profit. On appeal to the Houso of Lorcfs, it was held that there was e\'idonco 011 which the Commissioners could arrive at their finding that trading was, in fact, being carri<'d on.

Lord Buckmaster, speaki11g of the fads in that case, observed as follows : "For in truth it is quite plain· that right up to the end of 1\1 Ii thry were engaged in tradi11g which, so far as the cxtemal world is concerned, was the ordinary method of carrying on trade modified 011ly by arrangements which were merely part of the rnaohinory of businPss dealing adopted to <'ffect their intention to retire. It m&y well be accepted that they die! so intend ; yet the intention of a man cannot be considered ·as determining 11hat it is that his acts amount to; and the real thing that has to be decided !1ere is what were the acts that were done m counect1on with this business and whether they amount to a trading· which woulcl cause the profits that accrued to be profits arising from a trade or busine?~ ?" The ca,;e was, Lhcrcforc, decided on the finding of the special Commissioners, for which there was enough material in o·ddcnco.

Similarly, tho case SU,PREME COURT REPORTS of The Commissioner of Inland Heveniw y. "Old BelShni!ls"· Distillery Co., Ltd. (in Liquid-ztion) (l) was one decided on a finding, in support of which there wa~ evidence. The two cases relied upon by the Dapartment afld the assessee Company respec: tively do not shed any light upon the problem before us, because the central decision in both of them was whether the Commissioners' finding was justified or not. In J. and M. Craig (Kilm1~rnock), Ltd. v. Cowperthwaite (' ), the question was how the opening stock s!:wuld have been valued, and whether any profit could be said to have resulted. The Privy Council in IJoughty's case (") remarked about this case as follows :

"There, on a transference from one company to another, one-third of the value of each item, other than stock in trade, as it stood in the books of the selling company, was treated as its value for transfer purpose, and the balance of a slump price, which, with an under. taking to discharge JiabUities, formed the consideration, was infernntialJ v attributable to the stock. It was held, h~wever, in that case that no sum could bu pitched upon as the actual price of the stock, and no claim to assess a profit could be based upon such a foundation." This case shows that where a slump price is paid and no portion is attributable to the stock-in-trade, it may not be possible to bold that there is a profit other than what results from the appreciation of capital. The essence of the matter, however, is not that an extra amount has been gained by the selling out or the exchange but whether it can fairly tli (l926J lZ T.c. uis. c2J (l9l4J 13 r.c. 617. (3) (1927) A.C, 327. K.M .S. Reddy, Commissfoner (If lncoriie·tax, Kcrala The JVest Coasi Ch~micals and Industries Ltd. Hidayatull ,/i J. K .. \1 S. Ucdd-''• Cummi.niomr of lnc'.m'·tax.

Kuala v Thr IV, .<l Ciast (;/i,·micofs and lwlwtriu Ltd, /lld1;·111r1//oh J. be Eaid that there \\·as a trading from whirh alone prQfit1< can arise in business. If this test is a pp lied to tho present case, th1·n the true answer would be the one given by the High Court in the judgment unckr appeal. There is no doubt., in this cam, that the asscsooe Company was wound up at lea~t in so far as it" match manufacture was concerned. That the business of the Company was sold as a going concern, and was, in fact, worked by the assessee Company on behalf of the buyer till the entire consideration was p>.id, makes no difference, because the <Lgrecment clearly indicated that the assessce Company was keeping the factory going, not on its own behalf but entirely on behalf of the buyer.

One cannot fairlv sav, therefore, that a sale of the eherniculs and ra~ llla 0 terials for match manufacture was anything more than a winding up sale, not with iL view to trading in chemicals and raw mat.crial but to close clown th<' busine~s and to reali~o the asset~. There was, in fact, no identifiable price for the chemicals and raw material~ except by comparing the two prices offered to be paid by tho buyer, that is to s<iy, the price without tho chemicals and raw materials and the price with them. Prom that alone, however. it is impossible to infer that the chemicals and raw materials were sold in the 01 dinary way of business or that the assessee Company was carrying on a trading business.

The fact th[,t the clause in the Memorandum gave power to the Company to sell chemicals cauuot be used in this connection, because the eviclenco clearly 8hows that that clause wa.i never used and the two sales of chemicals through the years were too potty in themselv•'s to afford evidenco of a continued ur s:htaincd trading in chemicals. In our judgment, this was a winding up RBle with a view to realising the capital assets of the assesseo SUPREME COUH.T REPOH.TS Company and not a sale in the course of business operations, which alone would had attracted t.ax, if profit resulted. In the result, the appeiil fail.-i, ancl is dismissed with costs. Appeal dismi8sed. MADANLAL FAKfRCHAND DUDHEDIYA SHREITI CHANGDEO SUGAR MILLS L'l'D. (P. B. GAJENDRAGADKAR, A. K. SARKAR and K. N. WANCHOO JJ.)

Company-Agreement to pa11 c1Jmmission beyond specified limi'.t-Validity-Oompa.nie8 (1qf1950), 8, 76(1) & (2). from profit.o Act, .Wi6 There was an agreement between the respondent com~ pany, which was incorporated as a Private Limited Company in 1939, and its promoters, the appeilant and the rest l)f the respondent~, that in consideration of the promoters having each purchased sharers worth 1-1 /2 lakhs of the company, the company would pay them 12-l/2% of the net profits every yoar. That agreement was put in art. 3 of the ArticJes of Association of the company. In 1941 there was a second agreement between the company, its promoters and a firm, and by it the said firm was appointed as the managing agent of the company and the commission payable to the promoters \vas reduced to 6-1 /4% and art 3 amended accordingly. There was litigation between the parti's and the consent decrees pcissed there in left the promoters' commission in tact.

Meanwhile the Companies Act, I 956, came into force and the company served a notice to the appellant saying that the promoters' commission was no longer lawful and that.art. 3 would be deleted. The appellant then brought the suit out of which the present appeal arose, for a declaration that the agreement to pay cor.-imission was valid and for an injunction rf"Str::iining the company from deleting the said art. 3. It was urged on behalf of the companv that s. 76( l) anrl (2) of the '"id Act had made the agreement invalid and unenforceable. The trial court found in favour of the company and di~mis~ed the suit. The court of appeal agreeing, with the trial court dismissed the appeal· 1!162 K.M.S. Reddy, Commissioner of Income-tax, Kera/a The West Co1at Chemicals tJnd !ndurtiies l.td Tiidayat11llah .J, March 20.