HON’BLE SUPREME COURT · SOURCE-REVIEWED NOTE
Lakshmirattan Cotton Mills Co. Ltd. v. Commissioner of Income-tax, U.P.
Civil Appeal No. 2139 of 1966
[1969] 1 SCR 951 ·
Indian Income-tax Act, 1922: sections 10(2)(xv), 66(1), 66(2) and 66(4)
Sources & disclosures includedDownload original judgment / order
3-judge bench; unanimous judgment delivered by J. C. Shah, J. · J. C. Shah, J. · V. Ramaswami, J. · A. N. Grover, J.
Assessment years: 1945-46
01 · Facts of the case
Lakshmirattan Cotton Mills' shares were equally held by the Singhania and Gupta families, whose members formed Beharilal Kailashpat and received a 99-year managing agency in 1935. Family disputes led to awards, a civil suit and the agency's termination from 30 September 1944. Arbitrator K. M. Munshi later held the termination wrongful and awarded Rs.18,90,000 compensation; the company also spent Rs.13,300 on arbitration. For assessment year 1945-46 it claimed the total Rs.19,03,300 under section 10(2)(xv). The tax authorities found no proven agency service or business necessity and disallowed it. After the Tribunal refused a section 66(1) reference, the High Court directed one question under section 66(2), but later called for additional questions under section 66(4) and ultimately declined to answer them formally (SCR pp.953-962; PDF pp.3-12).
Source: Primary judgment: facts
02 · Discussion by the Hon’ble Court
Section 66(4) could supplement an inadequate statement of facts only to decide a question already referred; it could not introduce questions omitted from the section 66(1) and 66(2) applications. The High Court therefore correctly refused formal answers to the additional questions (SCR pp.962-965; PDF pp.12-15). On deductibility, the company bore the burden of proving a wholly and exclusively business expenditure. The Gupta directors managed the company before and after termination, the Singhania representatives had no effective management role, no evidence showed specific services by the firm, and contractual authorisation was not evidence of performance. No evidence showed that inter-family quarrels threatened daily business; a threatened receivership of company management was legally implausible on the facts. Because remuneration covered both company promotion and services, and no service was proved, the payment could not be established as deductible revenue expenditure. The Tribunal had ample material for its finding, regardless of whether its separate 'device' observation was correct (SCR pp.965-968; PDF pp.15-18).
Source: Primary judgment: discussion
03 · Judicial decision
The Court upheld the High Court's answer that material supported the Tribunal's disallowance and its refusal to answer the improperly introduced additional questions. The Rs.18,90,000 compensation and Rs.13,300 arbitration-expense claim remained disallowed. The appeal was dismissed with costs (SCR pp.968-969; PDF pp.18-19).
Source: Primary judgment: decision
04 · Outcome / in whose favour
In favour of the Commissioner of Income-tax/respondent. The company obtained neither the claimed deduction nor answers on the additional section 66(4) questions (SCR pp.965, 968-969; PDF pp.15, 18-19).
Source: Primary judgment: outcome
05 · AKHB REVIEW POINT
AKHB analysis: a termination-payment file should contain evidence of services actually performed, the business threat avoided, the commercial decision record and an allocation among promotion, capital and ongoing-service elements. For tax appeals or references, preserve every intended legal question at the first prescribed stage; a power to supplement the record is not necessarily a power to add a new issue (based on SCR pp.962-969; PDF pp.12-19).
Source: Primary judgment: reviewPoint
Source & verification
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Statutory scope
The judgment applies section 10(2)(xv) and the reference procedure in section 66 of the repealed Indian Income-tax Act, 1922 for assessment year 1945-46. It does not itself determine current business-deduction or appellate-question procedure under later legislation. No current-law or later-treatment clearance was undertaken.
Later treatment
Source checked 2026-10-11. Later judicial treatment and current statutory applicability have not been comprehensively checked; no current-law or citator clearance is represented.
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