TMI Blog1962 (7) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... 31, 1946, to the assessee and Mr. Hunt to purchase the entire 2,500 shares for a consolidated price of rupees 50 lakhs. A further sum of ₹ 27,34,325 was also offered by Karamchand Thapar Bros. Ltd. to buy over with effect from April 1, 1946, the managing agency rights vested in the assessee and Mr. Hunt. A copy of the letter dated August 31, 1946, written by Karamchand Thapar Bros. Ltd. to the assessee and Mr. Hunt is annexure B and forms part of the case. By letter dated September 26, 1946, the assessee and Mr. Hunt accepted the said offer of Karamchand Thapar Bros. Ltd. A copy of the letter dated September 26, 1946, written by the assessee and Mr. Hunt to Karamchand Thapar Bros. Ltd. is annexure C and forms part of the case. On the 7th January, 1947, Greaves Cotton Co. submitted its resignation of the office of the managing agents of the company and it also recommended that Karamchand Thapar Bros. Ltd. be appointed in its place. A copy of the letter dated 7th January, 1947, written by Greaves Cotton Co. to the managed company is annexure D and forms part of the case. A meeting of the board of directors of the managed company was held on 8th January, 1947. The directo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,09,375 Accountants' and architects' fees 26,000 Goodwill 10,00,000 56,18,176 Balance 21,16,149 and as the assessee was holding 2,300 shares out of the total 2,500 shares his share came to ₹ 19,46,857. A copy of the Income-tax Officer's order is annexure I and forms part of the case. 4. The assessee preferred an appeal to the Appellate Assistant Commissioner and the Appellate Assistant Commissioner worked out the capital gains at ₹ 25,88,117 thereby enhancing the capital gains by ₹ 4,34,210. This computation was made as follows: Rs. Consideration for relinquishment of management 27,34,325 Less value at 1-1-1939 Nil Capital gain 27,34,325 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the management rights for ₹ 77,34,325. The two letters from which extracts are reproduced above in paragraph 9 also describe the transaction of both the assets as a purchase and the consideration is also referred to not as compensation, as alleged, but as a price. There is no evidence whatsoever to support the plea that this was a case of relinquishment of managing agency rights. Actually there is conclusive evidence to support the finding that there was an outright sale or transfer of managing rights. 11. Now coming to the ruling in the case of Provident Investment Co. Ltd. [1953] 24 I.T.R. 33 relied upon by Shri Sharp, I think the facts of the present case can be easily distinguished. In that case, the buyer had laid down a specific condition (to which the seller had agreed) that the managing agency rights were not to be transferred to the buyer company or to its nominees but the managing agents were required to tender their resignation as managing agents which they actually did. In these circumstances, it was held that there was neither a sale, nor an exchange nor a transfer of managing agency rights, as the property (i.e., the managing agency rights) was already exting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the capital gains at ₹ 23,81,067. The Tribunal by its order dated March 9, 1959, held: We think, both the transfer of the shares and the managing agency was the sale of a capital asset to which capital gains tax applied. In regard to the contention of the assessee relating to the quantum of the capital gains as computed by the department the Tribunal held: Having regard to the various aspects of the case, we think that the value of the shares of Greaves Cotton Co. Ltd. as on January 1, 1939, could not be more than 60% of what it was at the time of the sale. As regards the value of the agency rights the Tribunal held: 7. The position as regards the value of the agency rights is concerned is also similar. The value must correlate to the income, the assets and other factors. Whereas, prior to 1939 for 4 years consecutively the agency remuneration had never exceeded the minimum of ₹ 1 lakh, the agency remuneration for 1943, 1944 and 1945 was in the neighbourhood of ₹ 1 lakhs every year. The value of the agency at the time of the sale was considerably higher than what it was on January 1, 1939. The Tribunal further observed: We think that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o become bound by the obligations undertaken by the said firm hereunder and upon such assignment being made and notified to the said company, the said company shall be bound to recognise the person or firm or company aforesaid as the agents of the said company in like manner as if the name of such person, firm or company had appeared in these presents in lieu of the names of the partners in the said firm and as if such person, firm or company had entered into this agreement with the said company and the said company shall forthwith upon demand by the said firm enter into an agreement with the person, firm or company aforesaid appointing such person, firm or company the agents of the said company for such term as the firm may elect and with the like powers and authorities, remuneration and emoluments and subject to the like terms and conditions as are herein contained. On 31st August, 1946, M/s. Karamchand Thapar Bros. Ltd. (hereinafter referred to as Thapars) wrote a letter to the said Mr. Greaves and Mr. Hunt, making an offer to purchase the said 2,500 shares held by them for a price of ₹ 50 lakhs. By the same letter, Thapars also offered to pay a price of ₹ 27,3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e office of managing agents be accepted and that M/s. Karamchand Thapar Bros. Ltd. be appointed managing agents of the company in their place for a period of 20 years from the date of their appointment on similar terms to those on which Greaves Cotton Co. was appointed by the agreement of 10th April, 1929, and that an extraordinary general meeting of the company be convened for that purpose. This proposed resolution was accepted by the board of directors, and it was further resolved that the directors recommend to the members that Messrs. Karamchand Thapar Brothers Limited be appointed the managing agents of the company for a period of twenty years from the date of appointment at the remuneration and upon the terms and conditions set out in the draft of an agreement to be made between Messrs. Karamchand Thapar Brothers Limited and the company to be presented to the members in extraordinary general meeting. The next resolution is to the effect that the members waive the statutory notice for calling the extraordinary general meeting, and further resolved that the extraordinary general meeting of the members be held immediately after the termination of the meeting of the board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntants' and Architects' fees 26,000 Goodwill 10,00,000 55,18,176 Balance 21,16,149 quot; Out of the total capital gains of ₹ 21,16,149 the Income-tax Officer computed the capital gains to the assessee on 2,300 shares at ₹ 19,46,857. The assessee preferred an appeal to the Appellate Assistant Commissioner, challenging the order of the Income-tax Officer. It also appears that before the Appellate Assistant Commissioner, the Income-tax Officer claimed that the amount of capital gains computed by him be enhanced by ₹ 5,44,832, ₹ 2,44,832 by reducing the value of the assets, and ₹ 3,00,000 by reducing the amount of goodwill. The Appellate Assistant Commissioner in appeal did not accept the contentions of the assessee, but, on the other hand, partially accepted the contentions of the Income-tax Officer, and enhanced the amount of capital gains by ₹ 4,34,210. The computation made by the Appellate Assistant Commissioner is as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either sale or transfer. The Tribunal rejected this contention, and held that the transfer of shares and managing agency was sale of capital assets to which the provisions of capital gains were attracted. The other contention raised by the assessee before the Tribunal was that the quantum of capital gains was not correctly made. From the order of the Tribunal, it appears that in this behalf the only contention raised by the assessee was that the income-tax authorities were not justified in holding that the value of the managing agency as on January 1, 1939, was nil. Accepting the aforesaid contention of the assessee, the Tribunal observed: We may agree with the assessee that the department's working is wrong, inasmuch as it has not taken the value of the agency rights as on January 1, 1939, into account. If the agency had a value as at the end of 1945, it had also some value as on January 1, 1939. The basis of valuation on both the date of sale and on January 1, 1939, should be the same. By taking the agency remuneration and future trends as the basis for valuing the agency rights, it would be found that the agency rights would ordinarily fetch much better price at the time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been revived from 1st April, 1957, in a slightly modified form. Sub-section (1) of section 12B provides that tax shall be payable by an assessee under the head Capital gains in respect of any profits or gains arising from the sale, exchange, or transfer of a capital asset effected after the 31st day of March, 1946, and before the 1st day of April, 1948; and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange or transfer took place. Sub-section (2) relates to the computation of capital gains, and provides that the capital gains shall be computed after making certain deductions from the full value of the consideration for which the sale, exchange or transfer of the capital asset is made, namely, (1) expenditure incurred solely in connection with such sale, exchange or transfer, and (2) actual cost to the assessee of the capital asset, including any expenditure of a capital nature incurred and borne by him in making any additions or alterations thereto. The third proviso to sub-section (2) of section 12B enables the assessee to substitute the value of the assets as on January 1, 1939, in place of actual cost. It is not in dispute that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he managing agent of two mills in which the bulk of shares were held by the Gwalior Durbar but were controlled by the assessee. Dalmia Investment Company Ltd. wanted to acquire the shares as well as the managing agency of the two managed companies. The Dalmia Company by its letter dated 14th September, 1946, offered to purchase the shares including the managing agency at a certain price. The offer was accepted by the assessee company on 26th September, 1946. On 7th October, 1946, the Dalmia Company wrote a letter to the assessee company that instead of transferring the managing agency to it, the assessee company might resign its office of managing agents. The assessee company then tendered its resignation as managing agents. The question that fell for consideration was whether any capital gain arose to the assessee company out of this transaction. The contention of the department was that the transaction amounted to a sale or transfer. The contention of the assessee company was that it was a transaction amounting to relinquishment of the managing agency and not to any transfer or sale. Mr. Kolah contends that the facts of the present case are identical with that case. The aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in the mode of performance and the contract of sale or transfer originally arrived at remained unaffected, then the assessee could be liable to tax because the consideration was received by him out of a transaction of sale...........But, in our opinion, the letter of the 7th October, 1946, does not merely alter the mode of performance, but it substitutes an entirely different contract for the original contract entered into and the transaction that would have been effected by reason of the original contract is an entirely different transaction from the one which was ultimately effected by reason of the modified contract arrived at on the 7th October, 1946. Their Lordships of the Supreme Court also have observed at page 197 of the report (Commissioner of Income-tax v. Provident Investment Co. Ltd. [1957] 32 I.T.R. 190 (S.C.) that on a true interpretation, the letter of October 7, 1946, substituted a new contract, a contract of relinquishment rather than a contract of sale, so far as the managing agency was concerned. In the case before us, there is no material or an iota of evidence that the original agreement of sale had undergone any change or was modified or was altered. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a document or documents in which the parties have chosen to embody the transaction or transactions. The court may even look at the surrounding circumstances in construing a document, but the court in looking at the surrounding circumstances must be anxious all the time to determine what is the true nature of the transaction. It is clear that what is vital and what is determinative is the nature of the transaction as embodying in the documents in which the parties have chosen to embody, the terms of the transaction, and not the mode by which it is performed. In the instant case, the documents in which the parties have embodied the transaction between them is only the offer of purchase made by Thapars by their letter of 31st August, 1946, and its acceptance by Mr. J.B. Greaves on 22nd September, 1946, and, on the construction of these two documents, there cannot be any doubt that the transaction between the parties was one of sale or transfer of the share as well as the managing agency. Further, the steps taken by the assessee also leave no doubt that this agreement between the parties has been performed by Mr. J.B. Greaves and Mr. Hunt by tendering their resignations simultane ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gain on the sale of managing agency computed by the Appellate Assistant Commissioner at ₹ 27,34,325 was not the correct figure. According to the assessee, the Appellate Assistant Commissioner was in error in holding that the value of the managing agency as on January 1, 1939, was nil, and therefore question No. 3 should be framed as follows: Whether on the facts and circumstances of the case the figure of ₹ 27,34,325 has been correctly and properly arrived at as capital gain on the sale of managing agency? On the other hand, Mr. Joshi stated that the amount of ₹ 27,34,325 in the third question is merely an inadvertence. The Appellate Assistant Commissioner had computed the capital gain at ₹ 25,88,117 and for reasons stated by the Tribunal, the Tribunal has affirmed that finding. The question, therefore, should be reframed by substituting the figure of ₹ 25,88,117 for ₹ 27,34,325. In our opinion, Mr. Joshi is right. The Tribunal affirmed the capital gains determined by the Appellate Assistant Commissioner at ₹ 25,88,117 though for different reasons. Accepting the contention of Mr. Joshi, we reframe the third question as under: W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greed to be purchased at the consideration of ₹ 27,34,325. The Appellate Assistant Commissioner also, in deciding the question of capital gain, has treated these two transactions as distinct and separate transactions. It is indeed true that the powers of the Tribunal under sub-section (4) of section 33 are wide. The Tribunal, after giving both the parties to the appeal, an opportunity of being heard, can pass such orders thereon as it thinks fit. The expression thereon occurring in sub-section (4) of section 33 has been construed in various decisions as meaning on the subject-matter of appeal before the Tribunal . Now the subject-matter in appeal before the Tribunal would naturally be the grounds raised by the appellant before it. Rule 12 of the rules framed relating to the Appellate Tribunal provides that the appellant shall not, except by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal; but the Tribunal, in deciding the appeal, shall not be confined to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal under this Rule........... Rule 27 further provides that the respondent, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts which are not already on record and are not based on facts which were neither alleged nor admitted nor proved and which the other side was never called upon to meet in the lower court. It thus follows that the subject-matter of appeal would get confined to the limits of the grounds specifically raised in the memorandum of appeal, the new grounds raised by the appellant with the previous permission of the Tribunal and the grounds urged by the respondent in support of the decree passed in his favour, even though the decision of the court, against which the appeal is filed, is against him. It is thus clear that the Tribunal will have no jurisdiction to found its decision on grounds which have not been raised before it by any of the parties at all. In other words, in our opinion, it would not be open to the Tribunal to make out a new case for either the appellant or the respondent. In the light of these principles, it will have to be seen whether the Tribunal was justified in interfering with the finding of the Appellate Assistant Commissioner that the transaction of sale of shares had resulted in capital loss, and in holding that the value of the shares as on January 1, 193 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellate Assistant Commissioner. It is indeed true that the Tribunal has gone into the question of determining the capital gains on the transaction of sale of shares. But nowhere from the order it appears that the departmental representative had raised any contention before the Tribunal or tried to support the order of the Appellate Assistant Commissioner on the ground that the transaction of sale of shares had resulted in capital gain. From the order of the Appellate Assistant Commissioner also, it does not appear that at any time it was the case of the Income-tax Officer that the transaction of sale of shares had resulted in capital gains. These being the circumstances of the case, in our opinion, the Tribunal was neither competent nor justified in interfering with the finding of the Appellate Assistant Commissioner as regards the transaction of sale and holding that the transaction of sale of shares had resulted in capital gains. The assessee's contention that the managing agency had value as on January 1, 1939, has been accepted by the Tribunal, and in view of this finding of the Tribunal, and in the light of the observations herein made, the amount of capital gains will ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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