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TMI Blog1953 (3) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... Co., Ltd., wrote a letter to the assessee company making a certain offer and the offer was that they agreed to purchase all the conversion shares of Sir Shapurji Broacha Mills at ₹ 300 together with the managing agency of the Mills. The letter further stated that on the assessee company accepting the offer the Dalmia Co. would pay the assessee company ₹ 30 lakhs as and by way of earnest money and the assessee company will have to arrange to get the transfer of the managing agency sanctioned by the general body of the shareholders within the period of 40 days from the date of acceptance; and the letter went on to state: "As soon as the transfer is sanctioned, we will pay the balance of the purchase price." The letter also stated that at the time of the transfer the assessee company will arrange that all the existing directors will resign from the board. On the same day a similar offer was made with regard to the shares of the Madhowji Dharamsi Co., and the only difference in the offer was that ₹ 500 per share was offered in place of ₹ 300 per share offered for the shares of Sir Shapurji Broacha Mills, Ltd. On 26-9-1946, a meeting was held of the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of every capital gain that the tax can be levied. The capital gain must be in respect of profits or gains arising from the sale, exchange or transfer of a capital asset. In this case there is no dispute that the managing agency which the assessee company had was a capital asset, nor is there any dispute that the sum of ₹ 1 crore which the assessee company received was a capital gain, but the controversy centres round the question as to whether this capital gain was in respect of the sale or transfer of the managing agency. No question arises with regard to exchange because it is nobody's case that there was an exchange in this case. But whereas the taxing authorities contend that the managing agency was sold or transferred and as a result of the sale or transfer the assessee received capital gains, the contention of the assessee company is that there was neither a sale nor a transfer and the capital gain arose out of a transaction which does not fall within the ambit of Section 12B. In construing Section 12B we must not give to the expression "sale or transfer" its technical meaning, nor must we attribute to "sale or transfer" as used by the Legisl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ples have been enunciated and have now been accepted as well settled canons of interpretation and of determination of the nature of a transaction when the question arises whether a particular transaction is subject to tax or not. The first case to which reference might be made is a decision of the Privy Council in --'Bank of Chettinad Ltd. v. Commr. of Income-tax Madras', . At p. 185 their Lordships of the Privy Council say: "Their Lordships think it necessary once more to protest against the suggestion that in revenue cases 'the substance of the matter' may be regarded as distinguished from the strict legal position." Therefore, if the strict legal position is clear, the Court is not permitted to look at the substance of the matter and ignore the true legal position. The Privy Council in enunciating this principle relied on the leading case of -- 'Duke of West-minister v. Commr. of Inland Revenue', (1935) 19 Tax Cas 490 (B) and Lord Tomlin at p. 520 makes the following observations in a case, the facts of which were rather striking. The assessee in that case by executing a number of deeds agreed to make payment to persons who had been in his emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain the substance, I must look at the legal effect of the bargain which the parties have entered into." And he winds up by saying that (p. 521): "... .here the substance is that which results from the legal rights and obligations of the parties ascertained upon ordinary legal principles .........." 5. Then there is the judgment of the House of Lords in -- 'Inl. Rev. Commrs. v. Wesleyan General Assur. Society', (1948) 16 I. T. Rule 101 (Supp.) (E) and there also the facts were very striking. An insurance company by a policy agreed to pay on the death of the person insured a certain sum measured by an amount fixed for each month, and the policy provided that the assured can obtain, as a loan from the insurance company an amount not exceeding the sum fixed for every month, and in accordance with these conditions the insurance company lent various sums to the assured, and the question that arose for the decision of the House of lords was whether the sums paid to the assured were loans or were really in the nature of annuities, and the House of Lords held that the payments were loans, and Lord Simon at p. 103 deals with two propositions which he says are we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract under which the assessee company was to cease to be the managing agents of these two companies and the Dalmia Company was to become the managing agents, and in substance the effect of the modification was the same. The assessee company was to cease to be the. managing agents, and as far as the Dalmia Company was concerned, it had the option or choice whether to accept a transfer or to accept a resignation of the managing agents. It is further contended on behalf of the Commissioner that this is a matter between the as assessee company and the Revenue Department, and the Dalmia Company by exercise of its option or choice cannot determine the taxability of any part of the sum of ₹ 1 crore paid to the assessee company for the managing agency. It is further pointed out that as far as the assessee company was concerned, at all times it was ready and willing to transfer or assign the managing agency to the Dalmia Company, but the Dalmia Company, preferred a different mode of performance and" heretofore asked for resignation rather than transfer. But Sir Nusserwanji says that that does not alter the nature of the transaction which was the sale of the managing agency an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e person to another of the right in property. On the other hand, relinquishment means the extinction of a right or the destruction of a property, and if the property is destroyed or the right is extinguished, there is nothing left to transfer or to sell. Under the first contract the managing agency, which is the capital asset with which we are concerned, would have continued to subsist and would have been vested in Dalmia Company. It could only have been vested by a deed of assignment executed by the assessee company and by getting the consent of the shareholders, and these were the two conditions which the Dalmia Company had insisted upon in their first letter. Under the substituted contract the managing agency which had been vested in the assessee company would cease to exist and no question would arise of that managing agency being transferred to or being vested in the Dalmia Company. 9. It has been suggested by Sir Nusserwanji that Dalmia chose to get the benefit of the managing agency by a different method. It was open to him to get himself appointed by the two companies as he held the bulk of the shares, or perhaps he preferred to control the two companies without the interv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt in the sense that they give rise to different legal position & different legal rights & obligations. In our opinion it seems to be fairly clear that these two transactions are not identical. In the one case the result would be the sale or the transfer of property in favour of Dalmia Company; in the other case there is no sale or transfer, there is only the relinquishment of rights by the assessee company or destruction of property by the assessee company at the instance of Dalmia Company. 10. Now, the result of our decision may be unfortunate, but it is clear, and Sir Nusserwanji does not contest the position, that Section 12B does not subject to tax capital gains arising to an assessee by reason of the fact that he has relinquished some property belonging to him or some rights vested in him. It may be a lacuna, but the Legislature, for reasons best known to it, has not chosen to tax such a transaction, and Sir Nusserwanji also concedes that if we take the view that ₹ 1 crore Which the assessee company received was received by it for resigning the managing agency and not for selling the managing agency, and if resignation means relinquishment of the assessee company's ..... X X X X Extracts X X X X X X X X Extracts X X X X
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