9911796707
TMI Blog1956 (1) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... me of the assessee or income from other sources. With respect to the partnership income, the accounting years are those ended on the 30th of April, 1946, and the 30th of April, 1947, but with those accounting years, we are not concerned. The accounting years relative to income from other sources are the years ended on the 31st of March, 1947, and the 31st of March, 1948. Of the six questions, two concern only the assessment year 1947-48. With the remaining four, both the assessment years are concerned. The assessee is one Mr. David Mitchell who was an accountant by profession and a partner of Messrs. Lovelock and Lewes, a well-known firm of chartered accountants of Calcutta. It appears that sometime before 1946 the promoters of a company, called the Chrestien Mica industries Limited, engaged the services of Messrs. Lovelock and Lewes to assist them in its flotation and, as it so often happens, the engagement was attended to by Mr. Mitchell as a partner of the firm. After the company had been formed and the engagement of Messrs. Lovelock and Lewes terminated, the promoters, who were two persons of the names of Ramkumar Agarwalla and Elbridge Watson, became desirous of retaining th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Act. The assessee's contention was that the amounts of premia paid by the promoters could be no part of his income, they having been neither paid to nor received by him. The policies provided for payments of annuities to Mr. Mitchell and his case was that those annuities were the only income that he would revive out of carrying out the terms of the agreement, but the premia paid could on no account be his income. The Tribunal accepted his contention and held that the premia paid on the policies could not be treated as income in the hands of the assessee. Out of the above facts and contention of the parties arises the first question which has been referred to this Court at the instance of the commissioner of Income-tax. The question reads as follows: "Whether on the facts and in the circumstances of this case the sums of ₹ 2,75,191 and ₹ 78,052 paid as premia by the promoters of the company or the assessment years 1947-48 and 1948-49 were assessable to income-tax as income in the hands of the assesse?" It appears that, during the assessment proceedings, the income-tax Officer examined Ramkumar Agarwalla and Elbridge Watson under section 37 of the Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the sum of ₹ 25,000 paid by Ramkumar Agarwalla to the assessee, being the value of 25,000 shares in Chrestien Mica Industries Limited, is taxable in the hands of the assessee?" It next appeals that during the accounting year relative to the assessment year 1947-48, the assessee made a net gain of ₹ 48,741 by the sale of certain Indian investments and similarly during the accounting year relative to the assessment year 1948-49, he made a gain of ₹ 20,018. He did not deposit that these were capital gains, but he wanted the gain of 1947-48 to be set off under section 24(2A) against a loss of ₹ 1,44,407 which he claimed to have suffered as a capital loss in the relevant accounting year. He claimed further that after the gain of ₹ 48,741 had been set off against the loss of ₹ 1,44,407 he would be entitled under section 24(2B) of the Act to carry forward to the next year the unabsorbed balance of the losses, amounting to ₹ 95,666 and set off that loss against the gain of ₹ 20,018. His case as to the loss he claimed to have suffered was that as a member of Messrs. Lovelock and Lewes he had a certain amount of money lying to his credi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he five policies of insurance effected by the promoters could properly be treated as his income but not the premia paid on the policies. "The appellant did not press before us", observes the Tribunal in its appellate order, "that the annuities received by him should not be subjected to tax." Nevertheless, after the contention of the assessee regarding the premia had been accepted, he wanted the Tribunal to refer a question regarding the annuities as well, when he found that the Commissioner of income-tax was causing a reference to be made regarding the premia. The Tribunal declined to accede to that request on the ground that the assessee had accepted the position that the annuities would be and were his income. It was pointed out that the assessee had not merely refrained from pressing a case regarding the non-taxability of the annuities, but had definitely given up that case, thereafter, the assessee moved this court under section 66(2) of the Act, his case being that while he would be content to suffer taxation on the annuities if only the annuities were taxed, he was entitled to protest, if the reference made at the instance of the Commissioner of Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if an if an inadequate statement of case is submitted by the Tribunal. Practically, no facts are stated in the statement of the case, nor are any to be found in the appellate order. I might almost say what Lord Atkinson said in the case of Reed v. Seymour [1927] 11 Tax Cas. 625, which was concerned with an almost identical point: "What has given me most trouble in the case is this--the bald, merger and sketchy way in which the facts of the case have been stated." (See page 647). However, the relevant facts which are all admitted can be culled from the different orders of the different authorities and other materials contained in the paper book. I have already stated that the fact of the receipt of these two thousand and five hundred shares was communicated to the Income-tax Officer by the assessee himself through his letter dated the 27th of March, 1948, sent along with his return. There the shares were described as an unsolicited gift. It is not known whether the shares were just handed over to the assessee by Ramkumar Agarwalla personally or whether there was any forwarding letter. The Income-tax Officer did obtain some information form Ramkumar Agarwalla and Elbridge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Lewis had been fully remunerated for the services rendered by them to the promoters in connection with the flotation of the company and also that the assesses had no independent claim on the promoters in connection with those service. But we have also the further fact that the shares concerned were given to him by Ramkumar Agarwalla "as a token of appreciation for the assistance rendered to him by the assesses in connection with the flotation of the company." The question therefore is: "in those circumstances, were the shares given merely as a personal gift or were they given as remuneration or rather on account of what the assessee had done for the promoters in the exercise of his profession?" I may say at once that I do not think that the taxing authorities were right in assessing the value of the shares under section 7 of the Act. They could only be described, if they at all came under clause (1) of section 7, as perquisites or profit, but the section requires that even perquisites or profits must be, if they are to be taxed under the section, "in lieu of or in addition to any salary or wages" which are due to the assesses, whether paid or not. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 12 which us concerned with income from other sources, since such income is not included among the exceptions. The question whether payments of the present kind constitute only gift of a windfall which is not income and therefore not assessable to tax or whether it is remuneration for services or gains of a profession or vocation, always present great difficulty. It has been considered by reference to similar statutory provisions contained in Schedule E to the English income Tax Act, the languages of which is slightly different, though not materially. Prior to the Act of 1918, the provision in the schedule to the English Act of 1942 was that any person, holding public offices or employments of profit, was liable to be taxed on all salaries, fees, wages, perquisites, or profits whatsoever accruing by reason of such offices or employments. The Act of 1918 slightly carried the languages and it said that "tax under this schedule (that is schedule E) shall be annually charged on every person having or exercising an office or employments of profit mentioned in this schedule....... in respect of all salaries fees, wages, perquisites or profits whatsoever therefrom". ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of a service or an engagement entered into in the exercise of a profession does not prevent it from becoming an income in the hands of the recipient. "Remuneration for services may take, in part, the form of a payment at the end of the employment, and a payment does not necessarily cases to be remuneration for services, because it is payable when the services come to an end." See Hunter (H.M. Inspector of Taxes) v. Dewhurst [1931] 16 Tax Cas. 605 per Lord Macmillan at page 653. On the other hand, the fact that the payment is in some way connected with employment does not necessarily and by itself make it taxable income. "The mere fact," observed Lord Warrington of Clyffe in the same case, "that the payment in question is made the employee as the result of, or in connection with, his employment is not enough to render it liable to tax." (See page 643 of the report). How a payment can be connected with service or an engagement in the exercise of a profession and yet be a present or a gift, is illustrated by the languages of Rowlatt, J., in the case of Reed v. Seymour [1927] 11 Tax Cas. 625. The payment may have been to the assessee who held an offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... County Cricket Club, but the gate money received at the benefit Match arranged in his honour was regarded, as it could clearly be regarded, as a tribute paid by the members of the public to a player whom they regarded as a hero for the skill and sportsmanlike qualities which he displayed in the practice of the game. It is impossible to find any such secondary reason in the present case. The plain fact appears to be that the assessee had rendered valuable assistance to the promoters in the course of rendering professional service as a member of Messrs. Lovelock and Lewes and having been highly pleased with the quality of the services rendered by him and the benefit which had resulted to them therefrom, the promoters had decided not to leave him merely to his share of the profit of the engagements as a member of the firm, but had paid him an extra amounts as his profit from the engagement which had been attended to and carried out by him. In my view, the value of the shares was an income receipt in the hands of the assesses, as rightly held by the Tribunal, but that it fell to be assessed under section 10 of the Act and not under section 7. Passing now to the fourth and the fifth q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he undrawn profits account was ₹ 72,475-13-0 and the amount drawn from his credit in the capital account was ₹ 4,399-4-8. It would be remembered that the loss claimed was ₹ 1,44,407 and therefore the sums transferred from the two accounts could not account for ₹ 67,532 of the amount of the loss claimed. The income-tax officer appears to have noticed that discrepancy but the assessee stated to him to him that the amount of ₹ 67, 532 as also due to him by the firm and the right to that amount also had been waived by him. Before us Mr. Chaudhuri stated that for the purposes of the present references he would be content to take the loss as limited to the two sums mentioned in the agreement, because they would be sufficient to cover the gains of both the years. The assessee's contention, it will remembered, was that by reason of the transfers to the taxation reserve account he had suffered loss to the extent of amounts transferred. Translated into the language of section 12B of the Act, his contention set out in full would be that the amounts lying to his credit in the two accounts were capital assets; that the transfer from those two accounts to the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c Chemical Works Ltd. I.L.R. 1948 Bom. 293. Assuming that firm under the Indian Partnership Act is a distinct entity for certain purposes, I asked Mr. Choudhury whether, if his client had received a gift voluntarily made to him by some other person, he would be agreeable to such gift being treated as a capital gain and to suffer taxation thereon. Mr. Choudhury replied with his usual fairness and candour that he felt greatly embarrassed by the question and that he was bound to concede that if a gift or a receipt of a voluntarily contribution made by a man could not be a capital gains, the reverse was also true and that a gift or a voluntary contribution made by a man could not cause him a loss according to the common acceptance of that term. I consider it strange that a man should voluntarily make a payment and claim that by, making it, he has suffered a capital loss, which he would be entitled to set off against his capital gains. Loss, it seems hardly necessary to explain, must mean loss arising out of the exigencies of some transaction by reason of the circumstance attending it and not a deprivation of property caused by a voluntary and spontaneous act of the person who is depriv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the firm was separate entity. The moneys lying to the credit of the partners in the two accounts belonged to themselves. If in those circumstances the ownership of the moneys was transferred to the firm and the transfers renounced all claims in respect thereof as stated expressly in the agreement, the transaction amount to a gift. If so, it is clear that the third proviso to section 12B(1) would apply and that proviso clearly excepts transfers of capital assets under a deed of gift. Looking at the transaction as a whole, its scope and object appears to me to be perfectly plain. The person who had formed themselves into a firm and were carrying on a business as such were liable to pay income- tax on the profit of the firm, or let me consider only the first stage of the assessment of a registered firm, the firm was liable. According to the practice of a well-ordered business concerns provision used to be made in the accounts of the firm for the payment of the income-tax. The practice followed in this particular firm, however, was to charge against the profits of any year only an amount equivalent to 11/12ths of the tax payable for fiscal year ending within the accounting year and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ". One does not sustain a loss unless the loss is caused to or forced to him by the exigencies of a transaction in the course of which he does everything in his power to prevent such a loss. In my view, whether judged by the concept of a transfer or the concept of a loss or by the essential character of the transaction, there was no transfer and if there was a transfer at all there was certainly no loss, not to speak of capital loss, which the assessee could claim to have sustained. The claim put forward on behalf of the assessee is, in my view, utterly untenable and he is entitled to derive no benefit from it except compliments for his ingenuity. Reverting now to the first and the sixth question, we are unable, as I have already stated, to answer them on the facts stated, as it appears to us that a great deal of further information is necessary. In the first place, clause 4 of the agreement of the 12th August, 1946, speaks of "policies of insurance effected by the promoters (details of which policies are set forth in the schedule marked A)." The schedule has not been printed but we have a mention of the policies in the assessment order for 1947-48. The language I h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olicy and if the former, whether the option was exercised. As I also said when referring briefly to the first question at the beginning of this judgment, the agreement contains provisions for the apportionment of benefits under the policies in case the agreement was terminated. It appears as if that contingency did not arise but we have no definite statement as regard whether the full period of the agreement was served out by the assessee. Lastly, it was case of the assessee that he had received certain annuities during the relevant accounting years. The supplementary statement of case states that in the accounting year relating to the assessment year 1947-48, the assessee received ₹ 4,987 and in the next accounting year he received ₹ 20,173. How these annuities could have been received before the completion of the period of agreement is a little mystifying and if there is an explanation, the same has not been furnished. Paragraph 4 of the agreement states that the benefits under the policies would come to belong to and be the property of the assessee for his sole use absolutely on the completion of this agreement. That language would appear to suggest that the benefi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el? When was it assigned to the assessee? Who paid the consideration for such assessment? In what form and on which date? (6) Under which of the policies were the annuities amounting to ₹ 4,927 received in the accounting year relative to the assessment year 1947-48 and to ₹ 20,173 in the accounting year relative to the assessment year 1948-49? (7) Did the assessee complete the period of agreement by serving for the full period in accordance with its terms? We realise that it will not be possible for the Tribunal to obtain information on the several points I have indicated unless the assessee cooperates and makes available the relevant policies of insurance and such other materials as may be required. I need hardly point out that it will be to his interest to co-operate. We also think that the documents annexed to the further statement of case should include the schedule to the agreement of the 12th August, 1946. It will be to the interest of the assessee to make a copy of that schedule available to the Tribunal. In the results question Nos. 2, 3, 4 and 5 are answered in the following manner: Question No. 2--Not pressed. Question No. 3--Yes. Question No. 4-- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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