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TMI Blog1967 (7) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... was a director of the bank. On May 9, 1943, a meeting of the board of directors of the bank was held and at that meeting it was decided that with a view to the strengthening the financial position of the bank, the balance of the authorized share capital of the bank should be issued and the managing governor should take steps to see that it was subscribed for by one or two or more parties in big lots and with a view to attracting such parties to subscribe, brokerage at the rate Rs. 3 per share and the right to the issue of the deferred shares should be offered to the subscribers. Following upon this decision of the board of directors, an agreement was arrived at between the assessee, J. C. Thakkar and Nanji Kalidas Mehta whereby it was agreed that the entire balance of the authorized capital consisting of 24,000 shares should be taken up by these three parties " in three equal parts " and that for the time being, these shares should stand in the name of Nanji Kalidas Mehta or some one residing in a Native State and that all the dealings should be put through the Rajkot branch of the bank. This agreement was disputed by the assessee in the course of the assessment proceedings but it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,677 and they were purchased and sold in different lots from time to time. The last sale took place on 21st June, 1944. The ultimate position as it emerged was that all 15,677 shares purchased in the market were sold, but out of 23,145 shares orginally taken up from the bank, 5, i 00 shares remained unsold. These 5,100 shares were admittedly taken over by the assessee. The second question referred to us raises the controversy whether these 5,100 shares were taken over by the assessee in lieu of his capital and share in the profit of the joint venture or they were withdrawn by him from the stock-in-trade of the joint venture at cost. We shall presently examine this question but, in the meantime, to continue with the narration of the facts, a statement of account in respect of the aforesaid transactions was drawn up after the shares were sold and this statement of account has been accepted as representing the correct state of affairs both by the income-tax authorities as also by the Tribunal. The decision of the controversy in regard to 5,100 shares turns largely on the true interpretation of the relevant entries in the statement of account and it would, therefore, be desirable to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccounts addressed to J. C. Thakkar : " The position is as above with regard to all of us and in future if any income-tax matter arises, please note that all will have to pay according to this account." The revenue took the view that the assessee, Nanji Kalidas Mehta and J. C. Thakkar being partners in the joint venture with equal shares, the share of each in the profit of the joint venture was Rs. 1,16,543-8-4 (excluding the underwriting commission or brokerage of Rs. 3 per share) and while this share of profit was received by each of the two partners, namely, Nanji Kalidas Mehta and J. C. Thakkar in cash, so far as the assessee was concerned, he received it partly in cash and partly in shares. Rs. 40,043-8-4 was received in cash and the balance of Rs. 76,500 was received embedded in 5,100 shares taken over by the assessee. According to the revenue, 5, 100 shares were received by the assessee in lieu of capital and his share of profit to the extent of Rs. 76,500 and the total profit which accrued or arose to the assessee as a result of the joint venture, therefore, was Rs. 40,043-8-4 Plus Rs. 76,500, that is, Rs. 1,16,543-8-4. The revenue accordingly claimed to tax the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be justified. But the question is whether Rs. 76,500 accrued to the assessee as his share in the profit of the joint venture and 5, 100 shares were taken over by him at an agreed valuation in payment of such amount. It is manifest that a profit cannot accrue to a partner unless it accrues to the joint venture and, therefore, if the revenue seeks to establish that Rs. 76,500 accrued to the assessee as his share in the profit of the joint venture, the first step in the argument which the revenue would have to take is that Rs. 76,500 accrued as the profit of the joint venture. The revenue must show that the profit of the joint venture was not Rs. 2,73,130-9-0 but Rs. 2,73,130-9-0 plus Rs. 76,500. Now Rs. 2,73,130-9-0 was admittedly the profit earned by the joint venture as a result of the sale of the shares and, therefore, according to the contention of the revenue Rs. 76,500 must necessarily be profit arising in respect of 5,100 shares which remained unsold. These 5,100 shares were admittedly not sold in the market and the only other way in which profit could arise to the joint venture in respect of these 5, 100 shares would be by the partners valuing them at a mutually agreed pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to 7,715 shares, out of his contribution of 7,715 shares, the assessee withdrew 5,100 shares at cost and only 2,615 shares remained as his contribution as against 7,715 shares contributed by each of the other two partners. The profit of Rs. 2,73,130-9-0 was, therefore, divisible amongst the partners according to the proportion of 2615 : 7715 : 7715. But since the division according to this proportion would involve complicated arithmetical calculations, what the partners did was to adopt a rough and ready method of effecting division. They divided the profit of Rs. 2,73,130-9-0 by the total number of shares contributed by the partners, namely, 18,045, and arrived at the nearest integer, namely, 15, and applying it as a multiplier to each partner's contribution of shares, they effected a division of Rs. 2,70,675 in the proportion of 2615 : 7715 : 7715, vide the following entries in the statement of account : Rate of profit per share Rs. 15 18,045 shares are to be divided as follows : --- Seth Kikabhai 2,615 Seth Nanjibhai 7,715 Mr. Thakkar 7,715 ---------------- 18,045 ---------------- Rs. Profit of Seth Kikabhai 2,615 at Rs. 15 39,225 Profit of Seth Nanjeebhai 7,715 at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,57,250-0-0 ------------------------------- Profit 3,49,630-9-0 ------------------------------- Profit to be divided in three equal parts as each partner is entitled to an equal share. Rs. As. Ps. Profit of Seth Kikabhai(i.e., the assessee) 1,16,543-8-4 Profit of Seth Nanjibhai 1,16,543-8-4 Profit of J. C. Thakkar 1,16,543-8-4 -------------------------- 3,49,630-9-0 -------------------------- and the assessee's capital account would have been as follows : --- Rs. As. Ps. Rs. As. Ps. Paid by Value of 5,100 shares Seth Kikabhai 2,40,000-0-0 taken over at Rs. 65 per share. 3,31.500-0-0 Share of profit 1,16,543-8-4 Balance due to Seth ------------------------ Kikabhai 25,043-8-4 3,56,543-8-4 ---------------------- ------------------------ 3,56,543-8-4 ----------------------- On no principle of commercial accountancy could the statement of account have been in the form in which we find it. It must be remembered that an account represents a historical record of a transaction and, therefore, in order to understand the true nature and import of the transaction, the statement of account would be the surest guide, unless of course it is shown that it does not contain a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment but he expressed his inability to do so. We cannot, therefore, proceed on the basis that the market value of the shares at the date of settlement of accounts was Rs. 65 per share. And if that be so, the entire superstructure of the argument of the revenue must fall to the ground. But even if this hurdle against the argument of the revenue were ignored, there are other obstacles on which the argument must founder. If we scrutinise the argument, we will find that it is essentially based on conjecture and speculation rather than upon an interpretation of the statement of account. Even if the market value of the shares at the relevant time was Rs. 65 per share, there is nothing in the statement of account to show or even remotely to lead to the inference that the assessee took over 5,100 shares at Rs. 65 per share. The entries in the statement of account are in fact destructive of any such inference. It is undoubtedly true that if 5,100 shares were taken over by the assessee at Rs. 65 per share, the profit in respect of those shares would be Rs. 15 per share and that does coincide with the rate obtainable by dividing the profit of Rs. 2,73,130-9-0 by the remaining 18,045 shares bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partners of the joint venture in September, 1944, by reference to some intention vaguely and ambiguously expressed by one of the partners, namely, the assessee, about ten months prior to the taking place of the transaction. We must determine the character of the transaction on an interpretation of the statement of account which has been accepted as a correct and faithful record of the transaction and if we do so, there is no doubt that 5,100 shares were taken over by the assessee at cost and no profit accrued to the joint venture in respect of those shares. The addition of Rs. 76,000 made in the assessable income of the assessee must, therefore, be deleted. That takes us to the next question referred to us. That question relates to the proper accounting year in respect of the assessee's share in the profit of the joint venture. The revenue adopted the calendar year 1944, as the previous year since the accounts of the assessee in respect of his other business were maintained according to the calendar year but this is plainly incorrect. Section 2(11)(i) as amended by the Income-tax (Amendment) Act, 1939, defines " previous year " in reference to each separate source of income and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as to what was the previous year and the controversy in regard to the previous year would be clearly academic and this was indeed not disputed by the assessee. But the argument of the assessee was that the joint venture did not consist of a single transaction and, therefore, the rule that assessable profits can arise only when the joint venture comes to an end or the entire cost is recouped, had no application, and the profit which accrued to the joint venture in the financial year 1943-44 was not assessable in the assessment year in question. The validity of this argument on merits was of course disputed on behalf of the revenue but the revenue also raised a preliminary objection against our entertaining the argument and that was on the ground that the point which was sought to be raised did not form the subject-matter of any question referred to us for our opinion. The preliminary objection is, in our view, well-founded and it is not necessary to enter upon a consideration of the merits of the argument urged on behalf of the assessee. If we look at the question referred to us for our opinion, it is clear that the question is limited only to the controversy in regard to the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to bring out a particular controversy between the parties but by reason of inappropriateness of language it fails to properly bring out ouch controversy. The power does not extend to reframe a question so as to introduce a totally different kind of controversy from that which is embodied in the question as framed. The suggestion on behalf of the assessee for reframing the question was : " Was the calendar year 1944 rightly taken as the previous year for the alleged income of Rs. 1,52,683 and whether the said alleged income accrued or arose in September, 1944 ? " If this suggestion of the assessee were to be accepted, the question as reframed would comprise two distinct and independent controversies, one in regard to the previous year and the other in regard to the time of accrual of profit to the joint venture. We would be expanding the scope of the question and introducing in the question a controversy which does not at present find a place there. That, we are afraid, is not permissible to us. On the question as framed, the only controversy is as regards the previous year and so far as that is concerned, it is entirely academic on the view taken by the Tribunal that the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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