TMI Blog1967 (7) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... 5-46. The relevant accounting year is the calendar year 1944. The assessee was at all material times the chairman of the board of directors of a company called the International Bank of India Ltd. (hereinafter referred to as the bank). One J. C. Thakkar was the managing governor and one Nanji Kalidas Mehta 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 par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ." By November 20, 1943, a few out of 23,145 shares were sold but from that date J. C. Thakkar expanded the activities of the joint venture and started purchasing further shares of the bank in the market and selling, them on account of the joint venture. The number of shares thus purchased and sold, came to 15,677 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shares were taken over by the assessee in lieu of his capital and share in the profit of the joint venture or they were withdrawn by him from the stock-in-trade of the joint venture at cost.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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counts sent to J. C. Thakkar were as follows : Rs. As. Ps. 1,16,543-8-4 My shares of profit on 7,715 shares 1,16,543-8-4 Your shares of profit on 7,715 shares 40,043-8-4 Seth Chunilal Khushaldas share of profit on 2,615 shares -------------------------- 2,73,130-9-0 -------------------------- It was stated at the end of the letter containing the final position of the accounts 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ock-in-trade of the joint venture may be given over to him at an agreed valuation in satisfaction of his share in the profit. If, therefore, Rs. 76.500 accrued to the assessee as his share in the profit of the joint venture and 5,100 shares were given over to the assessee at an agreed valuation in lieu of Rs. 76,500, the inclusion of Rs. 76,500 in the assessable income of the assessee would 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,73,130-9-0 and that was the profit divided amongst the partners. As pointed out in paragraph 5 of the order of the Tribunal, " the entire issue of 24,000 shares of the bank was to be taken in three equal parts " by the partners, but since the total number of shares taken from the bank was 23,145 instead of 24,000, the contribution of each partner to the stock-in-trade of the joint venture came 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 divi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n on the following lines : --- Rs. As. Ps. Total No. of shares of partnership 23,145 Total sale proceeds 22,32,609-8-0 Value of 5100 shares taken over by Seth Kikabhai at Rs. 65 per share 3,31,500-0-0 ----------------------------- 25,64,109-8-0 Less : Cost of shares purchased in the market 10,57,228-15-0 ------------------------------ 15,06,880-9-0 Less : Cost of 23,145 shares at Rs. 50 per share 11,57,250-0-0 ------------------------------- 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 ---------------------- ---------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Tribunal and any finding recorded by the Income-tax Officer is of no consequence unless it is adopted and made its own by the Tribunal. Moreover there is no evidence at all to support the statement that the prevailing market value of the shares at the date when they were taken over by the assessee was Rs. 65 per share. We asked the learned Advocate-General whether he was in a position to point out any evidence which would support this statement 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 lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bring him a profit of Rs. 1 to Rs. 1 1/4 lakhs. No reliance can, therefore, be placed on these words for the purpose of persuading the court to interpret the statement of account in the manner contended for on behalf of the revenue ; secondly, these words merely expressed an intention entertained by the assessee as far back as 12th November, 1943, and it would not be right to determine the character of the transaction which took place between three 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 1944 or the financial year 1944-45, for, in either case, the date of accrual of the share in the profit of the joint venture to the assessee would fall within the previous year. Now there can be no doubt that, if the profit of the joint venture could not be determined until the joint venture was completed and the share in the profit, therefore, accrued to the assessee only in September, 1944, when the accounts were made up, it would make no difference 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odies a totally different controversy from that set out in ground 22. The controversy embodied in the present question relates to the correct previous year and that is entirely distinct and separate from the controversy in regard to the time of accrual of profit to the joint venture referred to in ground 22. We have undoubtedly power to reframe a question referred to us, but that can be done only where it is found that the question as framed is intended 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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