TMI Blog1966 (9) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... es which support the view that in some cases termination of a managing agency leading to compensation is capital receipt. Mr. A. C. Mitra, the learned standing counsel for the revenue authorities, equally relied on the other line of cases where it has been said that such compensation arising cut of the termination of managing agency can be, and is, in the facts and circumstances of the case, a revenue receipt. Before proceeding to discuss this question and determining it, the relevant facts may be stated briefly. The assessee-company is Karamchand Thapar Brothers Private Ltd., of 25, Brabourne Road, Calcutta. It is a private limited company. The assessment year is 1952-53. The relevant accounting year is the year ended on the 31st March, 1952. The assessee-company was functioning as the managing agents of 27 other companies including Messrs. Greaves Cotton Co. Ltd. Messrs. Greaves Cotton Co. Ltd. became incorporated as a private company in 1922, and at that time its managing agent was a firm called "Messrs. Greaves Cotton Co." The assessee-company acquired a large block of shares in Greaves Cotton Co. Ltd. and also paid a sum of Rs. 27,34,325 to the firm of managing age ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Nizam on the 17th November, 1950, who subscribed 18,000 equity shares and 23,000 preference shares at a cost of Rs. 50 lakhs, but the point remains that the application to the Controller of Capital Issues for issue of additional capital of Rs. 55 lakhs by the managed company was made long before, on the 19th October, 1949, and the sanction thereof was also obtained on or about the 24th April, 1950, both such dates being prior to the date of 10th May, 1950, when the fresh managing agreement for twenty more years was executed. Coming back to the sub-committee, it appears that it worked with surprising alacrity and speed. Appointed on the 28th February, 1951, to report whether the managed company can be managed by its own board of directors, a question of policy and facts which the board of directors themselves could have decided, made its report within 15 days, to be accurate on the 16th March, 1951, recommending that the managing agency of the assessee-company should be terminated. Things moved with lightning speed and on the following date, the 17th March, 1951, the board of directors of the managed company immediately approved the recommendations and an extraordinary genera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) The managing agency had 19 more years to run when it was terminated. (2) There was no clause in the managing agency agreement giving any right to the managed company to terminate and such a right belonged only to the assessee managing agent and that also by notice of six months. The letter or notice of this unprovided for termination was retrospective. (3) This managing agency was not a losing concern but was earning handsome profits for the assessee-company. (4) The average return annually from only this managing agency of the managed company amounted to Rs. 2,50,000, and which was to run for 19 years. (5) The assessee-company purchased the managing agency right for a sum of Rs. 27,34,325, but it readily agreed to terminate the managing agency at an under-value and accepted only a sum of Rs. 18 lakhs. Having stated the facts and circumstances in which this managing agency agreement was terminated, it will be appropriate now to refer to the fact that the assessee-company made the necessary entries in its account books in respect of the sum of Rs. 18,00,000, showing it in the capital account as compensation and not in the revenue account. The assessee contended that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the management by the managing agents and it seemed very unusual that a few months after the conversion of Messrs. Greaves Cotton Company into a public limited company it was decided in hot haste to terminate the managing agency. Another contention before the Tribunal on behalf of the revenue authorities was that the compensation payable to the managing agents was proportionate to the agency commission that it would have received in course of the remaining period of its management. Therefore, the amount represents an advance payment of remuneration. Lastly, argument on behalf of revenue authorities before the Tribunal was that, having regard to the facts that the assessee-company was the managing agents of 27 managed companies, the business of the assessee was to acquire managing agency and, therefore, managing agency in such case was stock-in-trade of the assessee's business and if in course of its business it voluntarily agreed to give up managing agency, the compensation received by it for such loss would be in the nature of revenue. The Tribunal did not accept these arguments advanced on behalf of the revenue authorities. It came to the conclusion that the transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court in Kettlewell Bullen's case, almost all the cases up till then are collected. All that we, therefore, need to do in this case is to notice the latest decision of the Supreme Court on this point in Commissioner of Income-tax v. Best Co. just mentioned. There, at pages 17 and 18, the Supreme Court observed as follows : "As we have observed earlier, in view of the judgments of the court, no further citation is called for. Whether the compensation received by an assessee for the loss of agency is a capital receipt or a revenue receipt depends upon the circumstances of each case. Before coming to a conclusion one way or other, many questions have to be asked and answered : what was the scope of the earning apparatus or structure, from physical, financial, commercial and administrative stand-points ? If it was a business of taking agencies, how many agencies it had, what was their nature and variety ? How were they acquired, how one or some of them were lost and what was the total income they were yielding ? If one of them was given up, what was the average income of the agency lost ? What was its proportion in relation to the total income of the company ? What was the impact o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding interest even after the Nizam's advent, and the assessee did not lose its control of the majority of shares, even after the termination of the managing agency. The Supreme Court in Commissioner of Income-tax v. Best Co. (P.) Ltd. also observed at page 19 as follows : "What remains, therefore, is only the fact that the assessee had innumerable agencies in different lines and that it only gave up one of them and continued to do business without any apparent mishap. The correspondence between the parties shows that the assessee gave up the agency without any protest presumably because such termination of agencies was part of the normal course of its business. We, therefore, hold, on the facts of the present case, that the loss of the said agency by the assessee was only a normal trading loss and that the income it received was a revenue receipt." Here again applying that test, the record shows that the assessee also in this case had innumerable agencies to the extent of 26 more agencies and that it only gave up this particular one and it continued to do business without any apparent mishap. It is also the fact here that the assessee gave up agency not only without any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellation of an agency is always regarded as capital. The law, as we understand from them, is this that what is "prima facie" may not be, on a consideration of all the facts and circumstances, the true state of affairs and even what is "prima facie" will depend on the particular facts and circumstances in each case. In the facts of the present reference, here is an assessee whose main and major business is running managing agencies of 27 companies and who readily agrees without any apparent business reason to give up a profitable managing agency even at a loss to himself, and that even within a few months after entering into an agreement to run the managing agency for 20 years, reserving to himself only right to terminate and denying that right to the managed company. Even on the "prima facie" doctrine it appears to us that in the present context this termination was nothing but a device of capitalising its profits and essentially getting an advance profit or remuneration under the cover of terminating the contract of managing agency agreement. Lastly, the method of calculating the said sum of Rs. 18 lakhs also indicates that it was nothing but trading profit. The amount was arriv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary, here on the facts of this reference the evidence is conclusive that this sum of Rs. 18 lakhs was based on calculation of profits. The argument, therefore, about measure having no relation to quality cannot be applied to the facts of this case. The law on this point was summed up by the Supreme Court in Kettlewell Bullen Co. Ltd. v. Commissioner of Income-tax, and repeated in Gillanders Arbuthnot Co. Ltd. v. Commissioner of Income-tax, where it is stated as follows : "On an analysis of these cases which fall on two sides of the dividing line, a satisfactory measure of consistency in principle is disclosed. Where, on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue : where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of the managing agency agreement before the expiry of its period by the managed company with a view to getting rid of its recurring liability in the matter of payment of managing agency commission and/or taking over the management by its board of directors was a transaction in the ordinary course of its business in order indirectly to facilitate the carrying on of its business. It was held to be expenditure in the usual course of business although the managing agency agreement gave no right to the managed company to terminate and what the managed company did was to commit a breach of that contract and it was held that such breach of contract was part of the ordinary trade. Mr. Palkhivala, who was appearing for the managed company Greaves Cotton before the Bombay High Court, but appearing before us for the managing agent, naturally had to argue that what was sauce for the gander was not necessarily sauce for the goose. In other words, what was expenditure, under section 10(2)(xv) of the Income-tax Act, in the ordinary course of business in the case of the managed company, in the hands of the managing agents, the same sum by the alchemy of income-tax law was not a business or t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere in the agreement dated January 8, 1947) and became entitled to nominate in place of two directors, one third of the total number of directors of the managed company. There was no provision under the new terms for compensating the managing agents for giving up some of their rights in favour of the managed company. Hardly nine months had expired, since the said new agreement for a period of 20 years was entered into, when on February 20, 1951, a notice was issued convening a meeting on February 28, 1951. The question of termination of the managing agency was not on the agenda of the proposed meeting. The issue was introduced by the chairman himself, who was none else then Lala Karam Chand Thapar, through the omnibus agenda, namely, any other subject with the permission of the chairman. The sub-committee was appointed with three gentlemen, who were whole-time employees of the managed company and being directors with nominal shares (50, plus 50, plus 10), but none of the directors of the managing agents was a member thereof. Proceedings of the committee were of an informal nature. Deliberations were not recorded in any minute book. Terms of reference to the sub-committee are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds it convenient to do so." The Appellate Assistant Commissioner did not upset any of the above facts found by the Income-tax Officer, whose order is made an annexure to the statement of case before us, but the method of calculation of the compensation and the motive behind the termination of the managing agency, did not matter to him. The Appellate Assistant Commissioner ultimately found that the assessee-company did not earn any profit on the venture, rather incurred loss on the ground that the payment of Rs. 28,00,000 and odd and the receipts of Rs. 18,00,000 were not doubted. The Tribunal also did not reverse the said findings of fact but came to the only finding of fact on this point which runs in paragraph 8 of its order to the effect, namely, that the assessee "had a number of sources from which commission was received and the destruction of a particular source would be a destruction in the nature of capital and therefore in the present case the destruction of the managing agency should be considered to be a destruction of a structure which yielded profit to the assessee." The last sentence in the said paragraph was the conclusion of the Tribunal and the first sente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Supreme Court in the case of Best Co. also referred to by my learned brother, which to me at least, has made for better clarity. I am unable to accept the argument that the Supreme Court is always caught between the basic principles that look in different directions in different cases though on the same point, but tradition holds that the law being a jealous mistress has the feminine capacity to tempt each devotee to find his own image in her bosom. In saying this, I hope that I have not overlooked although I need not go back to the said earlier decision of Kettlewell Bullen, as some of the points there were decided on concession and also because its facts do not fit neatly into the facts of the present case. I have always kept in view that law is born of fact and the precise problem of a specific case is evaded and not solved by reiterating generalized approbations of freedom of speech. The basic question always has been how and where to locate the boundaries. The lawyers do sometimes become magicians who perform conjuring tricks. Sometimes they succeed, as in Kettlewell Bullen. At other times they fail, as in Best Co. It has become indeed a game of chess, played by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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