9911796707
TMI Blog1966 (9) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 agents, Messrs. Greaves Cotton & Co., who gave up their managing agency rights in consideration thereof. The assessee-company thereupon became the managing agents of Messrs. Greaves Cotton & Co. Ltd. The assessee-company became the managing agents of Greaves Cotton & Co. Ltd., on the 8th January, 1947, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 general meeting of the shareholders of the managed company was held within a fortnight thereafter on the 31st March, 1951. A resolution was passed at the extraordinary general meeting terminating the managing agency agreement subject to payment of compensation of 18 lakhs to the assessee-company as the mana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the sum of Rs. 18,00,000 was not revenue receipt and was not liable to tax. The Income-tax Officer decided that the payment of this sum of Rs. 18,00,000 to the assessee-company by Messrs. Greaves Cotton Co. Ltd. was a payment of remuneration in advance and it was not compensation on account of loss of employment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 by which the managing agency of the assessee was terminated were genuine and real business transactions. It also rejected the arguments that the assessee was acquiring managing agencies and that the managing agency in question was in the nature of stock-in-trade. The Tribunal found that the managing agencies held by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ows : "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 of giving it up on the structure of the entire business ? Did it amount to a loss of an enduring asset causing an unabsorbed shock dislocating the entire or a part of the earning apparatus or structure ? Or was it a loss due to an ordinary incident in the course of the business ? The answers to these questions would enabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 protest but readily and in fact too readily, to make it anything else than a trading venture. The other relevant facts and circumstances in this case point to the same conclusion that the receipt of Rs. 18,00,000 by the assessee was in this case a revenue receipt. The memorandum shows that the assessee company's major busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 arrived at by the calculation of probable profits on a certain basis. It is significant that, in its return of the assessment year 1952-53, the assessee had shown the income of Rs. 4,04,088, which was the income mainly from the managing agency commission and agency allowance received from several managed companies, interest and dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt." By applying that test of "dividing line", we have no doubt in our minds that, in the facts and circumstances of this case, the receipt of Rs. 18 lakhs is a revenue receipt, because t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 trading receipt at all. He is right in that respect. What is revenue in the hand of one may be capital in the hand of the other. But we are not coming to a decision on the basis of this argument that because it was trading expenditure in the case of the managed company, it must also be a trading receipt or a revenue receipt in the hands of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, 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 available. Only some time before such appointment, the managed company was converted into a public limited company. The managing agents started negotiation with the Nizam for subscribing substantial amount towards the increase of share capital of the managed company. The sub-committee sought legal opinion on the question of taxation on the payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssistant 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 sentence was on the point of onus of giving evidence and therefore they are not quoted. It has been rightly contended on behalf of the revenue authorities that there is no evidence in support of the said finding of the Tribunal and therefore it has become perverse. Dr. Debi Pal no doubt submitted in argument that, even though the finding of the Tribunal is perv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lous 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 each side with subtlety and skill. I say all these with deep esteem and due apology. It might be observed that after the Gillanders' case by the Supreme Court, which afforded another good example, common-sense seemed to demand to bring a fresh mind to the problem. I have noticed the full breath of the doubt expressed by the learned standing counsel on behalf of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
