TMI Blog1954 (9) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... ecided on its own facts. Now, the facts here are an illustration of high finance, in this case at its highest, and one must confess that the manipulations which high finance requires leave one completely bewildered. The Moon Mills had appointed P.A. Hormarjee Co. as its managing agents for several years, and on the 28th of June, 1943, a new managing agency agreement was entered into between the Mills and Hormarjee Co. This agreement was transferred by a deed of transfer to the assessee company on the 21st of July, 1944. On the 3rd of April, 1946, the assessee company surrendered its rights as managing agents of the company for a sum of ₹ 25 lacs. This sum was paid to the assessee company by the Moon Mills Ltd. and the taxing department treated this receipt as income and brought it to tax. A question also arose in the assessment of the Moon Mills Ltd. as to whether the expenditure of ₹ 25 lacs by the Moon Mills Ltd. for getting rid of its obligations under the agreement to pay the managing agents was an expenditure incurred wholly and exclusively for the purposes of the business of the Moon Mills. The department rejected the claim of the Moon Mills that the amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the managing agents as muccadums and brokers. It is a right which belongs to the managing agents under this agreement not only to act as managing agents of the company but also to act as muccadums and brokers. Now, we are unable to accept Mr. Palkhivala's submission that this right is not conferred upon the managing agents but upon Hormarjee Co. personally. Mr. Palkhivala has drawn our attention to the definition of managing agents contained in clause (1). This is the usual definition of managing agents which includes not only the managing agents appointed by the agreement but also their successors or assignees. Therefore what clause (8) means is that whoever at a particular time happens to be the managing agents of the company shall have the right to act as muccadums and brokers. There is no obligation upon the managing agents to continue as muccadums and brokers because they could give up of their own will this particular right conferred upon them. Then clause (9) casts a further obligation upon the company and that is that the company shall also employ its managing agents as the selling agents of the company and the clause provides what will be the remuneration to be p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company, be authorised to negotiate and finalize the question of compensation. On the 4th of March, 1946, there was a meeting of the board of directors of the assessee company. Mr. Jalan was in the chair. Now, it should be noted that he was the chairman of both the board of directors of the assessee company as also of the Moon Mills Ltd. and at this meeting of the board of directors of the assessee company it was resolved that in view of the termination of the managing agency by the Moon Mills Ltd., as from the 31st of March, 1946, a sum of ₹ 25,00,000 as compensation for loss of office be claimed from the Moon Mills Ltd. On the next day a meeting of the board of directors of the Moon Mills Ltd. was held and Mr. Jalan was again in the chair, and Mr. Narayanlal Bansilal reported to this meeting that he had been carrying on negotiations with the assessee company. He informed the board that it was not prepared to accept the termination of the contract and claimed ₹ 25,00,000 as full compensation for loss of office as managing agents of the company in the event of such termination. The board resolved that the employment of the assessee company as managing agents of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... colourable document and therefore what we have to do in this reference is to consider the effect of this deed of release and to decide the rights of the parties according to the terms of this deed. Certain other facts which have been set out in the statement of the case should also be pointed out. The Tribunal points out that the resolution which was passed by the shareholders of the company with regard to the termination of the managing agency agreement and the payment of compensation of ₹ 25,00,000 could have been got passed by the directors of the assessee company as these directors had sufficient voting strength with regard to a shareholders' meeting of the Moon Mills Ltd. It has also been pointed out how curious was the device resorted to for the purpose of paying this compensation of ₹ 25,00,000 to the assessee company. On the 26th of March, 1946, the Moon Mills Ltd. took a loan of ₹ 10,00,000, from Ganeshnarayan Onkarmal and a loan of ₹ 10,00,000 from Ganeshnarayan Mannalal in order to pay ₹ 25,00,000 to the assessee company. The assessee company having received these ₹ 20,00,000 on that very day advanced a sum of ₹ 10,00,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der to bring about a cessation of the assessee company's business as managing agents, and it is well settled that an amount paid as solatium for the cessation of a business activity constitutes a capital receipt and not income receipt. Mr. Joshi, while accepting this principle, contends that looking to the facts of the present case there is no cessation of the assessee's business and therefore that principle would not apply. Now, this principle to which reference has just been made was laid down by the Privy Council in Shaw Wallace Co. v. Commissioner of Income-tax, Bengal [1932] 59 I.A. 206, and it is rather necessary to consider that case in some detail because that case really constitutes the foundation of most of the arguments that have been advanced before us with regard to the taxability of this amount, and this case has also been looked upon as a locus classicus by Courts which had to consider similar questions from time to time after the decision of the Privy Council. In this case Shaw Wallace Co., assesses, carried on business in Calcutta as merchants and agents of various companies and had branch offices in different parts of India, and prior to 1928 they acte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere sums received, not for carrying on this business but as some sort of solatium for its compulsory cessation, the answer seems fairly plain. Then they further observe: If the business had been sold-even if that somewhat indeterminate asset known as the 'goodwill' had been assigned to the employing companies, as the High Court seems to have thought it had--it is conceded that the price paid would not have been taxable. But why? Plainly because it could not be regarded as profit or gain from carrying on the business, and their Lordships think that the same reasoning must apply when the sum received is in the nature of a solatium for cessation. Now, it is clear that the Privy Council here draws a clear line of demarcation between a sum received by reason of the carrying on of a business and a sum received for putting an end to the business and being paid as solatium for its cessation. At page 214 the Privy Council is repelling an argument that was obviously advanced before them that the two receipts should be treated as income because the source of that income still continued, and the source that was suggested was the other business that the assessees were carr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the contention of Mr. Palkhivala. We agree with Mr. Joshi that the source of income is the congeries of rights conferred upon the assessee company under the deed and those rights must be looked upon as integrated rights. It is by reason of the fact that the assessee company enjoys the status or office of the managing agents that these other rights are conferred upon it and we cannot look upon these rights as separate and distinct as constituting separate and distinct sources. But even accepting Mr. Joshi's contention, a serious difficulty still remains in the way of the Commissioner. Assuming that the sum of ₹ 25,00,000 is not referable to a separate source, it would still be incumbent upon the Commissioner to satisfy us that this sum of ₹ 25,00,000 is income which is liable to tax. Now, it seems to us clear that the managing agency was productive of profit or income and as such it must be looked upon as a capital asset, one among others, which the assessee possessed for the purpose of carrying on his business under this agreement. It is either one of the rights or a part of the source or one of the capital assets in the business of the assessee. Whichever way one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent must be looked upon as income arising under the agreement. Now, that contention again is also untenable. It is clear that what produced income and profits for the assessee was not the agreement but the services rendered by the assessee as managing agents. Even though the agreement might have been subsisting, if the assessee had ceased to render service, he could not have made any profit or derived any income. Therefore the true and the real source of income as far as the assessee is concerned in respect of this particular activity is the fact that he renders services as managing agents and in respect of those services he is paid remuneration as laid down in the agreement. Mr. Joshi relies on the passage in the Privy Council judgment to which reference has already been made at page 214 for the purpose of urging that the Privy Council has clearly laid down that if the business of the assessee continues, then the mere fact that part of the business has come to an end and in respect of that part a compensation is paid to the assessee, then that compensation cannot be looked upon as capital. Now, in the first place it must be borne in mind that the Privy Council was not concerned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has to satisfy us that the sum of ₹ 25,00,000 was profit made by the assessee in the course of its business or profit earned out of its business. Surely when these ₹ 25,00,000 have been paid to the assessee for the cessation of its particular business, it could not be urged that this very sum of ₹ 25,00,000 were profits earned by the assessee in the course of its business. This is exactly what the Privy Council has emphasised at page 213 that once it is admitted that the sums were received not for carrying on the business but as some sort of solatium for compulsory cessation the answer seems fairly plain. Now, a large number of authorities were cited at the Bar and it is our duty briefly to refer to them, but as we shall presently point out, excepting in the case of two authorities where there are certain observations which may seem to run counter to the view we have just expressed, all the other decisions are reconcilable with our view as to the true position in law. Mr. Palkhivala has rightly divided the cases cited by Mr. Joshi into certain categories and perhaps it would be convenient to follow that classification. The first are three cases dealing with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had continued although the assessee company was under no obligation to render service by reason of the agreement arrived at. The third case is the Barr, Crombie's case: Barr, Crombie Co. Ltd. v. Commissioners of Inland Revenue [1947] 15 I.T.R. Suppl. 56. In this case the appellant, the assessee company, acted as ship managers of a shipping company and the agreement provided that if the shipping company went into liquidation certain compensation would be payable to the assessee company. The Special Commissioner held that the sum received by the assessee company on the shipping company going into liquidation was remuneration under a service agreement and was a trading receipt on revenue account. The Court of Session held that this sum was payable as compensation if the carrying out of the agreement became impossible by reason of the liquidation of the shipping company and that therefore the payment made to the appellant company was of the nature of a capital payment and not of the nature of a payment chargeable to income-tax or excess profits tax as annual profits. At page 60 Lord President Normand refers to Kelsall's case [1938] 21 Tax Cas. 608 which he himself had dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipt was capital or revenue receipt. The General Commissioners held that it was revenue receipt and that decision was confirmed by the Court of Session. Now, the learned Lord President Normand, with respect, came to the right conclusion in view of two important facts which were found in this case. One was that the contract which was terminated was incidental to the normal course of the assessee's business and it was further found that it was a normal incident of a business such as that of the assessee that the contracts might be modified, altered or discharged from time to time. The second fact found was that in parting with the benefit of the contract, the assessee were not parting with something which could be described as an enduring asset of business. It was pointed out that the contract would have been terminated in any event within one year; but at page 619 the learned Lord President refers to one fact which also seems to have weighed with him in coming to his decision and that fact is, as set out by the learned Lord President, that the assessee's business was entirely different from the business carried on by some one who under contract, acts exclusively as agent for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is no continuation of the managing agency by the assessee company and therefore it cannot be said that ₹ 7,50,000 represents an advance payment for the remuneration which the assessee company would have earned by continuing to render service to the managed company as managing agents. The crucial fact in the case before us is that there was complete cessation of this particular activity on the part of the assessee company. Then the next category of cases is where the agreement is entered into as an ordinary normal part of the assessee's business and compensation is received for the breach of that agreement. That type of case is to be found in Bush, Beach and Gent Ltd. v. Road [1940] 8 I.T.R. Suppl. 36. In this case the assessee company entered into a contract to buy certain chemical salts. The vendor company terminated this contract and agreed to pay the assessee company, the buyer, a certain sum as compensation, and the question that arose was whether this amount was taxable as income. Mr. Justice Lawrence held that it was rightly taxed as income. Mr. Joshi relies on a passage at page 40 in the judgment of Mr. Justice Lawrence that the sum paid in my opinion re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could only be worked for some two and a half years before it would be exhausted, and it is consequently urged that the amount therefore represents nothing but the actual profit for two and a half years received in one lump sum. I regard that argument as fallacious. In truth the sum of money is the sum paid to prevent the fireclay company obtaining the full benefit of the capital value of that part of the mines which they are prevented from working by the railway company. It appears to me to make no difference whether it be regarded as a sale of the asset out and out, or whether it be treated merely as a means of preventing the acquisition of profit that would otherwise be gained. In either case the capital asset of the company to that extent has been sterilised and destroyed, and it is in respect of that action that the sum was paid. Now, it would be noted that in this case this fireclay represented only a part of the assets of the assessee company. The assessee company was carrying on the business with regard to the other fireclay and it was in respect of only a part of the capital asset that compensation was paid and yet the House of Lords held that to the extent that a part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an assessee sells part of its capital resources and not necessarily the whole of it, the amount received by the sale of a part is capital receipt and not income receipt. Now, this is exactly what the assessee has done in this case. It is not exactly a case of sale, but it is a case of surrender of a part of its capital resources, the resources consisting of the managing agency, muccadumage, brokerage business and the selling agency business. The mere fact that the assessee company still retains the other two capital resources cannot possibly lead to the inference that the amount received by the assessee company for the surrender of this part of capital resources is income receipt. The third case is a case decided by us and reported in Commissioner of Income Tax/Excess Profits Tax, Bombay City v. Shamsher Printing Press, Bombay [1953] 23 I.T.R. 363. That was a case of compensation for injury to a capital asset, and the injury was that the assessee was deprived of its place of business and had to shift to some other premises to carry on the business and under the Defence of India Rules Government paid compensation to the assessee for injury to its business, and the question was wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the position in Provident Investment Co. Ltd. v. Commissioner of Income-tax [1953] 24 I.T.R. 33. Mr. Joshi wanted us to decide that the view taken by the Tribunal that no capital gain was made in the year of account is not sound. The argument of Mr. Joshi is that the managing agents ceased to act as managing agents and the directors took over the management from the 1st of April, 1946, and therefore the profit or gain arose on the 1st of April, 1946. Mr. Joshi says that the date of the payment of compensation which is the 26th of March, 1946, is irrelevant for the purpose of considering when the amount received is liable to tax under section 12-B. In our opinion, it is unnecessary to consider or decide that aspect of the matter. If our view is that the case does not fall under section 12-B at all, it is not necessary to consider what would have been the proper date for considering when the profits arose if the amount had been a capital gain. It is further necessary to decide that question because the question that has been submitted to us is a general question whether the income is assessable under the head capital gain under section 12-B of the Act, and our view clearly is t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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