TMI Blog1986 (8) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ltd. were 20,40,000 of Rs. 10 each fully paid up. On July 17, 1963, an agreement in writing was entered into amongst nine parties including one M/s. Sohanlal Pachisia Co. It was recorded in the said agreement, inter alia, that the said parties respectively held or had at their disposal ordinary shares in Jessop Co. Ltd. aggregating to Rs. 11,23,000. The particulars of the shares of each of the parties were set out in the said agreement. Sohanlal Pachisia Co. were shown to hold or have at their disposal along with their clients 3,28,100 shares. Mahadeo Ramkumar, the assessee, at the material time, held 15,780 ordinary shares of Jessop Co. Ltd. which were included in the said 3,28,100 shares of Jessop Co. Ltd. declared by Sohanlal Pachisia Co. It was further recorded in the said agreement as follows : (a) All necessary steps were agreed to be taken jointly by or on behalf of the parties for the purpose of securing the management of Jessop Co. Ltd. by directors elected by the shareholders of the latter and/or sale of the said shares held by or at the disposal of the parties in a block at the best possible price. b) The parties constituted and appointed a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able for the said shares. (c) The parties had settled some of the disputes and had agreed to refer the remaining disputes to arbitration on terms and conditions recorded in the agreement. (d) The buyer would pay to the sellers on account towards the price of the said shares an amount calculated at the rate of Rs. 25 per share or at the closing rate quoted in the official quotation list of the Calcutta Stock Exchange Association Ltd. on the date of the agreement. If no rate was quoted on the said date, then the rate would be the closing rate on the date preceding the date of the agreement. (e) The dispute relating to the price payable by the buyers to the sellers under the agreement for sale of the said shares would be referred to the arbitration of Sudhansu Kumar Das, a retired judge of the Supreme Court of India. (f) The arbitrator would determine the price of the said shares payable by the buyers to the sellers under the said agreement and in determining such price, the arbitrator would take into consideration, inter alia, the value of all assets of Jessop Co. Ltd., all debts and claims of the latter at the date of the said agreement and also the fact that the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d payment of the price of the said shares as determined with interest after making adjustments of the amount paid on account in terms of the supplemental agreement dated August 19, 1965. On May 27, 1969, the assessee received through M/s. Khaitan Co., Solicitors, a further payment of Rs. 3,94,500 against its 15,780 shares in respect of the difference between the price as finally determined and the amount paid on account and a further sum of Rs. 98,446 towards interest aggregating to Rs. 4,92, 946. For the assessment year 1970-71, the accounting year ending on the Ramnabami day of Sambat year 2026, the assessee was assessed to income-tax. In its profit and loss accounts, the assessee had claimed legal expenses of Rs. 16,162 in respect of the profit of Rs. 4,92,946 arising out of the sale of the shares of Jessop Co. Ltd. held by the assessee. In its return, however, the assessee contended that a sum of Rs. 3,84,716 arising out of the sale of the said shares was capital receipt in its hands. The assessee also abandoned its claim of Rs. 11,835 on account of legal expenses. The assessee contended that the transaction in respect of the sale of shares of Jessop Co. Ltd. was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e arbitrator in determining the price of the said shares would take into account the fact that the shares represented the controlling interest in Jessop Co. Ltd. In the statement of claim filed before the arbitrator, a specific claim had been made for the value of the controlling interest. It was contended that where the shares of a public limited company were quoted in the stock exchange, in any dealing with such shares, the price on the relevant date would be that as quoted in the stock exchange. The assessee could not have obtained more than the price of the said shares as quoted in the stock exchange had it been sold in the ordinary course in the market. The Government of India wanted not only the shares but also the controlling interest and, therefore, had to pay more for the shares. In support of such contentions, reported decisions of High Courts and the Supreme Court were cited before the Tribunal. It was contended on behalf of the Revenue on the other hand that the assessee was a dealer in shares and the shares of Jessop Co. Ltd. sold by it formed part of its stock in trade. It was contended that the assessee received more than the market price for the said sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in the stock exchange was only Rs. 25.62 which indicated that the award of the arbitrator was for a composite payment not only for the price of the shares but also for other valuable rights. In the agreement dated July 17, 1963, the parties had first joined together for securing the controlling power in Jessop Co. Ltd. and thereafter to dispose of their shares in a block, On these facts, the Tribunal held that the price for the shares paid at the rate of Rs. 50 per share was for a composite consideration and that it was not disputed that the real market value of the shares on the relevant date was much less than the price as fixed. The Tribunal next considered whether the excess price realised for the shares amounted to capital gains in the hands of the assessee. The Tribunal held that as the Revenue had never set up such a case nor had sought to assess the said excess as capital gains, it was not open to the Revenue to contend that the said excess should be taxed as capital gains in the hands of the assessee. The Tribunal held further that, in any event, the consideration for obtaining the controlling interest could not be a capital gain as the controlling interest like g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue and had become final. It was further contended that what was obtained by the assessee was the price for the shares as also the price for the controlling interest. There was no dispute and it was established beyond doubt that the price of the shares in the market at the relevant time was only Rs. 25.62. Therefore, the balance which was realised by the assessee along with others in respect of the sale of the shares must be held to be the consideration received for parting with the controlling interest in Jessop Co. Ltd. The controlling interest was the actual asset in the hands of the assessee and the other persons and the consideration arising from the sale of such an asset cannot be taxed as a revenue receipt. It was contended further, reiterating the previous stand of the assessee before the authorities below, that the controlling interest of the assessee and the other shareholders in Jessop Co. Ltd. was not a capital asset in the accepted sense of the expression. Such an asset was in the nature of goodwill. There was no cost of acquisition of such controlling interest and this could not be fragmented or divided or sold in parts like other capital assets. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agency, the assessee acquired a capital asset. The intention of the assessee in purchasing the said shares of the mill was not to acquire the same as part of the stock-in-trade of the assessee's business in shares though it was shown as part of such stock. The loss incurred by the sale of the said shares was, therefore, a capital loss. (c) Kettlewell Bullen and Co. Ltd. v. CIT [1964] 53 ITR 261 (SC). In this case, the assessee carried on the business of managing agency and was the managing agent of several companies. The assessee entered into an agreement with a third party whereby the latter agreed to purchase the entire holding of shares of the assessee in one of the managed companies. The third party also agreed to procure repayment of all loans made by the assessee to the managed company and also to procure compensation by the managed company to the assessee for loss of its office by payment of a fixed sum after the assessee resigned its managing agency. The third party agreed to reimburse the said amount to the managed company. Pursuant to the aforesaid, the assessee resigned from its managing agency in the said managed company and received the stipulated sums. The questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch block held 75% or more of the shares, then the company would be one in which the public were not substantially interested and it would come within the mischief of section 23A(1). The Supreme Court observed further that the existence of a block was not decisive nor was it a condition that actual exercise of control by group must be established. It would be sufficient, having regard to the relationship, the conduct and the common interest of the members of the group to infer that they were acting together. The matter was remanded to the Tribunal for further enquiry. (f) New Era Agencies (Pvt) Ltd. v. CIT [1968] 68 ITR 585 (SC). The assessee in this case was a private limited company controlled by an individual and his nominees. The assessee was a dealer in shares. The persons in control of the assessee also acquired the control of another company and also acquired the managing agency of the said company. The assessee had been dealing in shares belonging to the managed company till 1948. From 1949 onwards, there was a slump in the price of the shares of the managed company. The assessee did not effect any sale of the shares of the managed company and on the contrary purchased s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction was merely passive and the assessee only kept the said shares of the managed company at the disposal of the person in control of the assessee. It is further found that the assessee had no controlling power over the managed company nor was it in a position to procure the resignation of the managing agents or directors or appoint new directors on the nomination of the transferee. The Supreme Court held that the assessee only parted with the shares held by it and what it received was by way of payment against the said shares. The entire sum received was the price and the excess over the cost price of the said shares was the profit of the assessee. (g) CIT v. Chunilal Prabhudas Co. [1970] 76 ITR 566. This decision of a Division Bench of this court was cited for the proposition that goodwill of a business was not a capital asset within the meaning of section 12B of the Indian Income-tax Act, 1922, and transfer of the same could not produce any profit or gain. In the judgment, the nature of goodwill was discussed in detail and it was held, inter alia, that goodwill as an asset could not exist independently of the business, it was indivisible and could not be transferre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a business. It was held that goodwill of a business could not be held to be an asset within the meaning of section 45 of the Income-tax Act, 1961, and a transfer of goodwill does not give rise to a capital gain exigible to tax. (k) Short v. Treasury Commissioners [1948] 2 All ER 509 [1948] AC 534 (HL). The facts in this case were that under the Defence (General) Regulations, 1939, of the U.K., the Government authorities appointed Controller over the undertaking of a company and further directed that all the shares of the company should be transferred to the nominees of the Government at prices of the said shares prevailing on the stock exchange on the date of the taking over control of the company. The shareholders of the company contended that the price of the shares should be fixed on the basis of the value of the entire undertaking including therein the value of the complete control of the undertaking as all the shares were being transferred. The said dispute was referred to arbitration and the arbitrator sent up a special case for the opinion of the court. The proceedings were disposed of ultimately in the House of Lords. Construing the Defence Regulations, it was h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the award and the terms of the reference. It is also evident that the assessee and the 65 other shareholders of Jessop Co. Ltd. had been acting in a group since 1963 that they had put their shares together to form a block and they were interested in selling the shares to the Government at the highest possible price knowing that the shares sold in a block would result in the transfer of controlling interest to the purchaser. It is to be decided whether the excess amount realised from the sale of the shares over and above their market value at Rs. 25.62 forms a part of the consideration for sale of the shares themselves or is the consideration for sale of the controlling interest as a separate asset. It appears to us that the controlling interest attached to the said block of shares cannot be considered separately from the shares themselves. Each share represents a vote in the management of the company and the shares put together formed a block and aggregated the votes. If the shares exceeded 51% of the total shareholding, the votes arising from the holding of the block of shares would represent a majority vote which could be utilised to control the company. This con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement, it appears that the main object of the shareholders who had combined was to sell the said block of shares at the highest price to be determined by negotiation, arbitration or otherwise. Apart from negotiations with the Government of India for sale of the shares, no other steps were taken by the assessee and the other shareholders to obtain control of Jessop Co. Ltd. In any event, the management of Jessop Co. Ltd. having been taken over by the Government of India for an indefinite period since 1958, it was not open to the assessee and the other shareholders, even though they acted in concert, to take over the management of Jessop Co. Ltd. In that view, it appears to us that the sale of the block of shares by the assessee and the other shareholders was done in the course of their business and, therefore, the excess amount realised from the sale must be treated as revenue receipt in their hands. The decisions cited on behalf of the assessee can be distinguished on the ground that in the said cases, the sales were not only of the shares involved but also of other independent and separate rights which constituted assets by themselves like a managing agency right. For ..... X X X X Extracts X X X X X X X X Extracts X X X X
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