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Garhwal Motor Owners Union Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 78 of 1975
Judge
Reported in[1980]122ITR417(All)
ActsIncome Tax Act, 1961 - Sections 2(18)
AppellantGarhwal Motor Owners Union Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateAshok Gupta, Adv.
Respondent AdvocateR.K. Gulati, Adv.
Excerpt:
.....that the losses were made good. 8. we may at this stage refer to the decisions cited by sri ashok gupta, but each of them is clearly distinguishable. 10. counsel also placed strong reliance on the case of p. thus, in every year, the company was entitled not only to the commission, but also to call upon its member operators to make good the loss suffered in a particular year......of each vehicle till such time that the losses were wiped off. as a result of the resolution, the company received amounts of rs. 32,720 in *the assessment year 1968-69, rs. 40,090 in the assessment year 1969-70, rs. 69,986 in the assessment year 1970-71 and rs. 13,671 in the assessment year 1971-72.3. in all these years, two other disputes were raised before the ito, in regular assessment or in proceedings for reassessment: one as to the rate of tax on the income of the assessee, the assessee's contention being that the rate should be calculated at 45% as it was a company in which the public were substantially interested, and the other as to whether the amounts received by the company in pursuance of the resolution of the general body referred to earlier was its income. all the.....
Judgment:

C.S.P. Singh, J.

1. The following two questions have come up for our opinion at the instance of the assessee:

'1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal erred in holding that the assessee was not a company in which the public are substantially interested for purposes of assessment ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the contribution made by the members at the rate of Rs. 20 per mensem per vehicle were taxable as the assessee's income ?'

2. The questions relate to the assessment years 1968-69, 1969-70, 1970-71 and 1971-72. The assessee-company was incorporated in 1948, being a company limited by guarantee. It had 149 members and, inter alia, its business was to manage the vehicles of its constituent members. By Clause 27 of the memorandum and articles of association, the company was entitled to retain or charge a commission at such rate as may be determined from time to time by the members, in their general meeting, on the total amount fetched for each trip or on the total gross monthly income of each vehicle. The company had been charging a commission of 6% on the total gross monthly income of each vehicle of its constituent members. It used to maintain an account of the gross monthly income of each vehicle of its constituent members, and also the commission collected from them. Apart from this, it also maintained accounts of its management unit. Separate balance-sheets used to be prepared, but in pursuance of the directions issued by the Registrar of Companies, a consolidated balance-sheet, as required by Section 227 of the Companies. Act, was prepared and it was found that the company incurred a loss of Rs. 1,88,754'21> which was attributable mainly to the management Section of the company. In order to cover up this loss, the general body passed a resolution No. 5 in its meeting held on September 30, 1967, resolving unanimously that the losses be neutralised by contribution by deduction of Rs. 20 per month from the gross income of each vehicle till such time that the losses were wiped off. As a result of the resolution, the company received amounts of Rs. 32,720 in *the assessment year 1968-69, Rs. 40,090 in the assessment year 1969-70, Rs. 69,986 in the assessment year 1970-71 and Rs. 13,671 in the assessment year 1971-72.

3. In all these years, two other disputes were raised before the ITO, in regular assessment or in proceedings for reassessment: one as to the rate of tax on the income of the assessee, the assessee's contention being that the rate should be calculated at 45% as it was a company in which the public were substantially interested, and the other as to whether the amounts received by the company in pursuance of the resolution of the general body referred to earlier was its income. All the authorities have held against the assessee. We may dispose of the first question at the outset. The expression 'company in which the public are substantially interested' is defined in Section 2(18) of the Act of 1961, the relevant part of which reads as under :

'2. (18) 'Company in which the public are substantially interested' --A company is said to be a company in which the public are substantially interested-

(a) if it is a company owned by the Government or the Reserve Bank of India or in which not less than forty per cent. of the shares are held (whether singly or taken together) by the Government or the Reserve Bank of India or a corporation owned by that bank ; or

(b) if it is not a private company as defined in the Companies Act, 1956, and

(i) its shares (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than fifty per cent. of the voting power having been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by-

(a) the Government, or

(b) a corporation established by a Central, State or Provincial Act, or

(c) any company to which this clause applies or any subsidiary company of such company where such subsidiary company fulfils the conditions laid down in Clause (b) of Section 108 (hereinafter in this clause; referred to as the subsidiary company), or

(d) the public (not being a director, or a company to which this clause does not apply);

(ii) the said shares were at any time during the relevant previous year the subject of dealing in any recognised stock exchange in India or were freely transferable by the holder to other members of the public; and

(iii) the affairs of the company, or the shares carrying more than fifty per cent. of its total voting power were at no time during the relevant previous year, controlled or held by five or less persons.

Explanation 1.--In computing the number of five or less persons aforesaid,--

(i) the Government or any corporation established by a Central, State or Provincial Act or company to which this clause applies or the subsidiary company of such company shall not be taken into account, and

(ii) persons who are relatives of one another, and persons who are nominees of any other person together with that other person, shall be treated as a single person.

Explanation 2.--In its application to an Indian company whose business consists wholly in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, sub-clause (b) shall have effect as if for the words 'not less than 'fifty per cent.' and 'more than fifty per cent.', the words 'not less than forty per cent.' and 'more than sixty per cent.' had been substituted.'

4. As will be seen before the company can claim advantage of this provision, each and every one of the conditions laid down in this provision has to be satisfied. We have perused the memorandum of the association, and agreed with the view of the Tribunal that the company does not satisfy therequirements of Section 2(18); The assessee rightly conceded before the Tribunal that all the conditions laid down under Section 2(18) were not fulfilled, and thus the mere fact that the assessee is a company will not entitle it to the benefit of Section 2(18) of the Act.

5. Now, coming to the second question. It has been noticed that the assessee was receiving a commission of 6% of gross receipts of freight and fare from the individual owners of vehicles. Each of these individuals were members of the company. The managing unit of the company had been incurring loss, and as a result in the annual general meeting held on September 30, 1967, the following resolution was passed :

'15. Consideration on the neutralization of the accumulated losses inthe balance-sheets of the past several years, as well as financial conditionof the company. Sri Kishanlal Agarwal, President, put forth in detailbefore the house, the ways and needs of neutralising the amount of the lossbeing accumulated for the last so many years as well as the going onincreasing expenditure. It was unanimously resolved that in order toneutralise the accumulated losses each owner will allow voluntary deduction of Rs. 20 per cent, from each vehicle till such time as the entire loss isneutralized. This amount will in no way be refundable and the deductionwill be stopped when the amount of loss is made good (Non-refundablededuction made voluntary to neutralize the accumulated loss of the balance-sheet).

Also that the board of directors should give due attention in future to minimising expenditure and promoting the business.'

6. Consequently, on the passing of this resolution the company started deducting an amount of Rs. 20 per month per vehicle. The Tribunal has treated this income as additional commission for services rendered by the company, but not fully paid for earlier. Sri Ashok Gupta, counsel for the assessee contended that the amount did not represent the income of the assessee, because it did not arise out of the business conducted by the assessee. It was also urged that it was a donation made by members to cover up the losses, and being casual in nature did not have the characteristic of income. He invited our attention to a number of decisions of various courts, which we shall be presently referring to. Before we consider the section, it would be useful to quote Clause 27(a) of the memorandum and articles of association of the company.

'27. The company shall be entitled to retain or charge a commission at such rate as may be determined from time to time by the members 'in their general meeting on the total amount fetched for each trip or on the total gross monthly income of each vehicles.

(a) The board of directors is authorised to wipe off the whole amount of loss whenever occurring in a financial year after completion ofthe audit of that year by distributing the same equally among the vehicles of the members on roll in that financial year.'

7. This clause permits the company to charge a commission on a route to be determined at the general meeting either trip-wise or on the gross monthly income of each vehicle. The company opted to make a charge on the latter basis. Clause 27(a) permits the board of directors, to wipe off the whole amount of loss occurring in a financial year by distributing it equally among the vehicles of the members on its roll in that financial year. Thus, even apart from the powers which the general body had in respect of losses, para. 27 of the memorandum and articles of association permitted the board of directors to allocate the losses equally among the vehicle of . the members. That such a loss had occurred, is not in dispute. In case, powers had been exercised under Clause 27(a) of the memorandum and articles of association, the board of directors would have reimbursed the company of the losses by allocating it to the members. This, however, was not done and instead a resolution was passed by the general body as has been seen earlier, as a result of which deductions at the rate of Rs. 20 per month per vehicle were to be made till such time that the losses were made good. This being so, we see no difficulty in holding that the resolution authorising a deduction of Rs. 20 per month per vehicle was passed in pursuance of the business activity of the assessee. It cannot be denied that the general body enjoys all the powers which the board of directors have, and as the board of directors could in the exercise of powers conferred on them by Clause 27(a) allocate the losses to the members, the general body could do likewise. An act done in conformity with the memorandum of the association of the company, cannot be said to be done outside its charter. It is also difficult to hold that the amounts received were of a casual nature or of the character of donations, in view of the resolution passed by the general body. The resolution is unanimous and bound the members of the company. As a result thereof the assessee acquired a vested right to make the deduction sanctioned at the general meeting. The deductions were to be made not once or at broken intervals, but continuously, and periodically till such time that the accumulated losses were wiped out. This being so, the amounts received by the assessee would satisfy the test of income judged by any standard.

8. We may at this stage refer to the decisions cited by Sri Ashok Gupta, but each of them is clearly distinguishable. We might begin with the earlier two cases, both of this court, one is the case of Mahammad Faruq, In re : [1938]6ITR1(All) and the other Major A. U. John, In re : [1938]6ITR434(All) . In the first case, the assessee was an employee of a sugar factory. The owner of the factory decided to transfer this sugar factory to a limited company. A large number of shares were disposed of by the assessee, and in recognition of the assessee's services, shares of the value of Rs. 15,000 were allotted. It was held that the shares allotted to him were in the nature of a windfall as the assessee had not done any activity with the object of acquiring profits. The question in that case was as to whether the amount of Rs. 15,000 was received by the assessee for any business activity, and the answer to it was obvious, as the assessee had sold the share without any object of making any profit from the sales. In the present case, it has been seen that the company passed the resolution for deducting Rs. 20 per month per vehicle in exercise of its power granted to it under its charter. The next case is also not in point as in that case the creditor had with the permission of the court acted as an auctioneer of the debtor's property and collected an amount of 5% on the sale proceeds. In the circumstances, it was held that the amount so received was not the assessee's income, but was a receipt of a casual and non-recurring nature. Nothing of the kind exists here, as the amount had been collected in pursuance of the charter of the company.

9. The third decision of this court relied upon is the case of Rani Amrit Kunwar v. CIT : [1946]14ITR561(All) . The assessee was receiving a remittance of Rs. 9,910 from the Nabha State, she being the sister of the Maharaja of Nabha. The amount was not treated as her income, inter alia, on the view that it was not related to a definite source and depended on the mere whim of the ruler. In the present case, the amounts were received as a consequence of the resolution passed by the general body of the company, which was carrying on the business of organising transport activities of its members and charging a commission in respect thereof.

10. Counsel also placed strong reliance on the case of P. H. Divecha v. CIT : [1963]48ITR222(SC) . In that case, the Philips Electrical Co. had granted exclusive right to a firm for purchase and sale of its electrical lamps. Subsequently, the company took over the distribution, and an agreement was executed between the company and the firm, as a result whereof the company agreed to pay an amount of Rs. 40,000 to each of the partners of the firm. On the amount received by the assessee, the department treated it as his income. The Supreme Court held that the consideration for the payment was not for any service rendered, but was made out of regard for the qualities of the three partners, who had built up a vast net-work of sales organisation of which the company would obtain the benefit when it entered into the business of selling for itself. It was also held that the payment was not related to any business done or to loss of profits. In the present case, as has been seen the company was entitled to charge a commission on the gross earnings of the member operators and also to reimburse itself for the loss occurring in any financial year. Thus, in every year, the company was entitled not only to the commission, but also to call upon its member operators to make good the loss suffered in a particular year. Both the amounts, viz., the agency commission and the reimbursement of loss in the business constituted the revenue of the company. All that has happened is that instead of members reimbursing the company each year, it was done later on to wipe off the accumulated losses. Payment thus received was referable to Clause 27 of the memorandum and articles of association and the business of the assessee. Sri Ashok Gupta has also referred to two English decisions, one in the case of Cowan v. Seymour [1919] 7 TC 372 (CA) and the other in the case of Reed v. Seymour [1927] 11 TC 625. In Cowan's case, the assessee was a secretary of a company for remuneration. On the company being liquidated, a surplus remained. The shareholders, who were entitled to the surplus by a unanimous resolution voted the sum in equal shares to the chairman and the secretary. The question arose whether the amount received was the income of the assessee. It was held that as the amount did not accrue in respect of an office or employment of profit it was not chargeable to tax under Schedule 'E'. This case was thus concerned only with the question as to whether the amount received could be charged as income from an office or employment of profit. The law laid down in this case can possibly have no application to the present case, as no question arises as to whether the payment received by the company was related to any office or employment of profit. The other case, i.e., Reed's case [1927] 11 TC 625 is also of little assistance. In that case, the committee of a cricket club in the exercise of their absolute discretion granted a benefit match to a professional cricketer in their service. The proceeds of the match, together with certain public subscriptions were invested in the names of the Trustees of the Club and the income paid to the beneficiary. Subsequently, the investments were realised and the proceeds paid over to the beneficiary who applied them with the approval of the trustees in purchasing a farm. The question that came up for decision was as to whether the proceeds of the benefit match was profit accruing to the cricketer in respect of his office or employment. It was held that it was in the nature of a personal gift and not assessable to income-tax. In the present case, the amounts have been received as a result of the resolution passed by the general body in consonance with the memorandum and articles of association. The amounts received are such as would have been normally received by the assessee from its members in years of loss. The principle of Reed's case [1927] 11 TC 625, as such, has no application.

11. We, accordingly, answer both the questions in the affirmative in favour of the department and against the assessee. The department is entitled to its costs, which are assessed at Rs. 200. Counsel's fee is assessed at Rs. 200.


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