BRIJLAL GUPTA J. - This is a reference under section 66(1) of the Income-tax Act. Two questions have been referred to us for opinion.
'1. Whether the notice dated January 27, 1949, issued by the Income-tax officer under section 34 was legal and valid
2. Whether the receipt of Rs. 2,50,000 was a revenue receipt liable to tax under the Act ?'
The assessee is a firm registered under section 26A of the income-tax Act. The case relates to the assessment year 1944-45. The constitution of the firm is as follows :
Rs. A. P.
Lala Laxmipat Singhania ...
Chiranjiv Gaur Hari, s/o Lala Padampat Singhania ...
Vijaypat, s/o. Lala Kailashpat Singhania ...
Sri S. D. Garg ...
Lala Murlidhar ...
Lala Viswanath Bhartiya ...
Lala Mahabir Prasad Jatia ...
By an agreement dated August 8, 1941, the assessee firm was appointed managing agent of J. K. Cotton . This company was originally a private limited company. It was reconstituted into a public company by a scheme of rearrangement and reconstruction sanctioned by the District Judge, Kanpur, on March 17, 1941. The managed company commenced its business from October 1, 1941. The share capital of the managed company both when it was a private limited company as well as when it became a public limited company was overwhelmingly subscribed by the three Singhania brothers, their wives, sons, members of their families, their relations, employees and friends (vide annexure 'A' to the statement of the case).
According to the managing agency agreement (annexure 'B' to the statement of the case) the managing agency of the assessee was to last for twenty years and they were entitled to be reappointed though not for more than twenty years at a time. The remuneration of the managing agents was to be :
(1) an office allowance of Rs. 1,000 per month,
(2) a commission at the rate of 10% on the net profits of the company calculated according to the provisions of section 87C(3) of the Indian Companies Act, 1913, and
(3) subject to the sanction of the company by a special resolution a commission at 2 1/2% on all the sales of the companys products.
The further terms of the managing agency agreement were :
(i) The managing agents could lend to the company money on interest (paragraph 8).
(ii) If the assessee firm was not dissolved and so long as one of its original partners continued to be part of the firm it would be lawful for the managing agency firm to change their constitution from time to time without forfeiting the managing agency (paragraph 9).
(iii) If the managed company transfers its business to another company the transferee company would be bound to appoint the firm as their managing agents.
By a special resolution dated March 21, 1942, the managed company sanctioned the commission of 2 1/2% on the sales of the companys products to the assessee firm (annexure 'C' to the statement of the case).
The business of managing agency was very lucrative. In the preceding year 1943-44 its income from managing agency amounted to Rs. 1,70,798.
In this posture of affairs on August 16, 1943, the managed company received a letter from another company of the name and style J. K. Commercial Corporation Limited. This company offered itself to work as managing agents of the managed company and requested that it may be so appointed. On September 28, 1943, the managed company decided to ask the assessee to retire from the managing agency business with effect from September 30, 1943, on receipt of Rs. 2,50,000 as compensation for the premature termination of the contract. This amount was paid to the assessee on September 30, 1943, and the assessee retired from the managing agency business with effect from that date. By a deed of agreement dated September 30, 1943, the managed company appointed J. K. Commercial Corporation Limited, as its managing agents. The office allowance of Rs. 1,000 was raised to Rs. 2,000 per month, 10% commission on net profits was payable to it also as it was payable to the assessee. Commission on sales was to be given at 2% on net sales instead of at 2 1/2%. The managing agency agreement dated September 30, 1943, is annexure 'D' to the statement of the case. In the opening portion of this agreement it was recited that the managing agency of the assessee firm was determined by 'mutual consent'. It was further recited that by resolution of the managed company dated September 28, 1943, the 'retirement' of the firm was confirmed. It was also recited that the J. K. Commercial Corporation Limited was the successor in business and the 'assignees' of the firm. Paragraphs 8 and 9 of this managing agency agreement were similar to paragraphs 8 and 9 of the managing agency agreement between the lending of money by the managing agents to the firm. Paragraph 9 provided as follows :
'In case the managing agency company alters its name or is would up for the purpose of reconstruction or changes its constitution, the same sell not in any way affect their appointment as managing agents of the company.'
Paragraph 11 of the agreement was also similar to paragraph 12 of the earlier agreement with the assessee that in case of transfer of the business of the managed company to some other company the vendee company shall be bound to appoint the J. K. Commercial Corporation Limited as its managing agents.
The details of the shares held by the three Singhania brothers, their wives, their relations, their employees and their friends are given in the statement of the case. From these details it is again clear that the majority of shareholders in J. K. Commercial Corporation Limited were the members of the families of the three Singhania brothers.
The Tribunal has observed that there was no evidence on the record to show whether the assessee firm was asked if it was willing to carry on its work on the same terms and conditions as were offered by J. K. Commercial Corporation Limited. Nor is there any evidence to show how the figure of Rs. 2,50,000 was arrived at. In the second managing agency company, the three Singhania Brothers and their wives and sons held 6,500 A class ordinary shares of Rs. 100 each out of a total of 8,580 shares and similarly they held 11,000 B class ordinary shares of Rs. 10 each out of a total of 15,000 shares. The uncle and the two cousins of these three brothers held another 1,170 and 2,000 shares of the A class and the B class and 2,000 B class shares were held by the personal assistant of Sir Padampat, the munim of J. K. Kothi, two directors of two J. K. Companies and one Mr. Garg. thus the Singhania Brothers and their family held an over whelming majority of shares in this company and the remaining shares were held by their employees or friends or associates and the Singhania brothers and their family whether as partners of the managing agency firm in which they had Rs. 0-12-9 share or as the shareholders of the second managing agency company in which they held an overwhelming majority of shares continued to exploit for profits the managing agency business as partners of the firm or as shareholders or directors of the company. The managing agency business was neither lost to them nor was it destroyed or sterilized. It continued to yield profits.
For the assessment year 1944-45 which is the year under consideration the assessee submitted a return on March 27, 1946, without showing in the return the receipt of the sum of Rs. 2,50,000. During the assessment proceedings the assessee produced its account books were duly seen by the Income-tax Officer and initialed by him on some pages. The finding of the Tribunal is that the balance-sheet and the profit and loss account filed before the Income-tax Officer did not disclose the receipt of Rs. 2,50,000. The Income-tax Officer completed the assessment without including in it the sum of Rs. 2,50,000.
A few months later the Income-tax Officer was succeeded by another officer. The successor noticed that the receipt of Rs. 2,50,000 had escaped assessment, whereupon he issued a notice under section 34 on January 27, 1949, calling upon the assessee to submit a return in respect of that amount. In response to the notice the assessee submitted the return but contended that the amount of Rs. 2,50,000 was receipt of a capital nature not liable to tax. This contention was rejected and the amount of Rs. 2,50,000 was subjected to tax.
The assessee went up in appeal before the Appellate Assistant Commissioner and contended that the notice under section 34 was bad in law and the sum of Rs. 2,50,000 was not revenue income. The Appellate Assistant Commissioner rejected both the contentions holding that the termination of the managing agency was not genuine and the payment of Rs. 2,50,000 was not bona fide.
Thereafter, the assessee went up in further appeal before the Income-tax Officer Appellate Tribunal. The same contentions were raised before the Tribunal and with the permission of the Tribunal an additional contention was raised that even if the receipt was not of a capital nature, it was of a 'casual and non-recurring nature not arising out of business' and therefore exempt from tax under section 4(3)(vii). The Tribunal recorded the following findings :
On the question of the validity of the proceedings under section 34 the assessee did not dispute that the sum of Rs. 2,50,000 was not included in the original assessment. It, however, contended that the Income-tax Officer had seen its account books and had known of the receipt of Rs. 2,50,000 as compensation from Messrs. J. K. Cotton manufacturers. It was alleged by the assessee before the Tribunal that along with the original return it had sent a covering letter that a sum of Rs. 2,50,000 had been received by it, but had not been shown by the departmental representative that no such covering letter was traceable on the records and no reference was ever made by the assessee to any such letter before the Income-tax Officer or before the Appellate Assistant Commissioner. On this point the Tribunal held that it was not proved that any such letter was in fact sent by the assessee to the Income-tax Officer.
On the question of the knowledge of the Income-tax Officer regarding the receipt of the sum of Rs. 2,50,000 by the assessee the Tribunal held that undoubtedly there was signature of the Income-tax Officer below the profit and loss account prepared by the assessee in its account books, but there was nothing in the balance-sheet to show that the receipt of Rs. 2,50,000 was on account of compensation received by the assessee from Messrs. J. K. Cotton Manufacturers, the managed company. The Tribunal also found that also with its return the assessee had sent a copy of its profit and loss account but there was no reference therein to the receipt of Rs. 2,50,000 which in the language of the Tribunal 'was obviously silent about the receipt of Rs. 2,50,000. The Tribunal concluded that 'there was nothing on which the Income-tax Officer could specifically conclude that the assessee had received Rs. 2,50,000.' It went on to hold : 'It is true in the accounts of the individual partners the amount of Rs. 2,50,000 could be noticed as being distributed in proportion to their shares and that the Income-tax Officer could have ascertained and might have known that, could not preclue the reopening of the assessment under section 34(1)(b) as amended in 1948.' On these findings it appears to be clear that even though the signatures of the Income-tax Officer appeared on some of the pages of the assessees account books, he did not know that the sum of Rs. 2,50,000 was received by the assessee as compensation from the managed company for termination of the managing agency business. If he had been more alert, if his mind was alive to the question of the taxability of the amount, if he had made enquiry and investigation, he might have discovered the nature of the receipt but as he did not do so, he did not know its real nature and consequently, there was an omission on his part to consider the question of its taxability. The successor derived information of the nature of the receipt and of the fact that it had not been included in the original assessment. On these findings the Tribunal held that action under section 34(1)(b) after its amendment in 1948 was justified. It seems to me that the case is not one of a change of opinion by the successor as on the findings of the Tribunal the predecessor being unaware of the nature of the receipt had no occasion to form any opinion and the case was simply one of omission or may even be one of negligence and where the successor became aware of the omission or negligence. The case of a change of opinion simpliciter occurs only where without reference to the papers on the record or books or information from any outside source the same person who formed the opinion originally, changes that opinion subsequently by process of contemplation or by mere thinking about it a second time. It follows that action under section 34 was viledly taken and the first question referred to this court for opinion must be answered in the affirmative and against the assessee.
On the merits the findings recorded by the Tribunal were that by reason of the share of the Singhania brothers and their family in the assessee firm being Rs. 0-12-9 and the shareholding of the Singhania brothers and their family being very large they did not stand to lose anything by the termination of the managing agency of the assessee and its being taken over by the company. The sum of Rs. 2,50,000 was largely shared by the Singhania brothers and their family, who had a dominant interest in the assessee firm, the second managing agents, and in the managed company. The alleged compensation was paid 'without any cogent reason' or 'any commercial necessity' and was, therefore, clearly collusive. There was an ulterior object for the payment, namely, the desire of the managed company to claim it as a business expenditure and of the assessee firm to claim it as a capital receipt or a receipt of a casual and non-recurring nature and thus evade payment of tax on it both ways. The Tribunal agreed with the Appellate Assistant Commissioner that as there was merely a change in the personnel of the managing agency, there was no loss of office, which might entitle the managing agents to payment, which was held to be collusive and it was held that there was no genuine termination of the managing agency. It was further held that the payment was not 'compensation for termination of the managing agency'.
By reference to the terms of the managing agency of the firm and subsequently of the company the alleged reasons for the change of the managing agency were rejected by the Tribunal. It observed : 'There was nothing on the record to show that the terms offered to the second managing agents were offered to the first managing agents or that the assessee firm had or would have refused to accept the terms offered to the second managing agents, nor was it possible to say that the terms of the second managing agents were onerous and would not have been acceptable to the first managing agents or that the assessee firm had or would have refused to accept the terms offered to the second managing agents, nor was it possible to say that the terms of the second managing agents were onerous and would not have been acceptable to the first managing agents. Not even one letter was exchanged between the managed company and the assessee regarding the termination of the managing agency......... If the termination was genuine one would expect the assessee to protest against the highhanded and unjust act of the managed company in terminating the contract.' It was noted that the assessee recorded the receipt of Rs. 2,50,000 for relinquishment of the managing agency. 'Relinquishment' according to the dictionary meaning is merely voluntary surrender. The assessee quietly went out of office without a word of protest.
The Tribunal further held that the office of managing agency was a lucrative one bringing an income of about Rs. 2,50,000 per year. The managing agency had still 18 years to run. It was not known how the figure of Rs. 2,50,000 was arrived at. The assessee was never consulted about the quantum of compensation and quietly accepted the amount which was given to it by the managed company and 'relinquished' the office.
The Tribunal also held that the receipt was not exempt under section 4(3)(vii) as it was not casual and it did arise out of the business of the assessee. The receipt was 'foreseen, well planned and thought of'. The amount would never have been received by the assessee if they had not been holding the office of the managing agency. It made no difference that the termination of the managing agency was not genuine and the payment was a collusive payment.
On these findings the Tribunal held that the receipt of Rs. 2,50,000 was a revenue receipt liable to tax and was not exempt under section 4(3)(vii). I am of the view that the decision of the Tribunal was correct on this point also and the second question referred to this court should also be answered in the affirmative.
I don not propose to discuss the matter afresh on this reference as this reference was argued along with Reference No. 2 of 1955 in which the facts were very similar and the same question of law arose for the decision of this court. I have started my reasons at some length in that judgment. If anything, the facts in that case were on a slightly higher footing than the facts in the present case. In that case, at least a show of reason was made by the managing agent before it accepted the so-called termination. In this case there was not even that kind of show.
The reference should accordingly be returned to the Income-tax Appellant Tribunal with the above answers under the seal of the court and the signature of the Registrar.
The department should be entitled to the costs of this reference assessed at Rs. 200.
The application under section 66(4) must also be dismissed as all the points raised in that application were allowed to be argued by learned counsel on this reference and accordingly the learned counsel himself did not press the application seriously. The application is rejected.
Question answered in the affirmative.