VEERASWAMI J. - This is a reference at the instance of the Commissioner of Income-tax under section 66 (1) of the Income-tax Act, 1922, of the following question :
'Whether, on the facts and in the circumstances of the case, the two sums of Rs. 72,515 and Rs. 3,14,100 are assessable to tax under section 10 (5A) of the Indian Income-tax Act, 1922 ?'
We are concerned with the assessment year 1956-57. The assessee was one of the two managing directors of a private limited company by name Textile Corporation Private Limited. The other managing director was one P. D. Asher. Out of the total of 20 shares or Rs. 100 each, the assessee held nine shares and his son one share, the remaining shares being held by P. D. Asher, his wife and cousin. This company was the managing agent of a public limited company called Asher Textiles Ltd. Both these companies have been incorporated under the provisions of the Indian Companies Act, 1913. The public limited company had issued 11,986 shares of the face value of Rs. 100 each, out of which the assessee held 1,674 shares. The book value of these shares was Rs. 1,11,625. P. D. Asher, his wife and into an agreement on December 21, 1954, by which it was agreed that the assessee and his son should transfer ten shares in the Textile Corporation to the other parties to the agreement or their nominees for a sum of Rs. 3,50,000. The agreement contained certain other terms which included that the assessee and his son should also transfer to P. D. Asher or his nominees 4,165 shares in the Asher Textiles Ltd. The parties also further agreed that 180 shares in addition to the shares already issued in the Textile Corporation Private Limited should be allotted to one H. B. Setna and his appointment as one of the directors of Asher Textiles Limited should be procured. Until necessary sanctions were obtained from the Central Government, the parties further agreed that the assessee and Asher should execute separate powers of attorney to H. B. Setna to enable him to manage the Textiles Limited on behalf of the Corporation. By the transfer of two sets of shares the assessee made a profit of Rs. 3,14,100 in respect of nine share and another sum of Rs. 72,515 in respect of 1,674 shares. These two amounts were brought to tax for the assessment year treating them as income and liable to tax under section 10 (5A) of the Income-tax Act, 1922. Both the Income-tax Officer as well as the Appellate Assistant Commissioner repelled the assessees contention that the receipt of the two amounts was in the nature of capital assets by sale of the shares. The Income-tax Officer, however, computed the tax on the amount of Rs. 3,14,100 on the basis of the average rates of income-tax and super-tax for the three years immediately preceding the relevant previous year but declined this benefit in respect of the other amount. The Appellate Assistant Commissioner gave the benefit of that method of computing the tax for the sum or Rs. 72,515 as well. While the Income-tax Officer did not specify the particular clause of section 10 (5A), the Appellate Assistant Commissioner was of the view that the two amounts were liable to tax under clause (c) of that sub-section. He accepted the view that the amounts in excess of the book value of the shares transferred by the assessee were in the nature of inducement to him or compensation for giving up the management. The assessee preferred an appeal to the Tribunal and with success. The Tribunal held that the assessee was neither a manager nor a managing agent of an Indian company within the meaning of section 2 (9A) of the Indian Companies Act and that the provisions of section 10 (5A), clauses (a) and (b), were, therefore, not applicable to the two amounts. It was also of opinion that neither clause (c) nor clause (d) of the sub-section would be applicable because as it said that the words 'any other company' in clause (c) referred to a company other than and Indian company and, therefore, Asher Textiles, which, as we said, was incorporated under the provisions of the Indian Companies Act, could not come under the category of 'any other company.' So far as clause (d) was concerned, the Tribunal thought that the use of the words 'any other person' in that clause as distinct from 'any other company' appearing in clause (c) or 'an Indian company' appearing in clauses (a) and (b) was significant and that because of this distinction between a person and a company, a person in that clause did not include a company. The Tribunal also considered the further question whether the two amounts could be regarded as compensation for loss of management rights in Asher Textiles and came to the conclusion that there was no material to hold that the profit represented such compensation.
We are of the view that the Tribunal was right in holding that the two amounts would not fall within the ambit of any of the clauses of section 10 (5A), though we form our view for slightly different reasons. Sub-section (5A) of section 10 is a follows :
'(5A) Any compensation or other payment due to or received by, -
(a) a managing agent of an Indian company at or in connection with the termination or modification of his managing agency agreement with the company;
(b) a manager of an Indian company at or in connection with the termination of his office or modification of the terms and conditions relating thereto;
(c) any person, by whatever name called, managing the whole or substantially the whole affairs of any other company in the taxable territories at or in connection with the termination of his office or the modification of the terms and conditions relating thereto;
(d) any person, by whatever name called, holding an agency in the taxable territories for any part of the activities relating to the business of any other person, at or in connection with the termination of his agency or the modification of the terms and conditions relating thereto;
shall be deemed to be profits and gains of a business carried on by the managing agent, manager or other person, as the case may be, and shall be liable to tax accordingly; and the tax on such compensation or other payment shall, if the assessee so elects, be computed at the average of the rates of income-tax and super-tax applicable to his total income for the three years immediately preceding the previous year in which the compensation or other payment was due or received.'
This sub-section was inserted by Act XV of 1955, with effect from April 1, 1955. It was enacted apparently because of the judgment of the Privy Council in Commissioner of Income-tax v. Shaw Wallace & Co. and the recommendation of the Taxation Enquiry Committee. In order to attract clause (a) of the sub-section, the assessee should be a managing agent of an Indian company; likewise, unless the assessee is a manager of an Indian company, clause (b) will be inapplicable. So, quite rightly, in our view, learned counsel for the revenue could not and did not rule on clause (a). Under section 2 (8A) the expressions 'manager' and 'managing agent' have the meanings respectively assigned to them in the Indian Companies Act, 1913. Under section 2 (9A) of the Indian Companies Act, 'managing agent' means a person, firm, or company entitled to the management of the whole affairs of a company by virtue of an agreement with the company, and under the control and direction of the directors except to the extent, if any, otherwise provided for in the agreement and includes any person, firm or company occupying such position by whatever name called. An Explanation to this definition says that if a person occupying the position of a managing agent calls himself a manager for the purposes of the Act. Section 2 (9) defines a 'manager' to be a person who subject to the control and direction of the directors has the management of the whole affairs of a company, and includes a director or any other person occupying the position of a manager by whatever name called and whether under a contract of service or not. It is obvious, having regard to these definitions, that the assessee by himself never entered into an agreement with either of the companies by which he was entitled to be a managing agent. Nor can it be said that as one of the two managing directors he was entitled to the management of the whole affairs of either of the companies. It was only the corporation of which the assessee along with Asher was the managing director that was entitled to manage the whole affairs of the textile company. That was one of the lines of reasoning on which the Tribunal held that clauses (a) and (b) of section 10 (5A) would be inapplicable to the amounts. We accept that view as correct. The assessee by himself was neither a managing agent nor a manager as the terms were defined in the Indian Companies Act, 1913.
For the revenue it was argued that having regard to item 72 in Table A to the first Schedule of the Indian Companies Act, 1913, there was really no difference between a managing director and a manager, especially when the term 'managing director' is not defined by the Indian Companies Act, 1913. We are unable to accept this connection. Table A does not have the force of law and it represents but a model form. Apart from that, the term 'manager' has been defined by the Companies Act and it is that definition which will govern the scope of the expression 'manager' in clause (b) of sub-section (5A) of section 10 of the Income-tax Act, 1922. One of the requisites of a person being a manager is that he should be entitled to manage the whole affairs by himself.
Clause (c) will obviously be inapplicable because, as the Tribunal rightly held, that contemplates a company other than an Indian company. Realising this, learned counsel for the revenue turned to clause (d) and contended that this counsel would in any case be attracted. We fail to see how, if clause (b) will not apply for the reason we mentioned. The same logic will not govern the scope of clause (d) as well. For this clause to apply the assessee must be holding an agency relating to the business of 'any other person.' It is impossible to say that the assessee here by himself held such an agency. The managing agency was vested in the corporation and not in any one of the directors. Neither of the directors can properly say that he by himself as of right held an agency which enable him to manage the affairs, as an agent, of the business of 'any other person'.
It follows, therefore, that clause (d) also will be inapplicable. This means the two amounts do not fall within the purview of section 10 (5A).
On that view, it is unnecessary to express our opinion on the question whether the two amounts really represent compensation for the loss of the office of the managing director. Nor is it necessary for us to decide whether the two amounts can be regarded as 'other payment' within the meaning of section 10 (5A). The Tribunal was inclined to think that 'any other person' in clause (d) will not include a company. This view it expressed on a comparison of the words 'any other person' in clause (d) with the phraseology occurring in other three clauses. We are of the view that the expression 'any other person' in clause (d) has been employed in the context of 'any person' which are the opening words in clause (d) and not with reference to the phraseology in clauses (a) to (c) of the sub-section. The expression 'any other person' would, in our opinion, include, therefore, a company.
We answer the reference in favour of the assessee with costs. Counsels fee Rs. 250.
Question answered in favour of the assessee.