P. B. MUKHARJI J. - The question for determination in this Income-tax reference is :
'Whether on the facts and in the circumstances of the case the sum of Rs. 18 lakhs paid to Messrs. Karamchand Thapar & Brothers (Private) Ltd., was a revenue receipt and as such assessable to Income-tax ?'
It raises the proverbial question of the nature, character and legal incidents of a managing agency and whether a termination of such managing agency forms capital receipt or revenue receipt. Mr. Palkhivala for the assessee has contended that this is capital receipt, relying on the well known cases which support the view that in some cases termination of a managing agency leading to compensation is capital receipt. Mr. A. C. Mitra, the learned standing counsel for the revenue authorities, equally relied on the other line of cases where it has been said that such compensation arising out of the termination of managing agency can be, and is, in the facts and circumstances of the case, a revenue receipt. Before proceeding to discuss this question and determining it, the relevant facts may be stated briefly.
The assessee-company is Karamchand Thapar & Brothers Private Ltd., of 25, Brabourne Road, Calcutta. It is a private limited company. The assessment year is 1952-53. The relevant accounting year is the year ended on the 31st March, 1952. The assessee-company was functioning as the managing agents of 27 other companies including Messrs. Greaves Cotton & Co. Ltd. Messrs. Greaves Cotton & Co. Ltd. became incorporated as a private company in 1922, and at that time its managing agent was a firm called 'Messrs. Greaves Cotton & Co.'. The assessee-company acquired a large block of shares in Greaves Cotton & Co. Ltd. and also paid a sum of Rs. 27,34,325 to the firm of managing agents, Messrs. Greaves Cotton & Co., who gave up their managing agency rights in consideration thereof. The assessee company thereupon became the managing agents of Messrs. Greaves Cotton Co. Ltd. The assessee-company became the managing agents of Greaves Cotton and Co. Ltd., on the 8th January 1947, for a period of 20 years. The assessee-company along with its associates and directors purchases the shares of Greaves Cotton & Co. Ltd. from the partners of the firm of Greaves Cotton & Co. for a sum of about Rs. 50 lakhs. It also purchased the managing agency rights for the said sum of Rs. 27,34,325. This state of affairs continued until the 8th May, 1950, when Greaves Cotton & Co. Ltd. was converted into a public company. Under the amendment of the Companies Act in 1939, the managing agents of a public company were no entitled to any commission on sales etc., but became entitled only to a fixed allowance and affixed percentage of the profits. In view of the amendment of the company law, the managing agency agreement between the assessee-company and Messrs. Greaves Cotton & Co. Ltd. was altered. A fresh deed of managing agency agreement was drawn up on the 0th May, 1950. It provides, inter alia, that with effect from the 8th May, 1950 the assessee-company would be the managing agents of Messrs. Greaves Cotton & Co. Ltd., on a fixed office allowance of Rs. 5,000 per month and a fixed commission of 10 per cent on the net profits. The new managing agency agreement was to subsist for a period of 20 years with effect from the 8th May, 1950.
Immediately after entering into this fresh managing agency agreement for 20 years from 1950, things began to move very fast and the object appears to be to put the newly created managing agency agreement for 20 years into termination. On the 28th February, 1951, the managed company appointed a sub-committee to enquire into the question whether the managing agency of the assessee-company should be terminated and whether the managed company should be managed by its own board of directors. It may be noted that all this took place between 10th May, 1950, when the managing agency agreement for 20 years was made, and 28th February, 1951, when this sub-committee was appointed. It was barely nine months after the new managing agency agreement for 20 years was executed. The reason for the volte face is supposed to be the advent of the Nizam on the 17th November, 1950, who subscribed 18,000 equity shares and 23,000 preference shares at a cost of Rs. 50 lakhs but the point remains that the application to the controller of Capital Issues for issue of additional capital of Rs. 55 lakhs by the managed company was made long before, on the 19th October, 1949, and the sanction thereof was also obtained on or about the 24th April, 1950, both such dates being prior to the date of 10th May, 1950, when the fresh managing agreement for twenty more years was executed.
Coming back to the sub-committee, it appears that it worked with surprising alacrity and speed. Appointed on the 28th February, 1951 to export whether the managed company can be managed by its own board of directors, question of policy and facts which the board of directors themselves could have decided, made its reports within 15 days, to be accurate on the 16th March, 1951, recommending that the managing agency of the assessee-company should be terminated. Things moved with lighting speed and on the following date, the 17th March 1951 the board of directors of the managed company immediately approved the recommendation and as extraordinary general meeting of the shareholders of the managed company was held within a fortnight thereafter on the 31st March, 1951. A resolution was passed at the extraordinary general meeting terminating the managing agency agreement subject to payment of compensation of 18 lakhs to the assessee-company as the managing agent.
The speed with which the newly born managing agency agreement of 10th May, 1950, was liquidated continued. That resolution of the managed company was communicated to the assessee-company within three days of its passing, i.e., on the 3rd April, 1951. The assessee-company within a week and without protest readily agreed and accepted it on the 10th April, 1951. In its letter dated 3rd April, 1951, forwarding copy of the two resolutions passed at the extraordinary general meeting of shareholders of the managed company held on the 31st March, 1951, the managed company wrote to the assessee-company in these terms :
'In accordance with the first resolution we hereby give you notice terminating with effect from 31st March, 1951, the agreement between us dated 10th May, 1950, whereby, you are appointed managing agents of this company for a period of 20 years from the 8th May, 1950. Further in accordance with the second resolution we hereby offer you as compensation for loss of office a sum of Rs. 18,00,000 payable by installments of Rs. 6,00,000 on the 15th April, 1952, and on the 15th April, 1953. We should be glad if you consider the offer for compensation made by us and if it is agreeable to you signify and confirm your acceptance.'
The managing agency agreement, therefore, was cancelled even retrospectively to quicken the process. The letter of cancellation was dated 3rd April, 1951, but the cancellation was to take effect from the 31st March, 1951. The resolution which the assessee company passed on the 10th April, accepting the terms quoted above, ran as follows :
'Resolved that the offer of Messrs. Greaves Cotton & Co., Ltd. of compensation of Rs. 18 lakhs to the company for loss of office of managing agent by the company due to earlier determination of the companys managing agency agreement dated 10th May, 1950, be accepted and that Greaves Cotton & Co. Ltd. be informed accordingly.'
Certain basic facts stand out in this hurried termination of the managing agency agreement. The facts may be stated serially :
(1) The managing agency had 19 more years to run when it was terminated.
(2) There was no clause in the managing agency agreement giving any right to the managed company to terminate and such a right belonged only to the assessee managing agent and that also by notice of six months. The letter or notice of this unprovided for termination was retrospective.
(3) This managing agency was not a losing concern but was earning handsome profits for the assessee-company.
(4) The average return annually from only this managing agency of the managed company amounted to Rs. 2,50,000, and which was to run for 19 years.
(5) The assessee-company purchased the managing agency right for a sum of Rs. 27,34,325, but it readily agreed to terminate the managing agency at an under-value and accepted only a sum of Rs. 18 lakhs.
Having stated the facts and circumstances in which this managing agency agreement was terminated, it will be appropriate now to refer to the fact that the assessee-company made the necessary entries in its account books in respect of the sum of Rs. 18,00,000, showing it in the capital account as compensation and not in the revenue account. The assessee contended that the sum of Rs. 18,00,000 was not revenue receipt and was not liable to tax.
The Income-tax Officer decided that the payment of this sum of Rs. 18,00,000 to the assessee-company by Messrs. Graves Cotton Co. Ltd. was a payment of remuneration in advance and it was not compensation on account of loss of employment.
On appeal the Appellate Assistant Commissioner disagreed with the view taken by the Income-tax Officer and held that the amount in question represented compensation and was capital receipt not liable to taxation. He relied on the fact that neither the payment of Rs. 28,28,450 for the acquisition of the managing agency rights not the receipt of Rs. 18,00,000 for the termination thereof has been doubted and, therefore, it cannot be said that the assessee-company earned any profit in this venture but rather it incurred a loss. He also took the view that, having regard to the fact that the quantum of the managing agency remuneration to the assessee-company was not any fixed amount and depended on the profits accruing to the managed company from year to year and as the company could also incur loss in one or several years, there is no likelihood of the assessee-company receiving any sum of remuneration in advance. According to the Appellate Assistant Commissioner, whatever might have been the method of calculation of the said sum of Rs. 18,00,000, and whatever might have been the motive behind the termination the receipt of the said sum of Rs. 18,00,000, could not be held to be in lieu of anything else than for permanently parting with the managing agency right in favour of the managed-company. The revenue authorities appealed to the Tribunal.
Three contentions were advanced on behalf of the revenue authorities before the Tribunal. In the first place, it was contended that the whole transaction leading to the termination of the managing agency was not a genuine transaction at all but were manipulations without any basis in reality. The contention was that the shareholding of the managed company vested in the members of the family of Karamchand Thapar and, therefore, the decisions taken by the two companies were merely a decision by which the assessee-company was put into funds to the extent of Rs. 18,00,000. It was also contended by the revenue authorities before the Tribunal that there was no necessity to change the management and no fault was found with the management by the managing agents and it seemed very unusual that a few months after the conversion of Messrs. Greaves Cotton Company into a public limited company it was decided in hot haste to terminate the managing agency. Another contention before the Tribunal on behalf of the revenue authorities was that the compensation payable to the managing agents was proportionate to the agency commission that it would have received in course of the remaining period of its management. therefore, the amount represents an advance payment of remuneration. Lastly, argument on behalf of revenue authorities before the Tribunal was that, having regard to the facts that the assessee-company was the managing agents of 27 managed companies, the business of the assessee was to acquire managing agency and, therefore, managing agency in such case was stock-in-trade of the assessees business and if in course of its business it voluntarily agreed to give up managing agency, the compensation received by it for such loss would be in the nature of revenue.
The Tribunal did not accept these arguments advanced on behalf of the revenue authorities. It came to the conclusion that the transactions by which the managing agency of the assessee was terminated were genuine and real business transactions. It also rejected the arguments that the assessee was acquiring managing agencies and that the managing agency in question was in the nature of stock-in-trade. The Tribunal found that he managing agencies held by the assessee-company represented sources from which it received its income by way of commission and, therefore, the termination of a managing agency represented here a destruction of a source of income. The conclusion to which the Tribunal arrived was that the compensation received by the assessee for the termination of its managing agency was in the nature of a capital receipt. It, therefore, confirmed the decision of the Appellate Assistant Commissioner.
The question before us is what is this, is it a capital receipt or is it a revenue receipt ?
The confusion on this branch of the law is acute. Many decisions are cited for and against capital and revenue, where principles are freely enunciated not perhaps with that disciplined precision which is required in seating a principle. Application of these principles to the facts is rendered difficult also by many decisions whole express and implied connotations are so exclusive that they impelled a great English judge to declare in despair that a decision on capital or revenue controversy very often depends on the spin of the coin.
Mr. Palkhivala, who appeared for the assessee, with commendable bravery and consummate skill attempted to simplify the problem. He said, 'what is there in the number True, the main business of the assessee-company is to run managing agencies. True it runs 27 companies as managing agents but the number is not material.' He said, he had a Supreme Court decision to support his argument on number. Presumably, he had in view the Supreme Court decision in Kettlewell Bullen & Co. Ltd. v. Commissioner of Income-tax. Equally tenacious was the argument of the learned standing counsel on the other side saying that number was not irrelevant, especially where the number is 27 as in the present case and he naturally had in view both the Supreme Court decisions in Gillanders Arbuthnot & Co. Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax v. Best & Co. (P.) Ltd.
It will be unnecessary for us to go into the details of all the decided cases. In the judgment of this court in Kettlewell Bullens case, almost all the cases up till then are collected. All that we, therefore, need to do in this case is to notice the latest decision of the supreme Court on this point in Commissioner of Income-tax v. Best & Co. just mentioned. There, at pages 17 and 18, the Supreme Court observed as follows :
'As we have observed earlier, in view of the judgments of the court, no further citation is called for. Whether the compensation received by an assessee for the loss of agency is a capital receipt or a revenue receipt depends upon the circumstances of each case. Before coming to a conclusion one way or other many questions have to be asked and answered : what was the scope of the earning apparatus or structure, from physical, financial, commercial and administrative stand-points If it was a business of taking agencies, how many agencies it had, what was their nature and variety How were they acquired, how one or some of them were lost and what was the total income they were yielding If one of them given up, what the average income of the agency lost what was the impact of giving it up on the structure of the entire business Did it amount to a loss of an enduring asset causing an unabsorbed shock dislocating the entire or part of the earning apparatus or structure Or was it a loss due to an ordinary incident in the course of the business The answers to these questions would enable one to come to a conclusions whether the loss of a particular agency was incidental to the business or whether it amounted to loss of an enduring asset. If it was the former, the compensation paid would be a revenue receipt; if it was the latter, it would be a capital receipt.'
The wholesome principle laid down by the Supreme Court is that the compensation received by an assessee for the loss of agency cannot be determined by any doctrinaire test or on any dogmatic principle and whether such compensation is a capital receipt or a revenue receipt will depend on the circumstances of each case. It is, therefore the facts, and circumstances of each case which are fundamental. The observations of the Supreme Court indicate the nature of the questions that should be asked in this context and the answers to them will determine whether in the particular facts of the case, a receipt is a capital receipt or a revenue receipt.
Applying those tests we have no hesitation in holding in the present case that the sum of Rs. 18,00,000 was a revenue receipt in the hands of the assessee managing agent. Apparently, there was no evidence that the impact of terminating this managing agency upon the assessees structure was such as to make it a capital receipt, or that it amounted to a loss of enduring asset causing an unabsorbed shock dislocating the entire or a part of the earning apparatus or a structure of the assessee. It is also plain in the record of evidence before us that the business of the assessee company was largely the business of taking agencies and it had as many as 27 managing agencies. We are fortified in this conclusion by the consideration that there was no reason why the assessee managing agent agreed terminate this managing agency at a loss without any adequate notice when the managed company had no right to terminate and why the assessee company readily agreed to accept this breach of contract of managing agency committed by the managed company. Nor can the fact be ignored that the assessee managing agent still had the larger shareholding interest even after the Nizams advent, and the assessee did not lose its control of the majority of shares, even after the termination of the managing agency.
The supreme Court in Commissioner of Income-tax v. Best & Co. (P.) Ltd. also observed at page 19 as follows :
'What remains, therefore, is only the fact that the assessee had innumerable agencies in different lines and that it only gave up one of them and continued to do business without any apparent mishap. The correspondence between the parties shows that the assessee gave up the agency without any protest presumably because such termination of agencies was part of normal course of its business. We, therefore, hold, on the facts of the present case, that the loss of the said agency by the assessee was only a normal trading loss and that the income it received was a revenue receipt.'
Here again applying that test, the record shows that the assessee also in this case had innumerable agencies to the extent of 26 more agencies and that it only gave up this particular one and it continued to do business without any apparent mishap. It is also the fact here that the assessee gave up agency not only without any protest but readily and in fact too readily, to make it anything else than a trading venture.
The other relevant facts and circumstances in this case point to the same conclusion that the receipt of Rs. 18,00,000 by the assessee was in this case a revenue receipt. The memorandum shows that the assessee companys major business was to run managing agencies. The fact shows that it has as many as 27 such agencies. Mr. Palkhivala made the simple argument that if a man has 27 houses and if he sells only one, then it is capital receipt and not revenue receipt and that we must apply the same analogy and hold in this case that the assessee, who was managing 27 managing agencies, by terminating one, was only getting a capital receipt. The analogy is misleading and does not apply. It is not a case of ownership that we are discussing in the present reference. We are discussing here the case of the assessee, which is a trading company, whose regular business it is to run managing agencies. Again it is unnecessary for us to discuss the well known decisions already discussed in this High Court judgment in Kettlewell & Bullen to which reference has already been made.
The Supreme Court in Gillanders Arbuthnot & Co. Ltd. v. Commissioner of Income-tax laid down at page 291 :
'There is, in our judgment, no immutable principle that compensation received on cancellation of an agency must always be regarded as capital. In each case the question has to determined in the light of the attendant circumstances. In the judgment in Kellewell & Bullen and Co.s case we have explained that the judgment of the Judicial Committee in Commissioner of Income-tax v. Shaw Wallace & Co. was not intended to, and did not, lay down that in every case cancellation of an agency resulted in loss of a source of revenue or that amounts paid top compensate for loss of agency must be regarded as capital loss.'
This observation must be read with the observation made by the Supreme Court in Commissioner of Income-tax v. Chari & Chari Ltd. where it was stated at page 406 :
'Prima facie, such a receipt, being in lieu of an extinction of asset of the assessee, is a capital receipt.'
We do not see the contradiction, urged at the Bar between these two observation of the Supreme Court, on the prima facie principle of capital receipt and there being no immutable principle that compensation on cancellation of an agency is always regarded as capital. The law, as we understand from them is this that what is 'prima facie' may not be, on a consideration of all the facts and circumstances, the true state of affairs and even what is 'prima facie' will depend on the particular facts and circumstances in each case. In facts of the present reference, here is an assessee whose main and major business is running managing agencies of 27 companies and who readily agrees without any apparent business reason to give up a profitable managing agency even at a loss to himself, and that even within a few months after entering into an agreement to run the managing agency for 20 years, reserving to himself only right to terminate and denying that right to the managed company. Even on the 'prima facie' doctrine it appears to us that the present context this termination was nothing but a device of capitalising its profits and essentially getting an advance profit or remuneration under the cover of terminating the contract of managing agency agreement.
Lastly, the method of calculating the said sum of Rs. 18 lakhs also indicates that it was nothing but trading profit. The amount was arrived at by the calculation of probable profits on a certain basis. It is significant that, in its return of the assessment year 1952-53, the assessee had shown the income of Rs. 4,04,088, which was the income mainly from the managing agency allowance received from several managed companies, interest and dividend but this sum of Rs. 18 lakhs has not been included in the total income on the ground that the amount in question was a capital receipt. The average profit of Rs. 2,50,000 from the managing agency which has been terminated immediately converted this profit in a lump. The uncertainties of the future 19 years, the risks attending thereupon, the instability under the new law and legal amendments operating upon the managing agencies made it good business return for the assessee to capitalise and get advance remuneration by terminating this managing agency or else there is no possible reason why a managing agent carrying on such a profitable managing agency to purchase which it had spent about Rs. 28 lakhs, should agree, without protest, to receive only sum of Rs. 18 lakhs. The sub-committee which we mentioned above have reported that the compensation should be not merely Rs. 18 lakhs but Rs. 87,000 more. Curiously enough the assessee was willing to give up even that Rs. 87,000 which was recommended even by the sub-committee appointed by the managed company. These features, facts and circumstances, leave no room for doubt in our minds that the assessee was trading with this managing agency, and making good business of it. It is needless to emphasise that even in Gillanders case, the compensation was calculated also on the test or basis of profits. Mr. Palkhivala for the assessee, in the strength of the well-known decision in Glenboig Union Fireclay Co. Ltd. v. Commissioner of Island Revenue, mentioned by the Supreme Court in Divechas case, contended that there was no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of application of that test. But then he forgot that the following sentence in the judgment went on to say. 'Here, the amount is large but there is nothing to show that it was even an adequate measure of the profits that were expected to be made during the three years in which the amount was to be paid.' On the contrary, here on the facts of this reference the evidence is conclusive that this sum of Rs. 18 lakhs was based on calculation of profits. The argument, therefore, about measure having no relation to quality cannot be applied to the facts of this case.
The law on this point was summed up by the Supreme Court in Kettlewell Bullen & Co. Ltd. v. Commissioner of Income-tax, and repeated in Gillanders Arbuthnot & Co. Ltd. v. Commissioner of Income tax, where it is stated as follows :
'On an analysis of these cases which fall on two sides of the dividing line, a satisfactory measure of consistency in principle is disclosed. Where, on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue : where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessees income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt.'
By applying that test of 'dividing line', we have no doubt in our minds that, in the facts and circumstances of this case, the receipt of Rs. 18 lakhs is a revenue receipt, because the payment was made to compensate a person for cancellation of a contract which did not affect the trading structure of the assessees business nor did it deprive him of what in substance is his source of income and that the such cancellation left the assessee free to carry on his trade freed from the contract terminated.
In the view that we have taken, it is no longer necessary to embark on the discussion, punctuated by many conflicts of judicial opinion as to whether a managing agency of a company is in the nature of a capital asset and whether it is no like an ordinary asset capable of being transferred from one person to another, and whether the managing agency of the assessee-company was an asset of the character of stock-in-trade of the company. We need only add here that the Supreme Court in Kettlewell Bullen & Co. Ltd. v. Commissioner of Income-tax, quoted the following observation of Lord President Normand :
'We are not embarrassed here by the kind of difficulties which arise when, by agreement, a benefit extending over a tract of future years is renounced for a payment made once and for all. The sum paid in this case is really and substantially a surrogatum for one years profits.'
Now on the facts, on doubt, the sum of Rs. 18 lakhs was payable in 3 years in equal installments of 6 lakhs a year. Nevertheless, this was a surrogatum of profits on whose basis the parities agreed to calculate.
To conclude the controversy, it will be appropriate now at this stage to make a reference to the fate of this sum of money not in the hands of the assessee managing agents as in the present case but when it came out of the hands of the managed company. That was the subject of the decision by the Supreme Court in Greaves Cotton & Co. Ltd. v. Commissioner of Income-tax. The Bombay High Court held that this very sum of Rs. 18 lakhs which the managed company paid was an admissible deduction under section 10 (2) (xv) of the Income-tax Act and held that the termination of the managing agency agreement before the expire of its period by the managed company with the view to getting rid of its recurring liability in the matter of payment of managing agency commission and/or taking over the management by its board of directors was a transaction in the ordinary course of its business in order indirectly to facilitate the carrying on of its business. It was held to be expenditure in the usual course of business although the managing agency agreement gave no right to the managed company to terminate and what the managed company did was to commit a breach of that contract and it was held that such breach of that contract and it was held that such breach of contract was part of the ordinary trade. Mr. Palkhivala, who was appearing for the managed company Greaves Cotton before the Bombay High Court, but appearing before us for the managing agent, naturally had to argue that what was sauce for the gander was not necessarily sauce for the goose. In other words, what was expenditure, under section 10 (2) (xv) of the Income-tax Act, in the ordinary course of business in the case of managed company, in the hands of the managing agents, the same sum by the alchemy of income-tax law was not a business or trading receipt at all. He is right in that respect. What is revenue in the hand of one may be capital in the hand of the other. But we are not coming to a decision on the basis of this argument that because it was trading expenditure in the case of managed company, it must also be a trading receipt or a revenue receipt in the hands of the managing agents. We are deciding that this is revenue receipt on the grounds that we have indicated above.
It is very clearly laid down by the Supreme Court in P. H. Divecha v. Commissioner of Income-tax, that in determining whether a payment amounts to a return for loss of a capital asset or is income liable to income-tax, one must have regard to the nature and quality of the payment. We have no hesitation on the facts here and no the analysis that we have made that the nature and quality of the payment of Rs. 18 lakhs make it a revenue receipt in the hands of the assessee managing agents. (See the observations of the Supreme Court in Divechas case at page 231, 233 of the report quoted).
In that view of the matter, it is unnecessary to discuss the question whether managing agency should be regarded as circulating capital, and the cases in Lachmi Narayan Ram Gopal and J. K. Trusts case.
For the reasons stated above, we hold that in the facts and the circumstances of this case, the sum of Rs. 18 lakhs paid to the assessee was a revenue receipt and as such assessable to income-tax and we answer the question in the affirmative. The Commissioner of Income-tax will get the costs of this reference. Certified for two counsel.
LAIK J. - I take same view but on different set of words.
It is possible to pass over a great amount of history recited in the opinion of my learned brother but I wish to advert to a part of it that seemed to my mind to underlie a considerable part of the submissions made in this case.
The assessee, having acquired the managing agency right in the year 1946 for a sum of Rs. 28,00,000 and odd, claimed a deduction as revenue expenditure but the same was not allowed by the department. The Bombay High Court in the case of Greaves Cotton, namely, of the managed company, refers at page 118, that the sum was Rs. 27,00,000 and odd.
The managing agents, by the new agreement dated May 10, 1950, with the managed company secured the discretion of resigning their office (which provision was not there in the agreement dated January 8, 1947) and became entitled to nominate in place of two directors, one third of the total number of directors of the managed company. There was no provision under the new terms for compensating the managing agents for giving up some of their rights in favour of the managed company.
Hardly nine months had expired, since the said new agreement for a period of 20 years was entered into, when on February 20, 1951, a notice was issued convening a meeting on February 28, 1951. The question of termination of the managing agency was not on the agenda of the proposed meeting. The issue was introduced by the chairman himself, who was none else the Lala Karam Chand Thapar, through the omnibus agenda, namely, any other subject with the permission of the chairman. The sub-committee was appointed with three gentlemen, who were whole-time employees of the managed company and being directors with nominal shares (50, plus 50, plus 10), but none of the directors of the managing agents was a member thereof. Proceedings of the committee were of an informal nature. Deliberations were not recorded in any minute book. Terms of reference to the sub-committee are not available.
Only some time before such appointment, the managed company was converted into a public limited company. The managing agents started negotiation with the Nizam for subscribing substantial amount towards the increase of share capital of the managed company.
The sub-committee sought legal opinion on the question of taxation on the payment of compensation but that opinion is also not available. It, interalia, reported that the basis of compensation on the ground of winding up of the company was 'considered as a fairly good indication of what was in contemplation of the parties should the agreement be terminated'. The averaged emoluments of the managing agents for the 3 years ended March 31, 1950, even under the new terms, would have amounted to near about Rs. 2,70,000 each year. The managing agents have forgone 19 years emoluments and got 18,00,000 (eighteen lakhs).
The board of directors held a meeting on March 17, 1951, the same being convened without any formal notice. It considered the report of the sub-committee submitted a day earlier, namely, on March 16. The board resolved and recommended the termination of the managing agency from January 31, 1951. The amount of compensation would be the said amount of Rs. 18,00,000, which would be paid to the managing agents in three annual installments. It appears form the statement of case in the said judgment of the Bombay High Court that they had sufficient funds out of the fresh capital raised as mentioned earlier (bottom of page 114 of 48 I. T. R.).
The extraordinary general meeting of the shareholders of the managed company was called on March 31, and Dr. Pal stated that the shortness of the period was waived by the shareholders.
The representative of the managing agents refrained from attending the meeting of the shareholders though the termination of the managing agency was considered and in fact it was terminated with effect from March 31, 1951. The assessee-company, namely, the managing agents, accepted the said termination on April 10, 1951, and agreed to receive Rs. 18,00,000.
The Income-tax Officer, in his order for considering the losses of the assessee on another head, found that taking advantage of the fact that several companies are under the management of the assessee-company, shares are transferred from one company to another and losses are worked out 'whenever the management finds it convenient to do so.'
The Appellate Assistant Commissioner did not upset any of the above facts found by the Income-tax Officer, whose order is made an annexure to the statement of case before us, but the methods of calculation of the compensation and the motive behind the termination of the managing agency, did not matter to him. The Appellate Assistant Commissioner ultimately found that the assessee-company did not earn any profit on the venture, rather incurred loss on the ground that the payment of Rs. 28,00,000 and odd and the receipts of Rs. 18,00,000 were not doubted.
The Tribunal also did not reverse the said findings of fact but came to the only finding of fact on this point which runs in paragraph 8 of its order to the effect, namely, that the assessee
'had a number of sources from which commission was received and the destruction of a particular source would be a destruction in the nature of capital and therefore in the present case the destruction of the managing agency should be considered to be a destruction of a structure which yielded profit to the assessee.' (See page 25 of the paper book.)
The last sentence in the said paragraph was the conclusion of the Tribunal and the first sentence was on the point of onus of giving evidence and therefore they are not quoted.
It has been rightly contended on behalf of the revenue authorities that there is no evidence in support of the said finding of the Tribunal and therefore it has become perverse. Dr. Debi Pal no doubt submitted in argument that, even though the finding of the Tribunal is perverse, this court is powerless and cannot go behind it, rather this court is bound by it. On so breath-taking a proposition, it is better not to comment, except stating that it ought to have been developed in a manner consistent with good sense.
If we analyse the Bombay High Court judgment in the case of the managed company, on which strong reliance was placed by Dr. Pal, we find that the counsel for the revenue there, did not place reliance on all the ten circumstances referred to be the Appellate Assistant Commissioner before the High Court. (See pages 122 and 128 of 45 I. T. R.). No collusion was alleged in the said case (page 124) and all transactions were conceded to be bona fide transactions including the termination of the managing agency agreement (page 128). It was found as a fact in the said case that the managed company had 'recouped to the extent of Rs. 16 lakhs out of Rs. 18 lakhs by saving the managing agency commission which would otherwise have been payable to the managing agents.' (See page 124 of the report). It is clear that the Bombay High Court considered the question from the view point of the managed company only and actually found at page 131 to the following effect :
'It was in the nature of things that, when nearly 19 years of the period of the agreement had still to run, the amount of compensation would be large.'
It was further noticed at page 133 of the said report that it had 'not been contended that the amount of compensation paid to Thapars was unreasonable.'
Accordingly, Dr. Pal would not be right in relying on the decision of the Bombay High Court for the purpose of the present reference. I am too sensible to follow the wooden rules and the ad hoc grounds for a decision, in respect of a separate assessee.
Starting from the vast amount of authority, ending with that of the Supreme Court in the case of Kettlewell Bullen referred to by my learned brother, on the question as to whether or not a particular amount was a revenue receipt, the instant case becomes a fairly simple one, as the law has been made tolerably plain by a later and more recent judgment of the Supreme Court in the case of Best & Co. also referred to by my learned brother, which to me at least, has made for better clarity. I am unable to accept the argument that the Supreme Court is always caught between the basic principles that look in different directions in different cases though on the same point, but tradition holds that the law being a jealous mistress has the feminine capacity to tempt each devotee to find his own image in her bosom. In saying this, I hope that I have not overlooked although I need not go back to the said earlier decision of Kettlewell Bullen, as some of the points there were decided on concession and also because its facts do not fit nearly into the facts of the present case.
I have always kept in views that law is born of fact and the precise problem of a specific case is evaded and not solved by reiterating generalized approbations of freedom of speech. The basic question always has been how and where to locate the boundaries. The lawyers do sometimes become magicians who perform conjuring tricks. Sometimes they succeed, as in Kettlewell Bullen. At other times they fail, as in Best & Co. It has become indeed a game of chess, played by each side with subtlety and skill. I say all these with deep esteem and due apology.
It might be observed that after the Gillanders case by the Supreme Court, which afforded another good example, common-sense seemed to demand to bring a fresh mind to the problem. I have noticed the full breath of the doubt expressed by the learned standing counsel on behalf of the revenue as to whether a casual reader of the said three Supreme Court decision, would notice between them the subtle distinction and different phraseologies; yet it would not, in my view, serve any useful purpose to review them, as the salient aspects of the said decisions along with another Supreme Court decision in the case of Chari and Chari have been discussed by my Lord on the material canvassed during the debate between the learned advocated on dither side.
I confess that after hearing the argument of Mr. Palkhivala for the assessee, which was not without its attractions, it at first seemed to be an arguable proposition; but I would only add that at the end I found it hard to see his view-point, particularly, after the sundry explanations advanced by Dr. Pal, who followed him, and who proceeded to spin out a new doctrine of capital receipt out of thin air. In my view, whatever the name, the essence is clear, namely, it is a revenue receipt out of thin air. In my view, whatever the name, the essence is clear, namely, it is a revenue receipt and the question should be answered in the affirmative.
I, therefore, respectfully concur in the order passed by my learned brother. It is fairly obvious that I should agree, the more gladly, because the reasoning are reinforced by the claims of good sense and justice.
Question answered in the affirmative.