GREAVES J B Vs. COMMISSIONER OF INCOME TAX
LAWS(BOM)-1962-7-3
HIGH COURT OF BOMBAY
Decided on July 17,1962

J.B.GREAVES Appellant
VERSUS
COMMISSIONER OF INCOME TAX Respondents





Cited Judgements :-

COMMISSIONER OF INCOME TAX VS. ABHIJIT SEN [LAWS(CAL)-1967-8-27] [REFERRED TO]
COMMISSIONER OF INCOME TAX VS. CALCUTTA DISCOUNT CO LTD [LAWS(CAL)-1969-7-31] [REFERRED TO]
SITAL CHOWDHURY VS. COMMISSIONER OF INCOME TAX [LAWS(CAL)-1978-5-20] [REFERRED TO]
POONAM CHAND VS. COMMISSIONER OF INCOME TAX [LAWS(MPH)-1983-3-1] [REFERRED TO]
ADDITIONAL COMMISSIONER OF INCOME TAX VS. RANGANATHAN CHETTY C R [LAWS(MAD)-1982-11-41] [REFERRED TO]
COMMISSIONER OF INCOME TAX BOMBAY VS. FRAMJI H COMMISSARIAT [LAWS(BOM)-1967-3-8] [REFERRED TO]
COMMISSIONER OF INCOME TAX BOMBAY CITY II VS. KESHAVJI MORARJI [LAWS(SC)-1967-3-5] [APPLIED]
PATWARDHAN H N VS. COMMISSIONER OF INCOME TAX [LAWS(BOM)-1970-1-4] [REFERRED TO]
COMMISSIONER OF INCOME TAX VS. N MUTHAMMAL [LAWS(MAD)-1996-7-29] [REFERRED TO]
COMMISSIONER OF INCOME TAX VS. KANCHANLAL VADILAL [LAWS(BOM)-1993-3-30] [REFERRED TO]
INDU JAIN VS. COMMISSIONER OF INCOME TAX [LAWS(P&H)-2006-3-603] [REFERRED TO]
MARUBENI INDIA PVT. LTD. VS. COMMISSIONER OF INCOME TAX [LAWS(DLH)-2010-9-331] [REFERRED TO]
SHAH RUKH KHAN VS. ASST. COMMISSIONER OF WEALTH TAX [LAWS(IT)-2014-12-14] [REFERRED TO]
RAMACHANDRA REDDIAR VS. COMMISSIONER OF INCOME TAX [LAWS(KER)-1991-11-24] [REFERRED TO]
COMMISSIONER OF INCOME TAX RAJASTHAN II JAIPUR VS. MAHENDRASINGH KACHHWAHA ORS. [LAWS(RAJ)-1977-4-26] [REFERRED TO]
P RAMACHANDRA REDDIAR AND P ARJUNA REDDIAR VS. COMMISSIONER OF INCOME-TAX [LAWS(KER)-1987-11-79] [REFERRED]
OM DUTT VS. COMMISSIONER OF INCOME TAX [LAWS(P&H)-2004-11-82] [REFERRED TO]


JUDGEMENT

TAMBE, J. - (1.)THIS is a reference under s. 66(1) of the Indian IT Act. The assessee before us is one Mr. J.B. Greaves. He held 2,300 shares out of 2,500 shares of the entire paid capital of Greaves Cotton & Co. Ltd., a private limited company. The remaining 200 shares were at the material time held by one Mr. N.G. Hunt. The managing agency of Greaves Cotton & Co. Ltd. was held by Greaves Cotton & Co., a partnership firm consisting of Mr. J.B. Greaves and Mr. N.G. Hunt. The terms of the managing agency agreement were reduced to writing under a deed dt. 10th April, 1929, which is annexure `A' to the statement of the case. Clause 10 of the said agreement provided that "It shall be lawful for the said firm to assign this agreement and the rights of the said firm hereunder to any person, firm or company having authority by its constitution to become bound by the obligations undertaken by the said firm hereunder and upon such assignment being made and notified to the said company, the said company shall be bound to recognise the person or firm or company aforesaid as the agents of the said company in like manner as if the name of such person, firm or company had appeared in these presents in lieu of the names of the partners in the said firm and as if such person, firm or company had entered into this agreement with the said company and the said company shall forthwith upon demand by the said firm enter into an agreement with the person, firm or company aforesaid appointing such person, firm or company the agents of the said company for such term as the firm may elect and with the like powers and authorities, remuneration and emoluments and subject to the like terms and conditions as are herein contained".
(2.)ON 31st Aug., 1946 M/s Karamchand Thapar & Bros Ltd. (hereinafter referred to as Thapars) wrote a letter to the said Mr. Greaves and Mr. Hunt, making an offer to purchase the said 2,500 shares held by them for a price of Rs. 50 lakhs. By the same letter, Thapars also offered a price of Rs. 27,34,325 for getting the right to the management of Greaves Cotton & Co. Ltd., from 1st April, 1946, which then was held by Mr. Greaves and Mr. Hunt. Thapars also offered to pay interest at 2-1/2 per cent per annum on the said amount of Rs. 27,34,325 from 1st April, 1946, to the day of payment. In paragraph 5 of the said letter, Thapars offered to pay Rs. 10 lakhs by way of earnest money on acceptance of the offer. Thapars further stipulated that on or before the completion of the sale Mr. Greaves and Mr. Hunt should deliver Thapars letters of resignation of several other directors of the company and should also secure appointment of three or more nominees of Thapars. Mr. Greaves on behalf of himself and also in his capacity as the duly constituted attorney of Mr. Hunt, wrote a letter of date 29th Sept., 1946, accepting the aforesaid offer made by Thapars for the purchase of the shares and the managing agency. A direction was given by Mr. Greaves in his letter to Thapars to credit to his account in Lloyds Bank Ltd., Bombay, the amount of earnest money. Annexure `L' to the statement of the case shows that a sum of Rs. 65 lakhs out of the aforesaid amount of Rs. 77,34,325 was paid under the contract, and the order of the AAC discloses that before him it was not in dispute that the entire purchase money was actually paid in January, 1947, including the stipulated interest to the date of payment.
On 7th January, 1947, the managing agents, i.e., Greaves Cotton & Co., wrote a letter to Greaves Cotton Co. Ltd., submitting their resignation from the office of managing agents of the company, and further recommending that M/s Karamchand Thapar & Bros. Ltd., be appointed as managing agents in their place. On 8th Jan., 1947, a meeting of the board of directors of the Greaves Cotton & Co. Ltd. was held. Two directors, viz., Mr. Hunt and Mr. McIntosh, tendered their resignation from the office of directors and in their place Karamchand Thapar and Verma were appointed as directors, and the members waived their right to have a prior offer of the shares which were proposed to be sold to M/s Karamchand Thapar & Bros. Ltd. The letter of resignation of the managing agents was laid on the table, and the chairman, i.e., Mr. J.B. Greaves himself, proposed a resolution that the resignation of Greaves Cotton & Co. from the office of managing agents be accepted and that M/s Karamchand Thapar & Bros. Ltd. be appointed as managing agents of the company in their place for a period of 20 years from the date of their appointment on similar terms to those on which Greaves Cotton & Co. was appointed by the agreement of 10th April, 1929, and that an extraordinary general meeting of the company be convened for that purpose. This proposed resolution was accepted by the board of directors and it was further resolved that the directors recommend to the members that M/s Karamchand Thapar & Bros. Ltd. be appointed the managing agents of the company for a period of twenty years from the date of appointment at the remuneration and upon the terms and conditions set out in the draft of an agreement to be made between M/s Karamchand Thapar & Bros. Ltd. and the company to be presented to the members in extraordinary general meeting. The next resolution is to the effect that the members waive the statutory notice for calling the extraordinary general meeting, and further resolved that the extraordinary general meeting of the members be held immediately after the termination of the meeting of the board of directors. The extraordinary general meeting then met. The terms of agreement of managing agency with the consequential amendments to the articles of association were approved and passed by it, and then it was resolved that the agreement between the company and M/s Karamchand Thapar & Bros. Ltd. regulating their appointment and setting out the remuneration to be paid to them and the other terms and conditions under which they were appointed as managing agents of the company, a draft of which with the initials of the chairman appended thereto for the purposes of identification was laid upon the table be, and was, approved and that an engrossment of that agreement be executed by the company and the common seal of the company affixed thereto in the presence of Mr. T. Kemp and Mr. A Forrington, directors of the company. It may be stated that the meeting of the board of directors commenced at 5.15 p.m. and by 5.30 p.m. all the aforesaid resolutions had been passed by it. At 5.30 p.m. an extraordinary general meeting of the members of the Greaves Cotton & Co. Ltd. commenced. Resolutions were passed appointing M/s Karamchand Thapar & Bros. Ltd. as managing agents on the terms approved by the directors. A resolution was also passed sanctioning the necessary amendments to the articles of association.

The assessee, i.e., Mr. J.B. Greaves, in the return of his income for the asst. yr. 1947-48 disclosed and claimed under s. D (Capital Gains) a capital loss of Rs. 13,38,646 as per statement enclosed by him with his return. The calculation was based on the cost of the capital assets sold, taking the fair market value of the assets as on 31st Jan., 1939, at Rs. 87,55,000. The ITO, however, computed capital gains to the assessee at Rs. 19,47,857. The computation made by him was as under:

(3.)OUT of the total capital gains of Rs. 21,16,149 the ITO computed the capital gains to the assessee on 2,300 shares at Rs. 19,46,857. The assessee preferred an appeal to the AAC challenging the order of the ITO. It also appears that before the AAC, the ITO claimed that the amount of capital gains computed by him be enhanced by Rs. 5,44,832, Rs. 2,44,832 by reducing the value of the assets and Rs. 3,00,000 by reducing the amount of goodwill. The AAC in appeal did not accept the contentions of the assessee, but, on the other hand, partially accepted the contentions of the ITO, and enhanced the amount of capital gains by Rs. 4,34,210. The computation made by the AAC is as follows: Rs. Rs.
"Sales Price . 77,34,325 Less : . . Value of assets as at 1-1-1939 41,82,801 . Dividends in reduction and the general reserve noted above 4,09,375 . Accountants' and Architects' fees 26,000 . Goodwill 10,00,000 55,18,176 Balance . 21,16,149'' . Rs. Rs. ``Consideration for relinquishment of management, . 27,34,325 Less : . . Value at 1-1-1939 Nil 27,34,325 . Capital gain . Consideration of 2,500 shares . 50,00,000 Less : . . Adjustments in favour of the purchaser 4,09,375 . Expenses 26,000 4,35,375 . . 45,64,625 Less : . . Value at 1st January, 1939 -- . Net assets as claimed 41,82,801 . Less : Reduced by AAC 1,71,968 . . 40,10,833 . Goodwill 7,00,000 47,10,833 Loss determined by AAC . 1,46,208."

Deducting the said amount of Rs. 1,46,208 from the amount of capital gain of Rs. 27,34,325, the AAC determined the net total capital gain at Rs. 25,88,117. The assessee's share therein was determined at Rs. 23,81,067. The assessee took a further appeal to the Tribunal, and before the Tribunal, the assessee, inter alia, contended that the AAC was in error in holding that the assessee had made any capital gain as a result of the transfer of managing agency. According to the assessee, the transaction between Greaves Cotton & Co. and Thapars was not of either sale or transfer. The Tribunal rejected this contention, and held that the transfer of shares and managing agency was sale of capital assets to which the provisions of capital gains were attracted. The other contention raised by the assessee before the Tribunal was that the quantum of capital gains was not correctly made. From the order of the Tribunal, it appears that in this behalf the only contention raised by the assessee was that the IT authorities were not justified in holding that the value of the managing agency as on 1st Jan., 1939, was nil. Accepting the aforesaid contention of the assessee, the Tribunal observed:

"We may agree with the assessee that the Department's working is wrong, inasmuch as it has not taken the value of the agency rights as on 1st Jan., 1939, into account. If the agency had a value as at the end of 1945, it had also some value as on 1st Jan., 1939. The basis of valuation on both the date of sale and on 1st Jan., 1939, should be the same. By taking the agency remuneration and future trends as the basis for valuing the agency rights, it would be found that the agency rights would ordinarily fetch much better price at the time of the sale than on 1st Jan., 1939. There appears to be an appreciation of about 50 per cent as compared to the value on 1st Jan., 1939."
The Tribunal, however, in its order has observed that the finding of the AAC that there was capital loss on the transaction of sale of shares was not correct, and for the reasons stated by it in its order, the Tribunal held:
"Having regard to the various aspects of the case, we think that the value of the shares of Greaves Cotton & Co. Ltd. as on 1st Jan., 1939, could not be more than 60% of what it was at the time of the sale."
The Tribunal observed that taking the capital gains earned by the assessee on the transaction of sale of shares and the transaction of sale of managing agency, the amount would be larger than that determined by the AAC, and for that reason, it dismissed the appeal. On an application made by the assessee under s. 66(1) of the IT Act, the Tribunal has drawn up a statement of the case and has referred the following three questions of law, which, in its opinion, arise out of its order:
"(1) Whether, on the facts and circumstances of the case the sum of Rs. 27,34,325 received by the assessee and another from Karamchand Thapar & Bros Ltd. is liable to be taxed as capital gains in accordance with the provisions of Act 12 of 1947 ? (The figure 12 appears to be a mistake for 22). (2) Whether, on the facts and circumstances of the case, there was any sale, exchange or transfer of the managing agency rights by the assessee to Karamchand Thapar & Bros. Ltd. ? (3) Whether, on the facts and circumstances of the case, the figure of Rs. 27,34,325 has been correctly and properly arrived at"



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