- (1.) The appellant is a public limited company, and has its registered office at Calcutta. By an agreement dated May 1, 1925, the Fort William Jute Company Ltd., appointed the appellant its managing agent upon certain terms and conditions set out therein. Under the agreement the appellant was to receive as managing agent remuneration at the rate of Rs. 3,000/- per month, commission at the rate of ten per cent on the profits of the company's working, additional commission at three per cent on the cost price of all new machinery and stores purchased by the managing agent outside India on account of the company, and interest on all advances made by the managing agent to the company on the security of the company's stocks, raw materials and manufactured goods. The appellant and its successors in business, whether under the same or any other style or firm, unless they resigned their office were entitled to continue as managing agent until they ceased to hold shares in the capital of the company of the aggregate nominal value of Rs. 1,00,000/- and were on that account removed by a special resolution of the company passed at an Extra-ordinary meeting of the company, or until the managing agent's tenure was determined by the winding up of the company. In the event of termination of agency in the contingencies specified, the managing agent was to receive such reasonable compensation for deprivation of office, as may be agreed upon between the managing agent and the company and in case of dispute, as may be determined by two arbitrators. By cl. 8, the managing agent was at liberty at any time to resign the office of managing agent by leaving at the registered office of the company previous notice in writing of its intention in that behalf. The agreement did not specify any period for which the managing agency was to enure. Since the successors of the appellant were also to continue as agents, unless they resigned or became disqualified, the duration was in a sense unlimited. But by virtue of S. 87-A (2) of the Indian Companies Act, 1913, the appointment of the appellant as managing agent would expire on January l4, 1957, i. e. on the expiry of twenty years from the date on which the Indian Companies (Amendment) Act, 1956, was brought into operation. Section 87-A(2), however, did not prevent the managing agent from being re-appointed after the expiry of that period.
(2.) Beside the managing agency of the Fort William Jute Co. Ltd. the appellant held at all material time managing agencies of five other limited companies, viz., Fort Gloster Jute Manufacturiug Co., Ltd., Bowreach Cotton Mills Co. Ltd., Dunbar Mills Ltd., Mothola Co., Ltd., and Joonktollee Tea Co. Ltd. The appellant had advanced Rs.12,50,000/- to the Fort William Jute Co. Ltd. on the security of the stocks, raw materials and manufactured goods of that company. The appellant held in 1952, 600 out of 14,000 ordinary shares of the face value of Rs. 100/- each, and 6,920 out of 10,000 preference shares also of the face value of Rs. 100/- each. On May 21, 1952 the appellant entered into an agreement with M/s. Mugneeram Bangur and Co., the principal conditions of which were: (i) M/s. Mugneeram Bangur and Co., to purchase the entire holding of shares of the appellant in the Fort William Jute Co. Ltd. - ordinary shares at Rs. 400/- each and preference shares at Rs. 185/- each and to make an offer to all holders of the company's shares - preference and ordinary - to purchase their holdings at the same rates: (ii) M/s. Mugneeram Bangur and Co., to procure repayment on or before June 30, 1952 of all loans made by the appellant to the principal company: (iii) M/s. Mugneeram Bangur and Co., to procure that the principal company will compensate the appellant for loss of office in the sum of Rs. 3,50,000/-, such sum being payable to the appellant after it submitted its resignation as managing agent; and (iv) M/s. Mugneeram Bangur and Co., to reimburse the company the amount payable to the appellant. The reasons for which the appellant agreed to relinquish the managing agency were set out in a letter dated May 28, 1952, addressed by the appellant to the members of the company intimating that M/s. Mugneeram Bangur and Co., were willing to purchase the shares at the same rates at which they had agreed to purchase the share-holding of the appellant. It was recited in the letter that the installation of modern machinery in the company's factory entailed heavy capital expenditure and it was necessary to obtain a loan secured by debentures charged on the company's property; that large sums were required for renewals and replacements of machinery and it was not possible to obtain additional bank accommodation; that the appellant had made large advances to the company exceeding Rs. 12,50,000/- and, having regard to its other commitments, it was doubtful if it would be able to make available to the company additional finance; that the arrangement with M/s. Mugneeram Bangur and Co., by acceptance of the terms offered by them, was the most satisfactory method of solving the company's difficulties; that it was in the best interest of the shareholders to terminate the appointment of the appellant which in the normal course would not fall due for renewal until January 14, 1957; that M/s. Mugneeram Bangur and Co., had agreed to procure that the Fort William Jute Co., Ltd. will pay to the appellant Rs. 3,50,000/- and that M/s. Mugneeram Bangur and Co., will reimburse the company for the payment, it being anticipated that they will in due course be appointed managing agents of the company.
(3.) The arrangement with M/s. Mugneeram Bangur and Co, was carried out. The appellant tendered its resignation with effect from July 1, 1952, in pursuance of the terms of the agreement and M/s. Mugneeram Bangur and Co. were appointed as managing agent of the company. The sum of Rs. 3,50,000/- received by the appellant from the company - which it is common ground was provided by M/s. Mugneeram Bangur and Co. - was credited in the profit and loss account of the appellant as received from the Fort William Jute Co. Ltd. on account of compensation for loss of office. But in arriving at the net profit in the return for income-tax for the year 1953-54 this amount was deleted. In the proceedings for assessment for the year 1953-54 the Income-tax Officer, Companies District IV, Calcutta, included this amount in the appellants taxable income. In appeal the Appellate Assistant Commissioner modified the assessment holding that the sum of Rs. 3,50,000/- received by the appellant as compensation for surrendering the managing agency, which was to enure for five years more, and which in normal course might have continued for another term of twenty years, was a capital receipt. The Appellate Tribunal confirmed the order of the Appellate Assistant Commissioner, observing that compensation received under an agreement for "an outright sale of such an agency to a third party", not being one which a businessman enters in the normal course of business, nor being one which amounts to modification, alteration or discharge of normal incidents of such a business, was not assessable to income-tax as a revenue receipt.;