B.L.GUPTA J. - (1.) 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 ?
(2.) 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 : JUDGEMENT_458_ITR49_1963Html1.htm By an agreement dated August 8, 1941, the assessee firm was appointed managing agent of J. K. Cotton Manufacturers Ltd. 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.
(3.) 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.;