P.B.MUKHARJI,J. - (1.) THE question for determination in this IT reference is : "Whether on the facts and in the circumstances of the case the sum of Rs. 18 lakhs paid to M/s Karamchand Thapar and Brothers (P) Ltd., was a revenue receipt and as such assessable to Income- tax ?"
(2.) 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 and Brothers (P) 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 M/s Greaves Cotton & Co. Ltd. M/s Greaves Cotton & Co. Ltd. became incorporated as a private company in 1922, and at that time its managing agent was a firm called "M/s 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, M/s Greaves Cotton & Co., who gave up their managing agency rights in consideration thereof. The assessee-company thereupon became the managing agents of M/s Greaves Cotton & Co. Ltd. The assessee- company became the managing agents of Greaves Cotton & Co. Ltd., on the 8th January, 1947, for a period of 20 years. The assessee- company along with its associates and directors purchased 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 and 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 not 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 M/s Greaves Cotton & Co. Ltd. was altered. A fresh deed of managing agency agreement was drawn up on the 10th May, 1950. It provides, inter alia, that w.e.f. the 8th May, 1950, the assessee-company would be the managing agents of M/s 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 w.e.f. the 8th May, 1950.
(3.) 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 this 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.;