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SUPREME COURT OF INDIA
K. SUBBA RAO, J.C. SHAH AND S.M. SIKRI, JJ.
Kettlewell Bullen and Co. Ltd., Appellant
Versus
Commissioner of Income-tax, Calcutta, Respondent.
Civil Appeal No. 226 of 1963.
Advocates Appeared
Mr. S. Chauudhuri, Senior Advocate, (M/s D. N. Mukherjee and D. N. Gupta, Advocates, with him), for Appellant; Mr. K. N. Rajagopal Sastri, Senior Advocate, (Mr. R. N. Sachthey, Advocate, with him), for Respondent.
INCOME TAX - Compensation received by assessee for surrendering managing agency of company - Whether capital or revenue receipt - Held, compensation received by assessee was capital receipt.
Fact of the Case:
The assessee, a public limited company, was appointed as the managing agent of the Fort William Jute Company Ltd. for a period of 20 years. The assessee was entitled to receive a monthly remuneration of Rs. 3,000/-, commission at the rate of 10% on the profits of the company's working, and additional commission at 3% on the cost price of all new machinery and stores purchased by the managing agent outside India on account of the company. The assessee also held managing agencies of five other limited companies. In 1952, the assessee entered into an agreement with M/s. Mugneeram Bangur and Co., whereby M/s. Mugneeram Bangur and Co. agreed to purchase the entire holding of shares of the assessee in the Fort William Jute Co. Ltd. at a specified rate and to procure repayment of all loans made by the assessee to the principal company. M/s. Mugneeram Bangur and Co. also agreed to procure that the principal company would compensate the assessee for loss of office in the sum of Rs. 3,50,000/-. The assessee tendered its resignation as managing agent with effect from July 1, 1952, 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 assessee from the company was credited in the profit and loss account of the assessee as received from the Fort William Jute Co. Ltd. on account of compensation for loss of office. However, in the proceedings for assessment for the year 1953-54, the Income-tax Officer included this amount in the assessee's taxable income. The Appellate Assistant Commissioner modified the assessment holding that the sum of Rs. 3,50,000/- received by the assessee 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. On a reference made by the Commissioner of Income-tax, the High Court answered the question whether the sum of Rs. 3,50,000/- received by the assessee to relinquish the managing agency was a revenue receipt assessable under the Indian Income-tax Act in the affirmative.
Finding of the Court:
The Supreme Court held that the compensation received by the assessee was a capital receipt. The Court observed that the managing agency of a company is in the nature of a capital asset and that the assessee was paid to compensate him for loss of a capital asset. The Court further observed that it matters little whether the assessee did continue after the determination of its agency with the Fort William Jute Co. Ltd. to conduct the remaining agencies. The transaction was not in the nature of a trading transaction, but was one in which the assessee parted with an asset of an enduring value.
Issues: Whether the compensation received by the assessee for surrendering the managing agency of the Fort William Jute Co. Ltd. was a capital or revenue receipt.
Ratio Decidendi: The Supreme Court held that the compensation received by the assessee was a capital receipt. The Court observed that the managing agency of a company is in the nature of a capital asset and that the assessee was paid to compensate him for loss of a capital asset. The Court further observed that it matters little whether the assessee did continue after the determination of its agency with the Fort William Jute Co. Ltd. to conduct the remaining agencies. The transaction was not in the nature of a trading transaction, but was one in which the assessee parted with an asset of an enduring value.
Final Decision: The Supreme Court answered the question submitted by the Tribunal in the negative. The appellant was entitled to its costs in the Supreme Court.
Judgment
SHAH, J:
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. 69 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 t
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