1966 (9) TMI 169 - HC - Income Tax

Two payments on share transfer not taxable under s.10(5A) as individual lacked statutory management status

HC held that two sums received on transfer of shares were not taxable under s.10(5A) because the recipient did not, in his personal capacity, occupy any ... - ISSUES PRESENTED AND CONSIDERED 1. Whether two sums received on transfer of shares (Rs. 72,515 and Rs. 3,14,100) are assessable as 'compensation or other payment' under section 10(5A) of the Income Tax Act, 1922. 2. Whether the payee falls within any class described in section 10(5A): (a) a managing agent of an Indian company, (b) a manager of an Indian company, (c) any person managing the whole or substantially the whole affairs of any other company in the taxable territories, or (d) any person holding an agency in the taxable territories for any part of the activities relating to the business of any other person. 3. Whether the transfers constituted compensation for loss of management rights or were otherwise 'other payment' within the meaning of section 10(5A). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of section 10(5A) to the sums received Legal framework: Section 10(5A) deems any compensation or other payment due to or received by specified categories of persons (managing agents, managers, persons managing the whole or substantially the whole affairs of another company, or persons holding an agency) at or in connection with termination/modification of their office/agency, to be business income and taxable as such; it also permits an elective average-rate method of computing tax. Interpretation and reasoning: The statutory deeming applies only if the recipient fits one of the defined categories in clauses (a)-(d). The two sums were alleged to be compensation/other payment in connection with relinquishment of management; therefore their taxability under s.10(5A) depends on whether the assessee personally occupied any of the specified statuses. Ratio vs. Obiter: Ratio - s.10(5A) applies only when the recipient personally occupies a qualifying status as statutorily defined; obiter - necessity of considering whether sums are substantively compensation need not be reached once status is negatived. Conclusion: The section does not apply because the recipient did not fall within any of the enumerated classes; therefore the two sums are not taxable under s.10(5A). Issue 2(a) - Whether recipient was a 'managing agent' within clause (a) Legal framework: 'Managing agent' and 'manager' are defined by the Indian Companies Act, and those statutory definitions inform the meaning of the corresponding terms in s.10(5A) by virtue of the Income Tax Act's cross-reference. Precedent treatment: The sub-section was inserted following prior judicial developments (mentioned: Shaw Wallace Privy Council decision) and legislative policy; legislative definitions govern scope. Interpretation and reasoning: A 'managing agent' is one entitled to the management of the whole affairs of a company by virtue of an agreement with the company. Here the management-agency was vested in a private corporation; the individual recipient did not by himself enter into any agreement entitling him to manage the whole affairs. The recipient was one of two managing directors of that private corporation, not a managing agent personally entitled to manage the public company. Ratio vs. Obiter: Ratio - an individual director or managing director of a corporation is not a 'managing agent' for s.10(5A) unless he personally, by agreement, is entitled to the management of the whole affairs of the company. Conclusion: Clause (a) inapplicable; recipient was not a managing agent of an Indian company. Issue 2(b) - Whether recipient was a 'manager' within clause (b) Legal framework: 'Manager' under the Companies Act is a person who, subject to control and direction of the directors, has the management of the whole affairs of a company and includes a director or other person occupying the position of a manager. Interpretation and reasoning: The recipient did not have entitlement to manage the whole affairs by himself; management rights were vested in the corporation as managing agent, not in any individual director personally. The statutory requirement that a manager be entitled to manage the whole affairs personally is not satisfied. Ratio vs. Obiter: Ratio - clause (b) requires personal entitlement to manage the whole affairs; mere status as a director or managing director of a corporation does not suffice. Conclusion: Clause (b) inapplicable; recipient was not a 'manager' of an Indian company as defined. Issue 2(c) - Whether clause (c) applies (person managing whole/substantially whole affairs of 'any other company in the taxable territories') Legal framework: Clause (c) targets 'any person, by whatever name called, managing the whole or substantially the whole affairs of any other company in the taxable territories' - syntactically construed to address persons managing companies in the taxable territories. Interpretation and reasoning: The Tribunal and Court read clause (c) as contemplating a foreign company ('any other company' construed as other than an Indian company), rendering it inapplicable where the managed company is an Indian company incorporated under the Companies Act. In any event, the recipient did not personally manage the whole affairs; management was exercised by the corporate managing agent. Ratio vs. Obiter: Ratio - clause (c) inapplicable where the managed entity is an Indian company and/or where the individual does not personally manage the whole or substantially the whole affairs; (Court accepts inapplicability on either basis). Conclusion: Clause (c) does not apply to the sums in dispute. Issue 2(d) - Whether recipient falls within clause (d) as a person holding an agency Legal framework: Clause (d) covers 'any person, by whatever name called, holding an agency in the taxable territories for any part of the activities relating to the business of any other person.' Interpretation and reasoning: The managing agency was vested in the private corporation, not in the individual recipient. The individual directors could not assert a personal agency right enabling them to manage the affairs of another person. The Tribunal questioned whether 'any other person' excludes companies; the Court clarified that 'any other person' is employed in the context of clause (d)'s opening words 'any person' and would include a company. However, even construing 'person' to include a company, the recipient did not personally hold an agency within clause (d). Ratio vs. Obiter: Ratio - clause (d) requires the individual to hold an agency personally; a company may be included in 'any other person' but that inclusion is irrelevant if the recipient lacks personal agency. Conclusion: Clause (d) inapplicable because the recipient did not personally hold an agency for the business of any other person; management rights were vested in the corporation. Issue 3 - Whether the amounts represent compensation for loss of office or are 'other payment' within s.10(5A) Legal framework: s.10(5A) collects 'compensation or other payment' in connection with termination/modification; for taxability the recipient must also be within a qualifying class. Interpretation and reasoning: Having concluded the recipient did not occupy any qualifying status, it is unnecessary to decide on the character of the payments (compensation for loss of office or 'other payment'). The Tribunal found insufficient material to treat the profit as compensation for loss of management rights; the Court did not need to resolve that question. Ratio vs. Obiter: Obiter - characterization of the payments as compensation need not be determined once statutory status is negatived. Conclusion: No decision required on whether amounts were compensation or 'other payment'; but on the primary point the sums are not within s.10(5A). Final Conclusion The two sums are not assessable under section 10(5A) because the recipient did not, in his personal capacity, occupy any of the statuses enumerated in clauses (a)-(d); accordingly, the reference is answered in favour of the taxpayer and the sums fall outside the purview of section 10(5A).