TaxTMI 
TaxTMI 
1965 (1) TMI 70
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....ired by the assessee in 1944 from E.D. Sassoon and Co. Ltd., for a consideration of Rs. 6 lakhs. After acquiring it from E.D. Sassoon, the assessee entered into a separate managing agency agreement with the managed company for a period of 17 years from the date of the said agreement. The price paid by the assessee-company was debited by it to the "goodwill account" in its books of account. In the years ended June 30, 1951 and 1952, Rs. 1? lakhs in all, out of this, has been written off and the balance carried forward under goodwill account in the subsequent year was at Rs. 4? lakhs. One Mulraj and his group held among themselves 25,000 ordinary and 10,000 preference shares of the Elphinstone Co. Mulraj negotiated for the sale of these shares with E.D. Jalan of Calcutta on behalf of the Howrah Trading Co. Ltd. By his letter of 25th September, 1953, annexure "A" to the statement of the case, Mulraj made a firm offer to Jalan for the sale of the said 25,000 ordinary shares and 10,000 preference shares, for a consideration of Rs. 45 lakhs. In this letter he further agreed that on the offer being accepted, he will transfer those shares to Jalan or his nominees, that he shall procure ....
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....mination or modification of the managing agency, and, therefore, not taxable under section 10(5A). In the alternative, it was contended that, at any rate, on a true construction of section 10(5A), the amount received, though it may be income, was not income for the account year ended with 30th June, 1954, but was the income of the financial year 1953-54. Section 10(5A) came into force on 1st April, 1955, and, therefore, the entire amount was not taxable. In the further alternative, it was contended that, at any rate, the amount taxable would be Rs. 3,95,000, the amount of Rs. 6 lakhs paid to E.D. Sassoon for acquiring the managing agency, and the amount of Rs. 5,000 paid to the broker, being deductible from the said amount of Rs. 10 lakhs. The Income-tax Officer negatived all the contentions raised on behalf of the assessee, and held that the entire amount of Rs. 10 lakhs was liable to be taxed in the hands of the assessee. The assessee-company took an appeal to the Appellate Assistant Commissioner. To state briefly, the view taken by him was that section 10(5A) created a new source of income; the income, therefore, cannot be income of the financial year, 1953-54, and, therefore....
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....see was entitled for deduction of the cost of Rs. 6 lakhs paid by it for acquiring the managing agency and Rs. 5,000 which it had paid as brokerage under section 10(1). In this view of the matter, the Tribunal partly allowed the appeal and held that the assessee was liable to pay tax on the sum of Rs. 3,95,000. On applications made by both the parties, this joint reference has been made by the Tribunal, referring to us the following two questions: "(1) Whether the sum of Rs. 10 lakhs is income assessable in the year 1955-56 by virtue of section 10(5A)? (2) If the answer is in the affirmative, whether the initial cost of the acquisition of the managing agency of Rs. 6 lakhs and Rs. 5,000 paid as brokerage on sale are deductible?" The first question is referred at the instance of the assessee, and the second question is referred at the instance of the department. We would proceed to deal with the first question. The contention raised by Mr. Mehta, learned counsel for the assessee, is two-fold. In the first instance, he contends that on a true construction of section 10(5A), the amount which is rendered taxable is only the amount received by the managing agents....
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....r person, at or in connection with the termination of his agency or the modification of the terms and conditions relating thereto; shall be deemed to be profits and gains of a business carried on by the managing agent, manager or other person, as the case may be, and shall be liable to tax accordingly;....." Before we read the definition of "previous year", it would be convenient to deal with the first part of the contention of Mr. Mehta. It is the argument of Mr. Mehta that what has been made taxable under this provision is the amount of compensation received either by a managing agent of an Indian company, or manager of an Indian company, or by a person managing the whole or substantially the whole affairs of any other company, or any person holding an agency relating to the business of any other person, received by them in connection with the termination or modification of the terms and conditions relating to their respective agreements. The only person, who could terminate or modify their respective agreements are the persons with whom they have entered into agreements, namely, the managed company in the case of managing agents, or a company which has employed its manager, o....
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....en the payment and the termination of the respective agreements or their modification. If the receipt has a direct nexus with the termination or modification of the respective agreements, then the amount received, whether it be by way of compensation or otherwise, falls within the meaning of section 10(5A) of the Act. Now, here the amount of Rs. 10 lakhs was offered by Mulraj to the assessee-company in consideration of the assessee-company tendering the resignation of its office as managing agents of the said Elphinstone Spinning and Weaving Mills. This offer of Mulraj has been accepted by the assessee- company, and the board of directors of the assessee-company in its meeting held on the same day passed a resolution accepting the offer. The assessee- company had also on the same day tendered its resignation of their managing agency to the managed company. The amount has been received from Mulraj, after having tendered resignation, and has been shown in its books of account and in the balance-sheet as at 30th June, 1954. The receipt has been shown under the head "Capital Reserve" as "compensation for loss of office". There can hardly be any doubt that it is the payment received by ....
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....as consideration for terminating the business, or part of its activities, and would, therefore, be a capital receipt. The legislature, however, by enacting two fictions in section 10(5A) has brought this amount to tax. The first fiction which is enacted is that what was not income in its real sense but was capital receipt has been deemed to be profits and gains of a business; and the second fiction enacted is that it is the profits and gains of a business carried on by the managing agent, manager or other persons. The amount received in connection with the termination of the managing agency business is not an income received as a result of carrying on the managing agency business. Obviously, therefore, the legislature has enacted another fiction of creating a new source for this income. This part of argument is sought to be reinforced by Mr. Mehta by referring to clause (b), and then referring to the words "a business" carried on by the managing agents, manager and other persons. Referring to clause (b), Mr. Mehta argues that a person who is a manager of an Indian company, cannot be said to be carrying on any business as such during the time he held the office of a manager of an In....
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....ersons falling under the four categories is income from a new source. In other words, what Mr. Mehta wants us to do is to read the word "new" between the words "a" and "business" occurring in the clause "shall be deemed to be profits and gains of a business carried on by managing agents.....". It is not permissible for us to do so. It is well settled that legal fictions are limited to the purpose for which they are created, and should not be extended beyond their legitimate field: Commissioner of Income-tax v. Amarchand N. Shroff [1963] 48 I.T.R. (S.C.) 59. The position in law prior to enacting section 10(5A) was that the amount received by way of compensation for termination of the managing agency agreements was not revenue receipt but a capital receipt, and was, therefore, not taxable, as laid down by their Lordships of the Privy Council in Commissioner of Income-tax v. Shaw Wallace and Company**. The facts in that case were : Shaw Wallace & Co. carried on business in India as merchants and as agents for various companies. For several years prior to the relevant year, they acted as distribution agents in India for two oil companies. The two oil companies combined and decided t....
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....brought to tax. The legislature was not concerned with creating a new source for that deemed income. In our opinion, therefore, it is not possible for us to hold that the legislature has enacted in section 10(5A) that the said amount of compensation or other payment for termination of the said agreement would necessarily be income from a new source. Mr. Mehta further argues that it could be said that the persons falling under clauses (a), (c) and (d) were carrying on a business during the continuance of their respective agreements, but, in no event, it could be said that the persons falling under clause (b), who were merely managers of an Indian company, were carrying on any business as such. None the less the amount of compensation or other payment received by a manager at or in connection with the termination of his office is deemed to be profits and gains of a business carried on by him. Clearly, the source for this deemed income is a new source. It would necessarily follow that the receipt which has been brought to tax under clauses (a), (c) and (d) as deemed profits and gains of a business carried on, must also be deemed to be income from a new source. The fiction enacted must....
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....ne, in the oft quoted passage at page 132, in the following terms: "If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it. One of these in this case is emancipation from the 1939 level of rents. The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs." The principle that a legal fiction must be carried to its logical end comes into play when the legal fiction has to be applied to a given set of facts. Here, the claim for compensation was in respect of compulsory acquisition of land on which had stood the buildings which were completely destroyed in war by enemy action. Applying the legal fiction to this state of affairs and imagining as if the dwellings stood rebuilt on the eve of acquisition, the necessary result that flowed from it was that the buildings became free from the restr....
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....ing in' with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere wind fall. Thus income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something which is often loosely spoken of as 'capital'. But capital, though possibly the source in the case of income from securities, is in most cases hardly more than an element in the process of production." Mr. Joshi has referred us in this connection to the various items which have been included in the definition of "income" in section 2(6C), and according to him, these various amounts which are included in the definition of "income" are receipts received by a person without there being any source. One of such items is "compensation or payment mentioned in section 10(5A)". We should, therefore, hold that the receipt under section 10(5A) is an income without there being a source. It is not necessary to elaborate the matter. In our opinion, the argument i....
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.... the persons falling under clause (b) of section 10(5A) also fall under the second Explanation of section 7(1), they would be governed by the special provision contained in section 10(5A) and not by section 7. As already stated, we are here concerned with the application of the fiction enacted in section 10(5A) to the facts of the case. The previous year relevant to the assessment year 1955-56 is the year commencing from 1st July, 1953, and ended on June 30, 1954. The assessee-company had passed a resolution on 21st October, 1953, accepting the sum of Rs. 10 lakhs from Mulraj as compensation for tendering the resignation of its managing agency to the managed company, Elphinstone Spinning & Weaving Mills. On the same day, the assessee-company also tendered its resignation. It is not in dispute that the amount of Rs. 9,95,000 had been paid on or about that time by Mulraj to the assessee-company, and the said amount has also been shown in the balance-sheet of the assessee company as at 30th June, 1954. The payment received by the assessee-company clearly is a compensation or at any rate a payment in connection with the termination of its managing agency. By reason of the fiction....
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.... On the view taken by us, it is not necessary to consider another argument which has been advanced on behalf of the revenue that even assuming that the amount was not income of the business of the managing agency, the assessee has chosen the same accounting year for this income by showing the receipt of the said amount in the balance-sheet as at 30th June, 1954, and, therefore, the same is taxable in the assessment year 1955-56. As already stated, the Tribunal has held that in computing these profits, the amount of Rs. 6 lakhs which the assessee had paid for acquiring the managing agency, and the sum of Rs. 5,000 paid to the broker, have to be deducted, and deducting them, has held that the amount that could be brought to tax out of the said amount of Rs. 9,95,000 would be only Rs. 3,90,000. Mr. Joshi contends that the entire amount of Rs. 10 lakhs is taxable, and the assessee is not entitled to deduct from that either the said amount of Rs. 6 lakhs or the said amount of Rs. 5,000. The argument is founded on the expression "and shall be liable to be taxed accordingly" occurring in the following clause: "Any compensation or other payment due to or received by (a).....(b).....(c).....