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Issues Involved:
1. Whether the receipt of Rs. 25 lacs by the assessee in consideration of the termination of its managing agency was a revenue receipt or a capital receipt. 2. If the receipt was a capital receipt, whether the sum of Rs. 25 lacs or any part thereof was income assessable under the head "Capital Gains" under section 12B of the Act. Detailed Analysis: Issue 1: Nature of Receipt (Revenue or Capital) The primary question was whether the Rs. 25 lacs received by the assessee for terminating its managing agency was a revenue receipt or a capital receipt. The court noted that this question has troubled many judges and courts, emphasizing that each case must be decided on its own facts. Facts and Background: - The Moon Mills had appointed P.A. Hormarjee & Co. as managing agents, and later this agreement was transferred to the assessee company. - On April 3, 1946, the assessee company surrendered its managing agency rights for Rs. 25 lacs, which the taxing department treated as income. - The Tribunal found no disputes between the parties despite a recital in the deed of release suggesting otherwise. Court's Reasoning: - The court examined the managing agency agreement and noted it was a composite agreement conferring multiple rights, including acting as muccadums and brokers. - The court rejected the argument that the right to act as muccadums and brokers was personal to Hormarjee & Co., stating it was a right conferred upon whoever was the managing agent at the time. - The termination of the managing agency was seen as a cessation of business activity, and the Rs. 25 lacs was paid as solatium for this cessation. - The court cited the Privy Council decision in Shaw Wallace & Co. v. Commissioner of Income-tax, Bengal, which held that amounts received as solatium for the cessation of business activity constitute capital receipts, not income receipts. - The court concluded that the managing agency was a capital asset, and the Rs. 25 lacs received for its termination was a capital receipt. Issue 2: Assessability under "Capital Gains" (Section 12B) The second question was whether the Rs. 25 lacs, if considered a capital receipt, was assessable under the head "Capital Gains" under section 12B of the Act. Court's Reasoning: - The court referred to its earlier decision in Provident Investment Co. Ltd. v. Commissioner of Income-tax, which held that section 12-B applies only to cases of sale, exchange, or transfer. - The court noted that the present case involved a surrender, not a sale, exchange, or transfer. - The court highlighted that the Tribunal's view that no capital gain was made in the year of account was not disputed by the Commissioner, although the Commissioner disputed the correctness of the decision. - The court concluded that the Rs. 25 lacs received was not assessable under section 12-B as it did not constitute a capital gain. Conclusion: - Issue 1: The Rs. 25 lacs received by the assessee was a capital receipt. - Issue 2: The Rs. 25 lacs was not assessable under the head "Capital Gains" under section 12B of the Act. Reference Answered: - Question No. 1: "It is a capital receipt." - Question No. 2: "In the negative." The Commissioner was ordered to pay costs.
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