1971 (7) TMI 27 - HC - Income Tax

Excess Profits Tax Act, 1940 - price paid for goodwill and for transfer of shares of managed company inclusion in capital of the assignee of managing agency

Summary

Issues Involved:
1. Whether the sum of Rs. 13 lakhs paid for acquiring goodwill should be included in the computation of the average capital under Schedule II to the Excess Profits Tax Act, 1940.
2. Whether the sum of Rs. 10 lakhs paid for purchasing 6,000 shares of the mill company should be included in the computation of the average capital under Schedule I, rule 4 and Schedule II, rule 3.
3. Whether the managing agency commission for the chargeable accounting periods should be assessed to excess profits tax in the subsequent chargeable accounting period, thereby excluding the commission for the last chargeable accounting period from excess profits tax.

Issue-wise Detailed Analysis:

1. Inclusion of Rs. 13 Lakhs for Goodwill in Average Capital:
The Tribunal held that goodwill is an asset of the business and should be included in the computation of capital employed in the business, as per the Supreme Court's decision in S.C. Cambatta & Co. Pvt. Ltd. v. Commissioner of Excess Profits Tax. The Tribunal allowed the inclusion of Rs. 13,00,000, subject to the condition that any excess over the market value should be excluded. The court affirmed this, stating that the true market value of goodwill at the date of its transfer must be included in the computation of the capital employed in the business. Thus, the first question was answered in the affirmative.

2. Inclusion of Rs. 10 Lakhs for Share Purchase in Average Capital:
The Tribunal found that the purchase of 6,000 shares for Rs. 10,00,000 was made out of business necessity and expediency, and should be included in the capital computation. The court examined the definitions of "investments" and "capital employed in the business" under the Act. It concluded that "investments" in this context refers to assets acquired with the intention to deal or trade in them as part of the business. The shares, although purchased out of necessity, were considered "investments" and thus excluded from the capital computation under rule 3 of the Second Schedule, read with rule 4 of the First Schedule. Consequently, the second question was answered in the negative.

3. Assessment of Managing Agency Commission:
The Tribunal held that the managing agency commission fell due on the 1st of April each year following the year to which it related, meaning the commission for the last chargeable accounting period ended on 31st March, 1946, was not liable to excess profits tax. The court referred to the Supreme Court's decision in R.G.S. Naidu and Co. v. Commissioner of Income-tax, which established that managing agency contracts should be treated as annual contracts for excess profits tax purposes. The court agreed with the Tribunal's decision, affirming that the commission for the last chargeable accounting period fell outside the chargeability to excess profits tax. Therefore, the third question was answered in the affirmative.

Conclusion:
The court answered:
- Question No. 1: In the affirmative.
- Question No. 2: In the negative.
- Question No. 3: In the affirmative.

No order as to costs was made due to the partial success and failure of both sides.