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TMI Blog1963 (6) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain speculative activities in B-Twills, hessian, etc. In the first year, there was a loss in speculation of ₹ 1,38,675. In the second accounting year, there was a loss in speculation of ₹ 32,625. Similarly, in the third accounting year, there was a speculative loss of ₹ 53,250. The department disallowed the losses in all the three years on the ground that the speculative activities were outside the scope of the objects of the assessee-company, and such activities were ultra vires the companys memorandum of association and on the ground that the activities were not in the nature of an adventure in trade. The Appellate Tribunal held that the activities of the company were well within the objects as enumerated in the memorandum of association and the activity of purchases and sale of hessian and B-Twill could not be for the purpose of investment but was only for carrying out the business of the company. In this view, it held that the losses were incurred in the carrying out of the assessees business and should be set off against the computation of its total income. The other point in this reference is that the assessee-company, as I have said, was the managin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ember. In the report to the shareholders, the managed company intimated to the shareholders about the surrender of the foresaid sum of ₹ 2,81,599. Similarly it reported to the shareholders to the same effect in the next accounting year. In the report it was stated that the managed company approached the managing agent (the assessee) to give up its claims of the managing agency remuneration and the managing agent agreed to the proposal. The assessee-company also intimated to the shareholders in the directors report ending on the 30th September, 1950, and the 30th September, 1951 about the surrender of these commissions. The Appellate Tribunal found that the managed companys balance-sheet showed that the said company was not financially strong and if the managing agency commission was paid in full, the managed company would run into debts. The Appellate Tribunal has held that the forgoing of a part of the managing agency commission could not be taken as a gift in favour of the managed company and that by the surrender of this part of the commission the managed companys financial position would be strong and the managing agent would benefit by the stronger financial position ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e blocks of flats comprising forty flats were in the process of erection. The company completed the building of the flats and let them to tenants. It acquired no other land. An offer to buy one block of flats was made to the company in 1902, but the negotiations fell through. Between 1920 and 1926 sixteen flats were sold separately. The memorandum of association of the company stated as one of its objects the acquisition of land, etc., to hold as an investment, and as another object the building of tenements etc., with power to realise any of its property. The company was assessed under Schedule D, Case, in respect of the profits on the sales. The General Commissioners on appeal were of opinion that the company had not traded but merely realising capital. The Crown appealed. It was held by the Court of Session, Scotland (First Division), that there were no grounds for disturbing the Commissioners decision as being erroneous in point of law. It is interesting to quote the observations of the Lord President Clyde, at page 699, which are as follows : The first point that strikes one is that the company in its memorandum of association describes its objects as being the acquisition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer. Assessment year 1952-53, year ending 30th September, 1951. Difference paid in respect of 75,000 pieces of B-Twill ......53,250 (Bought contract 28th September, 1951, sold contract 22nd August, 1951) The loss of ₹ 53,250 has been claimed in the assessment year 1952-53 and has been disallowed by the Income-tax Officer. The character and quantity of goods purchased and sold by the assessee clearly indicate that these transactions were entered into purely with the idea of making profits. There was no intention on the part of the assessee to make these purchases to hold and enjoy the goods concerned. The nature of the transactions precludes any such theory and the only conclusion is that these purchases were made with the intention to re-sell. The incidents associated with the purchase and re-sale of commodities like B-Twills and hessians were all present in these transactions. In the well-known case of G. Venkataswami Naidu Co. v. Commissioner of Income-tax, at pages 607 and 608, the Supreme Court observes as follows : This question has been the subject-matter of several judicial decisions; and in dealing with it all the judges appear to be agreed that no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns. In Rutledge v. Commissioners of Inland Revenue the appellant was a moneylender who was also in 1920 interested in a cinema company. He had since that time been interested in various businesses. Being in Berlin in 1920 on business connected with the cinema company, he offered an opportunity of purchasing very cheaply a large quantity of paper. He effected the purchase and, within a short time after his return to the United Kingdom, sold the whole consignment to one person at a considerable profit. The court of Session, Scotland (First Division), held that the profits in question were liable to assessment to income-tax, Schedule D, and to excess profits duty as being profits of an adventure in the nature of trade. In the present case, the quantities of B-Twills and hessians were, as I have said, fairly large. Not only they were sold soon after the purchases, in some of the cases the assessee had sold the goods first and then purchased from the market to earn profits. In Regent Estates Ltd. v. Commissioner of Income-tax the assessee, a property-owning company, on the 15th of June, 1949, entered into a contract with Nederlandsche Indische Handle Bank for the purchase of 90,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal that the speculative activities of the assessee in all the three assessment years in question were in the nature of adventures in trade. I will next deal with the question of the managing agency commission. In the earlier part of the judgment, the finding of the Tribunal on this aspect of the case have been referred to, but I intend to set out fully what has been stated by the Appellate Tribunal in paragraph 6 (pages 8 and 9 of the paper-book) of its order made on the 20th June, 1958. The said paragraph is as follows : For the assessment years 1951-52 and 1952-53, there was a common ground regarding the managing agency remuneration. The assessee company is the managing agents of Reform Flour Mills Ltd. It is to be noted that both these two companies, the managing agents and the managed company, were private companies. The term of the managing agency commission was the payment of a fixed remuneration of ₹ 1,000 per mensem and commission of 2% on the sales of the managed company. According to this arrangement, for the first assessment year relevant to the accounting year ending upon 30th September, 1950, the amount of commission accrued the assessee was ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder of these commissions. The learned standing counsel, appearing for the respondent, has contended before us that the Appellate Tribunal has found (1) that there was forgoing of commission accrued to the assessee and (2) this forgoing had taken place in the course of the accounting year. A close examination of the findings of fact made by the Appellate Tribunal in paragraph 6 of its order quoted above does not support these contentions. So far as the accounting year ending of the 30th September, 1950, is concerned, the Appellate Tribunals finding is that on the 15th March, 1951, the assessee-company wrote to the managed company stating that it was prepared to accept only the sum of ₹ 1,23,525 and agreed to refund ₹ 2,81,599. In other words, the managing agent received during the accounting year ending on the 30th September, 1950, the entire amount of commission and allowance aggregating to ₹ 4,05,124 and on the expiry of the accounting year it agreed to refund to the managed company the sum of ₹ 2,81,599. Similarly, for the accounting year ending on the 30th September, 1951, the resolution to give up the commission to the extent of ₹ 2,22,641 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter at all what the income is expended upon if the subject-matter is taxable. Then in Commissioner of Inland Revenue v. Anglo Brewing Co. Ltd., the respondent company, in October, 1920, which had in the past voluntarily granted pensions to certain employees on retirement, decided to close down its business, and immediately informed its employees of the fact, promising to treat them as generously as it had done in the past. On the 17th March, 1921, the directors at a formal meeting arranged to provide annuities for employees or to grant compensation for loss of office, and with two exceptions settled the amount to be awarded in each case. The pensions awarded were commuted for lump sums in 1922. The company ceased trading on the 30th November, 1921, and subsequently went into liquidation. No amounts were paid either as compensation for loss of office, or for pensions or for commutation of pensions, before the 31st March, 1921. The company claimed to deduct the whole of the compensation and the estimated cost of the annuities from its profits for the accounting period ended the 31st March, 1921, for the purpose of excess profits duty and corporation profits tax. The General Commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m third persons to whom he had leased the buildings. In computing the tax payable by the assessee in respect of the rents so received, the assessee claimed that allowance should be made for the expenditure incurred by him in erecting the buildings. On a reference by the Commissioner of Income-tax, the High Court held that the assessee was entitled to a deduction of the costs of erection from the rents in computing the taxable amount and that the deduction for the year of assessment should be one-thirtieth of the amount expended in erecting the buildings. The Judicial Committee, reversing the decision of the High Court, held that the assessee was not entitled to the deduction claimed inasmuch as the expenditure for erection of buildings was not incurred in the year in respect of which the income sought to be assessed arose, but occurred many years before. Lastly, I shall refer to the observation of the Supreme Court of India in Indian Molasses Co. (Private) Ltd. v. Commissioner of Income-tax, which run thus : The income-tax law does not allow as expenses all the deductions a prudent trader would make in computing his profits. The money may be expended on grounds of commercial ..... X X X X Extracts X X X X X X X X Extracts X X X X
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