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TMI Blog1971 (7) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... d and paid-up capital of the mill company was Rs. 10,00,000 divided into 10,000 shares of Rs. 100 each. A tripartite agreement dated 3rd September, 1937, was arrived at between the mill company, the Raja and one Ramgopal Ganpatrai, the karta of a Hindu undivided family, hereinafter referred to as " the H. U. F. " This agreement will be referred to as " the tripartite agreement ". By clause 4 of the tripartite agreement it was stipulated that the then existing Raja's managing agency agreement do stand cancelled and the mill company agreed to enter into and execute a new managing agency agreement appointing the H. U. F. as its managing agent for the period and upon the terms and conditions contained in the engrossment of the agreement in that behalf which had then already been prepared. As contemplated by the tripartite agreement, an agreement bearing the same date, viz., 3rd December 1937, was executed between the mill company and the H. U. F. This agreement will be referred to as " the H. U. F.'s managing agency agreement ". By clause 1. of that agreement the mill company appointed the H. U. F. as its managing agent from 3rd September, 1937, for a period of twenty years on the te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Raja stipulated that he would not, during or after the period of five years mentioned in the third stipulation, sell any of his shares in the mill company unless he shall have previously offered such shares to the H.U.F. at the price bona fide offered to him and the H.U.F. shall have refused or neglected for ten days to accept such offer. The H.U.F. acted as the managing agent of the mill company under and in pursuance of the H.U.F's managing agency agreement. Thereafter the Raja transferred his 6,000 shares of the mill company to the H.U.F. for a sum of Rs. 10,00,000. On 23rd June, 1943, the assessee-company was incorporated. Its main object was the taking over of the managing agency of the mill company from the H.U.F. On the 1st July 1943, the H.U.F. assigned its managing agency of the mill company to the assessee The mill company passed an ordinary resolution at an extraordinary general meeting of its members held on 25th October, 1943, whereby it was resolved to approve the transfer by the H.U.F. to the assessee of the H.U.F.'s managing agency agreement. Thereafter, an agreement dated 13th December, 1943, was executed between the mill company and the assessee whereby the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he capital employed by the assessee in its business. The Tribunal, therefore, allowed the first contention of the assessee and directed that the said sum of Rs. 13,00,000 should be taken into account as the value of the goodwill subject to the condition that "if on ascertainment of the correct market value of such goodwill as on the date of the transfer, it is found that the appellant-company (assessee) had paid anything in excess over the market value, such excess amount has got to be excluded from the capital computation under section 8(3) of the Excess Profits Tax Act." As regards the assessee's second claim in respect of the said sum of Rs. 10,00,000 the Tribunal held that the value of the said 6,000 shares of the mill company should be considered in the matter of computation of the average capital employed in the assessee's business during the relevant chargeable accounting periods because there was no contractual obligation subsisting between the assessee and the Raja like the one that existed between the H.U.F. and the Raja and that the assessee purchased the said shares out of sheer necessity and business expediency. As regards the assessee's third claim in respect of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Tribunal it will be only the true market value of the goodwill at the date of its transfer to the assessee which will be includible in the computation of the assessee's capital employed in its business judged in the light of the decision of the Supreme Court in the Cambatta's case it is clear that the goodwill being an asset of the assessee's business, its true market value as on the date of its acquisition by the assessee must be included in the computation of the capital of the assessee employed in its business. In view of this judgment of the Supreme Court, Mr. Joshi, the learned counsel for the revenue, has not advanced--and, in our opinion, quite rightly-any argument to the contrary or even to distinguish it in the application of the principle to the facts of this case. Under the circumstances, question No. 1 will have to be answered in the affirmative. We will now turn to question No. 2. It involves the consideration of the question whether the said sum of Rs. 10,00,000 is includible in the computation of the assessee's capital employed in its business. The Tribunal has upheld that contention, The Tribunal has held that the purchase of the said 6,000 shares of the mil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not form part of the capital employed in the assessee's business. Mr. Kaka contended that it did form part as it was not an " investment " but an asset of the assessee's business. It should be noted that it is not the assessee's case that the assessee's business activities comprised, inter alia, of dealing in or holding of shares of limited companies. According to the assessee, it acquired these shares out of sheer necessity and business expediency and not with the intention of investing in those shares, but with the only object or purpose of guarding against a possible deprivation of or interference with its managing agency, He contended that the scheme of the Act shows that it uses the word "investments" as an antonym of assets employed in the business and that, therefore, the assessee held these shares as an asset employed in its business. Sub-rule (1) of rule 3 of the Second Schedule provides that any investments the income from which is by virtue of the provisions of the First Schedule not to be taken into account in computing the profits of the business and any moneys not required for the purpose of the business shall be left out of account. Sub-rule (1) of rule 4 of the Firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be taken to be- . . . ." The words in brackets clearly show that money, which would normally be included in assets of a business, is not to be included in "capital "employed in a business for the purposes of the Act. The provisions of 'that rule further show that "capital" employed in business is equivalent to "assets" employed in business. "Assets" can consist of different kinds of properties, money being excluded from the present consideration. Properties can consist of shares and securities, movable properties other than shares and securities and immovable properties. The words which we have just used are "shares and securities". But, that is only for brevity and they would include shares, stocks, loans issued by Government and public bodies, debentures, and the like. "Investments" is a difficult word to construe and its meaning may vary depending on the context. It is capable of three meanings. In the first meaning it would include only shares and securities. In the second meaning it would include not only shares and securities but all other kinds of properties which a person acquires with the intention of retaining them either to enjoy them or mostly to earn periodica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (5). Now the relevant part of sub-rule (1) of rule 3 of the Second Schedule provides that any "investments" the income from which is by virtue of the provisions of the First Schedule not to be taken into account in computing the profits of the business shall be left out of account when computing the average amount of capital employed in the business under the Second Schedule. Sub-rule (1) of rule 4 of the First Schedule uses the word "investments" and provides that income received from investments shall not be included in the profits of a business in cases other than those mentioned is sub-rules (2), (2A) and (4). Sub-rules (2) and (2A) use the word investments ", but sub-rule (4) uses the word "property". Including of property " in sub-rule (4) within "investments" mentioned in sub-rule (1) makes it clear that the word "investments" has been used not in its said first meaning of including only shares and securities, but in its said second or third meaning. The distinction between the said second and the third meanings is only the intention in acquiring them, although the properties, i.e., "investments", can be the same. Now the object and purpose of the Act being to tax excess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther class of cases when capital employed in the business would require to be computed is when profits are to be computed by a calculation of a percentage the, capital employed in a business. The Second Schedule contains rules for computation of capital employed in a business. The basis of such computation of capital employed in the business with the basis of the computation of profits as provided by the First Schedule. Such consistency is brought about, inter alia, by rule 3 of the Second Schedule. It is because of that reason that the said rule 3 provides that "investments" the income from which is, by virtue of the provisions of the First Schedule, not to be taken into account in cotmpuing the profits of the business shall be left out of account in the computation of capital employed in the business. The principle underlying, this provision is, to use the language of Viscount Cave L.C. in his speech in Commissioners of Inland Revenue v. Gas Lighting Improvement Co, Ltd, where the fruit is out the source must be out. The source here is "investments". Therefore, in rule 3 of the Second Schedule also the word "investments" must be given the same meaning as it has in rule 4 of the F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant rule is rule 9 of the First Schedule. The same was the case before the Supreme Court in the said case. The Supreme Court has laid down that the provision of rule 9 of the First Schedule is a special provision and that when considering the application of rule 9, the principles underlying the Income-tax Act are of no avail. We will, therefore, not deal with the arguments based upon the provisions of the Income-tax Act. The facts before the Supreme Court were, however, different. The judgment of the Supreme Court was concerned with a case in which the accounting year of the managed company in respect of which the commission was received fell within two successive charging accounting periods. The Supreme Court, by applying the provisions of rule 9 of the First Schedule, held that although the commission of the managing agent was to be calculated for the whole of the company's accounting year and was to be paid on the first day after the expiry of that year, it should be apportioned as if it was earned day to day during the company's year of account. The facts in the case before us are, however, different. In the case before us the accounting year of the mill company, the accounting ..... X X X X Extracts X X X X X X X X Extracts X X X X
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