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TMI Blog1980 (7) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... nal's order at page 44 of the paper book. These shares, as we have mentioned before, were sold on February 20, 1961, Which would appear from page 46 of the Tribunal's order. The managing agency was relinquished on March 31, 1961, and that also will appear from the order of the Tribunal. It would be relevant to refer to the fact that there was certain unexpired period of this managing agency. The contract in respect of this managing agency was fixed for a certain term but we do not get as to what the actual terms were on which the managing agency was subsisting. It was claimed before the ITO that the surplus realised was capital gains as distinct from revenue gains. The ITO was, however, unable to accept this position, because he was of the opinion that the particular block of shares were given because the block of shares carried with it the managing agency right. The ITO, in his order, at page 11 of the paper book, stated that the shares were included not in the trade investment but in the shares of the subsidiary companies and the explanation of the company was that the shares were acquired to obtain the managing agency of the company. In the earlier years losses on the sale of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquired by the assessee company from the partnership concerns and had been held by the partnership since 1937. The shares were held by the assessee-company as capital investment in almost all wholly owned subsidiary companies of which the assessee was also the managing agent. The investment was clearly not, therefore, of a speculative nature. The assessee-company was also empowered to hold shares. But after considering all these contentions, the AAC stated that in view of the decision in the case of the assessee in [1964] 53 ITR 283 (SC), and in view of the innumerable agencies, according to the AAC, which the assessee carried on, the transaction involving the giving up of the managing agency was of a revenue nature. In that view of the matter, he upheld the order of the ITO on this aspect of the matter. The assessee thereafter preferred an appeal before the Appellate Tribunal. The Tribunal found, and it is important to refer to certain aspects of the findings of the Tribunal, that in this case, the assessee had parted with an asset of enduring nature.. This finding of the Tribunal appears at page 48 of the paper book. It also had parted with its investments, being the shares in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee-company from the sale of the shares was wholly or partly in consideration of the resignation by the assessee-company of the managing agency right of Salimbong Tea Co. Ltd., and whether such surplus was a revenue profit in the hands of the assessee-company ? The Tribunal, however, did not refer the questions as proposed but referred the questions as reframed in the manner indicated above. There was no further application under s. 66(2) of the Indian I.T. Act, 1922, to this court. The question is, in the background of these facts, whether the Tribunal was right in holding that the surplus arising out of the transaction of sale of shares was capital gains as distinct from revenue gains. The indisputable facts are, as we have mentioned, that these shares were treated as investment and were held to be as capital assets. In the past, these shares were so treated and so taxed. These shares were held in subsidiary companies in which the assessee was acting as the managing agent. It was further to be noted that the price of these shares was considerably higher than their break-up value, there being no market price or value. These were unquoted shares. If a certain commodity or stock-in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 2 lakhs. The question was whether the receipt of Rs. 2 lakhs was a receipt from business and not a mere appreciation of capital. It was held that the purchase of shares to the tune of Rs. 3 lakhs was an investment and not an adventure in the nature of business and the sum of Rs. 2 lakhs received by the assessee was not in the nature of income from business and was, therefore, not liable to tax. The Supreme Court was of the view that the circumstances whether the transaction was or was not within company's powers had no bearing on the nature of the transaction or on the question whether the profits arising therefrom were capital accretion or revenue income. At page 52 of the report, the Supreme Court emphasised that the exact nature of the business which the assessee-company was doing was important and it was observed, after conceding, that the taking up of the shares by the assessee-company in the sugar company was essentially a part of the arrangement arrived at, and the only reasonable conclusion, according to the Supreme Court, to which the High Court should have come, was that the investment of the money in the purchase of shares was capital in nature and the profits arisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the concept of trade or business. The inference on this question raised by the Tribunal on the facts found was a mixed question of law and fact and was open to challenge before the High Court on a reference under s. 66 of the Indian I.T. Act. The question whether the assessee's transaction amounted to a dealing in shares and properties or an investment was a mixed question of law and fact and the legal effect of the facts found by the Tribunal on which the assessee could be treated as a dealer or an investor was a question of law. Therefore, the question raised was whether the acquisition of the managing agency of the Dawn Mills Co. Ltd. was in the nature of a business carried on by the assessee-company and the subsequent question was that if the answer to the question was in the affirmative, what would be the consequences. In the instant case before us, the question whether the assessee was a dealer in managing agency in the sense that this purchasing or selling of the managing agency agreement as such was giving up the managing agency, was not raised. Indeed, the memorandum of association of the assessee-company permitted the assessee company to carry on the business of managing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hip of the companies might be the same, in cases like the present one, the court was not concerned with a theoretical question as to the assessee-company being a separate legal entity, but with the question whether a particular loss made by the company was a capital or a revenue loss. On the facts, it was found, that the controlling interest in M. S. & Co. was acquired by the persons controlling the six companies for the benefit of A & Co., and it was an acquisition of an interest of an enduring nature. The transaction would be regarded as one on the capital side as the shares were also never treated as part of the stock-in-trade and were not sold in the market. The sale at a loss to another company belonging to the same group, with the obvious intention of setting off the losses against the profits, was only a device to cancel the profits and save them from taxation. While it is true that the Supreme Court in that case emphasized the nature of approach, it has to be borne in mind that whether a particular transaction was collusive or not or really represent the real transaction is within the domain of a fact-finding body, and, the Tribunal, in an appropriate case, if the facts we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , therefore, in the nature of receipt on the cancellation of a contract of agency or office or the extinction or compulsory cessation of the agency or office. There, the payment was made to compensate a person for the cancellation of a contract which did not affect the trading structure of his business or deprive him of what in substance was his source of income. The termination of the contract being a normal incident of the business, and as such cancellation left him free to carry on his trade (freed from the contract terminated), the receipt was revenue, and where, by the cancellation of an agency, the trading structure of the assessee was impaired, or such cancellation resulted in loss of what might be regarded as the source of the assessee's income, the payment made to compensate for the cancellation of the agency agreement was normally a capital receipt. The important significance of this decision, in the facts and circumstances of the instant case, is that there was a good deal of doubt as to whether the carrying on of business of managing agency, in the instant case before us, was a source of income of the assessee-company and the termination of it affected its trading str ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, shipping agents, purchasing agents and secretaries, the company also had acted as importers and distributors on behalf of foreign principals and bought and sold on its own account. Under an unwritten agreement, which was terminable at will, the assessee-company had acted as the sole agents and distributors of explosives manufactured by the Imperial Chemical Industries (Export) Ltd. That agency was terminated and by way of compensation, ICI (Export) Ltd. had paid for the first three years after the termination of the agency two-fifths of the commission accrued on its sales in the territory of the assessee-company's agency computed at the rates at which the assessee-company had formerly been paid and in addition in the third year full commission for the sales effected in that year at the same rates. The Imperial Chemical Industries (Export) Ltd. had intended to take a formal undertaking from the assessee-company to refrain from selling or accepting any agency for explosives or other competitive commodities, but no such agreement in writing was taken or insisted upon. The question was whether the amounts received by the assessee for those three years were of the nature of capital o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng goods, air conditioning equipment and a large number of other commodities. It may reasonably be held, having regard to the vast array of business done by the appellant as agents, that the acquisition of agencies, a normal incident, not affecting, or impairing the trading structure of the appellant. The appellant was compensated by payment to it for the loss of profit it suffered by the cancellation of its agency, leaving it free to conduct its remaining business." There, it was argued that the assessee-company had employed expert officers who were accustomed to handle explosives which were a specialised commodity and the cancellation of that agency seriously affected the organisation of its trading operations. But the assessee was undoubtedly dealing in several kinds of inflammable substances, such as, petroleum, kerosene oil, timber and similar other commodities. The explosives, though they require great care in handling, these officers could be employed in respect of those agencies. It would further appear that eighty per cent. of the staff, attached to the magazine section, was maintained not at the expense of the assessee, but at the expense of the principal company. Out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court reiterated that this principle applied alike to cases in which the legal relation was recorded in a formal document, and to cases where it had to be gathered from evidence oral and documentary and conduct of the parties to the transaction. The Supreme Court referred to the observation in Sir Kikabhai Premchand v. CIT [1953] 24 ITR 506 (SC), to the effect that in revenue cases regard must be had to the substance of the transaction rather than its mere form could not be read as throwing any doubt on the principle that the true legal relation arising from a transaction alone determines the taxability of a receipt arising from the transaction. The Supreme Court observed that the said observation in Sit Kikabhai Premchand was casual and was not necessary for the purpose of the present case. The two correct principles are that (i) it is open in an appropriate case for the Revenue to find out the true legal position and substance of a transaction and (ii) it is open for a Tribunal or a fact-finding body to find that a document is a device or a transaction is a device to conceal the true legal relationship. But once that position is negatived it is accepted that the transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal was justified in law in declining to consider the documents which were already on record and which the department wanted to adduce as evidence ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal's finding that the purchase of the shares by the Rana was not benami transaction was legally valid ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the sum of Rs. 10,80,000 from the total income of the assessee by holding that the Rana was not the benamidar of the assessee ?" There, the Supreme Court observed as follows (p. 381): " In our view, the High Court and this court have always the jurisdiction to intervene if it appears that either the Tribunal has misunderstood the statutory language, because the proper construction of the statutory language is a matter of law, or it has arrived at a finding based on no evidence or where the finding is inconsistent with the evidence or contradictory of it, or it has acted on material partly relevant and partly irrelevant or where the Tribunal draws upon its own imagination, imports facts and circumstances not apparent from the record, or bases its conclusi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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