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TMI Blog1954 (11) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... The Judgment of the Court was delivered by MEHR CHAND MAHAJAN, C. J.----This appeal is preferred against the judgment of the High Court of Punjab at Simla, dated 18th June, 1951, delivered on a reference under section 66 of the Indian Income-tax Act whereby the High Court answered the following two referred questions in the affirmative :--- " (1) Whether on a proper construction of the relevant clauses of the appellant company's memorandum of association and articles of association and on a consideration of the circumstances in which the shares of the Sarswati Sugar Syndicate were purchased and sold, it could be held that the purchase and sale of such shares was a part of the appellant company's business activities and was a busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay decide to do." In 1933, another public limited company was incorporated by the name of Sarswati Sugar Syndicate Ltd., hereinafter called the sugar company. Lala Kishan Prasad, managing director of the assessee-company, entered into an agreement with the sugar company in March 1933, whereby the assessee-company was to invest Rs. 5,00,000 in the sugar company in lieu of which it was to be given the managing agency of the third mill of the sugar company--not in existence at the time but expected to be erected in 1933---when such mill was erected, on the same terms as given by the sugar company to other managing agents of their two other existing mills. The investment of Rs. 5,00,000 by the assessee-company was made conditional on the sug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al. The latter then referred at the instance of the assessee-company the two questions set out above to the High Court of Punjab. The assessee-company claimed exemption from tax in respect of the aforesaid amounts on the ground that they were not receipts arising from business and were of a casual and non-recurring nature. This claim was founded upon the exemption contained in section 4, sub-section (3)(vii), which reads thus :---- "Any receipt not being capital gains chargeable according to the provisions of section 12B and not being receipts arising from business ..................... which are of a casual and non-recurring nature .........." Admittedly the first portion of this clause does not apply to the case for the shares we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion whether the profits arising therefrom are capital accretion or revenue income. The High Court recognized the fact that the main purpose of the assessee-company was to acquire a managing agency and a directorship but held that as that object was not achieved because the acquisition of the managing agency became impossible and as it withdrew the shares and sold them at a profit, it must be regarded as the profits of the business or the adventure. We think that in so holding the High Court fell into an error. The exact nature of the business which the assessee-company was doing is admittedly not clear from the record but it is not denied that the memorandum of association of the assessee-company did not authorise it to purchase and/or s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be a correct interpretation of the terms of the agreement. The letter dated 14th March, 1933, which admittedly embodies the terms of the agreement between Lala Kishan Prasad and the directors of the sugar company clearly says that the assessee-company would invest Rs. 5,00,000 of their own. It is no doubt mentioned that out of this amount Rs. 1,00,000 will be considered as contribution on account of the managing agency but the letter goes on to say " the third mill will be erected and Messrs. Lala Kishan Prasad Co. will be appointed managing agents on the same terms as given to the other two managing agents. If it is not erected this year Messrs. Kishan Prasad Co. will be paid Rs. 15,000 as commission on the shares that have been ..... X X X X Extracts X X X X X X X X Extracts X X X X
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