Ram Kumar Agarwalla and Brothers Vs.
Commissioner of Income-Tax, Central, Calcutta  INSC 229 (26 October 1966)
26/10/1966 SHAH, J.C.
CITATION: 1967 AIR 921 1967 SCR (1) 955
Income-tax Act, 1922, s. 4(3) (vii)-Firm of
share brokers and paper merchants-Associating with a solicitor and an
accountant in negotiating purchase of controlling interest in large cotton
mills company-Amount paid by another party acquiring interests--Whether such
amount received for reframing from competing or in course of assessee's
business-Therefore whether exempt from tax.
The assessee firm which carried on business
as share brokers and paper merchants, together with D who was a partner in a
firm of Chartered Accountants and R who was a partner of a firm of Solicitors,
started negotiations for the purchase of shares representing the controlling
interest in S company.
At the same time M was also carrying on
negotiations to secure the same interest and wrote a letter to D to the effect
that he, together with his associates was desirous of purchasing the
controlling interest in the S company and that in the event of D and his
associates securing the same for them and giving up all claims to purchase the
same, M and his associates would pay a sum of Rs. 6 lakhs upon completion of
the purchase. M eventually purchased the shareholding in S company for just
over Rs. 4 crores. A sum of Rs. 6 lakhs was thereafter paid by M of which the
assessee firm received Rs. 2 lakhs as their share.
In the course of their assessment to income
tax for the year 1947-48 the assessee firm claimed that the sum of Rs 2 lakhs
received by them was exempt from tax under s. 4(3) (vii) of the Income-tax Act,
1922 or, alternatively, was a capital and not a revenue receipt. The Income-tax
Officer rejected this claim and his order was confirmed by the Appellate
Assistant Commissioner. In appeal, on a difference of opinion between the two
members constituting the Appellate Tribunal thematter was referred to a third
member, who, after calling for certain findings on evidence from the Appellate
Assistant Commissioner disposed of the entire appeal against the assessees,
holding that the, amount was received by them for services rendered -and not as
consideration for refraining from competing in the purchase of the controlling
interest. The High Court, on a reference; confirmed the view taken by the
On appeal to the this Court,
HELD : Dismissing the appeal, (i) On the
finding recorded by the Tribunal, the receipt of Rs. 2 lakhs arose from the
business of the assessees and was not exempt under s. 4(3) (vii).
In view of the terms of the letter written by
M, the fact that the principal business of the assessees was in paper, and as
it was not shown how it was intended to finance such a large transaction, the
conclusion recorded by the Tribunal that the assessees and their two associates
had no intention to acquire the, controlling interest, but were seeking to
associate themselves in a venture in the nature of trade could not be said to
be without evidence. [959 B-C, 960 A] Higgs v. Oliver 33 T.C. 136 and
Commissioner of Income-lax Bombay v. The Mills Store Co. Karachi 9 I.T.R. 642,
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 176 of 1966.
Appeal by special leave from the judgment and
order dated March 11, 1963 of the Calcutta High Court in Income-tax, Reference
No. 80 of 1959.
S.T. Desai and J.P. Goyal, for the appellant.
B. Sen, A.N. Kirpal and R.N. Sachthey, for the
The Judgment of the Court was delivered by
Shah J. M/s. Ram Kumar Agarwalla & Brothers--hereinafter called 'the
assessees'-were carrying on business at Calcutta as "share-brokers, share
dealers and paper merchants", Swadeshi Cotton Mills idea public limited
company-operates at Kanpur a large unit producing cotton textiles. It was
originally managed by a firm of Managing Agents styled M/s. Horseman Brothers. Sometime
early in 1946 M/s. Horseman Brothers desired to dispose of their share-holding
in the Company, and to part with the Managing Agency. David Mitchell a partner
of M/s. Lovelock & Lewis-accountants of the Company-Rowan Hodge of M/s. Orr
Dignam & Co.-solicitors of the Company-and the assessees started joint
negotiations with M/s. Horseman Brothers to purchase the controlling interest
in the Company. About the month of April, 1946 M/s. Mangturam Jaipuria acting
through their partner Anandram Gajadhar were also negotiating to secure the
controlling interest in the Company. M/s. Mangturam Jaipuria addressed a letter
on April 29, 1946 to David, Mitchell to the following effect:
"With reference to your negotiations to
acquire the controlling interest in the Swadeshi Cotton Mills Co. Ltd., we
confirm that we and our associates are desirous of purchasing the same and in
the event of your securing the same for us and upon your giving up all claims
to purchase the same and assigning to us and our associates any interest that
you may have acquired therein, we hereby agree to pay you and your colleagues a
capital sum of Rs. 6,00,000/-. Such, payment to be made upon completion of the
purchase by us." M/s. Mangturam Jaipuria also obtained a letter of
guarantee for Rs. 6,00,000/from the Imperial Bank of India in favour of David
Mitchell. M/s. Mangturam Jaipuria purchased the shareholding of M/s. Horseman
Brothers for Rs. 4,03,00,000/-. Thereafter the amount of Rs. 6,00,000/was duly
paid to David Mitchell, Rowan Hodge and the assessees, and it was divided
equally between them-each receiving Rs. 2 lakhs. The assessees paid Rs. 25,000/out
of their share to one Ratan Lal Goel for "services rendered in the dear',
and credited the balance of Rs. 1,75,000/as 957 "brokerage" in their
profit &'loss account, and submitted a return of income for the assessment
year 1947-48 showing that receipt as income from "brokerage in the %course
of business". Later, the assessees submitted a revised return excluding
the amount of Rs. 1,75,000/-. The Income-tax Officer rejected the claim of the
assessees that the amount of Rs. 1,75,000/was a non-recurring casual receipt
exempt from tax under s. 4(3) (vii) of the Act or that it was a capital and not
revenue receipt. The order was confirmed by the Appellate Assistant
Commissioner. On the plea of the assessees that the amount of Rs. 2,00,000 was
received by them as consideration for agreeing to refrain from carrying on
their business and was on that account not taxable as their income, and that in
any event it was a non-recurring casual receipt, there was difference of
opinion between the two Members who constituted the Appellate Tribunal, and the
appeal was referred to a third Member who remanded the case for a finding on
certain matters on which the order of the Appellate Assistant Commissioner was
silent. The Appellate Assistant Commissioner then reported that the payment of
Rs. 6,00,000/was not made only as an inducement to the assessees to refrain
from competition in purchasing the controlling interest in the Company, but it
was made to remunerate the services rendered by the assessees and their
associates in helping M/s. Mangutram Jaipuria to acquire the controlling
interest. The Tribunal agreed with the report of the Appellate Assistant
Commissioner and dismissed the appeal. The Tribunal observed :
"He never had the intention or the money
to buy the Mills worth a few crores. The very fact that he had two other
associates will again show that there was no intention of either of these three
persons to purchase the Mills. Partners of solicitors and auditors had no
intention of buying the Mills.
I think that the sum of Rs. 2 lacs has
accrued to the assessee as a result of a venture in the nature of trade.
Services of auditors, brokers and solicitors have been employed in completing
the sale." The Tribunal submitted a statement of the case on the following
two questions, on application by the assessees, under s. 66(1) of the
Income-tax Act "(1) Whether there was any material on record before the
President to give a finding to the effect that the contention of the assessee
that it intended to buy the Mills was without any basis whatsoever ? (2) Was
the receipt in question a revenue receipt from a venture in the nature of trade
and has it, been rightly brought to tax 958 The High Court of Calcutta held
that there was ample material to support the finding of the Tribunal that the
receipt in question, was a revenue receipt from a venture in the nature of
trade. With special leave, the assessees have appealed to this Court.
Counsel for the assessees says that the two
Members of the Tribunal who originally heard the appeal had concurrently held
that Rs. 6 lakhs were paid to the assessees and their associates for dissuading
them for not competing with M/s.
Mangturam Jaipuria and it was not open to the
third Member to ignore that finding and to arrive at a different conclusion. We
are unable to agree with that contention.
On a difference of opinion, the appeal in its
entirety and not any specific question, was referred to the third Member.
Again only the Accountant Member was of the
view that the receipt of Rs. 2 lakhs to the assessees arose not in the course
of their business, but because they agreed to refrain from competing with M/s.
Mangturam Jaipuria in that firm's attempt to acquire -the controlling interest
in the Company:
the Judicial Member did not accept that view.
The terms of the letter addressed by M/s.
Mangturam Jaipuria to David Mitchell make it abundantly clear that Rs. 6 lakhs
were agreed to be paid primarily as remuneration for services to be rendered..
The expression "in the event of your securing the same (controlling
interest in the Swadeshi Cotton Mills) for us, and upon your giving up, all
claims 'to purchase the same, and assigning to us and our associates any
interest that you may have acquired, we hereby agree to pay you sum of Rs.
6,00,000/-" evidences that object. The Tribunal had also called for a
report from the Appellate Assistant Commissioner and that Officer, as we have
already observed, expressly recorded that the payment made to the assessees and
their associaties was for services rendered in acquiring the controlling
interest for M/s. Mangturam Jaipuria and not for dissuading them in competing
for the purchase of the shares. The Tribunal accepted the report of the
Appellate Assistant Commissioner, and observed that the assessees had no
intention to buy the controlling interest in the Company. The principal
business of the assessees was in paper, and they were doing some business in
shares and brokerage' in shares. The evidence does not disclose how it was
intended by the assessees to finance such a large transaction. The Tribunal was
apparently of the view that a solicitor, an auditor and a firm of sharebrokers
and paper merchants could not have been associated in a genuine project of acquiring
the controlling interest in one of the largest textile units in the country
which was expected to and did cost Rs. 4 crores. The Tribunal had directed that
certain persons including Ram Kumar Agarwalla the-principal partner of the
assessees be examined as witnesses. The principal partner of the assessees did
not give evidence. Ramgopal Agarwalla another partner of the firm who appeared
before the Appellate Assistant 959 Commissioner pleaded. that he had no
personal knowledge about the details of the negotiations or "as to the
financial part of the aspect of the matter, since it was being dealt with by
the senior partner Ram Kumar Agarwalla".
David Mitchell and Rowan, Hodge had it
appears left India, and they also could not be examined. The conclusion
recorded by the Tribunal that the assessees David Mitchell and Rowan Hodge had
no intention to acquire the controlling interest, but were seeking to associate
themselves in a venture in the nature of trade, cannot in the circumstances be
said to be without evidence. The conclusion that the assessees and their two
associates received Rs. 6,00,000/not in consideration of refraining from
competing in the purchase of, the controlling interest, but as remuneration for
services rendered is based on evidence before the Tribunal. The receipt must
therefore be regarded as a revenue receipt earned in the course of the business
of' the assessees.
It is unnecessary to make a detailed
reference to the decisions which were cited at the Bar e.g. Higgs v. Oliver ()
and in Commissioner of Income-tax Bombay v. The Mills Store Co. Karachi(2). In
Higgs's case() a professional actor who had agreed to give his exclusive
services to a film company in consideration of a fixed sum,. and a proportion
of the net profits from exploitation of a film was, after the agreement was
fulfilled, given a sum of 15,000 a consideration for an undertaking not to act,
produce or direct any film for any person for a period of eighteen months. It
was held that the amount paid was not for carrying on business, but for
refraining from carrying on the business, and was not taxble. In the Mills
Store Company's case(2) under an agreement for a stated' consideration the
assessee Company parted with the oil tanks and' installations and other
structures and goodwill and leasehold rights held by it in respect of the land
on which its business of storing petroleum and petroleum products was carried,
and agreed not to import petroleum for ten years, and not to act on behalf of anyone
else as importers of petroleum for five years. By another agreement in
consideration of extending the latter restriction to ten years, the assessee
was paid Rs. 10,000/annually during the subsistence of the restriction. It was
held by the Chief Court of Sind that the sum of Rs. 10,000/was not the direct
result of the profit or gains accruing to the assessees as a result of the
business actually carried on by them, and did not fall under the head 'Profits
and gains of' business, profession or vocation. These cases have, on the findings
recorded by the Tribunal no relevance.
Under S. 4(3) (vii) receipts which are of a
casual and nonrecurring nature are not liable to be included in the computation
of the total income of the assessee; but the rule in express terms does.
(1) 33 T. C. 136.
(2) 9 I.T.R. 642.
960 not apply to capital gains, receipts
arising from business or the exercise of a profession or vocation and receipts
by way of addition to the remuneration of an employee. On the finding recorded
by the Tribunal, the receipt arose from the business of the assessees, and is
not exempt under s.
The appeal therefore fails and is dismissed
R.K.P.S. Appeal dismissed.