1958 (9) TMI 99 – MADRAS HIGH COURT – AIR 1960 Mad 137, (1960) IIMLJ 1 – Dated:- 3-9-1958 – Rajagopalan And B Ayyar, JJ. JUDGMENT Rajagopalan, (1) Both the assessee and the Department were aggrieved, each with a part of the order of the Appellate Tribunal. On applications presented by them the Tribunal made a consolidated reference under S. 66(1) of the Income-tax Act and submitted three questions for the determination of this court. (2) The questions arose out of the assessment proceedings for the assessment years 1949-50 and 1950-51. (3) The second of the question, which is easiest answered, ran: "Whether the dividends of ₹ 36,820 and ₹ 32,603 received in the previous years for assessment years 1949-50 and 1950-51 from Plantation Companies whose main business was agriculture can be said to include any agricultural income exempt under S. 4(3) of the Income-tax Act." The issue is no longer res integra and it is concluded by the decision of the Supreme Court in
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agreement. In 1945-1946 the assessee company held such managing agencies for sixteen Plantation Companies. Tallier Estate Ltd. was one of such Plantation Companies, and the agreement between that company and the assessee was in 1937 (Annexure A). In 1945 Tallier Estate sold its plantation, which was in India, and, the company subsequently went into liquidation. On 24-7-1945 Tallier Estates passed a special resolution which ran: "That the Liquidator be authorised to pay the Secretaries and Agents, Pierce Leslie and Co., Ltd., London, 4500 by way of compensation for loss of office." In accordance with that resolution the assessee received ₹ 60,000, in the year of account which ended on 30-6-1946. That was treated as a trading receipt by the department for the purpose of assessment to income-tax, excess profits tax and business profits tax. When the assessee appealed to the Tribunal it purported to apply the principles laid down by this court in Commr. of Income-tax and Ex
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h v. Commr. of Income-tax, B. and O., 1943-11 ITR 513: (AIR 1943 PC 153), is a word of the broadest connotation and difficult and perhaps impossible to define in any precise general formula. Lord Macmillan said in Van Dan Berghs Ltd. v. Clark, (1935) 19 Tax Cas 390, that though in general the distinction between an income and a capital receipt was well recognised and easily applied, cases did arise where the item lay on the border line and the problem had to be solved on the particular facts of each case. No infallible criterion or test can be or has been laid down and the decided cases are only helpful in that they indicate the kind of consideration which may relevantly be borne in mind in approaching the problem." The learned Chief Justice observed further at p. 915 (of ITR): (at p. 495 of AIR): "The assessee before us is a company carrying on a business and it received the sum in question in connection with that business. We have, therefore, to ask ourselves as to what is
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of its apparent capital assets. (7b) The relevant facts in as set out in the headnote were as follows: "The assessee (South India Pictures Ltd.) which carried on the business of distribution of films entered into three agreements for advancing monies to certain motion picture producers towards the production of three films and acquiring the rights of distribution thereof. The agreements, inter alia, provided that the assessee would advance certain sums of money in instalments for the production of the firms, the assessee acquiring the sole right to distribute the films for a period of five years from the date of release of each film. The assessee was to pay itself from the money realised by the distribution of the films its commission and the amount advanced to the producers and to pay the balance to the producers. The assessee had a charge by way of security on the negative and positive copies of the films for amounts due on account of advance. If the producers failed to deliver
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ertainly be regarded as having been so paid or received in the ordinary course of its business and therefore a trading disbursement or trading receipt… In fact in the accounting year the assessee had distribution rights in respect of eleven films including these three. These three agreements would have come to an end on the expiration of the period of five years from the respective dates of release of the films and had only a part of the period to run, a fact which may also be relevantly borne in mind. The cancellation of these agreements must have left the assessee free, if it so chose, to secure other films which could be distributed in the place of these films and which might have brought in better box office collections. In the language of Lord Hanworth M. R. in Short Bros. Ltd. v. Commissioner of Inland Revenue, (1927) 12 Tax Cas 955, the sum paid to the assessee was not truly compensation for not carrying on its business but was a sum paid in the ordinary course of business to
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sessee's business of distribution of films proceeded apace notwithstanding the cancellation of these three agreements." (9) After pointing out that what the South India Pictures Ltd. entered into were composite agreements, and that even under the financing part of the agreements the South India Pictures Ltd. did not acquire any capital assets, the learned Chief Justice proceeded to observe at pp. 918-9 (of ITR): (at p. 497 of AIR): "Assuming that to start with the films constituted capital assets the entire capital outlay had been recovered and the security had been extinguished and that part of the agreements which constituted financing agreements had been fully worked out and had come to an end and the three films ceased to be capital assets and the assessee was holding the films only under that part of the agreements which constituted the distributing agency agreements which only were subsisting. In the premises the amount received by the assessee was only so received
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he assessee, taking up managing agency along with secretaryship to the Plantation company and other trading rights was part of the assessee's normal trading activities. The assessee dealt with among other things, the export of tea produced in India, and obtaining managing agencies and other rights from the Plantation companies certainly facilitated that trade in tea. The managing agencies the assessee obtained were liable to termination, in which event the assessee received the compensation it was entitled to by agreement. We should point out that the agreement (Annexure A) was not a contract for securing simpliciter the managing agency, for Tallier estates. It was a composite agreement securing other rights as well to the assessee, which helped it in its trading activities in tea. The assessee was in a position to obtain such contracts with Plantation companies because of its large experience in handling tea for export and also in managing plantations in India. Even confining ours
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it was a trading receipt. (11) Mr. Rama Rao Sahib, learned counsel for the department, referred us also to Anglo French Exploration Co. Ltd. v. Clayson, 1956-30 ITR 309, Lord Evershed M. R. said at page 316: "If the matter were res integra, I think that there is much to be said for the simple view that a sum of money received in consideration for the giving up or destruction of an agreement under which you look to earn an annual sum if capital and not income; for in such case the sum received might be described fairly as the capitalised equivalent at the present time of income prospects." (12) After pointing out that the real question for determination was whether it was a profit or gain arising from the trade of the recipient within the terms of Sch. D. the learned Master of the Rolls proceeded. "And the matter is not in any case res integra. The line of cases to which we have had our attention directed starting from the well known trilogy: Inland Revenue Commrs. v. Ne
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ract in no sense affected the 'profit making apparatus' of the company which retained its offices and staff, in Johannesburg exactly as before." The case of the assessee before us was certainly analogous to that the Court of Appeal had to consider in 1956-30 ITR (Sup.) 309. (13) In our opinion, in the circumstances in which the assessee company carried on its trading operations the amount of ₹ 60,000 constituted a trading receipt received in the usual course of its business activities. (14) We answer the first question in the affirmative and against the assessee. (15) The third question ran: "Whether the credit balances in the capital profits accounts, profit and loss account and business profits tax post war refund suspense account form part of the 'reserve' of the assessee within the meaning of rule 2(1) of Sch. II of the Business Profits Tax Act ?" The relevant chargeable accounting periods for the assessment to business profits tax were: (1) 1-4
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econd question which we have set out above. (17) The sums in question apparently represented the undistributed profits and were shown in the balance sheet partly as capital and partly as revenue receipts. During the arguments before us the learned counsel for the assessee limited the claim for abatement to the following amounts: .27857 (capital profits account) and .219 (profit and loss account) for the chargeable accounting periods 1 and 2 we have mentioned above; .9812-0-5 (capital profits account) and .30-7-4 (profit and loss account) for the chargeable accounting periods 3 and 4. In addition the assessee claimed abatement with reference to the chargeable accounting periods 2, 3 and 4 of another sum of .19236, which amount was shown in the balance sheets under the head excess profits tax post war Refund suspense account. (18) Did these amounts constitute reserves within the meaning of rule 2(1) for the relevant chargeable accounting periods is the question, which, as we have said, h
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lying unutilised and not specially set apart for any purpose on the crucial date did not constitute reserves within the meaning of Sch. II, rule 2(1)" on this basis of what was pointed out by this court at page 245 (of ITR): (at p. 327 of AIR) in 1957-32 ITR 237: (AIR 1958 Mad 326), what the Tribunal will have to decide in this case is whether, with reference to each of the sums we have mentioned above, any one possessed of the requisite authority indicated on or before the crucial dates, with reference to each of the chargeable accounting periods, the manner of disposal or the destination of the funds of the company which constituted its profits. Was any portion of the profits specifically set apart for any purpose on or before the crucial date and was it so set apart by one having the requisite authority? It was on an erroneous view of the law that the Tribunal upheld the claim of the assessee, and as we said there was no occasion at that stage to investigate the question at is
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