http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 5  

PETITIONER: RAM KUMAR  AGARWALLA AND BROTHERS

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, CENTRAL, CALCUTTA

DATE OF JUDGMENT: 26/10/1966

BENCH: SHAH, J.C. BENCH: SHAH, J.C. RAMASWAMI, V. BHARGAVA, VISHISHTHA

CITATION:  1967 AIR  921            1967 SCR  (1) 955

ACT: 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.

HEADNOTE: 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, alter- natively,  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 the- matter 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,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 5  

on a reference; confirmed the view taken by the Tribunal. 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, distinguished. 956

JUDGMENT: 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, Re- ference 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 respondent. 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.  Some time 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 Anand- ram 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.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 5  

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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 5  

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  asso- ciates  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  share- brokers  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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 5  

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 any one 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  non- recurring  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. 4(3)(vii).  The appeal therefore fails and is dismissed with costs. R.K.P.S.        Appeal dismissed. 961