Case Note & Summary
The respondent company, Provident Investment Co. Ltd., was the managing agent of two other companies and held certain shares in them. In September 1946, one D offered to purchase some shares along with the managing agency, proposing payment of earnest money and later balancing payment upon sanction of transfer of the managing agency by shareholders. The respondent accepted, with a condition that Rs. 1 crore of the consideration be treated as compensation for loss of the managing agency. Following payment of earnest money, the parties modified the arrangement in October 1946: instead of transferring the managing agency, the respondent would resign from the office and certain individuals would be appointed directors. The respondent duly resigned, and the balance consideration was paid. The Income-tax Officer invoked Section 12B of the Indian Income-tax Act, 1922, treating the managing agency valued at Rs. 1 crore as a capital asset, and computed capital gains at Rs. 81,81,900. The Appellate Tribunal held that the respondent, as owner of shares and managing agency, had sold the shares and handed back the managing agency to the managed companies, which constituted a transfer. On reference, the High Court decided on an agreed statement of case that there was neither a sale nor a transfer of the managing agency within Section 12B. The Commissioner of Income-tax appealed to the Supreme Court, contending that there was a concluded contract for sale of the managing agency. The Supreme Court’s decision on whether the relinquishment by resignation amounted to a taxable transfer of a capital asset remains to be determined from the available text.
Headnote
A) Income Tax – Capital Gains – Definition of ‘transfer’ and ‘sale’ of capital asset – Indian Income-tax Act, 1922, Section 12B – The respondent company was managing agent of two companies, holding shares therein. It entered into an arrangement to sell its shares and managing agency; later the transaction was modified so that instead of transferring the agency, it resigned, with the buyer paying consideration including Rs. 1 crore as compensation for loss of agency. The Income-tax Officer treated the managing agency as a capital asset and computed capital gains. The High Court held that the relinquishment by resignation did not constitute a sale or transfer within the meaning of Section 12B. (Paras Not mentioned)
B) Civil Procedure – Reference – Agreed Statement of Case – Binding nature – Indian Income-tax Act, 1922, Section 66 – The case was referred to the High Court on an agreed statement of facts, the dispute being whether the managing agency transaction resulted in capital gains. The Supreme Court was to consider the effect of such agreed statement on the rights of the parties. (Paras Not mentioned)
Issue of Consideration
Whether the relinquishment of a managing agency by resignation amounts to a sale or transfer of a capital asset under Section 12B of the Indian Income-tax Act, 1922, and whether the agreed statement of case is binding on the parties.
Law Points
- capital gains
- managing agency
- relinquishment by resignation
- whether resignation constitutes sale or transfer
- Section 12B
- Indian Income-tax Act
- 1922
- capital asset
- transfer of managing agency
- agreed statement of case
Case Details
1957 LawText (SC) (05) 13
A.K. Sarkar, S.K. Das, Natwarlal H. Bhagwati, P. Govinda Menon, J.L. Kapur
1957 AIR 664, 1957 SCR 1141
The Commissioner of Income-tax, Bombay
The Provident Investment Co., Ltd.
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Nature of Litigation
Tax appeal under Income Tax Act
Remedy Sought
Commissioner of Income-tax seeking to tax transaction as capital gains
Filing Reason
Dispute over whether relinquishment of managing agency by resignation resulted in capital gains
Previous Decisions
Income-tax Officer assessed capital gains; Appellate Tribunal held handing back of managing agency constituted a transfer; High Court on reference held no sale or transfer of managing agency within Section 12B.
Issues
Whether the relinquishment of managing agency by resignation amounts to a sale or transfer of a capital asset under Section 12B of the Indian Income-tax Act, 1922
Whether the agreed statement of case filed before the High Court was binding on the parties
Submissions/Arguments
For the Commissioner: There was a concluded contract for sale of the managing agency.
Judgment Excerpts
The respondent company was the managing agent of two other companies holding certain shares therein. D wrote two letters to the respondent on September 14, 1946, offering to purchase some of those shares together with the managing agency and agreeing to pay certain sums as earnest money on the acceptance of the offer and to pay the balance after the transfer of the managing agency was sanctioned by the general body of shareholders. By a letter dated September 30, 1946, the respondent accepted the offer on condition of a sum of Rs. 1 crore being paid out of the consideration as compensation for the loss of the managing agency, and on receipt of the letter, D paid the earnest money. Subsequently, D wrote a letter on October 7, 1946, whereby, in modification of the arrangement previously made, it was agreed that instead of the managing agency being transferred by the respondent, the latter would resign the office of managing agents and certain individuals would be appointed Directors of the two companies. Accordingly, the respondent relinquished the managing agency and thereupon the balance of consideration money was paid to it.
The Income-tax Officer considered that s. 12B of the Indian Income-tax Act, 1922, was applicable to the transaction and on the footing that the managing agency, which was valued at Rs. 1 crore, was a capital asset, he computed the capital gains at Rs. 81,81,900.
The Income-tax Appellate Tribunal held that the respondent, as the owner of the shares and the managing agency, sold the shares to D and handed back the managing agency to the managed companies, and that this handing back constituted a transfer.
On a reference to the High Court by the Tribunal, the agreed statement of the case proceeded on the basis that the dispute between the parties was whether the transaction with regard to the managing agency resulted in capital gains and the High Court held that there was neither a sale nor a transfer of the managing agency within the meaning of S. 12B of the Act.
Procedural History
Income-tax Officer assessed capital gains under Section 12B. Income-tax Appellate Tribunal upheld assessment, treating handing back of managing agency as transfer. On reference, High Court held no sale or transfer. Appeal to Supreme Court by Commissioner of Income-tax.
Acts & Sections
- Indian Income-tax Act, 1922: 12B
