Commissioner of Income Tax vs Deepak Kumar Agarwal

R. Jayasimha Babu, J.—The question referred to us at the instance of the Revenue is as to whether the sum of Rs. 42,294 received by the

assessee from one V. V. Raman who was the assessee''s power of attorney holder and who had been asked to set up a company at Bombay, but

who misused the authority given by the assessee, by setting up a company for his own benefit making himself and his wife the owners of the

company, and against whom the assessee had filed a suit in C. S. No. 182 of 1972, for rendition of accounts which suit ended in compromise in

terms of which the sum of Rs. 42,294 was paid in the hands of the assessee, a receipt of a capital nature and hence is not to be treated as the

income of the assessee. The assessment year is 1976-77.

The undisputed facts are that the assessee is a person doing"" business in garments who had started a branch at Bombay, in the name of Kala

Niryat and had appointed one V. V. Raman, to manage it. The said Raman who was subsequently asked to set up a company in order to enable

the assessee to receive the benefits of export of Indian handlooms, fabrics and garments, as under the Import Trade Control Policy of the

Government of India as revised in 1968 only companies registered under the Companies Act, Co-operative Marketing Societies and Federations

registered under the appropriate law were eligible for being accorded recognition as export houses. Some of the benefits receivable by such export

houses included release of foreign exchange, grant-in-aid, etc., as stated in the order of the Appellate Assistant Commissioner.

Raman instead of forming the company with the assessee, as the owner of the shares, registered the company Kala Niryat Private Limited with

himself and his wife as owners of the shares therein. He carried on the assessee''s business at Bombay in the name of that company and received

all the benefits under the Import Trade Control Policy through that company. The assessee having"" come to know of the wrongful act of Raman,

later filed a suit in this court in C. S. No. 182 of 1972 seeking various reliefs including the rendition of accounts, injunction to restrain Raman from

doing the business in the name of Kala Niryat, for transfer of the shares in that company to the assessee, for payment of the amounts received by

that company, etc. That suit ended in a compromise.

That suit came to be compromised on November 27, 1974. The terms of the compromise, inter alia, provided for the transfer to the name of the

assessee of all the shares in Kala Niryat Private Limited without any further consideration; the payment of Rs. 75,000 from the amount deposited

by Indian Cotton Mills Federation in the Sub-court, Nellore, wherein a suit had been filed by a third party against Kala Niryat Private Limited and

wherein a garnishee order has been obtained, and certain other benefits to which it is not necessary to advert.

The assessee claimed before the Income Tax Officer that the amount of Rs. 75,000 less the legal expenses in the net amount received by the

assessee being Rs. 42,294 was a capital receipt as that amount had not been paid to the assessee in lieu of profits, but only for preserving the

business and further that the money had not been paid by Raman alone but by the firms run by his son and daughter who were also parties to the

suit and who were parties to the compromise decree. That claim was rejected by the Income Tax Officer who held that the assessee had instituted

the suit in order to preserve his business and the money received was in the course and conduct of the business and for preserving the business and

the receipt was therefore a revenue receipt. That view was affirmed by the Appellate Assistant Commissioner in an elaborate order. The Tribunal,

on further appeal by the assessee, reversed the decision of the Appellate Assistant Commissioner. It accepted the contentions that had been put

forth unsuccessfully by the assessee before the Income Tax Officer.

Having examined the terms of the compromise, relief''s sought by the assessee in the suit and the admitted facts, we are unable to accept the

view of the Tribunal. There can be no doubt that the suit filed by the assessee was for rendition of accounts of the profits of the business belonging

to the assessee but wrongfully carried on and profits of which had been appropriated by Raman who, according to the assessee had abused the

trust placed by the assessee in the said Raman who had been asked to incorporate the company for the benefit of the assessee and not for his own

benefit. The benefit of the trading through that company were required according to the assessee to be passed on to the assessee and not to be

appropriated as had been done by Raman. The other prayers included a prayer for transfer of the shares in the company to the assessee, injunction

to prevent Raman and his family members from carrying on business in the same name and other reliefs. The compromise decree in express terms

provided for the transfer of all the shares of the company Kala Niryat Private Limited to the assessee without any further consideration and that too

after meeting the liabilities of the said company by Raman and his wife. In addition to handing over the company to the assessee, the defendants

were required to pay to the assessee a sum of Rs. 75,000. That amount was to be paid from out of the amounts deposited by the Indian Cotton

Mills Federation in the court at Nellore in which court, a third party had filed a suit against the company, Kala Niryat Private Limited and had

caused the Indian Cotton Mills Federation to deposit in that court the amounts which it was required to pay to Kala Niryat Private Limited. The

amounts so deposited, having regard to the facts of this case can be safely presumed to be the amount which the company had become entitled to

in terms of the policy then governing the import and export, the amounts having become payable by reason of the export effected by that company

of Indian handlooms and garments which was the business in which the assessee was engaged and for exporting which Raman had been asked by

the assessee to set up the company at Bombay. The amounts so received were clearly the amounts which the assessee would have been entitled to

receive directly had Raman not committed breach of trust and had the assessee been in control of the company from its inception. The amount paid

by the Cotton Mills Federation was clearly in the nature of a revenue receipt in the hands of the recipient and by no means regarded as a capital

asset and no enduring benefit resulted from the payment either to the Federation or to the recipient.

The argument for the assessee advanced by learned counsel for the assessee that the receipt was of a capital nature as it involved the transfer of

ownership of the company cannot be accepted as the very terms of the compromise provided that no consideration was payable for the transfer of

the shares in that company to the assessee. The sum of Rs. 75,000 paid to the assessee was in addition to the transfer of the shares and

independent of the transfer.

We may in this context referred to the case in F. Spence v. IRC [1941] 24 TC 311wherein the facts were somewhat similar. In that case a

seller of shares had obtained a decree against the purchaser setting aside the sale on the ground of fraudulent misrepresentation by the purchaser

and the shares were retransferred to the seller. The purchaser was also directed to pay to the seller a lump sum which included the amount of the

dividends received by the purchaser while the shares stood in his name. On those facts it was held by the court that the amount of dividends

recovered from the purchaser was assessable as income of the decree-holder.

The sum of Rs. 75,000 received by the assessee in terms of the compromise decree having regard to the circumstances in which that sum was

paid to the assessee must be regarded as the amount that the assessee would have received through the company had it been under his control and

which amount when received by the company would clearly have been a revenue receipt. That character cannot change because of the fact that the

amount had been initially misappropriated by Raman who had abused the assessee''s trust and had formed the company with himself and his wife

as owners of the shares and as directors and had received the amounts from the Indian Cotton Mills Federation and had retained the same for his

own benefit.

Our answer to the question that has been referred to us, therefore, is in the negative, in favour of the Revenue and against the assessee. The

Revenue shall be entitled to costs in a sum of Rs. 1,000.