The Commissioner of Income Tax, Madras vs S. Chenniappa Mudaliar

Veeraswami, J.

(1) This is a reference at the instance of the Commissioner of Income Tax under Sec. 66(1) of the Income Tax Act 1922 of the following question:

Whether on the facts and in the circumstances of the case, the two sums of Rs. 72,515 and Rs. 3,14,100 are assessable to tax under S. 10(5-A)

of the Indian Income Tax Act 1922?

We are concerned with the assessment year 1956-57. The assessee was one of the two managing directors of a private limited company by name

Textiles Corporation Private Ltd. The other managing director was one P.D. Asher. Out of the total of 20 shares, of Rs. 100 each, the assessee

held nine shares and his son one share, the remaining shares being held by P.D. Asher, his wife and cousin. This company was the managing agent

of a public limited company called Asher Textiles Ltd. Both these companies have been incorporated under the provisions of the Indian

Companies Act 1913. The Public Limited Company had issued 11986 shares of the face value of Rs. 100 each, out of which the assessee held

1674 shares. The book value of these shares was Rs. 1,11,625 P.D. Asher, his wife and cousin on the one had and the assessee and his son on

the other entered into an agreement on 21-12-1954 by which it was agreed that the assessee and his son should transfer their ten shares in the

Textile Corporation to the other parties to the agreement or their nominees for a sum of Rs. 3,50,000. The agreement contained certain other

terms which included that the assessee and his son should also transfer to P.D. Asher or his nominees 4165 shares in the Asher Textiles Ltd. The

parties also further agreed that 180 shares in addition to the shares already issued in the Textile Corporation Pte. Ltd, should be allotted to one

H.B. Setna and his appointment as one of the directors of Asher Textiles Ltd. should be procured. Until necessary sanctions were obtained, from

the Central Government the parties further agreed that the assessee and Asher should execute separate powers of attorney to H.B. Setna to enable

him to manage to Textiles Ltd. on behalf of the Corporation. By the transfer of two sets of shares the assessee made a profit of Rupees 3,14,100

in respect of nine shares and another sum of Rs. 72,515 in respect of 1674 shares. These two amounts were brought to tax for the assessment

year, treating them as income and liable to tax under S. 10(5-A) of the Income Tax Act 1922. Both the Income Tax Officer as well as the

Appellate Assistant Commissioner repelled the assessee''s contention that the receipt of two amounts was in the nature of capital assets by sale of

the shares. The Income Tax Officer however, computed the tax on the amount of Rs. 3,14,000 on the basis of the average rates of Income Tax

and super-tax for the three years immediately preceding the relevant previous year but declined this benefit in respect of the other amount. The

Appellate Assistant Commissioner gave the benefit of the method of computing the tax for the sum of Rs. 72,515 as well. While the Income Tax

Officer did not specify the particular clause of S. 10(5-A) the Appellate Assistant Commissioner was of the view that the two amounts were liable

to tax under clause (c) of that sub-section. He accepted the view that the amount in excess of the book value of the shares transferred by the

assessee were in the nature of inducement to him of compensation for giving up the management. The assessee preferred an appeal to the Tribunal

ad with success. The Tribunal held that the assessee was neither a manger nor a managing agent of an Indian company within the meaning of

Section 2(9-A) of the Indian Companies Act and that the provisions of S. 10(5-A) clauses (a) and (b) were, therefore, not applicable to the two

amounts. It was also of opinion that neither clause (c) nor clause (d) of the sub-section would be applicable because as it said that the words ""any

other company"" in clause (c) referred to a company other than an Indian company and therefore, Asher Textiles which, as we said, was

incorporated under the provisions of the Indian Companies Act, could not come under the category of ""any other company"". So far as clause (d)

was concerned, the Tribunal thought that the use of the word ""any other person"" in that clause as distinct from ""any other company"" appearing in

clause (c) or an ""Indian Company"" appearing in clauses (a) and (b) was significant and that because of this distinction between a person and a

company, a person in that clause did not include a company. The Tribunal also considered the further question whether the two amounts could be

regarded as compensation for loss of management rights in Asher Textiles and came to the conclusion that there was no material to hold that the

profit represented such compensation.

(2) We are of the view that the Tribunal was right in holding that the two amounts would not fall within the ambit of any of the clauses of S. 10(5-

A) though we form our view for slightly different reasons. Sub-Sec. (5-A) of S. 10 is as follows:

(5-A) : Any compensation or other payment due to or received by:-(a) a managing agent of an Indian company at or in connection with the

termination or modification of his managing agency agreement with the company:

(b) a manager of an Indian company at or in connection with the termination of his office or modification of the terms and conditions relating

thereto;

(c) any person by whatever name called, managing the whole or substantially the whole affairs of any other company in the taxable territories, at or

in connection with the termination of his office or the modification of the terms and conditions relating thereto.

(d) any person, by whatever name called, holding an agency in the taxable territories for any part of the activities relating to the business of any

other person at or in connection with the termination of his agency or the modification of the terms and conditions relating thereto;

shall be deemed to be profits and gains of a business carried on by the managing agent, manager or other person, as the case may be, and shall be

liable to tax accordingly; and the tax on such compensation or other payment shall, if the assessee so elects, be computed at the average of the

rates of Income Tax and super-tax applicable to his total income for the three years immediately preceding the previous year in which the

compensation or other payment was due or received.

This sub-section was inserted by Act 15 of 1955 with effect from 1-4-1955. It was enacted apparently because of the judgment of the Privy

Council in AIR 1932 138 (Privy Council) and the recommendations of the Taxation Enquiry Committee. In order to attract clause (a) of the sub-

section, the assessee should be a managing agent of an Indian company; likewise, unless the assessee is a manager of an Indian company, clause

(b) will be inapplicable. So quite righly in our view learned counsel for the Revenue could not and did not rely on clause (a). Under Sec. 2(8-A)

the expressions ""manager"" and ""managing agent"" have the meanings respectively assigned to them in the Indian Companies Act 1913. Under S.

2(9-A) of the Indian Companies Act.

''managing agent'' means a person, firm, or company entitled to the management of the whole affairs of a company by virtue of an agreement with

the company, and under the control and direction of the directors except tot he extent, if any, otherwise provided for in the agreement and includes

any person, firm or company occupying such position by whatever name called.

An explanation to this definition says that

if a person occupying the position of a managing agent calls himself a manager he shall nevertheless be regarded as managing agent and not as

manager for the purposes of the Act.

Sec. 2(9) defines a ""manager"" to be

a person who subject to the control and direction of the directors has the management of the whole affairs of a company, and includes a director

or any other person occupying the position of a manager by whatever name called and whether under a contract of service or not.

It is obvious, having regard to these definitions, that the assessee by himself cannot by any means be regarded as a managing agent. He by himself

never entered into an agreement with either of the companies by which he was entitled to be a managing agent. Nor can it be said that as one of the

two managing directors he was entitled to the management of the whole affairs of either of the companies. It was only the Corporation of which the

assessee along with Asher was the managing director that was entitled to manage the whole affairs of the Textile company. That was one of the

lines of reasoning on which the Tribunal held that clauses (a) and (b) of S. 10(5-A) would be inapplicable to the amounts. We accept that view as

correct. The assessee by himself was neither a managing agent nor a manager as the terms were defined in the Indian Companies Act, 1913.

(3) For the Revenue it was argued that having regard to item 72 in Table A to the First Schedule of the Indian Companies Act, 1913 there was

really no difference between a managing director and a manager, especially when the term managing director is not defined by the Indian

Companies Act 1913. We are unable to accept this contention. Table A does not have the force of law and it represents but a model form. Apart

from that, the term ''manager'' form. Apart from that, the term ''manager'' has been defined by the Companies Act and it is that definition which will

govern the scope of the expression ""manager"" in clause (b) of sub-sec. (5-A) of S. 10 of the Income Tax Act, 1922. One of the requisites of a

person being a manager is that he should be entitled to manage the whole affairs by himself.

(4) Clause (c) will obviously be inapplicable because as the Tribunal rightly held, that contemplates a company other than an Indian company,

Realising this, learned counsel for the revenue turned to clause (d) and contended that this clause would in any case be attracted. We fail to see

how if clause (b) will not apply for the reason we mentioned, the same logic will not govern the scope of clause (d) as well. For this clause to

apply, the assessee must be holding an agency relating to the business of ""any other person"". It is impossible to say that the assessee here by

himself held such an agency. The managing agency was vested in the Corporation and not in any one of the directors. Neither of the directors can

properly say that he by himself as of right held an agency which enabled him to manage the affairs, as an agent, of the business of ""any other

person"".

(5) It follows, therefore, that clause (d) also will be inapplicable. That means the two amounts do not fall within the purview of Sec. 10(5-A).

(6) On that view, it is unnecessary to express our opinion of the question whether the two amounts really represent compensation for the loss of the

office of the managing director. Nor is it necessary for us to decide whether the two amounts can be regarded as ""other payment"" within the

meaning of Sec. 10(5-A). The Tribunal was inclined to think that ""any other person"" in clause (d) will not include a company. This view it

expressed on a comparison of the words ""any other person"" in clause (d) with the phraseology occurring in the other three clauses. We are of the

view that the expression ""any other person"" in clause (d) has been employed in the context of ""any person"" which are the opening words in clause

(d) and not with reference to the phraseology in clauses (a) to (c) of the sub-section. The expression ""any other person"" would, in our opinion,

include, therefore a company.

(7) We answer the reference in favour of the assessee with costs. Counsel''s fees Rs. 250.

(8) Answered accordingly.