The Judgment of the Court was delivered by

Dipak Kumar Sen, J.:— The facts material and the proceedings leading up to this reference are, inter alia, that by a notification dated May 15, 1958, the Government of India had taken over the management of Jessop and Co. Ltd., a public limited company carrying on business of manufacture of machinery and equipment for a limited period. By subsequent notifications issued respectively on May 6, 1961, and April 25, 1963, the Government of India continued to retain the management of the said company and, at the material time, the management of Jessop and Co. Ltd. remained with the Government of India.

2. Subsequently, the Government of India decided to purchase an adequate number of shares of Jessop & Co. Ltd. to obtain a controlling interest in the said company. The shares of Jessop & Co. Ltd. were quoted regularly in the stock exchange. At the material time, the total issued ordinary shares of Jessop & Co. Ltd. were 20,40,000 of Rs. 10 each fully paid up. On July 17, 1963, an agreement in writing was entered into amongst nine parties including one M/s. Sohanlal Pachisia & Co. It was recorded in the said agreement, inter alia, that the said parties respectively held or had at their disposal ordinary shares in Jessop & Co. Ltd. aggregating to Rs. 11,23,000. The particulars of the shares of each of the parties were set out in the said agreement. Sohanlal Pachisia & Co. were shown to hold or have at their disposal along with their clients 3,28,100 shares. Mahadeo Ramkumar, the assessee, at the material time, held 15,780 ordinary shares of Jessop & Co. Ltd. which were included in the said 3,28,100 shares of Jessop & Co. Ltd. declared by Sohanlal Pachisia & Co.

3. It was further recorded in the said agreement as follows:

(a) All necessary steps were agreed to be taken jointly by or on behalf of the parties for the purpose of securing the management of Jessop & Co. Ltd. by directors elected by the shareholders of the latter and/or sale of the said shares held by or at the disposal of the parties in a block at the best possible price.

(b) The parties constituted and appointed a committee consisting of five named persons to decide the concerted action to be taken by or on behalf of the parties for the aforesaid purpose.

(c) The committee would have power to act in the names and on behalf of the parties to negotiate with the Government of India or any other person or authority for the aforesaid purpose; to settle the price of Shares by negotiation, arbitration or otherwise and to incur expenses and to appoint accountants, lawyers and technicians and other persons to assist the committee.

(d) The parties agreed to appoint M/s. Khaitan & Co. as solicitors to act on behalf of the parties.

(e) The agreement would remain in force up to May 31, 1965, or Until the parties realised the value of their shares in Jessop & Co. Ltd., whichever was earlier.

4. On August 18, 1965, a further agreement was entered into by and amongst the Government of India in the name of the President and 66 persons including the said Sohanlal Pachisia & Co. and the assessee. It was recorded in the said agreement, inter alia, as follows:

(a) The said 66 persons between them were the owners of 11,23,300 fully paid up ordinary shares of Rs. 10 each in Jessop & Co. Ltd.

(b) The Government of India was desirous of purchasing the said shares in a block and the said persons were agreeable to sell the said shares in a block at a price to be determined by taking into consideration, inter alia, the value of all assets of Jessop & Co. Ltd., including investments, know-how, goodwill and profit potentiality, also all debts and claims of the latter as on date and also the fact that the said shares in block represented the controlling interest in Jessop & Co. Ltd.

(c) The buyer agreed to buy and accept from the sellers and the sellers agreed to sell and deliver to the buyer the said 11,23,300 ordinary shares in Jessop & Co. Ltd. against payment of cash.

5. On August 19, 1965, another agreement was entered into by and amongst the Government of India on the one hand in the name of the President and the said 66 persons on the other recording, inter alia, as follows:

(a) An agreement dated August 18, 1965, had been entered into by: and between the Government of India and the said 66 persons for sale of 11,23,300 fully paid up ordinary shares of Rs. 10 each in Jessop & Co. Ltd.

(b) Disputes had arisen between the buyer and the sellers in respect of the price payable for the said shares.

(c) The parties had settled some of the disputes and had agreed to refer the remaining disputes to arbitration on terms and conditions recorded in the agreement.

(d) The buyer would pay to the sellers on account towards the price of the said shares an amount calculated at the rate of Rs. 25 per share or at the closing rate quoted in the official quotation list of the Calcutta Stock Exchange Association Ltd. on the date of the agreement. If no rate was quoted on the said date, then the rate would be the closing rate on the date preceding the date of the agreement.

(e) The dispute relating to the price payable by the buyers to the sellers under the agreement for sale of the said shares would be referred to the arbitration of Sudhansu Kumar Das, a retired judge of the Supreme Court of India.

(f) The arbitrator would determine the price of the said shares payable by the buyers to the sellers under the said agreement and in determining such price, the arbitrator would take into consideration, inter alia, the value of all assets of Jessop & Co. Ltd., all debts and claims of the latter at the date of the said agreement and also the fact that the said shares represented the controlling interest in Jessop & Co. Ltd.

(g) The amount paid on account by the buyer to the sellers would be adjusted after the amount payable as price of the said shares was determined by the arbitrator.

(h) The buyer would pay to the sellers interest on the difference between the price of the said shares as determined by the arbitrator and the amount paid on account at the rate of 3% per annum over the Reserve Bank of India rates as might be in force from time to time from the date of the said payment on account to the date of the payment of the amount of the difference together with interest. Provided that interest only at the rate of 1% per annum over the Reserve Bank of India rates would be payable by the buyer if the buyer paid such interest within 60 days from the date of making and signing of the award and the sellers would be bound to accept the reduced rates of interest in satisfaction of their claim for interest.

(i) The arbitrator would make and sign his award within nine months from the date of entering upon reference. The arbitrator might from time to time extend the time beyond the said period of nine months with the consent in writing of both parties or their representatives.

6. Pursuant to the aforesaid, the Government of India paid to the said 66 persons including the assessee on account amounts at the rate of Rs. 25 per share. The assessee who held 15,780 shares received on account a payment of Rs. 3,94,500.

7. Further and in pursuance of their earlier agreement, the said 66 persons entered into an another agreement on November 15, 1965, appointing a sellers' committee to represent their interest in the arbitration.

8. The arbitrator entered into the reference some time after August, 1965. The parties to the arbitration filed their respective statements and rejoinders. Common pleadings were filed on behalf of the 66 sellers. Evidence was adduced and by consent of the parties, the time for the arbitrator to make and publish the award was extended from time to time and ultimately was extended up to April 30, 1969.

9. On April 21, 1969, the arbitrator made and published his award. The value of the said 11,23,300 of the face value of Rs. 10 each in Jessop & Co. Ltd., in a block and as a block was determined to be Rs. 50 per share On the date of the agreement of sale dated August 18, 1965. The arbitrator directed payment of the price of the said shares as determined with interest after making adjustments of the amount paid on account in terms if the supplemental agreement dated August 19, 1965.

10. On May 27, 1969, the assessee received through M/s. Khaitan & Co., Solicitors, a further payment of Rs. 3,94,500 against its 15,780 shares in respect of the difference between the price as finally determined and the amount paid on account and a further sum of Rs. 98,446 towards interest aggregating to Rs. 4,92,946.

11. For the assessment year 1970-71, the accounting year ending on the Ramnabami day of Sambat year 2026, the assessee was assessed to Income-tax. In its profit and loss accounts, the assessee had claimed legal expenses of Rs. 16,162 in respect of the profit of Rs. 4,92,946 arising out of the sale of the shares of Jessop & Co. Ltd. held by the assessee. In its return, however, the assessee contended that a sum of Rs. 3,84,716 arising out of the sale of the said shares was capital receipt in its hands. The assessee also abandoned its claim of Rs. 11,835 on account of legal expenses.

12. The assessee contended that the transaction in respect of the sale of shares of Jessop & Co. Ltd. was not a normal transaction. If the assessee had sold its said shares in the open market, it would not have received Rs. 50 per share and would also not be entitled to receive any interest.

13. The Income-tax Officer did not accept the contention of the assessee. He held that the assessee was a regular dealer in shares and in the earlier year had been allowed legal expenses in respect of the sale of the said shares as revenue expenditure. The Income-tax Officer held that the said amount received under the award of the arbitrator was a trading profit and not capital receipt and included the same in the total income of the assessee.

14. Being aggrieved, the assessee preferred an appeal from the order of the Income-tax Officer to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner rejected the contention of the assessee that a part of the amount realised from the sale of the said shares was a revenue receipt and the balance was capital receipt. The Appellate Assistant Commissioner held that the amount which the assessee received under the award of the arbitrator was a part of the market price of the said shares and that the assessee had realised such price in terms of the award. The assessee having received a determined amount against his shares, the Income-tax Officer could not have determined that the price payable in respect of the said shares was less than the price fixed by the arbitrator. The contention of the assessee was rejected.

15. Being aggrieved, the assessee preferred a further appeal before the Income-tax Appellate Tribunal. It was contended on behalf of the assessee before the Tribunal that the amount received by the assessee in respect of the shares held by it not only represented the price of the shares but it also constituted a composite payment for the price of the shares and certain other valuable rights. It was emphasised that the shares were sold in a block and, therefore, what had been transferred to the Government of India were not only the shares but also the controlling interest in Jessop & Co. Ltd. It was contended that the said 66 persons had combined together and entered into the agreement with the Government of India and at all material times, the said persons acted in concert. It was also contended that under the agreement to refer the dispute regarding the price of the shares, it was specifically recorded that the arbitrator in determining the price of the said shares would take into account the fact that the shares represented the controlling interest in Jessop & Co. Ltd. In the statement of claim filed before the arbitrator, a specific claim had been made for the value of the controlling interest.

16. It was contended that where the shares of a public limited company were quoted in the stock exchange, in any dealing with such shares, the price on the relevant date would be that as quoted in the stock exchange. The assessee could not have obtained more than the price of the said shares as quoted in the stock exchange had it been sold in the ordinary course in the market. The Government of India wanted not only the shares but also the controlling interest and, therefore, had to pay more for the shares.

17. In support of such contentions, reported decisions of High Courts and the Supreme Court were cited before the Tribunal.

18. It was contended on behalf of the Revenue on the other hand that the assessee was a dealer in shares and the shares of Jessop & Co. Ltd. sold by it formed part of its stock in trade.. It was contended that the assessee received more than the market price for the said shares as he derived a benefit of an advantageous sale by bargaining the same collectively with 65 other persons. It was contended that the 66 persons who sold the said shares had never acted earlier in concert in respect of the management of Jessop & Co. Ltd. and, therefore, it could not be said that they had any controlling interest. It was further contended that the assessee having only 15,780 shares in Jessop & Co. Ltd. could not claim to have any controlling interest in the said company. There was no question of the assessee surrendering or transferring any controlling power. It was, however, not disputed that by reason of the purchase of the entire block of shares, the Government of India might have acquired a controlling interest in Jessop & Co. Ltd. but it was contended that for that very reason the Government had paid a price higher than the market price. The earlier decisions in the case of Saraogi & Co. and Dehri Lotus Light Railway Co. Ltd., Bihar, who were parties to the said transaction in respect of the same shares were relied on and cited on behalf of the Revenue.

19. On behalf of the assessee, the said decisions were sought to be distinguished by relying on facts which were brought on record in the case of the assessee. It was contended that in the other cases, the assessees concerned were not able to establish before the Tribunal that the said 66 persons had acted in unison and sold their shares in a block.

20. The Tribunal considered the entire records and evidence and, in particular, the first agreement dated July 17, 1963. The Tribunal noted that as early as in 1963, the parties were acting in concert. In the said agreement though there were only nine parties, the broker, M/s. Sohal Lal Pachisia, had been representing the others including the assessee. The parties intended to sell their shares in a block at the best possible price which indicated they were expecting a higher price than that quoted in the stock exchange inasmuch as the shares were intended to be sold in a block, the Tribunal came to the conclusion that what was agreed to be sold by the assessee and the other shareholders and what was agreed to be purchased by the Government of India were the shares in a block together with the controlling interest over Jessop & Co. Ltd. The Tribunal held that the Arbitrator determined the price of the shares at Rs. 50 per share when the |ate quoted in the stock exchange was only Rs. 25.62 which indicated that the award of the arbitrator was for a composite payment not only for the price of the shares but also for other valuable rights. In the agreement dated July 17, 1963, the parties had first joined together for securing the controlling power in Jessop & Co. Ltd. and thereafter to dispose of their shares in a block. On these facts, the Tribunal held that the price for the shares paid at the rate of Rs. 50 per share was for a composite consideration and that it was not disputed that the real market value of the shares on the relevant date was much less than the price as fixed.

21. The Tribunal next considered whether the excess price realised for the shares amounted to capital gains in the hands of the assessee. The Tribunal held that as the Revenue had never set up such a case nor had sought to assess the said excess as capital gains, it was not open to the Revenue to contend that the said excess should be taxed as capital gains in the hands of the assessee. The Tribunal held further that, in any event, the consideration for obtaining the controlling interest could not be a capital gain as the controlling interest like goodwill was not a capital asset, transfer of which would attract capital gains tax. The Tribunal held that the controlling interest could not exist independently of the shares and the same could not be divided into parts, fragments or fractions. The Tribunal also noted that obtaining the controlling interest had not cost the assessee anything.

22. For the above reasons, the Tribunal held that the assessee was not liable to be taxed on the excess it had realised from the sale of its shares in Jessop & Co. Ltd. over the market rate. In a separate order given by the Vice President, a member of the Tribunal, reasons were recorded as to why the Tribunal was differing from its earlier order passed in the cases of Saraogi & Co. and Dehri Rohtas Light Railway Co. Ltd. It was noted that evidence was adduced in this reference to show that the sixty six parties including the assessee were acting in unison from 1963 and in a concerted manner. The agreement dated July 17, 1963, established that the parties had combined for more than two years before they had agreed to sell their shares in Jessop & Co. Ltd. to the Government of India as a block and in a block.

23. The appeal of the assessee was accordingly allowed.

24. At the hearing of this reference, learned advocate for the Revenue contended that the assessee in the instant case did not have any controlling interest. It was contended further that the management of Jessop & Co. ltd., at all material times, remained with the Government of India and that there was no question of any person or any group of persons having control over Jessop & Co. Ltd. It was submitted that what was sold were the shares in Jessop & Co. Ltd., and by reason of the said sale, the assessee received the price of the shares and nothing else. The price was received partly in advance and partly after the award of the arbitrator and the entire amount must be treated to be the price of the said shares. The profits arising from such sale was a revenue receipt taxable in the hands of the assessee.

25. Learned advocate for the assessee contended on the other hand that the Tribunal found as a fact that what was sold by the assessee acting in concert with other persons were not only the shares in Jessop & Co. Ltd. but the controlling interest in Jessop & Co. Ltd. which were represented by the shares being sold as a block. This finding had not been challenged by the Revenue and had become final. It was further contended that what was obtained by the assessee was the price for the shares as also the price for the controlling interest.

26. There was no dispute andlit was established beyond doubt that the price of the shares in the market at the relevant time was only Rs. 25.62 Therefore, the balance which was realised by the assessee along with others in respect of the sale of the shares must be held to be the consideration received for parting with the controlling interest in Jessop & Co. Ltd.

27. The controlling interest was the actual asset in the hands of the assessee and the other persons and the consideration arising from the sale of such an asset cannot be taxed as a revenue receipt. It was contended farther, reiterating the previous stand of the assessee before the authorities below, that the controlling interest of the assessee and the other shareholders in Jessop & Co. Ltd. was not a capital asset in the accepted sense of the expression. Such an asset was in the nature of goodwill. There was no cost of acquisition of such controlling interest and this could not be fragmented or divided or sold in parts like other capital assets. Therefore, the receipt arising from the transfer of such a capital asset could not be taxed as capital gains in the hands of the transferor. In support of the respective contentions of the parties, a number of decisions were cited at the Bar which are noted hereafter as follows:

(a) Baijnath Chaturbhuj v. CIT, [1957] 31 ITR 643 (Bom). In this case, the assessee sold a number of shares of another company held by it together with its managing agency right over the latter company at Rs. 65 per share. On the date of transaction, the market value of the share was only Rs; 46 per share. The Revenue sought to tax the excess realised as capital gains in the hands of the assessee. The Tribunal held that the transaction was not an ordinary sale of shares and the main object of the transaction was the transfer of the managing agency but the contentions of the assessee could not be accepted as the price of the shares and that of the managing agency has not been apportioned.

On a reference, it was held by a Division Bench of the Bombay High court that as it was not in dispute that, at the time of sale, the real market value of the shares was only Rs. 46 per share only, the same should be taken into account for the purpose of taxing capital gains. The consideration for the transfer of the shares on the basis of an inflated value without apportioning the same between the shares and the managing agency would not affect the position. It was held further that the income-tax authorities were precluded from taxing the capital gains arising from the transfer of the managing agency and such a case had never been made out earlier.

(b) Ramnarain Sons (P.) Ltd. v. CIT, [1961] 41 ITR 534 (SC). In this case, the assessee was a dealer in shares and also carried on business as managing agents of other companies. In order to acquire the managing agency of a textile mill, the assessee purchased from the then managing agents of the mill, shares at a price higher than the market price of the said shares. Further shares in the mill held by the then managing agents were acquired by the directors of the assessee. Subsequently, the assessee sold a number of the said shares of the textile mill at a loss and claimed the loss as a trading loss.

On these facts, it was held by the Supreme Court that by purchase of shares in excess of their market value to facilitate the acquisition of the managing agency, the assessee acquired a capital asset. The intention of the assessee in purchasing the said shares of the mill was not to acquire the same as part of the stock-in-trade of the assessee's business in shares though it was shown as part of such stock. The loss incurred by the sale of the said shares was, therefore, a capital loss.

(c) Kettlewell Bullen and Co. Ltd. v. CIT, [1964] 53 ITR 261 (SC). In this case, the assessee carried on the business of managing agency and was the managing agent of several companies. The assessee entered into an agreement with a third party whereby the latter agreed to purchase the entire holding of shares of the assessee in one of the managed companies. The third party also agreed to procure repayment of all loans made by the assessee to the managed company and also to procure compensation by the managed company to the assessee for loss of its office by payment of a fixed sum after the assessee resigned its managing agency. The third party agreed to reimburse the said amount to the managed company.

Pursuant to the aforesaid, the assessee resigned from its managing agency in the said managed company and received the stipulated sums. The question was whether the amount received by the assessee in consideration of relinquishing of managing agency was a revenue receipt liable to tax. On these facts, it was held by the Supreme Court that the arrangement between the parties was not in the nature of a trading transaction. The assessee parted with assets of an enduring value. The assessee was paid compensation for loss of a capital asset and the amount received was not, therefore, in the nature of a revenue receipt. By reason of the cancellation of the agency, the trading structure of the assessee was impaired or such cancellation resulted in loss of a source of income and payment to compensate for cancellation of the agency would normally be a capital receipt.

(d) CIT v. Best & Co. (Private) Ltd., [1966] 60 ITR 11 (SC). In this case, the assessee in the course of its business acquired a number of selling agencies. One of such agencies was terminated by the principal and was transferred to a nominee of the principal. By way of compensation, the assessee was paid during three successive years, after the transfer of the agency, amounts calculated on the basis of commission earned by the new spiling agent. It was also a condition of payment of such compensation that the assessee would for a period of five years refrain from selling or accepting any selling agency for products competitive with the product covered by the terminated agency.

On the facts, the Supreme Court held that the compensation agreed to be paid was not only in lieu of the loss of agency but also for the assessee accepting a restrictive covenant for a limited period which came into operation only after the agency was terminated. It was further held that that part of the compensation which was attributable to the restrictive covenant was a capital receipt and not taxable.

(e) CIT v. East Coast Commercial Co. Ltd., [1967] 63 ITR 449 (SC). In this case, the Supreme Court considered, in the context of section 23A(1) of the Indian Income-tax Act, 1922, whether the assessee was a company in which the public were not substantially interested. The Supreme Court held that it was to be determined first whether any individual member of the company or a group could control the voting power as a block, holding more than 50% of the shares and acting in concert. It was to be further ascertained if the block exercised a control over the company. If such a block held 75% or more of the shares, then the company would be one in which the public were not substantially interested and it would come within the mischief of section 23A(1).

The Supreme Court observed further that the existence of a block was not decisive nor was it a condition that actual exercise of control by a group must be established. It would be sufficient, having regard to the relationship, the conduct and the common interest of the members of the group to infer that they were acting together. The matter was remanded to the Tribunal for further enquiry.

(f) New Era Agencies (Pvt) Ltd. v. CIT, [1968] 68 ITR 585 (SC). The assessee in this case was a private limited company controlled by an individual and his nominees. The assessee was a dealer in shares. The persons in control of the assessee also acquired the control of another company and also acquired the managing agency of the said company. The assessee had been dealing in shares belonging to the managed company till 1948. From 1949 onwards, there was a slump in the price of the shares of the managed company. The assessee did not effect any sale of the shares of the managed company and on the contrary purchased some more shares of the latter. Subsequently, the person in control of the managed company and of the assessee offered to sell to a third party a number of ordinary and preference shares of the managed company standing in his name as also in the names of his relatives and other allied concerns. The transferor undertook to obtain simultaneously the resignation of the existing managing agents and the directors of the managed company and obtain the appointment of the transferees as directors of the managed company. The offer was accepted by the third party. A sum of Rs. 45 lakhs was paid as a consideration for the transaction of which a sum Rs. 10 lakhs was paid to the existing managing agents of the managed company in consideration of its resignation. The balance was distributed to the respective shareholders. A number of ordinary shares and preference shares of the managed company held by the assessee were also transferred. Out of the consideration, the assessee received value for the shares of the other company held by it at a price above the market rate. The excess received by the assessee as consideration for the shares held by it was sought to be taxed as profits of business. The assessee contended, inter alia, that the profit was a capital accretion, that from 1949 the assessee was holding the shares in the other company as an investment and that the consideration received included consideration for procuring the resignation of the directors, securing the appointment of the transferee's nominees as directors and obtaining the resignation of the managing agents of the managed company.

In an appeal before the Supreme Court by the assessee, it was held that the profit arising from the sale of the shares of the managed company by the assessee was not a capital accretion but business income. There was no evidence to establish that the shares held by the assessee in the managed company were investments and the fact that no sale of the said shares had been made by the assessee from 1949 was not sufficient to conclude that the said shares in the other company were being held by the assessee as an investment.

The Supreme Court held further that there was no material on record to show that the object of the assessee in acquiring the shares of the managed company was to support the existing managing agents. It was held that the part played by the assessee in the transaction was merely passive and the assessee only kept the said shares of the managed company at the disposal of the person in control of the assessee. It is further found that the assessee had no controlling power over the managed company nor was it in a position to procure the resignation of the managing agents or directors or appoint new directors on the nomination of the transferee.

The Supreme Court held that the assessee only parted with the shares held by it and what it received was by way of payment against the said shares. The entire sum received was the price and the excess over the cost price of the said shares was the profit of the assessee.

(g) CIT v. Chunilal Prabhudas & Co., [1970] 76 ITR 566. This decision of a Division Bench of this court was cited for the proposition that goodwill of a business was not a capital asset within the meaning of section 12B of the Indian Income-tax Act, 1922, and transfer of the same could not produce any profit or gain. In the judgment, the nature of goodwill was discussed in detail and it was held, inter alia, that goodwill as an asset could not exist independently of the business, it was indivisible and could not be transferred in parts, fragments or fractions.

(h) CWT v. Mahadeo Jalan, [1972] 86 ITR 621. In this case, the Supreme Court considered the principles of valuation of shares held by an assessee for the purpose of the Wealth-tax Act, 1957. The Supreme Court, inter alia, held that where the shares were of a public company and were quoted on the stock exchange for dealings in such shares, the price prevailing on the valuation date would be the value of the shares. The Supreme Court further observed as follows (at page 628):

“There may yet be investors who notwithstanding that the company is; not in a solvent condition or is unable to pay dividends for a number of years are willing to purchase the controlling interest for the purpose of manipulation or bringing it to liquidation for obtaining some benefit.”

(i) CIT v. East Coast Commercial Co., [1978] 115 ITR 633 (Cal). This decision of a Division Bench of this court was in a reference which followed from the decision of the Supreme Court in CIT v. East Coast Commercial Co. Ltd., [1967] 63 ITR 449. The said decision of the Supreme Court has been considered earlier. Pursuant to the directions of the Supreme Court, the Tribunal submitted a supplementary statement of case on the question whether the assessee was a company in which the public were substantially interested within the meaning of section 23A of the Indian Income-tax Act, 1922. It was found by the Tribunal that more than 75% of the shares of the company were held by a particular group. The Tribunal stated further that having regard to the normal course of human conduct, the said group consisting of family members must have acted in concert. It was noted by this court that this inference was drawn by the Tribunal without making any enquiry as to the conduct and activities of the group. It was held that the Tribunal was required to make the said enquiry as directed by the Supreme Court and the matter was remanded to the Tribunal for a further supplementary statement of the case. It was held, following the decision of the Supreme Court, that the Revenue had to bring on record relevant materials to show that a group of shareholders holding more than 75% of the shares of a company have acted in concert in relation to the affairs of the company.

(j) Cit v. B.C Srinivasa Setty., [1981] 128 ITR 294 (SC). In this case, the Supreme Court considered the nature of goodwill of a business. It was held that goodwill of a business could not be held to be an asset within the meaning of section 45 of the Income-tax Act, 1961, and a transfer of goodwill does not give rise to a capital gain exigible to tax.

(k) Short v. Treasury Commissioners, [1948] 2 All ER 509; [1948] AC 534 (HL). The facts in this case were that under the Defence (General) Regulations, 1939, of the U.K, the Government authorities appointed a Controller over the undertaking of a company and further directed that all the shares of the company should be transferred to the nominees of the Government at prices of the said shares prevailing on the stock exchange on the date of the taking over control of the company.

28. The shareholders of the company contended that the price of the shares should be fixed on the basis of the value of the entire undertaking including therein the value of the complete control of the undertaking as all the shares were being transferred.

29. The said dispute was referred to arbitration and the arbitrator sent up a special case for the opinion of the court.

30. The proceedings were disposed of ultimately in the House of Lords. Construing the Defence Regulations, it was held by the House of Lords that price was to be paid for the individual holdings and not on the shares as a whole and that it was convenient to decide the value of any particular holding by reference to the stock exchange price at the relevant date. The method of valuation adopted was held to be correct in principle. Lord Uthwatt observed as follows (p. 546 of AC):

“… if some one shareholder held a number of shares sufficient to carry control of the company, it might well be that the value proper to be attributed to his holding under the regulation was greater than the sum of the values that would be attributed to the shares comprised in that holding if they were split between various persons. The reason is that he has something to sell—control—which the others considered separately have not.”

31. Other decisions cited at the Bar were:

(a) G. Venkataswami Naidu & Co. v. Commissioner Of Income-Tax , [1959] 35 ITR 594 (SC).

(b) Mahesh Anantrai Pattani v. CIT, [1961] 41 ITR 481 (SC).

(c) Vadlamani Kamemara Rdo v. CIT, [1964] 51 ITR 304 (AP).

32. The said decisions and the principles laid down therein are of no particular relevance to the questions involved in the instant case and the same need not be considered further.

33. On a consideration of the facts and circumstances of the case, the contentions of the parties and the decisions cited, it appears to us that it has been established factually that by purchasing 11,23,200 shares in a block cut of the total shares of Jessop & Co. Ltd., being 20,40,000, the Government of India obtained more than 51% of the total shareholding of Jessop & Co. Ltd., and thereby obtained a controlling interest in the said company.

34. It is also established that the shares purchased by the Government of India in a block from the assessee and the other 65 persons fetched a value higher than the market price of the said shares. This was a factor which was in the contemplation of the assessee and the other shareholders of Jessop & Co. Ltd., who formed a group, put their shareholdings together constituting a block and negotiated for sale of the said shares with the Government of India on that basis. In determining the value of the said shares, the arbitrator also took into account the fact that the said shares were being sold in a block and that in a block the said shares represented the controlling interest in Jessop & Co. Ltd. This is apparent from the face of the award and the terms of the reference.

35. It is also evident that the assessee and the 65 other shareholders of Jessop & Co. Ltd. had been acting in a group since 1963 that they had put their shares together to form a block and they were interested in selling the shares to the Government at the highest possible price knowing that the shares sold in a block would result in the transfer of controlling interest to the purchaser.

36. It is to be decided whether the excess amount realised from the sale of the shares over and above their market value at Rs. 25.62 forms a part of the consideration for sale of the shares themselves or is the consideration for sale of the controlling interest as a separate asset.

37. It appears to us that the controlling interest attached to the said Mock of shares cannot be considered separately from the shares them-selves. Each share represents a vote in the management of the company and the shares put together formed a block and aggregated the votes. If the stares exceeded 51% of the the total shareholding, the votes arising from the holding of the block of shares would represent a majority vote which could be utilised to control the company.

38. This controlling interest is, therefore, inextricably attached to the block of shares and cannot form a separate asset by itself. A controlling interest, in our view, is different from a managing agency. A managing Agency is a creature of a separate agreement which creates a right in fkvour of the managing agent to manage the company. Managing agency is an asset which can exist independently by itself and is in no way directly connected with the shares of the managing or the managed company. A controlling interest on the other hand, as noted earlier, must arise from and remain attached to the majority shares.

39. In our view, the shares which were utilised to constitute a block carried the voting rights in a block and the controlling interest which arose thereby was a part and parcel of the block of shares. The amount paid by the Government of India was for the purchase of the said shares in a block which carried along with it sufficient votes to control the company. Therefore, even if we accept the primary facts found by the Tribunal as correct, it cannot be held that the Government of India purchased from the assessee and the other shareholders something more than or apart from the block of shares. What was paid by the Government of India was for the block of shares itself which carried along with it the controlling interest and each share in the said block, to the extent it carried a vote, contained in it a part of the controlling interest. Therefore, we hold that the excess amount which was paid for the shares was part of the price of the shares themselves. The Tribunal, in our view, erred in holding that the excess amount was paid for a separate valuable right, viz., the controlling interest.

40. Next to be considered is whether the said excess amount paid for the shares can be taxed as capital gains or revenue receipt in the hands of the assessee. It has been found as a fact that the assessee is a dealer in shares. It is also found that when the assessee entered into the agreement with other shareholders of Jessop & Co. Ltd. to bring into existence a block of shares, the intention and the main object of the assessee was to sell the said block of shares at the highest price. No doubt it is recorded in the agreement dated July 17, 1963, that they were taking steps jointly to secure the management of Jessop & Co. Ltd. But, construing the other clauses of the said agreement, it appears that the main object of the shareholders who had combined was to sell the said block of shares at the highest price to be determined by negotiation, arbitration or otherwise. Apart from negotiations with the Government of India for sale of the shares, no other steps were taken by the assessee and the other shareholders to obtain control of Jessop & Co. Ltd. In any event, the management of Jessop & Co. Ltd. having been taken over by the Government of India for an indefinite period since 1958, it was not open to the assessee and the other shareholders, even though they acted in concert, to take over the management of Jessop & Co. Ltd. In that view, it appears to us that the sale of the block of shares by the assessee and the other shareholders was done in the course of their business and, therefore, the excess amount realised from the sale must be treated as revenue receipt in their hands.

41. The decisions cited on behalf of the assessee can be distinguished on the ground that in the said cases, the sales were not only of the shares involved but also of other independent and separate rights which constituted assets by themselves like a managing agency right. For the above reasons, we answer the question referred in the negative and in favour of the Revenue. We state that the excess over the market price received in respect of the shares sold was a revenue receipt in the hands of the assessee.

42. In the facts and circumstances, their will be no order as to costs.

Monjula Bose, J.:— I agree.