Full Judgment Text
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PETITIONER:
SENAIRAM DOONGARMALL
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, ASSAM
DATE OF JUDGMENT:
13/03/1961
BENCH:
HIDAYATULLAH, M.
BENCH:
HIDAYATULLAH, M.
KAPUR, J.L.
SHAH, J.C.
CITATION:
1961 AIR 1579 1962 SCR (1) 257
CITATOR INFO :
R 1962 SC 429 (6)
RF 1964 SC 758 (12,16)
R 1970 SC1702 (3)
R 1972 SC 386 (17)
F 1973 SC 515 (7,8,9)
F 1987 SC 500 (36,37)
RF 1992 SC1495 (31)
ACT:
Income Tax--Capital or Revenue--Tea estate--Requisition of
factories and buildings--Stoppage of tea
business--Compensation--Nature of--Indian Income-tax Act,
1922 (11 of 1922), S. 10.
HEADNOTE:
The assessee, a Hindu undivided family, owned a tea estate
in Assam comprising a tea garden, factories, labour,
quarters, staff quarters etc. On February 27, 1942, the
military authorities requisitioned all the factory buildings
etc., under the Defence of India Rules but the tea garden,
however, was left in the possession of the assessee. The
possession of the military continued till the year 1945 and
during that period, though the assessee looked after its tea
garden, its business as tea-growers and tea-manufacturers
could not be continued. Under the Defence of India Rules,
the military authorities paid the assessee as compensation a
sum of Rs. 2,22,080 for the year 1944, which included Rs.
10,000 for repairs to quarters for labourers, and a sum of
Rs. 2,46,794 for the year 1945, which included Rs. 15,231
for repairs. For the assessment years 1945-1946 and 1946-47
the question arose as to whether the aforesaid sums or any
portion thereof were capital receipts or were revenue
receipts and liable to tax. The facts showed that the
business, which the assessee had been carrying on, consisted
in growing tea plants and in making tea out of the leaves by
a manufacturing process into a commercial commodity, that
without the factory and the premises the tea leaves could
not be dried, smoked and cured to become tea, and that the
result of the requisition of the factories was to stop the
business.
Held, that the amounts paid by the military authorities were
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received by the assessee not as compensation for the loss of
profits of the business which it had been carrying on but
for the injury to the business as a whole, because the
entire structure of business was affected to such an extent
that no business was carried on by the assessee during the
two years in question. Accordingly, the compensation could
not bear the character of profits of a business and was not
liable to tax under S. Io of the Indian Income-tax Act,
1922.
Income-tax Commissioner v. Shaw Wiallace & CO., (1932) L.R.
59 I.A. 206, referred to and applied.
Case law reviewed.
33
258
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 535 of 1958.
Appeal from the judgment and order dated March 29,1955, of
the Assam High Court in I.T.R. No. 1 of 1954.
A.V. Viswanatha Sastri and D. N. Mukherjee, for the
appellants.
Hardayal Hardy and D. Gupta for the respondent.
1961. March 13. The Judgment of the Court was delivered by
HIDAYATULLAH, J.-This appeal which has been filed with a
certificate under s. 66(A)(2) granted by the High Court of
Assam against its judgment and order dated March 29, 1955,
concerns the assessment of the appellants, a Hindu undivided
family, for the assessment years, 1945-1946 and 1946-1947.
The appellants owned a tea garden called the Sewpur Tea
Estate in Assam. They had on the Estate, factories, labour
quarters, staff quarters etc. On February 27, 1942, the
Military authorities requisitioned all the factory
buildings, etc., under R. 79 of the Defence of India Rules.
Possession was taken sometime between March land March 8,
1942. The tea garden was, however, left in the possession
of the appellants. The possession of the military continued
till the year 1945, and though the appellants looked after
their tea garden the manufacture of tea was completely
stopped. Under the Defence of India Rules, the Military
authorities paid compensation. For the year 1944,
corresponding to the assessment year, 1945-1946, they paid a
total sum of Rs. 2,22,080 as compensation including a sum of
Rs. 10,000 for repairs to quarters for labourers and Rs. 144
which represented the assessor’s fee. For the year 1945,
corresponding to the assessment year, 1946-1947, the
Military authorities paid a sum of Rs. 2,46,794 which
included a sum of Rs. 15,231 for other repairs. The sums
paid for repairs appear to have been admitted as paid on
capital account, and rightly so. The question was whether
the two Sums paid in the two
259
years minus these admitted sums, or any portion thereof,
were received on revenue or capital account.
The assessments for the two years were made by different
Income-tax Officers. For the assessment year, 1945-1946,
the Income-tax Officer deducted from Rs. 2,22,080, a sum of
Rs. 1,05,000 on account of admissible expenses. He then
applied to the balance Rs. 1,17,080, R. 24 of the Indian
Income-tax Rules, 1922, and brought to tax 40 per cent of
that sum amounting to Rs. 46,832. The assessment was made
under s. 23(4). For the assessment year, 1946-1947, the
assessment was made under s. 23(3) of the Incometax Act.
The Income-tax Officer excluded the sum paid on account of
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repairs and treated the whole of the amount as income
taxable under the provisions of the Income-tax Act, after
deduction of admissible expenditure. The appeals filed by
the appellants to the Appellate Assistant Commissioner
against both the assessments were unsuccessful. On further
appeal, the Income-tax Appellate Tribunal (Calcutta Bench)
was divided in its opinion. The Judicial Member held that
the receipts represented revenue but on account of "use and
occupation" of the premises requisitioned. He, therefore,
computed the not compensation attributable to such use and
occupation at 20 per cent of the total receipts in both the
years. He however, observed that if the receipts included
income from the tea estate he would have been inclined to
apply R. 24 in the same way as the first Income-tax Officer.
The Accountant Member was of the opinion that the appellants
were liable to pay tax on 40 per cent of their receipts in
both the years after deduction of the sums paid for repairs
of buildings and the admissible expenditure. He accepted
the estimate of expenditure for the account year, 1944,. at
RE;. 1,05,000, and directed that the admissible expenditure
for the succeeding year be determined and deducted before
the application of R. 24.
It appears that through some inadvertence these two orders
which were not unanimous, were sent to the appellants and
the Department. The Commissioner of Income-tax filed an
application under s. 66(1) for a
260
reference, while the appellants filed an application under
s. 35 for rectification of the orders, since many other
matters in appeal were not considered at all. When these
two applications came before the Tribunal, it was realised
that the matter had to go to a third Member for settling
the difference. The President then heard the appeal, and
agreed with the Accountant Member. Though he expressed a
doubt whether the appellants were entitled to the benefit of
rr. 23 and 24, he did not give an opinion, because this
point was not referred to him.
The Tribunal then referred the case to the High Court of
Assam on the following two questions:
"(1). Whether the sums of Rs. 2,12,080 and
RE;. 2 31,563 paid by the Government to the
assessee in 1945 and 1946 respectively
(exclusive of the sums paid specifically for
building repairs) were revenue receipts in the
hands of the assessee comprising any element
of income?
(2). If so, whether the whole of the said
sums less the expenses incurred by the
assessee in tending the tea bushes constituted
agricultural income in his hands exempt from
tax under the Indian Income-tax Act, 1922?"
The reference was heard by Sarjoo Prasad, C.J., and Ram
Labhaya, J., along with two writ petitions, which had also
been filed. They delivered separate judgments, but
concurred in their answers. The High Court answered both
the questions against the appellants. The writ petitions
were also dismissed.
Before we deal with this appeal, we consider it necessary to
state at this stage the method of calculation of
compensation adopted by the Military authorities. It is not
necessary to refer to both the years, because what was done
in the first year was also done in the following year except
for the change in the amounts. This method of calculation
is taken from the order of the Judicial Member, and is as
follows:
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261
Rs. A. P.
Crop-211120 1bs. at 17.85d (half)
and at 18.35d (half) 2,12,292 14 0
15480 1bs. at Rs. 0-11-10 11, 449 12 0
52600 1bs. at Rs. 0-15-6 50,956 4 0
-----------------
2,74, 698 14 0
Less-Saving of plucking and
manufacturing:-
Rs.
(a) Expenses at annas 3
per lb. 49,209
(b) Sale of export rights,
1,32,935 1bs. 4,924
(c) Purchase of export rights
78,185 lbs. at annas 4. 1,629
(d) Food and clothing
concessions 7,000 62,762 0 0
--------------------------
2,11,9360 0
Add---For fees of assessors, Rs. 144
Coolie lines repairs, Rs. 10,000 10,1440 0
-----------------------
Rs. 2,22,08000
------------------------
From the admitted facts which have been summarised above, it
is clear that the business of the appellants as tea-growers
and tea-manufacturers had come to a stop. The word
"business" is not defined exhaustively in the Income-tax
Act, but it has been held both by this Court and the
Judicial Committee to denote an activity with the object of
earning profit. To say that a business is being carried on,
means no more than that profit is to be earned by a process
of production. The business of a tea-grower and manu-
facturer is not merely to grow tea plants but to collect tea
leaves and render them fit for sale. During the years in
question, the appellants were tending their tea garden to
preserve the plants, but this activity cannot be described
as a continuation of the business,
262
which had come to an end for the time being. It would have
hardly made any difference to the carrying on of business,
if, instead of the factories and buildings, the tea garden
was requisitioned and occupied, because in that event
also, the business Would have come to a standstill.
The compensation which was paid in the two years was no
doubt paid as an equivalent of the likely profits in those
years; but, as pointed out by Lord Buckmaster in The
Glenboig Union Fireclay Co. Ltd. v. The Commissioners of
Inland Revenue (1) and affirmed by Lord Macmillan in Van Den
Berghs Ltd. v. Clark (2),
"there is no relation between the measure that
is used for the purpose of calculating
a particular result and the quality of the
figure that is arrived at by means of the
application of that test".
This proposition is as sound as it is well-expressed, and
has been followed in numerous cases under the Indian Income-
tax Act and also by this Court. It is the quality of the
payment that is decisive 1 of the character of the payment
and not the method of the payment or its measure’. and makes
it fall within capital or revenue.
We are thus required to determine what was it that was paid
for, or, in other words, what did the two payments replace,
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if they replaced anything. The arguments at the Bar
followed the pattern which has by now become quite familiar
to Courts. We were taken to the 12th Volume of the Tax
Cases series, where are collected case,% dealing with Excess
Profits Duty and Corporation Profits Tax in England follow-
ing the First World War, and to, other English case,-,
reported since. These cases have been considered and
applied on more than one occasion by this Court, and we were
referred to those cases as well.
Now, it is necessary to point out that the English cases
were decided under a different system of taxation and must
be read with care. A case can only be decided on its own
facts, and the desire to base one’s decision on another case
in which the facts appear to be near enough sometimes leads
to error. It is well to
(1) (1922) 12 T.C 427.
(2) [1935] A.C. 431.
263
remember the wholesome advice given by Lord Dunedin in Green
v. Gliksten & Son Ltd. (1) that "in these Income Tax Act
cases one has to try, as far as possible, to tread a narrow
path, because there are quagmires on either side into which
one can easily be led............"
The English cases to which we were referred, were used even
in England by Lord Macmillan in Van Den Berghs’ case (2) as
mere illustrations, and when cited before the Judicial
Committee in Income-Tax Commissioner v. Shaw Wallace &
Co.(3) were put aside by Sir George Lowndes with this
observation
"their Lordships would discard altogether the
case law which has been so painfully evolved
in the construction of the English income-tax
statutes--both the cases upon which the High
Court relied and the flood of other decisions
which has been let loose in this Board".
Most of the cases cited before us deal with Excess Profits
Duty and Corporation Profits Tax. In the former group, pre-
war profits had to be determined, so that they might be
Compared with post-war business for the purpose of arriving
at the excess profits, if any. In dealing with the pre-war
profits, diverse receipts were considered from the angle
whether they formed capital or revenue items. The
observations which have been made are sometimes appropriate
to the nature of the business to which the case related and
the quality of the payment in relation to that business.
Similarly, the Corporation Profits Tax was a tax intended to
be imposed upon the profits of British Companies (which
included some other corporate bodies’ carrying on trade or
business including the’ business of investments. The
profits which were taxed under s. 52 of the English, Finance
Act were required to be determind according to the
principles laid down in that Act.
It is thus obvious that though the English cases may be of
some help in an indirect way by focussing one’s attention on
what is to be regarded as relevant
(1) (1929) 14 T.C 364 384 (2) [1935] A.C. 431.
(3) (1932) L.R- 59 J.A. 206.
264
and what rejected, they cannot be regarded in any sense as
precedents to follow. Since this Court on other occasions
used these cases as an aid, we shall refer to them briefly;
but we have found it necessary to sound a warning, because
the citation of these authorities has occasionally outrun
their immediate utility.
We begin with the oft-cited case of The Glenboig Union
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Fireclay Co. Ltd. (1). That was a case under the Excess
Profits Duty. The facts are so well-known that we need not
linger over them. A seam of fireclay could not be worked,
and compensation was paid for it. That the clay was capital
asset was indisputable, and the portion lost was a slice of
capital. The hole made in the capital was filled up by the
compensation paid. It was said that a portion of the
capital asset was sterilized and destroyed, and even though
the business went on, the payment was treated as on capital
account. The case cannot be used as precedent, because
here, no doubt, the factories and buildings were apart of
fixed capital, but the payment was not so much to replace
them in the hands of the appellants as to compensate them
for the stoppage of business. The Glenboig case (1) does
not apply.
The case of Short Bros. Ltd. v. The Commissioners of Inland
Revenue (2), another case under the Excess Profits Duty,
illustrates a contrary principle. The Company had agreed to
build two ship;, ’but the contracts were cancelled and E.
100,000 were paid for cancellation of the contracts. This
was held to be a receipt in the ordinary course of the
Company’s trade. Rowlatt, J., said that it was "simply a
receipt, in the course of a going business, from that going
business--nothing else". In the Court of Appeal, Lord
Hanworth, M.R., affirmed the decision, observing:
"Looked at from this (business) point of view
it appears clear that the sum received was
received in ordinary course of business, and
that there was not in fact any burden cast
upon the company not to carry on their trade.
It was not truly compensation
(1) (1922) 12 T.C 427.
(2) (1927) 12 T.C. 955.
265
for not carrying on their business; it was a
sum paid in ordinary course in order to adjust
the relation between the shipyard and their
customers. "
The payment was by a customer to the shipyard. Whether the
amount was paid for ships built or because the contract was
cancelled, it was a business receipt and in the course of
the business. In the present case, the payment is not of
this character, and Short Bros. case (1) does not apply.
The next case-also of Excess Profits Duty-is The
Commissioners of Inland Revenue v. Newcastle, Breweries,
Ltd. (2). In that case, the admiralty took over one-third
stock of rum of the Brewery, and paid to the Company the
cost plus 1 s. per proof gallon. Later, the compensation
was increased by an amount of E. 5,309 and was brought to
tax in the earlier year, when the original compensation was
paid. The observations of Rowlatt, J., though made to
distinguish the case from one in which the compensation is
paid for destruction of business, are instructive. We shall
refer to them later. The learned Judge held that this was a
case of compulsory sale of rum, and that a compulsory sale
was also a sale. The receipt was held to be a profit. The
decision was affirmed by the Court of Appeal. This case
also, so far as its facts go, was very different, and the
actual decision has no relevance.
The Commissioners of Inland Revenue, v. The Northfleet Coal
and Ballast Co. Ltd. (3) was a case like Short Bros. case
(1). ;E. 3,000 in a lump sum were paid to be relieved from a
contract, and as the business was a going business, it was
held to be profit. In fact, Short
Bros. case (1) was applied.
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Ensign Shipping Co. Ltd. V. The, Commissioners of Inland
Revenue 4 a case of Excess Profits Duty, is interesting.
During the Coal Strike of 1920, two ships of the Company
were ready to sail with cargoes of coal. They were detained
for 15 and 19 days respectively by orders of Government. In
April 1924,pound 1,078/were paid as compensation, and were
held to be
(1) (1927) 12 T.C. 955.
(3) (1927) 12 T.C. 1102.
34
(2) (1927) 12 T.C. 927.
(4) (1927) 22 T.C. 1169.
266
trading receipts. Rowlatt, J., laid down that if there was
an operation which produced income, it was none the less
taxable, because it was a compulsory operation. The learned
Judge then observed that he could not hold that this was a
case of hire, like Sutherland v. The Commissioners of
Inland Revenue (1), because the ships lay idle and their use
was interrupted. The learned Judge then concluded:
"Now it is quite dear that if a source of
income is destroyed by the exercise of the
paramount right... and compensation is paid
for it, that that is not income, although the
amount of the compensation is the same sum as
the total of the income that has been lost..
but in this case I have got to decide the case
of a temporary interference... Here these
ships remained as ships of the concern... they
merely could not sail for a certain number of
days, and in lieu of the value of the use
which they would have been to their owners in
their profit-earning capacity during those
days, in lieu of that receipt, this money was
paid to the owners, although they were not
requisitioned, as if requisitioned... I think
I ought to regard this sum, as the
Commissioners have obviously regarded it, as a
sum paid which to the shipowners stands in
lieu of the receipts of the ship during the
time of the interruption."
This decision was approved by the Court of Appeal. Now, the
case was one of loss of time during which the ships would
have been usefully and profitably employed. It was argued
in the Court of Appeal with the assistance of the Glenboig
case (2), and it was suggested that the vessels, were
‘sterilised’ for the period of detention. Lord Hanworth
said that that was rather a metaphorical word to use, and
that the correct way was to look at the matter differently.
The Master of the Rolls observed:
"But in the present case it seems to me that,
looked at from a business point of view, all
that has happened is that the two vessels
arrived much later at the ports to which they
were consigned than they would have done, with
the consequent result
(1) (1918) 12 T.C. 63.
(2) (1922) 12 T.C. 427
267
that for the certain number of days which they
were late they could not possibly make any
earnings, and it is in respect of that direct
loss by reason of the interference with the
rights exercised on behalf of His Majesty that
they made a claim and have been paid
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compensations
This ruling was strongly relied upon by the Department as
one which laid down a principle applicable here. We do not
agree. The, payment there was made towards loss of profits
of a going business, which business was not destroyed. As a
source of income, the business was intact, and the business
instead of being worked for the whole period, was worked for
a period less by a few days and the profit of that period
was made up. That may be true if one is going to determine
standard profits of a particular period, because what is
paid goes to profits in the period but is of no significance
in a case like the present, where during the whole of the
year no business at all was done nor profits made. This
case also does not help to solve the problem.
Charles Brown & Co. v. The Commissioners of Inland Revenue
(1) is yet another case of Excess Profits Duty. In that
case, the business of the taxpayer was carried on under the
control of the Food Controller from 1917 to 1921, and he was
compelled to bay and sell at prices fixed by the
Controller-. By agreement a ’mill standard’ was fixed, and
the tax. payer was allowed to retain profits up to that
standard, and if there was a shortfall, it was to be made up
by the Controller. This amount which the taxpayer retained
together. with the amount paid towards shortfall was
regarded as profits. The principle applicable is easily
discernible. There can be little doubt that the trade was
being carried on, and what was received was rightly treated
as profits. Howlatt, J., observed that this was a clearer
case than the Ensign case (2). The matter was covered by s.
38 of the Finance (No. 2) Act of 1915, Fourth Schedule, Part
1(1), where the words were "The profits shall be taken to be
the actual profits arising in the accounting period".
(1) (1929) 12 T.C. 1256.
(1) (1927) 12 T.C. 1169.
268
In Barr Crombie & Co. Ltd. v. The Commissioners of Inland
Revenue (1), the Company’s business consisted almost
entirely of managing shipping for another Company. When the
shipping Company went into liquidation, a sum was paid as
compensation to the managing Company. It was held that this
was a capital receipt. The reason for holding thus was that
the structure (if the managing Company’s whole business was
affected and destroyed, and this was not profit but
compensation for loss ’of capital. Kelsall Parsons & Co. v.
The Commissioners of Inland Revenue (2), to which we shall
refer presently, was distinguished on the ground that,
though in that case the agency was cancelled, the payment
was for one year and that too, the final year. This case is
important in one respect, and it is that if the entire
business structure is affected and destroyed, the payment
may be regarded as replacing capital, which is lost.
These are cases of Excess Profits Duty where profits for a
particular period had to be determined and also the
character of the payments in relation to the kind of
business, to determine whether to treat them as excess
profits or not. In the Glenboig case (1), the payment was
not regarded as profit, because it replaced lost capital and
so also, in Barr Crombie case(1). These form the first
group. Short Bros. case Northfleet case (5) and Ensign
Shipping CO’s case were of a going business, and what was
paid was towards lost profits in a going concern. These
form the second group. Newcastle Breweries case (7) and
Charles Brown and 60’s case (3) were of business actually
done and profits therefrom. None of these rulings is
directly in point. In the case with which we are concerned,
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the payment was not towards any capital asset to attract the
first group, there was no going business so as to attract
the second, and nothing was bought nor any business done
with the taxpayer to make the third group applicable.
(1) (1945) 26 T.C. 406. (2) (1938) 21 T.C. 608.
(3) (1922) 12 T.C. 427. (4) (1927) 12 T.C. 955.
(5) (1927) 12 T.C. 1102. (6) (1927) 12 T.C. 1169.
(7) (1927) 12 T.C. 927. (8) (1929) 12 T.C. 1256.
269
We shall next see some cases which involved Corporation
Profits Tax. In The Gloucester Railway Carriage and Wagon
Co. Ltd. v. The Commissioners of Inland Revenue(1), the
Company was doing business of selling wagons and of hiring
them out. The Company then sold all the wagons which it was
using for purposes of hiring. The receipt was treated as
profit of trade, there being but one business and the wagons
being the stock-in--trade of that business. In Green v.
Gliksten & Son Ltd.(2), stocks of timber were destroyed.
Their written down value was pound 160,824 but the Insurance
Company paid :E. 477,838. The Company credited E. 160,824
in its trading account but not the balance.- The House of
Lords held that the timber, though burnt, was realised, and
that the excess of the sum over the written down book value
must be brought into account. These two cases throw no
light upon the problem with which we are faced, and any
observations in them are so removed from the facts of this
case as to be of no assistance.
The cases under Sch. D of the Income-tax Act like Burmah
Steam Ship Co. Ltd. v. The Commissioners of Inland
Revenue(3), a case of late delivery of ships sent for
overhaul, Greyhound Racing Association (Liverpool) Ltd. v.
Cooper(4), which was a case of surrender of an agreement in
which the amounts were treated as trading receipts, are not
cases of stoppage of a business and are not relevant.
Kelsall Parsons case(5), where one of the agreements of a
commission agency which was to run for 3 years was
terminated at the end of the second year and compensation of
pound 1500/- was paid for the last and final year, was held
on its special facts to involve taxable profits of trading.
Though the business came prematurely to an end, the struc-
ture of the business was not affected because the payment
was in lieu of profits in the final year of the business as
if business had been done. The payment was held to be
within the structure of the business in the same way as in
Shove v. Dura Manufacturing Co. Ltd. (6). The converse of
these cases is the well-known
(1) (1925) 12 T.C. 720.(2) (1929) 14 T.C. 364.
(3) (1930) 16 T.C. 67.(4) (1936) 20 T.C. 373.
(5) (1938) 21 T.C. 608.(6) (1941) 23 T.C. 779.
270
Van Den Berghs Ltd. v. Clark (1), where mutual trade
agreements were rescinded between two Companies and pound
450,000 were paid to the assessee Company as ",damages".
This was treated as capital receipt and not as income
receipt to be included in computing the profits of trade
under Sch. D Case 1 of the Income-tax Act of 1918. Lord
Macmillan observed:
"On the contrary the cancelled agreements
related to the whole structure of the
appellants’ profitmaking apparatus. They
regulated the appellant’s activities, defined
what they might and what they might not do,
and affected the whole conduct of their
business. I have difficulty in seeing how
money laid out to secure, or money received
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for the cancellation of, so fundamental an
Organisation of a trader’s activities can be
regarded as an income disbursement or an
income receipt".
We have referred to these cases to show that none of them
quite covers the problem before us. The facts are very
dissimilar, and the observations, though attractive, cannot
always be used with profit and often not without some danger
of error. We shall now turn to the cases of this Court,
which were referred to at the hearing.
The first case of this Court is The Commissioner Income Tax
and Excess Profits Tax, Madras v. The, South India Pidures
Ltd., Karaikudi (2). The South India Pictures, Ltd., held
distribution rights for 5 years of three films towards the
completion of which they had advanced money to a film
producing Company, called the Jupiter Pictures. When the
term had partially run out, the agreement for distribution
was cancelled, and the South India Pictures, Ltd., received
Rs. 26,000/- as commission. The question was whether this
sum was on capital or revenue account. Das, C. J., and
Venkatarama Aiyar, J., held that it was the latter, while
Bhagwati, J., held that it was the former. The learned
Chief Justice came to his conclusion on four grounds: (i)
that the payment was towards commission which would have
been earned; (ii) that it was not the price of any capital
(1) [1935] A.C. 431.
(2) [1956] S.C.R. 223.
271
asset sold, surrendered or destroyed; (iii) that the
structure of the business, which was a going business, was
not affected; and (iv) that the payment was merely an
adjustment of the relation between the South India Pictures,
Ltd. and the Jupiter Pictures. The learned Chief Justice
thus rested his decision on, Short Bros’(1) and Kelsall
Parsons’(2) cases and not upon Van den Berghs (3) or Barr
Crombie’s case (4).
Bhagwati, J., who dissented, judged the matter from the
angle of business accountancy. He observed that money
advanced to produce the cinema pictures, if returned, would
have been credited on the capital side as a return of
capital, just as expenditure for distribution work was
revenue expenditure and the commission, a revenue receipt.
On a parity of reasoning, the learned Judge held that money
spent in acquiring distribution rights was a capital outlay,
and that when distribution rights were surrendered, it was
capital which was returned, since the agreement was a
composite one, the films were a capital asset and the
payment for their release was a return of capital.
With due respect, it is difficult to see how the payment
could be regarded as capital in that case. The fact which
seems to have been overlooked in the minority view was that
the entire capital outlay had, in fact, been previously
recouped and even the security held by the South India
Pictures had been extinguished. It was a portion of the
running business which ceased to be productive of commission
and by the payment, the commission which would have been
earned and would have constituted a revenue receipt when so
earned, was put in the pockets of the South India Pictures.
The business of the South India Pictures. was still & going
business, one portion of which instead of being fruitful by
stages became fruitful all at once. What was received was
still the fruit of business and thus revenue. The case,
though interesting, is difficult to apply’. in the present
context of facts, where no business at all was done and what
was received was not the fruit of any business.
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(1) (1927) 12 T.C. 955.
(3) [1935] A.C. 431.
(2) (1938) 21 T.C. 608.
(4) (1945) 26 T.C. 406.
272
The next case of this Court, Commissioner of Income Tax v.
Jairam Valji (1), may be seen. The assessee there was a
contractor, and received Rs. 2,50,000 as compensation for
premature termination of a contract. This was held to be a
revenue receipt. The assessee had many businesses including
many contracts, and the receipt was considered as one in the
ordinary course of business. All the English decisions to
which we have referred, were examined in search for
principles, but the principle on which the decision ’was
rested, was that the payment wag an adjustment of the rights
under the contract and must be referred to the profits which
could be made if the contract had instead been carried out.
The payment not being on account of capital outlay and the
assessee not being prevented from carrying on his business,
the receipt was held to be revenue, that is to say, related
to income from a contract terminated prematurely. In a
sense, the case is analogous to The South India Pictures,
Ltd. case which it follows.
In The Commissioner of Income-tax, Hyderabad-Deccan v.
Messrs. Vazir Sultan & Sons (3), the assessee held the sole
selling agency and distribution rights of a particular brand
of cigarette, in the Hyderabad State on foot of a 2 per cent
discount on all business done. Subsequently, the area
outside Hyderabad State was also included on the same terms.
Later still, the area was again reduced to the Hyderabad
State. Rs. 2,19,343 were paid by way of compensation "for
loss of territory outside Hyderabad". Bhagwati, J., and
Sinha, J., (as he then was), held that the compensation was
on capital account, while Kapur, J., held otherwise. The
reason given by the majority was that the agency agreement
was a capital asset and the payment was in lieu of the loss
of a portion of the capital asset. Kapur, J., on the other
Wand, held that the loss which was replaced was the loss of
agency commission and bore its character. The case
furnishes a difficult test to apply. If what was adjusted
was the relationship between the parties and if
(1) [1959] Supp. 1 S.C.R. 110. (2) [1956] S.C. R. 223.
(3) [1959] SUPP. 2 S.C.R. 375.
273
there was a going business as, in fact, there was, the case
comes within the dicta in The South India Pictures Ltd. case
(1) and Jairam Valji’s case (2). The case can only be a
decision on the narrow ground that a portion of the ’fixed
capital was lost and paid for.
In Godrej & Co. v. Commissioner of Income-tax(3) the
assessee firm, which held a managing agency, released the
managed Company from an onerous agreement and
inconsideration,, was paid Rs. 7,50,000. It was held that
the payment was not made to make up the difference in the
remuneration of the managing agency firm bat to compensate
it for the deterioration or injury of an enduring kind to
the managing agency itself. The injury being thus to a
capital asset, the compensation paid was held to be on
capital account.
The last case of this Court to which reference may be made
is Commissioner of Income-tax v. Shamshere Printing Press
(4). That ’was a very special case. There, the premises of
the Press were requisitioned by Government, but the Press
was allowed to set up its business elsewhere, the charges
for shifting the machines, etc., being paid by Government.
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In addition, Government paid a sum claimed as loss of
profits, which was expected to bring up the profits to the
level of profits while the business was in its old place.
The’ assessee claimed that this sum was paid as compensation
for loss of goodwill arising from its old locality. There
was however, nothing to show that the payment was goodwill
and it was held that the compensation paid must be regarded
as money arising as profits in the course of business. It
was like putting money in the till to bring the profits
actually made by the level of normal profits.
All these cases were decided again on their special facts.
Though they involved examination of other decisions in
search for the true principles, it cannot be said that they
resulted in the discovery of any principle of universal
application. To summarise them: South India Pictures’ case
(1) was so decided because
(1) [1956] S.C.R. 223. (2) [1959] SUPP. 1 S.C.R. 110.
(3) [1960] 1 S.C.R. 527.(4) [1960] 39 I.T.R. go.
35
274
the money received was held to be in lieu of commission
which would have been earned by the business which was still
going, and the receipt was treated as the fruit of the
business. The same reason was given in Jairam Valji’s case
(1) and Shamshere Printing Press case (2). In Vazir
Sultan’s case (3), the compensation was held to replace loss
of capital, and in Godrej’s case (4), the compensation was
said not to have any relation to the likely income or
profits but to loss of capital. Each case was thus decided
on its facts.
We have so far shown the true ratio of each case cited
before us, and have tried to demonstrate that these cases do
no more than stimulate the mind, but none can serve as a
precedent, without advertence to its facts. The nature of
the business, or the nature of the outlay or the nature of
the receipt in each case was the decisive factor, or there
was a combination of these factors. Each is thus an
authority in the setting of its own facts.
Before we deal with the facts of this case and attempt to
answer the question on which there is so much to guide but
nothing to bind, we will refer to two cases of the Judicial
Committee, one of which is Income-Tax Commissioner v. Shaw
Wallace & Co. (5), to which we have referred in another
connection. In that case, all the authorities prior to 1935
to which we have referred (and some more) were used in aid
of arguments; but the Judicial Committee, for reasons which
are now illustrated by this judgment, declined to comment on
them. Shaw Wallace and Co., did many businesses, and
included in them was the managing agency of two oil-
producing Companies. This agency wag terminated, and
compensation was paid for it. The usual question arose
about capital or revenue. The Full Bench of the Calcutta
High Court related the payment to goodwill, but the Judicial
Committee rejected that ground because no goodwill seemed to
have been transferred. The Judicial Committee also rejected
the contention that it was compensation in lieu of notice
under s. 206, Indian
(1) [1959] SUPP. 1 S.C.R. 110.
(3) [1959] SUPP. 2 S.C.R. 375.
(2) [1960] 39 I.T.R. 90.
(4) [1960] 1 S.C.R. 527.
(5) (1932) L.R. 59 I.A. 206.
275
Contract Act, as there was no basis for it either. The
Judicial Committee held that income meant a periodical
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monetary return coming in with some sort of regularity or
expected regularity from a definite source and in business
was the produce of something "loosely spoken of as capital".
In business, income is profit earned by a process of
production, or, in other words, by the continuous exercise
of an activity. In this sense, the sum sought to be charged
could not be regarded as income. It was not the product of
business but some kind of solatium for not carrying on
business and thus, not revenue.
The case is important, inasmuch as this analysis of ’income’
has been accepted by this Court and has been cited with the
further remark made in Gopal Saran Narain Singh v. Income
Tax Commissioner (1) that the words "profits and gains" used
in the Indian Income-tax Act do not restrict the meaning of
the word "income" and the whole expression is ’income’, writ
’large. From this case, it follows that the first
consideration before, holding a receipt to be profits or
gains of business within s. 10 of the Indian Income-tax Act
is to see if there was a business at all of which it could
be said to be income.
We shall now take up for consideration the facts of our case
and see how far any principle out of the several which have
governed earlier cases can be usefully applied. The
assessee was a tea-grower and tea. manufacturer. His work
consisted in growing tea and in preparing leaves by a
manufacturing process into a commercial commodity. The
growing of tea plants only furnished the raw material for
the business. Without the factory and the premises, the tea
leaves could not be dried, smoked and cured to become tea,
as is known commercially, and it could not be packed or
sold. The direct and immediate result of the requisition of
the factories was to stop the business. That the tea was
grown or that the plants were tended did not mean that the
business was being continued. It only meant that the source
of the raw material was intact but the business was gone.
(1) (1935) L.R. 62 I.A. 207.
276
Now, when the payment was made to compensate the assessee,
no doubt the measure was the out turn of tea which would
have been manufactured; but that has little relevance. The
assesee was not compensated for loss or destruction of or
injury to a capital asset. the buildings were taken for the
time being, but the injury was not So much to the fixed
capital as to the business as a whole. The entire structure
of business was affected to such an extent that no business
was left or was done in the two years.’ This was not a case
where the interruption was caused by the act of a
contracting party so that the payment could be regarded as
an adjustment of a contract by payment. It was a case of
compulsory requisition, but the requisition did not involve
the buying of tea either as raw material or even as a
finished product. If that had been the case, it might have
been possible to say that since business was done, though
compulsorily, profits had resulted. It’ was not even a case
in which the business continued, and what was paid was to
bring up the profits to normal level. The observations of
Rowlatt, J., in Newcastle Breweries case (1) distinguish a
case where business is carried on and one in which business
comes to an end. The learned Judge observes:
"Now I have no doubt that a Government re-
quisition, such as took place during the war,
could destroy a trade, and anything which was
paid would be compensation for such
destruction. I can understand, for instance,
if they had requisitioned in this case the
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people’s building and stopped them either
brewing and selling or doing anything else,
and paid a sum, that could not be taken as a
profit; they would have destroyed the trade
pro tempore and paid compensation for that
destruction; and in fact I daresay if they
take the whole of the raw materials of a man’s
trade and prevent him carrying it on, and pay
a sum of money, that is to be taken, not as
profit on the sale of raw materials, which he
never would have sold,, but as compensation
for interfering with the trade altogether."
These observations, though made under a different
(1) (1927) 12 T.C. 927.
277
statute, are, in general, true of a business as such, and
can be usefully employed under the Indian Income-tax Act.
Our Act divides the sources of income, profits and gains
under various heads in s. 6. Business is dealt with under s.
10, and the primary condition of the application of the
section is that tax is payable by an assessee under the head
profits and gains of a business’ in respect of a business
carried on by him. Where an assessee does not carry on
business at all, the section cannot be made applicable, and
the compensation that he receives cannot bear the character
of profits of a business. It is for this reason that the
Judicial Committee in Shaw Wallace’s case (1) observed that
the compensation paid in that case was not the product of
business, or, in other words, profit, but some kind of
solatium for not carrying on business and thus, not revenue.
It is to be noted that Das, C.J, in South India Pictures’
case (2), in distinguishing Shaw Wallace’s case (1), made
the following observation:
"In Shaw Wallace’s case the entire
distributing agency work was completely
closed, whereas the termination of the
agreements in question, did not have that
drastic effect on the assessee’s business at
all............ In Shaw Wallace’s case,
therefore, it could possibly be said that the
amount paid there represented a capital
receipt."
The observation is guarded, but it recognises the difference
made in the Privy Council case and others between payment to
compensate interference with a going business and
compensation paid for stoppage of a business altogether.
This distinction was emphasised in the dissenting opinion in
Vazir Sutltan’s case (3).
Though the payment in question was not made to fill a hole
in the capital of the assessee, as in the Glenboig case (4),
nor was it made to fill a hole in the profits of a going
business as in Shamshere Printing Press case (5), it cannot
be treated as partaking the character of profits because a
business not having
(1) (1932) L.R. 59 I. A. 206.
(3) [1959] Supp. 2 S.C.R. 375.
(2) [1956] S.C.R. 223.
(4) (1922) 12 T.C. 427.
(5) [1960] 39 I.T.R. 90
278
been done, no question of profits taxable under s. 10 arose.
The Privy Council described such a payment as a solatium.
It is not necessary to give it a name; it is sufficient to
say that it was not profit of a business.
Once it is held that this was not profit at all, it is clear
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that Rules 23 and 24 of the Indian Income-tax Rules could
not apply, and there was no question of apportioning the
amount, as laid down in R. 24. The whole of the amount
received by the assessee was not assessable.
It remains to consider whether the payment could be treated
as income from property under s. 9 of the Income-tax Act.
That this was never the case of the Department is clear from
the fact that the income was not processed under that
section, and even the Judicial Member of the Tribunal, who
entertained this opinion, did not express it as his decision
in the case. This aspect of the matter not having been
considered in the case before, we cannot express any opinion
upon it.
In our opinion, the answers to the two questions ought to
have been:
Question (1)-no
Question (2) -does not arise.
In the result, the appeal is allowed with costs here and in
the High Court.
Appeal allowed.
279