Full Judgment Text
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PETITIONER:
J.& K., HIMACHAL PRADESH
Vs.
RESPONDENT:
PRABHU DAYAL
DATE OF JUDGMENT06/10/1971
BENCH:
HEGDE, K.S.
BENCH:
HEGDE, K.S.
GROVER, A.N.
KHANNA, HANS RAJ
CITATION:
1972 AIR 386 1972 SCR (1) 911
CITATOR INFO :
RF 1973 SC 515 (10)
ACT:
Income-tax-Capital or Revenue-Compensation for giving up a
capital asset is capital receipt.
HEADNOTE:
The assessee was instrumental in discovering the existence
of Kankar deposits in the erstwhile Jind State. He also
brought about an agreement between one S and the State of
Jind for the acquisition of sole and exclusive monopoly
rights of manufacturing cement in the State. The agreement
was entered into an April 2, 1938 and was to remain
operative initially for a period of 25 years which could be
extended to 100 years at the option of S. The latter
transferred his rights to a public limited company on May 4,
1938. For the Services rendered by the assessee the company
by agreement dated May 27, 1938 agreed to pay him a
Commission of 1 % on the yearly net profits earned by the
company from the said cement factory. The agreement was to
subsist so long as the original agreement dated April 2 ,
1938 subsisted. The company paid the assessee’s commission
up to 1950 but not thereafter. The assessee filed a suit
which resulted in a compromise decree under which the
assessee was to be paid Rs. 15,000 as commission for the
years 1951 & 1952 and Rs. 15,000 as commission for the year
1953. Further he was to be paid Rs. 70.000 by way of
compensation for the termination of the agreement between
him and the company as from January 1, 1954. That
compensation was received by the assessee on June 11, 1954.
The Income-tax Officer held that the sum of Rs. 70,000 was a
remuneration paid once and for all for the services rendered
by the assessee and as such taxable in his hands. The
Appellate Assistant Commissioner upheld the said order. The
Tribunal however held that the amount in question was a
capital receipt and the same view was taken by the High
Court in answering the reference. In appeal to this Court
by the Revenue,
HELD : (i) Business as understood in the income-tax law
connotes some real, substantial and systematic or organised
course of activity or conduct with a set purpose. Even a
single transaction may sometimes amount to a business
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transaction but the present transaction was not one such.
This was a case dealing with the stray activity of a non-
business man. Hence it was difficult to agree with the
Revenue in its contention that the agreement entered into by
the assessee with the company should be considered as a
business activity. [994 E-F]
In the determination of the question whether a particular
receipt is capital or an income it is not possible to lay
down any single test as infallible or any single criterion
as decisive. The question must ultimately depend on the
facts of the particular case and the authorities hearing on
the question are valuable only as indicating the matters
that have to be taken into account in reaching a decision.
That however is not to say that the question is one of fact,
for these questions between capital and income. trading
profit and non-trading profit, are questions which though
they may depend to a very great extent on the particular
facts of each case do involve conclusions of law to be drawn
from those facts. 994 G-H]
992
It is now well settled that a distinction has to be drawn
between a payment made for past services or discharge of
past liabilities and that made for compensation for
termination of an income producing asset. The, former does
not lose its revenue nature but the latter being a payment:
for destruction of a capital asset, must be considered as a
capital receipt. [997 D]
The assessee possibly by some fortuitous circumstance
discovered Kankar in some place in Jind State. This
circumstance gave him an opportunity to bring about an
agreement between the State of Jind and S, and when S
transferred his right to a new.company in the formation of
which the assessee had a hand, be was promised certain
yearly commission on the net profits earned by the company.
None of these activities, of the assessee can be considered
as a business activity but yet did acquire an income
yielding asset as a result of these activities. But the
compromise decree destroyed that asset and in its place he
was given Rs. 70,000 as compensation. ’This payment was
neither in respect of services rendered by him in the past
nor towards the accumulated commission due to him. It was
paid as compensation to him because he gave up his right to
get commission in future to which he was entitled under the
agreement. It was a price paid for surrendering a valuable
right which was a capital asset. Therefore the receipt must
be considered as a capital receipt. [998 F-H]
Narain Swadeshi Weaving Mills v. Commissioner of Excess
Profits I tax, 26 1. T. R. 765, Commissioner of Income-Tax,
Nagpur v. Rai Bahadur Jairam Valji & Ors., 35 I.T.R. 148.
Yan Den Berghs Ltd. v. Clark, 19 T.C. 390-(1935) 2 I.T.R.
Supp. 17, Senairam Doongarmal v. C.I.T., Assam, 42 I.T.R.
392 and Kettlewell Bullen & Co. Ltd. v. C.I.T., Calcutta, 53
I.T.R. 261, applied.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1693 of
1968.
Appeal from the judgment and order dated January 4, 1967 of
the Punjab and Haryana High Court in Income-tax Reference
No. 44 of 1962.
O. P. Malhotra, R. N. Sachthey and B. D. Sharma, for the
appellant.
V. S. Desai and A. G. Ratnaparkhi, for the respondent (L.R.
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No.2).
The Judgment of the Court was delivered by
Hegde, J. This is an appeal by certificate from the decision
of the High Court of Punjab and Haryana in a Reference
under s. 66(1) of the Indian Income-tax Act, 1922 (to be
hereinafter referred to as the Act). The question referred
to the High Court for its opinion was :
"Whether on the facts and in the circumstances
of the case, the receipt of Rs. 70,000/- by
the assessee on 11-6-1954 was revenue or
capital in nature."
993
The High Court held that the said receipt was capital
receipt. Aggrieved by that decision the Commissioner of
Income-tax came up in appeal to this Court.
We shall now refer to the material facts found by the
Incometax Appellate Tribunal as can be gathered from the
case stated. The assessee was assessed as an individual.
The relevant assessment year is 1955-56, the accounting
period for the same ended on Asad sudi 1, S.Y. 201 1.
The assessee was instrumental in discovering the existence
of Kankar deposits in Jind State. He also brought about an
agreement between one Shanti Parsad Jain and the erstwhile
State of Jind, now a part of Punjab State for the
acquisition of sole and exclusive monopoly rights of
manufacturing cement in the said Jind State. That agreement
was entered into on April 2, 1938. The same was to remain
operative for a period of 25 years, which term was liable to
be extended to 100 years at the option of the said Shanti
Parsad Jain or his nominee. Shanti Parsad Jain transferred
his rights under that agreement to a public limited company
by name M/s. Dalmia Dadri Cement Ltd. on May 4, 1938. The
assessee was one of the promoters of the said company.
For the services rendered by the assessee, the Dalmia Dadri
Cement Co. by an agreement dated May 27, 1938 agreed, to pay
him a commission of 1 % on the yearly net profits earned by
the company from the said cement factory. That agreement
was to subsist so long as the original agreement dated April
2, 1938 subsisted.
The agreement dated May 27, 1938 between the assessee and
the Dalmia Dadri Cement Co. was acted upon till 1950 and
thereafter the company did not pay the commission agreed to
be paid. Consequently the assessee filed a suit against the
company claiming the commission due to him. The said suit ended
in a compromise and the compromise was made a decree
of court. Under that decree the assessee was to be paid Rs.
15,000/ as commission for the years 1951 and 1952 and Rs.
15,000/- as commission for the year 1953. Further he was to
be paid Rs. 70,000/- by way of compensation for the
termination of the agreement between him and the company as
from January 1, 1954. That compensation was received by the
assessee on June 11, 1954.
The assessee’s claim that the sum of Rs. 70,000/- was
capital receipt and hence not taxable in his hands was
rejected by the Income-tax Officer. That officer held that
the said sum of Rs. 70,000/- was a remuneration paid once
and for all for the services rendered by the assessee and as
such taxable in his hands. This decision was affirmed by
the Appellate Assistant Commissioner, who held that the
amount of Rs. 70,000/- was a lump sum
994
compensation received for the services rendered; hence the
same was a receipt in the ordinary course of assessee’s
business and consequently it was taxable as a revenue
receipt.
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Aggrieved by that order the assessee took up the matter in
appeal to the Tribunal. The Tribunal held that the company
by paying the said compensation of Rs. 70,000/- terminated
the contract which enabled the assessee to receive from the
said company a commission of one per cent of the net profits
and as such the said receipt by the assessee was capital and
not revenue.
Thereafter at the instance of the Commissioner the question
set out earlier was referred to the High Court for its
opinion which, as mentioned earlier, was answered in favour
of the assessee.
It was not the case of the Revenue that the assessee was
engaged in the business of discovering Kankar or any other
mineral. He appears to have found Kankar by mere chance.
It is also not the case of the Revenue that the assessee
was engaged in the business of bringing about agreements
between parties. In fact. it is not the case of the Revenue
that the assessee "as engaged in any business. There is no
evidence to show that he was a business man. His discovery
of Kankar as well as his part in bringing about the
agreement mentioned earlier were stray acts, possibly occa-
sioned by fortuitous circumstances.
Business as understood in the income-tax law connotes some
real, substantial and systematic or organised course of
activity or conduct with a set purpose-see the decision of
this Court in Narain Swadeshi Weaving Mills v. Commissioner
of Excess Profits Tax(1). By this statement we do not mean
to say that under no circumstance a single transaction
cannot amount to a business transaction. But this is not
one such. Herein we are dealing with the stray activity of
a non-business man. Hence it is difficult to agree with the
Revenue in its contention that the agreement entered into by
the assessee with the Dalmia Dadri Cement company should be
considered as a business activity.
In the determination of the question whether a particular
receipt is capital or an income, it is not possible to lay
down any single test as infallible or any single criterion
as decisive. The question must ultimately depend on the
facts of the particular case and the authorities bearing on
the question are valuable only as indicating the matters
that have to be taken into account in reaching a decision.
That, however, is not to say that the question is one of
fact, for these questions between capital and income,
trading profit or no trading profit, are questions which,
though they may depend to a very great extent on the
particular
(1) 26 I.T.R. 765.
995
facts of each case, do involve conclusions of law to be
drawn from those facts--see Commissioner of Income-tax
Nagpur v. Rai Bahadur Jairam Valij and ors.(1).
The controversy whether a particular receipt is capital or
revenue has engaged the attention of this Court as well as
of the High Courts in numerous cases. It is, by no means an
easy question to decide. It is neither feasible nor
profitable to refer to those cases because in the ultimate
analysis the decision in those cases rests on the facts of
each case. But the case nearest to the case before us is
that decided by the House of Lords in Van Den Berghs Ltd. v.
Clark(2). The facts of that case were as follows :
The assessee therein received a sum of pound 450,000 in full
settlement of all claims and counter-claims which existed
between the assessee and a Dutch company. Both the
companies had been engaged in the business of manufacturing
and dealing in margarine and similar products. They had
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entered into pooling arrangements at as early a date as in
1908 under which they bound themselves to work in friendly
alliance and to share their profits of their respective
business in margarine in specified proportions. This basic
agreement of 1908 was being added to and varied from time to
time particularly in 1913 and 1920 and, under this, the
agreement was to subsist until 1940. In 1922 the assessee
made a claim against the Dutch company for about pound
450,000 as the amount due to it by the Dutch company under
the agreements recited just previously. This was however
repudiated and the Dutch company claimed that far from owing
any moneys to the assessee, moneys were owing to them. One
of the methods suggested for putting an end ’to the dispute
was by a termination of the agreement between the two
companies but this was resisted by the assessee company. A
settlement was, however, reached in 1927 whereby in
consideration of the payment by the Dutch company of pound
450,000 to the assessee as damages, the agreements were
determined as at 31st December, 1927 and each party released
the other from all claims thereunder. The question was
whether this sum of pound 450,000 was a revenue receipt on
which the income-tax could be levied against the assessee.
The matter came up before Finlay J. He held against the
Crown. According to him the sum received was not a revenue
receipt. This decision was reversed by the Court of Appeal
but was restored on a further appeal by the House of Lords.
Finlay J. in the course of his judgment formulated the
question to be considered by him in these terms
"I agree with Mr. Latter that there are three
questions here. The first is : What was this
payment for?
(1) 35 I.T.R. 148.
(2) 19 Tax Cases 390= (1935) 3, I.T.R. Supp. 17.
996
The second is : If a Payment for future
rights, is it assessable ? The third question
is : Ought it to go into the year 1927."
The learned judge’s answer to the first question was that it
was a payment for future rights. He held that it was really
a payment for cancelling such rights as subsisted in the
assessee between 1928 and 1940. Having answered the first
question in that manner the learned judge held on the second
question that it was not assessable. In arriving at that
conclusion he reasoned thus
"Not without hesitation, I have come to the,
conclusion that it is not liable to
assessment. I think that the agreement being
an agreement whereby this company had a share
in the profits of another company, was a
capital asset. I think that the case is to be
distinguished from the case where there is a
cancellation of a contract made in the
ordinary course of the company’s business ....
But it seems to me that where one gets, as one
does here, not a contract made in the course
of the company’s business--for it is not the
business of this company to make pooling
agreements or to make agreements whereby they
acquired shares in the business of another
company-it seems to me that where one gets a
payment made in respect of the cancellation of
that agreement, that, truly is a sum received
by way of capital and not an income receipt at
all."
Lord Macmillan who delivered the leading judgment of House
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Lords put the case thus
"Now what were the appellants giving up? They
gave up their whole rights under the
agreements for thirteen years ahead. These
agreements are called in the stated cases
’pooling agreements’ but that is a very
inadequate description of them, ’for they ’did
much more than merely embody a system of
pooling and sharing profits. If the
appellants were merely receiving in one sum
down aggregate of profits which they would
otherwise have received over a series of
years, the lump sum might be regarded as of
the same nature as the ingredients of which it
was composed. But even if payment is measured
by annual receipts, it is not necessarily in
itself an item of income..... The three
agreements which the appellants consented to
cancel were not ordinary commercial contracts
made in the course of carrying on their trade;
they were not contracts for the disposal of
their products or for the engagements of
agents or other employees necessary for the
997
.lm15
conduct of their business : nor were they merely agreements
as to how their trading profits when earned should be
distributed as between the contracting parties. On the
contrary, the cancelled agreements related to the whole
structure of the appellant’s profit making 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 for the
cancellation of, so fundamental an Organisation of a
trader’s activities can be regarded as an income
disbursement or an income receipt.... In my opinion that
asset, the congeris of rights which the appellants enjoyed
under the agreements and which for a price they surrendered
was a capital asset."
It is now well settled that a distinction has to be drawn
between a payment made for past services or discharge of
past liabilities and that made for compensation for
termination of an income producing asset. The former does
not lose its revenue nature but the latter being a payment
for destruction of a capital asset, must be considered as
capital receipt.
The distinction between a capital receipt and a revenue
receipt came up for consideration before this Court in
Senairam Doongarmal v. Commissioner of Income-tax, Assam(1).
The assessee therein owned tea estate consisting of tea
gardens, factories and other buildings, carried on a
business of growing and manufacturing tea. The factory and
other buildings on the estate were requisitioned for defence
purposes by the military authorities. The assessee
continued to be in possession of the tea gardens and tended
them to preserve the plants but the manufacture of tea was
completely stopped. The assessee was paid compensation for
the year 1944-45 under the Defence of India Rules calculated
on the basis of the out-turn of tea that would have been
manufactured by the assessee during that period. The
question was whether the amounts of compensation were
revenue receipts taxable in the hands of the assessee. This
Court held that the first consideration before holding a
receipt to be profits or gains of business within s. 10 of
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the Income-tax Act was to see if there was a business at all
of which it could be said to be income’ The primary
condition of the application of section 10 was that tax was
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 did not carry on business at all the
section could not be made applicable and any compensation
for requisition of
(1) 42, I.T.R. 392.
998
assets that he received could not bear the character of
profits of a business. The Court further held that the
amounts of compensation received by the assessee were not
revenue receipts and did not comprise any element of income.
It is true that in that case the Court did not consider
whether the income in question could have been considered as
income from other sources but, the ratio of that decision is
that the compensation paid being in respect of sterilisation
of an income producing asset, the same should be considered
as a capital receipt.
The only other decision we need make; reference is the deci-
sion of this Court in Kettlewell Bullen and Co. Ltd. v.
Commissioner of Income-tax, Calcutta(1). Therein this Court
observed that it cannot be said as general rule that what is
determinative of the nature of a receipt on the cancellation
of a contract of agency or office is extinction or
compulsory cessation of the agency or office. Where payment
is made to compensate a person for cancellation of a
contract which does not affect the trading structure of his
business or deprive him of what in substance is his source
of income, termination of the contract being a normal
incident of the business, and such cancellation leaves him
free to carry on his trade though freed from the contract
terminated, the receipt is revenue; where by the
cancellation of an agency the trading structure of the
assessee is impaired, or such cancellation results in loss
of what may be regarded as the source of the assessee’s
income, the payment made to compensate for cancellation of
the agency agreement is normally a capital receipt., These
decisions lay down the tests to be applied in distinguishing
a capital receipt from a revenue receipt. With the guidance
thus afforded, let us now take a second look at the facts
found for answering the question referred. The assessee,
possibly, by some fortuitous circumstance discovered Kankar
in some place in Jind State. This circumstance gave him an
oportunity to bring about an agreement between the State of
Jind and Shanti Prasad Jain and when Shanti Parsad Jain
transferred his right to a new company, in the formation of
which the assessee had a hand, he was promised certain
yearly commission on the net profits earned by the company.
None of these activities of the assessee can be considered
as a business activity but yet he did acquire an income
yielding asset as a result of his activities. But the
compromise decree destroyed that asset and in its place he
was given Rs. 70,000 as compensation. This payment was
neither in respect of the services rendered by him in the
past nor towards the accumulated commission due to him. It
was paid as compensation to him because he gave up his right
to get commission in future to which
(1) 53, I.T.R. 261.
999
he was entitled under the agreement. It was a price paid
for surrendering a valuable right which in our opinion was a
capital asset. Therefore that receipt must be considered as
a capital receipt.
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For the reasons mentioned above this appeal fails and the
same is dismissed with costs.
G.C. Appeal dismissed
1000