1950 (4) TMI 22 - HC - Income Tax

Court rules damages for contract termination not taxable as income under Indian Income-tax Act.

Rai Bahadur Jairam Valji Versus Commissioner of Income-tax

The court ruled that the sum of Rs. 2,50,000 received by the assessee as damages for the premature termination of a contract was a capital receipt and not ... - Issues Involved:1. Whether the sum of Rs. 2,50,000 received by the assessee as damages or compensation for the premature termination of the contract is income assessable under the Indian Income-tax Act.2. Whether, if the sum is assessable, the provisions of Rule 9 of Schedule 1 of the Excess Profits Tax Act should be applied and the profits of the chargeable accounting period determined according to law.Issue-Wise Detailed Analysis:Issue 1: Assessability of Rs. 2,50,000 as IncomeThe primary issue is whether the Rs. 2,50,000 received by the assessee as damages or compensation for the premature termination of the contract dated 9th May 1940 is assessable as income under the Indian Income-tax Act.Facts and Arguments:- The assessee had a long-standing business of supplying dolomite and limestone to the Bengal Iron Company, later succeeded by the Indian Iron and Steel Company.- Due to the company's breach of agreement and subsequent non-receipt of supplies, the assessee suffered significant losses.- The dispute was settled with the company agreeing to pay Rs. 2,50,000 as a solatium for the surrender of rights under the contract dated 9th May 1940.- The Tribunal held that the sum was received as damages or compensation for breach of the agreement and was a receipt of a casual and non-recurring nature but not exempt under Section 4(3)(vii) as it arose from business.Legal Precedents:- The assessee argued that the amount should be considered a capital receipt, relying on precedents like Commissioner of Income-tax v. Shaw Wallace and Co. [1932] 59 IA 206 and Van Den Berghs Ltd. v. Clark [1935] AC 431; 3 ITR Eng. Cas. 17.- In Shaw Wallace's case, compensation for cessation of agency was held as a capital receipt, not income.- In Van Den Berghs Ltd., compensation for termination of pooling agreements was also considered a capital receipt.Court's Analysis:- The court noted that the assessee's business of supplying dolomite and limestone was not a continuous activity but dependent on specific agreements.- The agreement dated 9th May 1940 was a new venture and not part of a series of commercial contracts.- The restrictive covenant in the agreement effectively prohibited the assessee from other business in limestone, making the agreement a framework for the business.- The Rs. 2,50,000 was received as a solatium for the surrender of the agreement, not as a result of carrying on the business.Conclusion:- The sum of Rs. 2,50,000 was a capital receipt and not liable to assessment as income. Therefore, the first question was answered in the negative.Issue 2: Application of Rule 9 of Schedule 1 of the Excess Profits Tax ActGiven the conclusion on the first issue, the second question becomes redundant.Facts and Arguments:- The second question was contingent on the sum being considered assessable income.- Since the sum was determined to be a capital receipt, it did not qualify as income from business.Conclusion:- The court did not find it necessary to answer the second question as the sum was not liable to excess profits tax.Final Judgment:The assessee succeeded, and the sum of Rs. 2,50,000 was deemed a capital receipt, not liable to assessment under the Indian Income-tax Act. Consequently, the second question regarding the application of Rule 9 of Schedule 1 of the Excess Profits Tax Act was not addressed. The assessee was awarded costs of the reference, with counsel's fee assessed at Rs. 300 for the assessee and Rs. 100 for the Commissioner.