1973 (7) TMI 36 - HC - Income Tax

Income from Professional Activities & Business Taxable under Indian Income-tax Act

Commissioner Of Income-Tax, Madras Versus PN. Nagaraj And Another

The court held that the sums of Rs. 12,333 received by Paterson and Nagaraj Brothers were taxable as income arising from the exercise of a profession and ... Income Tax Act Issues:1. Nature of the sum of Rs. 12,333 received by Paterson.2. Nature of the sum of Rs. 12,333 received by Nagaraj Brothers.3. Applicability of Section 4(3)(vii) of the Indian Income-tax Act, 1922.Issue-wise Analysis:1. Nature of the sum of Rs. 12,333 received by Paterson:Paterson, an architect and partner in the firm Prynee, Abbot & Davis, was engaged by Binny & Co. to find a purchaser for their Waterton Estate. Upon the successful sale of the property, Binny & Co. paid Paterson Rs. 37,000, which he shared equally with Nagaraj and Ethiraj. Paterson included his receipt of Rs. 12,333 in his return and claimed exemption under Section 4(3)(vii) of the Indian Income-tax Act, 1922, arguing that the amount was a casual and nonrecurring receipt not arising from his profession.The Tribunal, however, held that the payment was remuneration for professional services rendered by Paterson in finding a purchaser, thus making it taxable income. The court observed that the payment was made in appreciation of Paterson's professional services, which resulted in the sale of the property. The court rejected the argument that the receipt was outside the scope of Paterson's profession, noting that architects could perform services related to real estate dealings within their professional capacity. The absence of an enforceable agreement or expectation of reward did not negate the taxability of the amount, as it was received as remuneration for professional services.2. Nature of the sum of Rs. 12,333 received by Nagaraj Brothers:Nagaraj Brothers, informed by Paterson about the sale, formed a partnership named Satyanarayana and Nagaraj and Company to carry on real estate business. They entered into an agreement with Binny & Co. for the purchase of the estate and ultimately received Rs. 12,333 each from Paterson. They claimed exemption under Section 4(3)(vii), arguing that the receipt was casual and nonrecurring.The Tribunal initially held that the receipt was not for services rendered but was shared by Paterson out of a moral obligation. However, the court found that the transaction was a business transaction, as Nagaraj Brothers had formed a partnership specifically to purchase and sell the property for profit. The court noted that the partnership's object was to carry on real estate business, and the receipt was for services rendered in connection with this business. Thus, the amount was taxable as income arising from business.3. Applicability of Section 4(3)(vii) of the Indian Income-tax Act, 1922:Section 4(3)(vii) exempts from tax any receipt which is of a casual and nonrecurring nature and not arising from business, profession, or vocation. Both Paterson and Nagaraj Brothers claimed this exemption for their respective receipts of Rs. 12,333.The court held that Paterson's receipt was not casual or nonrecurring as it arose from his professional services as an architect. The court emphasized that voluntary payments connected with an office, profession, or vocation are taxable even if there was no enforceable agreement or expectation of reward. Similarly, the court found that Nagaraj Brothers' receipt was not casual or nonrecurring as it arose from a business transaction. The partnership was formed to carry on real estate business, and the receipt was for services rendered in connection with this business.Conclusion:The court concluded that the sums of Rs. 12,333 received by Paterson and Nagaraj Brothers were taxable as income arising from the exercise of a profession and business, respectively. The exemption under Section 4(3)(vii) was not applicable in either case. The court answered the questions of law in favor of the revenue and against the assessees, holding that the receipts were rightly included in their total income for tax purposes.