1958 (10) TMI 6 - SC - Income Tax

Supreme Court: Rs. 2,50,000 Receipt Taxable

The Supreme Court held that the receipt of Rs. 2,50,000 by the respondent was a revenue receipt and chargeable to tax. The appeal was allowed, the ... Whether in the circumstances of the case the sum of ₹ 2,50,000 received by the assessee as damages or compensation for the premature termination of the contract of 9th May, 1940, is income assessable within the meaning of the Indian Income-tax Act? Held that:- On a consideration of all the facts established, we are of opinion that the receipt of ₹ 2,50,000 by the respondent is a revenue receipt and is chargeable to tax. In the result, the appeal is allowed, the judgment of the High Court set aside and the order of the Tribunal restored Issues Involved:1. Whether the sum of Rs. 2,50,000 received by the respondent is chargeable to income-tax.2. Whether the sum is a capital receipt or a revenue receipt.3. The nature of the contract and its termination.4. The legal principles applicable to determine the nature of the receipt.Issue-Wise Detailed Analysis:1. Whether the sum of Rs. 2,50,000 received by the respondent is chargeable to income-tax:The respondent received Rs. 2,50,000 as compensation for the premature termination of a contract. The Department contended that this amount is a revenue receipt and should be included in the chargeable income. The respondent argued that it is a capital receipt and not liable to tax. The Appellate Tribunal, affirming the decisions of the Income-tax Officer and the Appellate Assistant Commissioner, held that the amount was a trading receipt and was income liable to be assessed. The High Court disagreed with the Tribunal and held that the sum was a capital receipt and not liable to be taxed. The Supreme Court granted special leave to appeal against this decision.2. Whether the sum is a capital receipt or a revenue receipt:The Supreme Court noted that the question of whether a receipt is capital or income depends on the facts of the particular case and involves a conclusion of law to be drawn from those facts. The respondent argued that the sum was a reimbursement for capital expenses incurred in the execution of the contract, thus making it a capital receipt. However, the Court found no evidence to substantiate this claim. The Court held that the sum of Rs. 2,50,000 was not paid as compensation for expenses thrown away and could not be held to be a capital receipt on that account.3. The nature of the contract and its termination:The respondent, a businessman engaged in various activities including the supply of limestone, had entered into a contract with a company to supply limestone from a quarry. The contract was prematurely terminated, and the respondent received Rs. 2,50,000 as compensation. The Court examined whether the contract was entered into in the ordinary course of the respondent's business. It was found that the respondent had been supplying limestone for many years and that the contract was indeed part of his usual business activities. Therefore, the compensation received for its termination must be held to be a trading receipt.4. The legal principles applicable to determine the nature of the receipt:The Court referred to various precedents to determine the nature of the receipt. In cases like Short Bros. Ltd. v. Commissioners of Inland Revenue and Commissioners of Inland Revenue v. Northfleet Coal and Ballast Co. Ltd., it was held that compensation received for the termination of a trading contract is a revenue receipt. The Court distinguished these cases from those involving agency agreements, where compensation for termination might be considered a capital receipt if the agency is a capital asset. The Court concluded that the contract in question was entered into in the ordinary course of business, and any compensation received for its termination would be a revenue receipt.Conclusion:The Supreme Court held that the receipt of Rs. 2,50,000 by the respondent was a revenue receipt and chargeable to tax. The appeal was allowed, the judgment of the High Court was set aside, and the order of the Tribunal was restored. The respondent was ordered to pay the costs of the appellant throughout.