1972 (3) TMI 23 - HC - Income Tax

High Court rules Rs. 50,000 from Duncan Bros. Ltd. as business profit, not capital receipt

The High Court determined that the sum of Rs. 50,000 received from M/s. Duncan Bros. Ltd. was a trading receipt, not a capital receipt. The court held ... Assessee was compensated by payment for the loss of income or profit suffered by the wrongful act of the customers - amount received by the assessee as compromise decree consequent to the filing of suit for compensation for causing loss of part of assessee's business - true character of the money received by the asseesee on the basis of the consent decree, therefore, represents compensation for loss to the assessee in its trade and not for any loss of any capital asset and the said amount must, therefore, be considered to be a trading receipt of the assessee Issues Involved:1. Whether the sum of Rs. 50,000 received from M/s. Duncan Bros. Ltd. was a capital receipt or a trading receipt.2. Applicability of section 10(5A)(d) of the Indian Income-tax Act, 1922.3. Determination of the true character of the receipt in the context of the assessee's business.Issue-wise Detailed Analysis:1. Capital Receipt vs. Trading Receipt:The primary issue is whether the sum of Rs. 50,000 received by the assessee from M/s. Duncan Bros. Ltd. was a capital receipt or a trading receipt. The Tribunal initially held that the amount was a capital receipt, reasoning that it was compensation for an injury to the business itself, which affected the capital structure of the assessee's business. The Tribunal stated, 'The amount was paid by M/s. Duncan Bros. Ltd. as compensation for the injury caused to the assessee for the transfer of its business with M/s. Joseph Tetley & Co. Ltd. to M/s. Duncan Bros. Ltd. The compensation must, therefore, be held to be a compensation for an injury to the business itself and its receipt must, therefore, be held to be a capital receipt.'However, the High Court disagreed, emphasizing that the true character of the receipt must be determined based on the facts and circumstances of the case. The court noted, 'If any amount is received as compensation for an injury which affects a capital asset of the assessee or the capital structure of the assessee's business such amount may normally be considered to be a capital receipt.' The court concluded that the sum of Rs. 50,000 was compensation for the loss of income or profit suffered by the wrongful acts of Gardner and Duncan Bros. Ltd., which led to the withdrawal of the custom of M/s. Joseph Tetley & Co. Ltd., one of the assessee's many foreign customers. Therefore, the amount was deemed a trading receipt.2. Applicability of Section 10(5A)(d):The next issue was whether section 10(5A)(d) of the Indian Income-tax Act, 1922, applied to the sum received by the assessee. The Tribunal had held that section 10(5A)(d) did not apply, stating, 'Section 10(5A) contemplates compensation payable to the agent in consideration of premature termination of the agency. Such compensation must move either from the principal or from somebody on behalf of the principal.'The High Court, however, found that the assessee was not holding any agency of M/s. Joseph Tetley & Co. Ltd. as required under section 10(5A)(d). The court observed, 'The fact that the assessee acted as the sole buying agent of tea on commission does not necessarily establish that the assessee was holding any agency.' The court further noted that the claim made in the suit was not for damages for wrongful termination of any agency but for damages for the loss of service of Mr. Gardner and for wrongful seduction of the assessee's custom of M/s. Joseph Tetley & Co. Ltd. to Duncan Bros. Ltd. Therefore, the provisions of section 10(5A)(d) were not applicable.3. True Character of the Receipt:The High Court emphasized the importance of determining the true character of the receipt in the context of the assessee's business. The court stated, 'The true character of the money received by the assessee on the basis of the consent decree, therefore, represents compensation for loss to the assessee in its trade and not for any loss of any capital asset and the said amount must, therefore, be considered to be a trading receipt of the assessee.'The court highlighted that the sum of Rs. 50,000 was received in full settlement of the assessee's claim in the suit, which included claims for damages for loss of service of Mr. Gardner, expenses incurred for Mr. Gardner, general damages arising from loss of business, and special damages for the transfer of business from M/s. Joseph Tetley & Co. Ltd. The court concluded, 'The sum of Rs. 50,000 received by the assessee on the basis of the consent decree was, therefore, a receipt in satisfaction of the assessee's claim for damages and also of the costs incurred by the assessee.'Conclusion:The High Court answered the question in the negative, holding that the sum of Rs. 50,000 received from M/s. Duncan Bros. Ltd. was not a capital receipt but a trading receipt and was assessable as the assessee's business profits under section 10 of the Indian Income-tax Act, 1922. The court stated, 'We must, therefore, hold that the Tribunal was not right in holding that the sum of Rs. 50,000 received from M/s. Duncan Bros. Ltd. was a capital receipt and was not assessable as the assessee's business profits under section 10 and we answer the question accordingly in the negative in favour of the revenue against the assessee.'