TaxTMI 
TaxTMI 
1961 (3) TMI 7
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....r their tea garden, the manufacture of tea was completely stopped. Under the Defence of India Rules, the military authorities paid compensation. For the year 1944, corresponding to the assessment year 1945-1946, they paid a total sum of Rs. 2,22,080 as compensation including a sum of Rs. 10,000 for repairs to quarters for labourers and Rs. 144 which represented the assessor's fee. For the year 1945, corresponding to the assessment year 1946-1947, the military authorities paid a sum of Rs. 2,46,794 which included a sum of Rs. 15,231 for other repairs. The sums paid for repairs appear to have been admitted as paid on capital account, and rightly so. The question was whether the two sums paid in the two years minus these admitted sums, or any portion thereof, were received on revenue or capital account. The assessments for the two years were made by different Income-tax Officers. For the assessment year 1945-1946, the Income-tax Officer deducted from Rs. 2,22,080, a sum of Rs. 1,03,000 on account of admissible expenses. He then applied to the balance, Rs. 1,17,080, rule 24 of the Indian Income-tax Rules, 1922, and brought to tax 40 per cent. of that sum amounting to Rs. 46,832. The ....
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....the Government to the assessee in 1945 and 1946 respectively (exclusive of the sums paid specifically for building repairs) were revenue receipts in the hands of the assessee comprising any element of income ? (2) If so, whether the whole of the said sums less the expenses incurred by the assessee in tending the tea bushes constituted agricultural income in his hands exempt from tax under the Indian Income-tax Act, 1922 ? " The reference was heard by Sarjoo Prasad, C.J., and Ram Labhaya, J., along with two writ petitions, which had also been filed. They delivered separate judgments, but concurred in their answers. The High Court answered both the questions against the appellants. The writ petitions were also dismissed. Before we deal with this appeal, we consider it necessary to state at this stage the method of calculation of compensation adopted by the military authorities. It is not necessary to refer to both the years, because what was done in the first year was also done in the following year except for the change in the amounts. This method of calculation is taken from the order of the Judicial Member, and is as follows : Rs. a. p. Crop---2,11,120 lbs. at 17.85 d (h....
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.... It is the quality of the payment that is decisive of the character of the payment and not the method of the payment or its measure, and makes it fall within capital or revenue. We are thus required to determine what was it that was paid for, or, in other words, what did the two payments replace, if they replaced anything. The arguments at the Bar followed the pattern which has by now become quite familiar to courts. We were taken to the 12th volume of the Tax Cases series, where are collected cases dealing with excess profits duty and corporation profits tax in England following the First World War, and to other English cases reported since. These cases have been considered and applied on more than one occasion by this court, and we were referred to those cases as well. Now, it is necessary to point out that the English cases were decided under a different system of taxation, and must be read with care. A case can only be decided on its own facts, and the desire to base one's decision on another case in which the facts appear to be near enough, sometimes leads to error. It is well to remember the wholesome advice given by Lord Dunedin in Green v. Gliksten & Son Ltd. that in th....
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...., and compensation was paid for it. That the clay was capital asset was indisputable, and the portion lost was a slice of capital. The hole made in the capital was filled up by the compensation paid. It was said that a portion of the capital asset was sterilised and destroyed, and even though the business went on, the payment was treated as on capital account. The case cannot be used as precedent, because here, no doubt, the factories and buildings were a part of fixed capital, but the payment was not so much to replace them in the hands of the appellants as to compensate them for the stoppage of business. The Glenboig case does not apply. The case of Short Bros. Ltd. v. Commissioners of Inland Revenue, another case under the excess profits duty, illustrates a contrary principle. The company had agreed to build two ships, but the contracts were cancelled and pounds 100,000 was paid for cancellation of the contracts. This was held to be a receipt in the ordinary course of the company's trade. Rowlatt, J., said that it was " simply a receipt, in the course of a going business, from that going business--nothing else. " In the Court of Appeal, Lord Hanworth, M. R., affirmed the decis....
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.... operation. The learned judge then observed that he could not hold that this was a case of hire, like Sutherland v. Commissioners of Inland Revenue, because the ships lay idle and their use was interrupted. The learned judge then concluded : " Now it is quite clear that if a source of income is destroyed by the exercise of the paramount right . . . and compensation is paid for it, that that is not income, although the amount of the compensation is the same sum as the total of the income that has been lost . . . but in this case I have got to decide the case of a temporary interference ... Here these ships remained as ships of the concern. . . they merely could not sail for a certain number of days, and in lieu of the value of the use which they would have been to their owners in their profit-earning capacity during those days, in lieu of that receipt, this money was paid to the owners, although they were not requisitioned, as if requisitioned . . . I think I ought to regard this sum, as the Commissioners have obviously regarded it, as a sum paid which to the ship-owners stands in lieu of the receipts of the ship during the time of the interruption. " This decision was approved ....
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....ttle doubt that the trade was being carried on, and what was received was rightly treated as profits. Rowlatt, J., observed that this was a clearer case than the Ensign case. The matter was covered by section 38 of the Finance (No. 2) Act of 1915, Fourth Schedule, Part I (1), where the words were " The profits shall be taken to be the actual profits arising in the accounting period. " In Barr Crombie & Co. Ltd. v. Commissioners of Inland Revenue, the company's business consisted almost entirely of managing shipping for another company. When the shipping company went into liquidation, a sum was paid as compensation to the managing company. It was held that this was a capital receipt. The reason for holding thus was that the structure of the managing company's whole business was affected and destroyed, and this was not profit but compensation for loss of capital. Kelsall Parsons & Co. v. Commissioners of Inland Revenue, to which we shall refer presently, was distinguished on the ground that, though in that case the agency was cancelled, the payment was for one year and that too, the final year. This case is important in one respect, and it is that if the entire business structure i....
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.... amounts were treated as trading receipts, are not cases of stoppage of a business and are not relevant. Kelsall Parsons' case, where one of the agreements of a commission agency which was to run for 3 years was terminated at the end of the second year and compensation of pounds 1,500 was paid for the last and final year, was held on its special facts to involve taxable profits of trading. Though the business came prematurely to an end, the structure of the business was not affected because the payment was in lieu of profits in the final year of the business as if business had been done. The payment was held to be within the structure of the business in the same way as in Shove v. Dura Manufacturing Co. Ltd. The converse of these cases is the well-known Van den Berghs Ltd. v. Clark, where mutual trade agreements were rescinded between two companies and pounds 450,000 were paid to the assessee company as " damages ". This was treated as capital receipt and not as income receipt to be included in computing the profits of trade under Schedule D, Case I, of the Income Tax Act of 1918. Lord Macmillan observed : " On the contrary the cancelled agreements related to the whole structure ....
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....as a capital outlay, and that when distribution rights were surrendered, it was capital which was returned, since the agreement was a composite one, the films were a capital asset and the payment for their release was a return of capital. With due respect, it is difficult to see how the payment could be regarded as capital in that case. The fact which seems to have been overlooked in the minority view was that the entire capital outlay had, in fact, been previously recouped and even the security held by the South India Pictures had been extinguished. It was a portion of the running business which ceased to be productive of commission and by the payment, the commission which would have been earned and would have constituted a revenue receipt when so earned, was put in the pockets of the South India Pictures. The business of the South India Pictures was still a going business, one portion of which instead of being fruitful by stages became fruitful all at once. What was received was still the fruit of business and thus revenue. The case, though interesting, is difficult to apply in the present context of facts, where no business at all was done and what was received was not the fru....
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....ing agency, released the managed company from an onerous agreement and in consideration was paid Rs. 7,50,000. It was held that the payment was not made to make up the difference in the remuneration of the managing agency firm but to compensate it for the deterioration or injury of an enduring kind to the managing agency itself. The injury being thus to a capital asset, the compensation paid was held to be on capital account. The last case of this court to which reference may be made is Commissioner of Income-tax v. Shamsher Printing Press. That was a very special case. There, the premises of the press were requisitioned by Government, but the press was allowed to set up its business elsewhere, the charges for shifting the machines, etc., being paid by Government. In addition, Government paid a sum claimed as loss of profits, which was expected to bring up the profits to the level of profits while the business was in its old place. The assessee claimed that this sum was paid as compensation for loss of goodwill arising from its old locality. There was, however, nothing to show that the payment was for goodwill, and it was held that the compensation paid must be regarded as money ....
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.... also rejected the contention that it was compensation in lieu of notice under section 206 of the Indian Contract Act, as there was no basis for it either. The Judicial Committee held that income meant a periodical monetary return coming in with some sort of regularity or expected regularity from a definite source and in business was the produce of something " loosely spoken of as capital ". In business, income is profit earned by a process of production, or, in other words, by the continuous exercise of an activity. In this sense, the sum sought to be charged could not be regarded as income. It was not the product of business but some kind of solatium for not carrying on business and thus not revenue. The case is important inasmuch as this analysis of " income " has been accepted by this court and has been cited with the further remark made in Gopal Saran Narain Singh v. Commissioner of Income-tax, that the words " profits and gains " used in the Indian Income-tax Act do not restrict the meaning of the word " income " and the whole expression is " income " writ large. From this case, it follows that the first consideration before holding a receipt to be profits or gains of busin....
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....as paid would be compensation for such destruction. I can understand, for instance, if they had requisitioned in this case the people's building and stopped them either brewing and selling or doing anything else, and paid a sum, that could not be taken as a profit ; they would have destroyed the trade pro tempore and paid compensation for that destruction ; and in fact I dare say if they take the whole of the raw materials of a man's trade and prevent him carrying it on, and pay a sum of money, that is to be taken, not as profit on the sale of raw materials, which he never would have sold, but as compensation for interfering with the trade altogether. " These observations, though made under a different statute, are, in general, true of a business as such, and can be usefully employed under the Indian Income-tax Act. Our Act divides the sources of income, profits and gains under various heads in section 6. Business is dealt with under section 10, and the primary condition of the application of the section is that tax is 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 does not carry on business ....