TaxTMI 
TaxTMI 
1958 (10) TMI 6
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....he respondent, it referred the following question for the decision of the High Court : " Whether in the circumstances of the case the sum of Rs. 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." The reference was heard by Sen and Deo, JJ. who held, disagreeing with the Tribunal, that the sum of Rs. 2,50,000 was a capital receipt in the hands of the respondent, and that it was not liable to be taxed. The appellant then filed an application under section 66A(2) of the Act for a certificate to appeal to this court, but that was dismissed, the learned Judges holding that the law on the subject was well settled. The appellant thereafter applied to this court for special leave under article 136, and the same was granted, and hence this appeal. The question whether a receipt is capital or income has frequently come up for determination before the courts. Various rules have been enunciated as furnishing a key to the solution of the question, but as often observed by the highest authorities, it is not possible to lay down any single test as ....
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....ngly. Thereupon, the respondent filed Suit No. 211 of 1940 in the High Court of Calcutta for specific performance of the contract dated January 5, 1935, as modified on December 21, 1935, and for an injunction restraining the Indian Iron and Steel Company Ltd. from purchasing limestone or dolomite from any person other than the plaintiff, and on March 13, 1940, an injunction, in those terms was actually issued against the company. Thereafter, the company and the respondent entered into an agreement in settlement of all the disputes between them, and the same was embodied in a document dated May 9, 1940. As it is this document that forms the source for the payment of Rs. 2,50,000 to the respondent, it is necessary to refer to the terms thereof in some detail. Under this agreement, the respondent was to work a quarry of the company at a place called Gangapur for a period of 25 years and to supply the limestone quarried therefrom to the company according to its requirements. This quarry, it should be stated, was situated near Kulti where the company carried on its smelting operations, and obviously it would reduce the working expenses, if limestone required therefor could be got from....
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....ing unpaid under the contract dated May 9, 1940 ; (2) that the company should take all the limestone required for its furnaces at Kulti from the respondent for a period of 12 years on terms and conditions set out in an agreement ; (3) that the respondent was to be appointed the loading contractors of the company for loading all iron ore at Monoharpore for a period of 12 years from January 1, 1942, on the terms and conditions specified in a separate agreement. Pursuant to this agreement, the respondent was paid a sum of Rs. 2,50,000 and the two agreements relating to the purchase of limestone and the loading of iron ore at Monoharpore were also executed. The balance due on account of monthly payment of Rs. 4,000 provided in the agreement of May 9, 1940, was also duly paid. Now, on these facts, the question is whether the sum of Rs. 2,50,000 received by the respondent was capital or revenue. Before discussing the principles applicable to the facts as stated above, it is necessary to deal with a contention raised on the facts of the case on behalf of the respondent. Dr. Radha Binode Pal, who appeared for him, argued that for the purpose of carrying out the agreement dated January 5,....
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....evenue receipt. Rowlatt, J., held that it was merely a receipt in a going concern and was revenue, and that was affirmed by the Court of Appeal, Lord Hanworth, M.R., observing that such a contract as the one before him was liable in the ordinary course of business to be altered or terminated on terms, and the payment of pound 100,000 in settlement of the rights under the contract was an adjustment made between the appellants and their clients in the ordinary course of business. Similar observations are to be found in the judgment of Sargant, L. J., and Lawrence, L. J. It may be noted on the facts of the present case that the agreement of January 5, 1935, was modified on December 21, 1935, and the disputes which arose with reference thereto were settled by the agreement of May 9, 1940, which was, in turn, replaced by agreement dated August 2, 1941. The agreements dated May 9, 1940, and August 2, 1941, could, therefore, be properly said to be adjustments made in the ordinary course of business. In Commissioners of Inland Revenue v. Northfleet Coal and Ballast Co. Ltd., the respondent company which was the owner of a chalk quarry had entered in a contract with a purchaser for the su....
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....received in that respect for breach of contract is not a sum which is part of the receipts of the business for which that contract was made." Examining the facts of the present case in the light of the above decisions, the question to be considered is whether the contract dated May 9, 1940 was entered into by the respondent in the usual course his business. If it was, then the amount paid for the termination of the contract must be held to be a trading receipt. That the respondent has been carrying on business in the production and supply of limestone is amply established. The record shows that he had been supplying limestone and dolomite to the Bengal Iron Company, Ltd., from about the year 1920 and that the contracts of 1935 were entered into only in the carrying on of that business. Vide paragraph 4 in the plaint in Suit No. 211 of 1940 already referred to. The contract of May 9, 1940, was made in settlement of the rights under those contracts. It is to be noted that under the agreement dated August 2, 1941, under which he received a sum of Rs. 2,50,000, he also secured a contract for the supply of limestone for a period of 12 years. On these facts, it is impossible to come to....
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....w be considered. (1) Is the receipt of Rs. 2,50,000 a capital receipt for the reason that it was compensation for settlement of a contract which had a long life before it ? The argument of the respondent is that there is in the income-tax law a well-defined distinction between fixed capital and circulating capital, vide John Smith & Son v. Moore, that where there is a contract the performance of which is to be not once and for all but spread over a period of years, it is in the nature of a fixed capital and a payment on account of it must be held to be capital receipt. Reliance is placed in support of this contention on the decisions in Commissioner of Income-tax v. Shaw Wallace & Co., and Barr, Crombie & Co. Ltd. v. Commissioners of Inland Revenue and certain observations in Kelsall Parsons & Co. v. Commissioners of Inland Revenue and Commissioner of Income-tax v. South India Pictures Ltd. In Commissioner of Income-tax v. Shaw Wallace & Co., the respondent company had been acting for several years as the distributing agents of two oil companies. In 1927-28, these companies decided to make their own distribution arrangements and accordingly terminated the agency of the responde....
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....many agencies as it could, that it was incidental to that agency that it should be modified, altered or discharged and that as the period outstanding was one year, it could not be said that the appellant was parting with an enduring asset of the business. Lord Fleming in agreeing with this conclusion stated that he attached importance to the fact that the agreement had only one year to run and that different considerations might arise if the outstanding period was considerable. "A different case would have arisen for decision", he observed, (at page 622) "if the agreement had been terminated when it had still, say, a period of 10 years to run. A payment made in respect of a loss to be sustained over a period of years may well have a different character from a payment made in respect of a loss to be sustained in the year in which the payment is received." All these cases were considered by this court in Commissioner of Income-tax v. South India Pictures Ltd. There, the assessee was carrying on business in the distribution of films, and in the course of such business entered into three contracts dated September 17, 1941, July 16, 1942, and May 5, 1945, with a company called the J....
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....s light, the agency right can be held to be of the nature of a capital asset invested in business. But this cannot be said of a contract entered into in the ordinary course of business. Such a contract is part of the business itself, not anything outside it as is the agency, and any receipt on account of such a contract can only be a trading receipt. That there is a distinction between an agency agreement and a contract made in the usual course of business will further be clear, if we have regard to one of the reasons on which the conclusion that compensation paid for the cancellation of agency rights is a capital receipt is sometimes rested. It is that, in substance, the agent assigns the agreement to the principal and the compensation is price paid therefor. Vide the observations of Lord Moncrieff in Barr, Crombie & Co. Ltd. v. Commissioners of Inland Revenue already quoted. It no doubt sounds somewhat strange that an arrangement between parties to a contract settling claims thereunder should be regarded as an assignment of the rights of one of them to the other, but it at least emphasises that the agreement is to be regarded as a capital asset of the agent, which is saleable. ....
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....ess in the sale and purchase of goods for a stated period on terms settled between them, or whether they enter into a succession of contracts for that purpose ? Two decisions have been quoted before us as showing that payments under a contract entered into in the ordinary course of business would be revenue receipts, even though the agreement may be for a period. In Commissioners of Inland Revenue v. Northfleet Coal and Ballast Co. Ltd. cited above, the contract was for the supply of chalk for a period of ten years, and the compensation paid was for the cancellation of the contract for the unexpired period of four years, and it was held to be a trading receipt. In Shove (H. M. Inspector of Taxes) v. Dura Manufacturing Co., Ltd., the respondent company had introduced company A to company B, as the result of which the former obtained a remunerative business with the latter. In return for this service, A agreed to pay the respondent a commission on the business so obtained. Later on, this agreement was terminated on payment of a sum of pound 1,500 by A to the respondent. The question was whether this was a revenue receipt. In answering it in the affirmative, Lawrence, J., observed :....
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....t of his circulating capital, as is the coal that a coal merchant buys and sells in the course of his trade. So, too, is the coal that a manufacturer of gas buys and from which he extracts his gas." Therefore, when a question arises whether a payment of compensation for termination of an agency is a capital or a revenue receipt, it would have to be considered whether the agency was in the nature of capital asset in the hands of the assessee, or whether it was only part of his stock-in-trade. Thus, in Barr Crombie & Sons Ltd. v. Commissioners of Inland Revenue, the agency was found to be practically the sole business of the assessee, and the receipt of compensation on account of it was accordingly held to be a capital receipt, while in Kelsall's case the agency which was terminated was one of several agencies held by the assessee and the compensation amount received therefor was held to be a revenue receipt, and that was also the case in Commissioner of Income-tax v. South India Pictures Ltd. It is, however, unnecessary to further elaborate this point, as we are concerned in this appeal, not with an agency agreement but with a contract entered into in the ordinary course of busine....
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....appellants' profit-making apparatus. They regulated the appellants' activities, defined what they might and what they might not do, and affected the whole conduct of their business." Thus the agreements in question were intended to ensure that the business in margarine was carried on to the best advantage, but did not, in themselves, form part of the business. They were merely collateral to it. For the reasons given in discussing the nature of agency agreements, the agreements between the two companies must be regarded as not pertaining to the trading activities, which yielded profits, and the payment on account of those agreements must be held to be a capital receipt. But these considerations would be inapplicable to the agreement with which we are concerned. The business which the respondent was to carry on and which was to yield profits to him was the very business to which the agreement relates. It is under this very agreement that he was to be paid Rs. 2-9-0 per ton of limestone loaded by him, and the business which he had to do to earn the amount was to raise and supply limestone as provided in the agreement. There is here no profit-making apparatus set up by the agreement ....
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....n settlement of rights under a trading contract are trading receipts and are assessable to revenue. But where a person who is carrying on business is prevented from doing so by an external authority in exercise of a paramount power and is awarded compensation therefor whether that receipt is a capital receipt or a revenue receipt will depend upon whether it is compensation for injury inflicted on a capital asset or on a stock-in-trade. The decision in Glenboig Union Fireclay Co. Ltd. v. Commissioners of Inland Revenue applies to this category of cases. There, the assessee was carrying on business in the manufacture of fireclay goods and had, for the performance of that business, acquired a fireclay field on lease. The Caledonian Railway which passed over the field prohibited the assessee from excavating the field within a certain distance of the rails, and paid compensation therefor in accordance with the provisions of a statute. It was held by the House of Lords that this was a capital receipt and was not taxable on the ground that the compensation was really the price paid "for sterilising the asset from which otherwise profit might have been obtained". That is to say, the firecl....