Commissioner Of Income-Tax, Nagpur v. Rai Bahadur Jairam Valji And Others

llO SUPREME COURT REPORTS [1959) Supp. '95[8 ]question did not arise for consideration at that stage, M. c. v. s. did ~ot also consi~er any material to support their Ah .. achal• .vadar findmg. In the circumstances, the only reasonable Etc. course is to leave that question open so that it may v. be decided in appropriate proceedings. 1-he Slate of In the result, subject to the aforesaid observations, the appeals are dismissed but without costs. Mad.as .s. Othm Subba Rao ]. Appeals dismissed. Ootober 7. COMMISSIONER OF INCOME-TAX, NAGPUR RAI BAHADUR JAIRAM VALJI AND OTHERS (VENKATABAMA AIYAB, P. B. GAJENDBAGADKAB . and A. K. SABKAB JJ.) Income Tax-Capital or Revenue receipt-Compensation for premature termination of contract_..:.Whether trading reccipt-Liabi· lity to tax-Indian Income-tax Act, r922 (XI of r922). The respondent had been carrying on business in the produc-tion and supply of limestone since 1920, and under an agreement entered into with the Bengal Iron Company was supplying all its requirements of limestone and dolomite. Sometime later the Indian Iron and Steel Company took over all the assets and liabilities of the former company. Subsequently differences having arisen between the respondent and the Indian Iron and Steel Company they entered into an agreement on May 9, 1940, in settlement of all the disputes .between them whereby, inter alia, the respondent was to work a quarry of the company for a period of 25 years and to supply the limestone quarried there-from to the company according to its requirements and to get from the railway authorities facilities for transporting the lime-stone more economically; and it was agreed that till such facili-ties were given, the respondent was to be paid Rs. 4000/- every month. Under the agreement the respondent had the right to work other quarries of his own and supply limestone so quarried to other purchasers. The railway authorities having declined to grant facilities, it became impossible to carry out the agreement in the manner contemplated by the parties, who, thereupon, entered into a fresh agreement on August 2, 1941, terminating the agreement dated May 9, 1940, on certain terms. The agree-1958 ment provided inter alia (1) that the Company should pay "I~s. 2,50,000/- to the sellers as solatium besides the monthly instal- Commissio11er of merits of Rs. 4000/-", remaining unpaid under the contract dated Incotne-Ta" May 9. 1940, (2) that the company should purchase limestone v. from the respondent for a period of 12 years, and .(3) that the Jairam Valji respondent was to be appointed the loading contractors of the Company for loading iron ore. On a question as to whether the the sum of Rs. 2,50,000/- was liable to tax, the respondent claim-ed that it was not, being a capital receipt but the income-tax authorities held that it was a trading receipt and was income chargeable to tax. The High Court however held on a reference under s. 66(1), that the income was not chargeable to tax. and hence the present appeal. In support of the appeal, the respon-dent contended inter alia that (1) the contract dated May 9, 1940, was for a period of 25 years of which more than 23 years had still to run at the time of the settlement, and it was therefore an asset of an enduring character, capital in character, and the compensation paid therefor was a capital receipt. and (2) that the true character of the agreement was that it broug.ht into existence an arrangement which would enable the respondent to carry on a business and was not itself any business, and any pay-ment made for the termination of such an agreement was a capital receipt. Held, that the contract of May 9, 1940, was entered into by the respondent in the ordinary course of his business and that the sum of Rs. 2,50,000/- which was paid as solatium for the cancellation of that contract, was a revenue receipt and was chargeable to tax. 1958 1958 1958 1958 Section: CONCLUSION There is a distinction between a contract entered into in the usual course of business and an agency contract. While it may be possible to regard the latter as merely a framework for doing business, the former constitutes the business itself. and, therefore, compensation paid for the termination of the former kind of contract must be held to be revenue, whereas compensation paid for the termination of the latter might be capital in character. It would make no difference in the character of the receipt, when it is compensation for cancellation of a trading contract, whether its performance is to consist of a single act or a series of acts spread over a period. Case law reviewed. Van Den Berghs Ltd. v. Clark, [1935] A.C. 431, distinguished. CIVIL APPELLATE JURISDICTION: Civil Appeal No. 109 of 1954. Appeal by special leave from the judgment and order dated April 21, 1950, of the former Nagpur High Court in Misc. Civil Case No. 135 of 1949. 112 SUPREME COURT REPOH1'S [1959] Supp. R. Gmiapathy Iyer and R. H. Dhebar, for t.he appe1- Co1nmissioner of ]ant. f,,come-Tax v. the respondents. ]airum Valji Radhavinod Pal, J, M. Thakar and I. N. Shroff, for the respondents. 1958. October 7. The Judgment of the Court was delivered by VENKATARAMA AIYAR J.-This is an appeal against the judgment of the High Conrt of Nagpur in a referpnce under s. 66(1) of the Indian Income-tax Act (XI of 1922), hereinafter referred to as the Act, and the point that is raised for our determination is whether a sum of Its. 2,50,000 received by the respon-dent on Angust 2, 1941, is chargeable to income.tax. While, according to the Department, the amount in question is a revenue receipt liable to be included in the chargeable income, according to the respondent it is capital receipt not liable to tax. The Appellate Tribunal held, affirming the decisions of the Income-tax Officer and the Appellate Assistant Commissioner, that the amount in question was a trading receipt, and was income liable to be assessed. On the application of the respondent, it referred the following question for the decision of the High Court: V enkalar,1ma Aiyar } . " Whether in the circumstances of the case the sum of Rs. 2,50,000 rec'Pived by the assessee as damages or compensation for the premature termina• tion oft he contract of 9th May UJ40 is income assess-able 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 s. 66(A)(2) of the Act for a certificate to appeal to this Court, but that was dismissed, the leamed judges holding that the law on the subject was well settled. The appellant thereafter applied to this Court for specialleave under Art. 136, and the same was granted, and hence this appeal. (I) S.C.R. SUPREME COURT REPORTS The question whether a receipt is capital or income has frequently come up for determination before the courts. Various rules have been enunciated as furnish-ing 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 infallible or any single criterion as decisive in the determination of the ques-tion, which must ultimately depend on the facts of the particular case, and the authorities bearing on the q11estion are valuable only as indicating the matters that have to be taken into account in reaching a deci-sion. Vide Van Den Berghs Ltd. v. Clark (1). That, however, is not to say that the question is one of fact, for, a.s observed in Davies (H. M. Inspector of 'l'axes) v. The Shell Company of China Ltd. ([2]) "these questions between capital and income, trading profit or no tracl-ing profit, are questions which, though they may depend no doubt to a very great extent on the parti-cular facts of each case, do involve a conclusion of law to be drawn from those facts". Vide also the observa-tions of Lord Greene, M. R. in Rustproof Metal Window Co.,. Ltd. v. Commissioners of Inland Revenue ([3]). That being so, we must first examine the facts of the present case, and then consider whether on those facts and in the light of the applicable principles, the sum of Rs. 2,50,000 received by the respondent is a capital or a revenue receipt. The respondent is a businessman whose trading activities run in several channels. He is a railway contractor ; he runs a rice mill and a sugar factory; he is ·a supplier of limestone and dolomite. It is with the last of these businesses that we are concerned in these proceedings. The respondent had acquired a quarry at Paraghat and had been himself working it and selling limestone quarried out of it to, among others, a Company called the Bengal Iron Company, Ltd. On January 5, 1935, the said Company entered into an agreement with the respondent for the purchase of all its requirements of limestone and dolomite from (1) [1935] A.C. 431. (2) (1951) 32 Tax Cas. 133. 151. (3) (1947) 29 Tax Cas. 243, 266. Cotnniissio11er of Income-Tax v. ]airam Valji Venkatarama 4iyar ]. 114 SUPREME COURT REPORTS [1959] Supp. the latter at rates specified therein, and these rates " were subsequently modified by another agreement b h · d d D b 2 93 I etween t e parties at_e . ec~m er 1, l 5. n 1936 the Company went mto hqmdation, and its assets and liabilities were taken over by another Company called the Indian Iron and Steel C9mpany, Ltd. under a scheme of amalgamation dated September 8, 1936. This Company continued to purchase limestone and dolomite from the respondent for some time, but later on, finding that the rates were uneconomic owing to increase in the railway freight, it dec:ided to purchase its requirements from other sources, and by notice dated May 29, 1939, informed the respondent accord-ingly. 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 aud 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. r958 Commissioner o, . . b Income-Tax v. Jafram Valji Venkata.ama Aiyar f. 115 1958 117 1958 Thereafter, the Company and the respondent enter-ed into an agreement in settlement of all the disputes between them, and the same was embodied in a docu-ment dated May 9, 1940. As it i~ 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 Com-pany according to its requirements. This quarry, it should be stated, was situated near Kulti where the Company carried on its smelting operations, aud obviously it would reduce the working expenses, if limestone required therefor could be got from Gan-gapur. There were, however, no facilities in Gangapur railway station for transporting the goods from the quarry, and so it was arranged that the authorities should be moved for permission to construct a siding at Gangapur, and that the cost thereof should be borne by the Company. It was expected that it would take z[9]ss 18 months before the siding could be completed, and Comniissioner of it was agreed that during that period the respondent Income-1·ax was to be paid Rs. 4,000 every month. Thereafter, v. the respondent was to be paid at the rate of Rs. 2-9-0 Jairam Valji per ton of limestone which might be loaded in the Venkatarama railway waggons to be arranged for by the Company. Aiyar J. The working of the quarry was left entirely in the hands of the respondent. It was he that was to purchase the machinery and the appliances necessary for quarrying. He was to engage his own workmen and put up all the requisite superstructures. After the limestone was raised from the quarry, he was to get it cleaned and rendered merchantable, and it was thereafter to be loaded in the wagon. There are two clauses in the agreement to which reference might be made. Under cl. 6, the respondent agreed "to supply to the Company such other quantities of limestone, if any, as the Company may order besides Kulti require-ments ". Clause 13 of the agreement enjoined that the respondent was not to engage, during the sub-sistence of the agreement., in any other contract busi-ness for the working of any quarry within an area of 20 miles from the Company's quarry, but this was subject to the proviso that the respondent was free to work any quarry belonging to and held by him. To continue the narration, the railway authorities did not agree to the construction at Gangapur of a siding and a loopline to the quarry, and so it became impossible to carry out the agreement in the manner contemplated by the parties. It is in this situation that the parties came together, and on August 2, 1941, entered into a new agreement and it is with this that we are directly concerned in this appeal. The agree-ment recites that the Company feeling difficulty in working their mines referred to in the contract dated May 9, 1940, made a proposal for termination of the said contract on certain terms, and that was agreed to. The terms of the agreement are (1) that the Company should pay "Rs. 2,50,000 to the sellers as solatium besides the monthly instalments of Rs. 4,000 ",remain. mg unpaid under the contract dated May 9, 1940 ; (2) 116 SUPREME COURT REPORTS [1959] Supp. 1958 Section: FACTS that the Company should take all the limestone re-quired for its furnaces "'t Kulti from the respondent Com"'i"iln&ome-Tax [0]"" of for a period of 12 .J vears on terms and conditions snt v. out in an agreement; (3) that the respondent was to J•iram Valji be appointed the loading contractors of the Company for loading all iron ore at Monoharpore for a period of Yenllalarama 12 years from January 1, 1942, on the terms and con-Aiyat ]. ditions 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 tu the purch11.se of limestone and the loading of iron ore at l\Ionoharpore were also executed. The balance due on account of monthly payment of Rs. 4,000 provided in the agreement of May 9, 1940, wa~ 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 necessarv to deal with a contention raised on the facts Of the case Oil 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, 1935, the respondent -had executed works of a capital nature such as con-struction of quarters, tenements and the like, and had incurred expenses exceeding Rs. 4 lakhs on that account, that all this had to be thrown away when the quarry at Paraghat had to be abandoned, and the sum of Rs. 2,50,000 was really a reimbursement of the amount spent by him as above and was therefore a capital receipt. If the facts were as stated by the respondent, the position in law would no doubt be as contended for by him. But have those facts been established ? In his statement before the Income-tax Officer, the respondent merely stated that the amount in question was paid as consideration for the termina-tion of the contract of 1935 and not of 1940, and it is pointed out by the Tribunal that the respondent did not substantiate even this assertion. There was no allegation that capital expenses had been incurred in the execution of the contract of 1935, and that the amount in question was paid as compensation therefor; nor is there any evidence on that question. deed, when it is remembered that the quarry at Para-ghat had been abandoned before the contract dated May 9, 1940, was entered into, it is difficult to imagine how any amount paid as compensation for the cancel-lation of that contract can have any connection with expenses incurred with reference to that quarry. \Ve m~st hold that the sum of Rs. 2,50,000 was not paid as compensation for expenses thrown away and cannot be held to be a capital receipt on that account. 121 1958 Now, the contention on behalf of the appellant is that the contract dated May 9, 1940, was one entered into by the respondent in the ordinary course of his business, that the sum of Rs. 2,fi0,000 was paid admit-tedly as solatium for the cancellation of that contract, that the payment really represents the profits which the respondent could have made, had the cont.ract been performed, and that it is therefore a revenue receipt; and a number of authorities were quoted in support of this contention. \Ve shall now refor to the more important of them. In Short Bros. Ltd. v. The Commissioners of Inland Revenue (1), the facts were that the appellant Company which was carrying on business as shipbuilders had entered into a contract to build two steamers and later on, agreed to its cancel-lation on receipt of a sum of £ 1,00,000. The ques-tion was whether this was a capital or revenue 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 Han worth, M.R., observ· ing 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 £ 1,00,000 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 Sar-gant, 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 .(1) (1927) 12 Tax Cas. 955· Comtnissioner of I nconie-T ax v. J airam Valji Venkatarama Aiyar ]. 118 SUPREME COURT REPORTS [1959] Supp. were settled by the agreement of May 9, 1940, which was, in turn, replaced by agreement replaced by agreement dated August 2, 1941. The agreements dated May 9, 1940, and August 2, 1941, could therefore be properly said to be adjust-ments made in the ordinary course of business. Comm;,,;0 ,.,, of was, in turn, replaced by agreement replaced by agreement dated August 2, In,ome-Tax v. Jafrum Valji Venkatarnma Aiya' 1. In The Commissioners of Inland Revenu.e v. 'l'he Northfieet Coal and Ballast Co., Ltd.('), the respondent Company which was the owner of a chalk quarry had entered into a contract with a purchaser for the supply of certain quantity of chalk for a period of ten years. After some time, the purchaser wanted to be relieved from the contract, and the respondent agreed to its termination on receipt, of£ 3,000. The point for decision was whether that was a capital or a revenue receipt. In holding that it was the latter, Rowlatt, J., observed: · "If the contract had gone forward those sums would have come into profits every year and now that they are represented by a commutation, so far as that is concerned, the point seeq1s to be concluded by Short's case(')". One of the contentions urged on behalf of the assessee was that the contract being for a term war; a capital asset, that the effect of the subsequent agreement terminating it on payment of£ 3,000 was in substance to assign the unexpired portion of the contract for a consideration, and that it \v