1. The question referred for our decision is as follows :
'Whether, on the facts and circumstances of the case, the sum of Rs. 1,05,074 received by the applicant as compensation from the Government is taxable as income of the applicant or is a capital receipt in its hands ?'
2. The question arises with reference to the assessment year 1951-52, the account year being the Samvat year 2006, i.e., from October 22, 1949, to November 9, 1950. The facts, upon which the reference came to be made, are briefly as follows :
The assessee is an unregistered firm by the name of Manna Ramji & Co. In the year 1944 they were doing business at Poona as timber merchants. For the purpose of their business they had six sheds in which they used to stock their timber and an office premises. It appears that the proprietor had a residential house in Poona. On May 19, 1944, during the last war, the Collector of Poona requisitioned the above premises for the purpose of godowns for storage of food grains. Originally, the entire premises of the assessee were requisitioned but upon request from the firm, the Collector agreed to allow the office premises to remain in their possession as before.
3. Consequent upon the requisition, the assessee put in a claim for compensation under section 19 of the Defence and of India Act, claiming Rs. 1,85,200 some time in October, 1944. The Collector on his part, however, offered them only rent at the rate or Rs. 310 per month some time in June, 1946.
4. Not satisfied with his offer the assessee-applicant claimed reference to arbitration and on November 10, 1947, the Civil Judge, Senior Division, Poona, was appointed the arbitrator. The Government appointed its consulting surveyor as an assessor to aid the arbitrator and the assessee on its apart of appointed one Mr. J. P. Parekh as its assessor. On April 15, 1948, the arbitrator gave his award and he awarded the following sums of money as compensation to the assessee :
(1) Rs. 310 per month as rent from the 15th May, 1944, till the date on which the premises would be restored to the claimants.
(2) A lump sum of Rs. 1,25,500 for loss of earnings.
(3) A sum of Rs. 100 for loss of certain wooden frames fitted inside the sheds, and
(4) Interest at 3% per annum on Rs. 1,25,500 from the 15 November, 1944, till the date of actual payment.
5. The Government of appealed against this award to this court but a Division Bench of this court confirmed the award of the arbitrator by its judgment on September 7, 1949.
6. Consequent upon the award being finally confirmed by this court, the assessee claimed and was paid in the year of account, S. Y. 2006 (assessment year 1951-52) the following sums of money :
Rs.(i) Amount by way of rent under the 1st head ... 22,180.00(ii) Lump sum for loss of earning under the2nd head ... 1,25,500.00(iii) Compensation for wooden frames underthe 3rd head... 100.00(iv) Interest at 3% p.a. under the 4th head ... 20,550.00(v) Cost of the arbitration proceedings ... 2,000.00------------Total ... 1,70,330.00-------------
7. In regard to the sum paid by way of rent of Rs. 22,180 and by way of interest Rs. 20,550.10, the assessee had contended that they should be excluded from his business income but the contention was rejected both by the Income-tax Officer and the Appellate Assistant Commissioner and the assessee does not seem to have proceeded further in regard to those two amounts.
8. The short question that arises for decision in this reference is whether the amount of Rs. 1,05,074 paid to the assessee in respect of the loss of earnings was, in his hands, a capital receipt or should be treated as a revenue receipt of income from business. This amount was computed by the department after deducting the from the gross amount of compensations for loss of earnings awarded to the assessee of Rs. 1,25,500 a sum of Rs. 20,426 which represented at Rs. 22,426 as the actual expenditure incurred by the assessee in pursuing his claim for compensation against Government less an amount of Rs. 2,000 awarded to him by the arbitrator. The account by which this figures of Rs. 1,05,074 was arrived at, thus stood as under :
Lump sum for loss of earnings.Rs. 1,25,500.0Less : Actual expenditure incurredby the assessee in pursuinghis claim against Government.Rs. 22,426Less amountawarded by thearbitrator Rs. 2,000 Rs. 20,426.0-------------- ------------------Net Rs. 1,05,074.0------------------
9. Now, so far as this amount is concerned, the Income-tax Officer, held that the amount was business income and liable to be taxed. In appeal by the assessee the Appellate Assistant Commissioner, Poona, held that the amount represented a capital receipt and was not a revenue receipt in the hands of the assessee and therefore not liable to tax. The Tribunal has, in appeal by the Income-tax Officer, Poona, reversed the decision of the Appellate Assistant Commissioner, and held that the amount was a business or revenue receipt and as such liable to be taxed in the hands of the assessee.
10. Now in order to ascertain the true nature of this amount of the compensation granted to the assessee by the authorities, it is necessary to consider what was the nature of the claim made by the assessee in respect of the which it was granted. Counsel for both the parties have taken us through the statement and the order of the arbitrator and the appellate judgment of this court, in order to show that what was the true nature of this amount in the hands of assessee. It is necessary, therefore, to refer to the documents, which indicate the nature of the claim made and what in essence was granted to the assessee. In making their claim, the assessee-firm, who were the claimants before the arbitrator, had stated that as a result of the requisitioning of the six sheds or godowns, they had incurred a loss of profits as mentioned in the claim made by them in their letter to the Government dated November 13, 1944, and as detailed 26th October, 1944. That report is on the record of this reference and in that report the surveyor has stated, inter alia, that all the sheds were constructed by M/s. Manna Ramji & Co., and that the requisitioning authorities have, after taking possession, demolished four out of six sheds and have considerably altered the remaining two sheds. Then they stated that the profits of the business of the trading in timber of the assessee-firm for three years was as a follows :
Rs.S. Year 1996 ... 66,000S. Year 1997 ... 79,000S. Year 1998 ... 66,000S. Year 1999 (estimated) ... 40,000
as the accounts had not been finally made up.
11. Thus the average the net income of the assessee for the last four years was Rs. 62,750. Then they added :
'We submit that whole of this profit resulting from the trading in timber will be lost to the claimants for the next three years and the claimants should be compensated for this loss. The compensation is the present value of the above said average yearly profits of Rs. 62,750 for the next three years. The present value of income Rs. 62,750 for three years at 3 1/2% comes to Rs. 1,75,700.'
12. They claimed further amounts for loss due to forced sale of timber Rs. 7,500 and expenses for dismantling and re-erection of frames for storage of timber Rs. 2,000, and thus made a total claim of Rs. 1,85,200. In answer to this claim the Collector, inter alia, stated that the business of the claimant had not suffered any loss and he added that as a result of war restrictions and control on material and movements, the claimants was not in position to replenish his stock about a year prior to requisitioning. Along with his statement the Collector appended a report of the Consulting Surveyor to the Government and he pointed out that the plea put in by the Government that the rent of Rs. 310 per month or Rs. 3,720 per annum would adequately compensate the loss of earnings was not acceptable to him and that, in addition to other monthly rent of Rs. 310, the assessee would be entitled to a lump sum compensation for loss of earnings. He added :
'The recognised method for assessing compensation for loss of earnings is to allow a sum equal to from 6 months to 3 years' earnings. Three years is the maximum which is allowed when the whole business is totally acquired.'
13. Then he pointed out that the Government had decided to exclude the main business office together with some storing space and that the portion retained with the claimant formed the most prominent and important part of the whole premises where the claimant could carry on business, though he would have to make other arrangements for storage of timber, etc. He then added :
'I do not believe the contention now put forth that he cannot carry on business for want of storing space which need not necessarily be attached to the office premises.'
14. He, therefore, recommended that a lump sum compensation of Rs. 31,374 should be paid to the claimants, calculated at Rs. 5,229 per month for six months. With the rest of the claim made we are not here concerned.
15. When the matter went before the arbitrator, the assessor for the assessee pointed out that the firm had been trading for the last 42 years since the S. Y. 1962 and that the claimants had erected six sheds on the land for storage of timber, the area occupied by the sheds being, as given by Government 19,000 sq. ft. and that out of these six sheds, four had been demolished and two had been substantially altered by Government after taking over possession. He also pointed out that the average, monthly net earnings from the timber business of the assessee, exclusive of income from other sources sand interest, was Rs. 5,350 and that the claimants had paid heavy excess profits tax on their earnings and, if they had not paid the said tax, their earnings would have been Rs. 9,550 per month. He, however, stated that the levy of the excess profits tax had been withdrawn from January 1, 1946. He also stated that after the requisition, the claimants had searched for suitable premises for their business but they could not find them. He made enquiries from several main persons but none of the them was willing to give their land for storing timber and Government had not succeeded in proving that some other premises were in fact available firm which place the claimants could have carried on their timber business. He stated : 'The business was thus practically extinguished incidental to the requisition.' Taking into account all the circumstances, he stated :
'......... I am of opinion that the claimants are entitled to compensation for loss of earnings at Rs. 5,350 per month for the period of 19th May, 1944, to 31st March, 1946, and, at Rs. 9,550 per month from 1st April, 1946, up to the date the premises are restored back to the claimants.'
16. Now, on behalf of the department Mr. Joshi has strongly relied upon this claim made on behalf of the assessee and what he has urged is that all that the assessee proved was that he had, as a result of requisitioning his premises, lost his profits and what he claimed, and in the opinion of his assessor he was entitled to, was only a multiple of the profits. Since that was the basis of his claim, whatever, he has obtained must necessarily in his hands, be equivalent to the profits lost and, therefore, a revenue receipt. On the other hand, it has been urged on behalf of the assessee by Mr. Palkhivala that it would have been well if this claim of the assessee would have received a much larger amount than he was actually awarded. But he pointed out that the arbitrator did not accept this basis of computation of compensation and the arbitrator has adopted a completely different mode of assessment.
17. We thus turn to the findings of the arbitrator and of the High Court. After stating the respective claims, the arbitrator found in paragraph 4 as follows :
'The main premises consisted of six sheds erected for storing timber and wood...... Out of these 6 sheds, the Government have demolished 4 and have made alterations in the remaining two, so as to make them more suitable for storing bags of food grains.'
18. He also found in paragraph 5 of his order that a timber business could not be carried on without grounds for storing the timber and an office for meeting the customers and for settling bargains, and that in the present case the claimants were allowed to retain their office, but they were deprived of their godowns, where they had stored considerable quantities of timber at the date of the requisition. As regards the status of the firm, he found that the assessee had been in this business for more than 40 years and that they had been occupying the requisitioned premises for about 22 years. He also held that they were one of the leading concerns in Poona in timber business.
19. As to the respective claims of the parties, the arbitrator pointed out that the assessee's architect Mr. Divecha had proceeded on the basis that the firm, Manna Ramji & Co. had practically to close down their business in timber and that the average annual net income of the firm was found to be Rs. 62,750. He also pointed out that the compensation claimed on behalf of the assessee was the present value of the above said average yearly profit of Rs. 62,750 for the next three years, which came to Rs. 1,75,000 at 3 1/2% interest. So far as the Collector is concerned, he denied that there could be any demand for loss of profits and loss due to compulsory disposal of timber at reduced rates and stated that it was thus clear that the Collector had based his offer of compensation entirely on the basis of proper rent of the premises of and declined to consider the claim for loss of earnings caused by the loss of the premises.
20. Thus the basis on which the assessee as well as the Collector claimed before the arbitrator is very clear and correctly understood by the arbitrator. The assessee claimed a multiple of his average annual profits of Rs. 62,750 for three years, whereas the Collector was only willing to offer compensation on the basis of the proper rent of the premises and declined to consider the loss of earnings caused by the loss of the premises. It is on the basis of these claim before him that the arbitrator did not accept the basis on which either party before him claimed the compensation.
21. In paragraph 12 of his order the arbitrator considered the question whether the loss of earning caused on account of the loss of these premises could be taken into account of not in determining the proper compensation, and then the stated that the Government pleader and had conceded in the course of the proceedings that 'loss of earning ought to be taken into account in determining proper compensation' and had filed a purpose so stating. Therefore, for the first time before the arbitrator it was conceded on behalf of the Collector that the loss of the earning ought to be taken into account in determining proper compensation. Now, no doubt, the assessee had claimed the loss of earnings on the basis of the average annual profits lost to him for a period of three years, but nevertheless the arbitrator did not award this amount. In paragraph 12 he held :
'Apart from that purshis, I think that it is clear that when a running business is stopped or discontinued to on account of the requisitioning of the premises in which the business had been carried on, the owner of the business in entitled to be compensated, not only for the loss of the premises but also for the loss of his earnings resulting from the discontinuance of the business'.
22. After referring to some authorities, he proceeded to consider what were the principles deducible from the authorities and in and connection observed :
'............ the first point which deserves to be noted is that the claimants' business was practically stopped on account of the loss of the storage godowns. It is obvious that a timber business cannot be carried on without provisions for storing wood in suitable sheds or godowns. It is pointed out that the claimants were allowed to the continue to have the use of the their office at the same old place near the godowns. But a mere office for reception of customers would be of little use in a business of this kind.'
23. Then he has given a finding that when the original claim was made, it appeared that the claimants had hopes of securing some other suitable godowns or sheds in that locality for storing their timber. He stated :
'But the in the end they found it impossible to secure any such premises for their use anywhere. The evidence shows that no suitable premises were available in the same locality or anywhere else in Poona. It seems from the claimants' letter, exhibit 55, that another godowns owned by the claimants bungalow at store their timber. These facts seems to me to be space for the claimants to store their timber. These facts seems to me to be uncontestable.'
24. It was urged before the arbitrator that the Government had taken over the property only for the temporary use. As to that the arbitrator found :
'But when as in this case, the period of occupation is indefinite and uncertain and is, in all probability, likely to be very long, the claimants can derive little consolation from the fact that even then the requisition must be technically termed as temporary. The claimants are unable to open their business elsewhere. There would be great difficulty in securing new premises. The place where the business is carried on has an important bearing on the profits.'
25. A little later he added :
'For the purpose of determining compensation, therefore, it would not be unfair to proceed in this case on the basis as if the premises have been taken over permanently.'
26. He then pointed out that the loss of the business premises would necessarily involve the loss of earnings and compensation should be given for the loss of earnings. Since the claimants' business was practically closed down on account of the los of the godowns, he proceeded to consider on what principle he should damages and stated the principle in paragraph 20 as follows :
'It is also clear that the proper method of determining compensation in the case of loss of earnings is to determine the present value of a number of years' purchase.'
27. He then quoted Lawrence and May on Modern Methods of Valuation and the principle which he extracted is eloquent of how his mind was working. The principle was :
'Where the taking of the premises will mean total extinction of trade, of where there are no other premises to which the trader can move, the full value of the goodwill may be allowed as compensation. In the case of most retail businesses this will seldom exceed three years' purchase of the net profits, and may be less.'
28. He dealt with the arguments urged on behalf of the Government that the assessee could not have, in the wear years, carried on business on the same scale and on the same profits as before, because of various restrictions and war-time difficulties, but rejected the said contention and held that the assessee could have maintained the same volume of business. He then awarded damages as follows :
'Considering all the circumstances and especially the delay in determining compensation, I think I should allow two years' purchase of the net annual profits by way of compensation in this case.'
29. Accordingly, he awarded a sum of Rs. 1,25,500 which is twice the figure of annual average profits as given by the assessee of Rs. 62,750.
30. The matter was then taken to the High Court. Before the Division Bench the Government pleader had urged on behalf of the Government that the assessee could have gone to a suitable place for doing business and carried on the business. The Division Bench answered this point by the pointing out that there was no pleading on behalf of the Government of the Province of Bombay that the respondents could have carried on business by having a godown in a place which was not suitable or which was not as suitable as their requisitioned premises. They found :
'.......... as a matter of fact, the respondents could not carry on their timber business, because of the requisitioning of their premises by Government.'
31. They confirmed the quantum of damages also and observed :
'Once it was found that no accommodation was available, it would take some time for the defendants to divert their timber business from Poona elsewhere. Taking into consideration all these things, in our view, the compensation which has been awarded by the arbitrator is the correct compensation to make.'
32. Now, it seems to us clear upon these two decisions of the arbitrator and of the High Court in appeal that it was found as a fact by both the arbitrator and the High Court that the assessee could not carry on their timber business had practically closed down as a result of the requisitioning. Thirdly, that it was impossible to secure alternative premises for use anywhere in Poona. Fourthly, that the loss of the premises necessarily involved the loss of earnings because the business practically closed down. And fifthly, that the compensation awarded was after determining the present value of a number of years' purchase, and what was actually awarded was 'two years' purchase of the net annual average profits by way of compensation.'
33. It was strenuously urged by Mr. Joshi that these findings, particularly of the arbitrator, show that even in the ultimate analysis what was granted to the assessee by the arbitrator was really a multiple of the average annual profits, in other words, nothing more nor less than the profit which they had claimed and which the arbitrator has awarded for the loss caused by virtue of the requisitioning. We do not think that the we can accept that interpretation. It is clear that the arbitrator did not award merely a multiple of the average annual profits but what he awarded was two years' purchase of the net average annual profits by way of compensation. The word 'purchase' is significant and it shows, in our opinion, that compensation was awarded as if the business were at an end or taken over by the Government. This conclusion is further strengthened by the findings which the arbitrator the given that the claimants' business was practically stopped on account of the loss of the storage godowns consequent upon the requisition and that the assessee could not carry on their timber business without provisions for storing wood in suitable sheds or godowns. No doubt, the arbitrator has used in his discussion the expression 'loss of earning', but loss of earnings may equally well able merely a loss of profits or loss of earnings consequent upon the cessation of the business itself, and he has shown that the compensation which the arbitrator ultimately awarded was really for the compulsory cessation of the business consequent upon the requisitioning of the premises and not merely for the loss of profits. Indeed it seems to us that the very principle which the extracted from the opinion of Lawrence and May on 'Modern Methods of Valuation', which we have quoted above, shows that he awarded the compensation for the taking over of the premises, which implied a total extinction of trade and because there were no other premises to which the trader could move. These, in our opinion, would be vital considerations in determining the question whether the compensation received by the assessee upon these grounds should be classed as a capital receipt or a revenue receipt in his hands.
34. Then we turn to the orders which the tax authorities have passed. The Income-tax Officer in his order dated November 27, 1951, has held :
'Since its godown was taken over by the Government, the business was practically at a standstill.'
35. He referred to a decision of the Income-tax Appellate Tribunal in Appeal No. 2053 of 1950-51 (Pure Products Ltd., Bombay) and drew a distinction between that case and the case of the assessee. He observed that in that case 'the Government paid compensation to the company for vacating the premises and for the loss suffered by the assessee-company by reason of quitting the premises and consequent disorganisation of the business. In the present case the assessee-company closed down its business and could not start the business anywhere else for want of suitable place. Due to requisitioning the company had to close down its business and could not carry to on.' In our opinion this was a correct and crucial finding given by the Income-tax Officer, though he went wrong in the conclusion. Where as a result of requisitioning the business is closed down and compensation paid for the closure of the business, the receipt of that compensation must necessarily be in the nature of the a capital receipt. Thus, so far as the facts found by the Income-tax Officer are concerned, they were in favour of the assessee. Nevertheless, the held the receipt to be a revenue receipt in the hands of the assessee. The Appellate Assistant Commissioner reversed the decisions of the Income-tax Officer. He also found :
'Appellant-firm has been doing business in timber and the Income-tax Officer's order shows that, since the firm's godown was taken over by Government, the business was practically at a standstill.'
36. Referring to the decision in the Pure Products Ltd's. case, he observed :
'The Income-tax Officer, however, came to the conclusion that although the facts in that case were to some extent similar, the Government had paid compensation to that company by reason of quitting the premises and for the loss suffered by the company by reason of quitting the premises and consequent disorganisation for the business; in the present case the appellant had closed down the business and could not start it anywhere else for want of suitable place and, therefore, the compensation paid was for loss of earnings resulting from the discontinuance of business and he held the same to be liable to tax relying on the Patna High Court decision in the case of Rai Bahadur H. P. Bannerji v. Commissioner of Income-tax.'
37. He distinguished the Pure Product Limited's case and observed :
'In that case, the appellants were able to carry on the business in other premises and still it was held that the payment was not for carrying on the whereas in the present case, on the Income-tax Officer's own admission, the business could not be carried on by the appellant and the compensation received was thus for loss of business, and I should, therefore, think that the amount to so received a capital receipt and not a revenue receipt........'
38. Here again the Appellate Assistant Commissioner, therefore, has found that the assessee's business was closed down as a result of the requisition or as the Income-tax Officer has observed - 'was practically at a standstill.' He also confirmed the findings of fact that the assessee were not able to the carry on their business in any other premises. He corrected the conclusion of the Income - tax Officer and held that the amount to be in the nature of a capital receipt and not liable to tax.'
39. When the matter went before the Appellate Tribunal on a departmental appeal, the two Member thereof wrote separate orders. So far as the Judicial Member was concerned, he referred to the decision of the Supreme Court in Commissioner of Income-tax/Excess Profits Tax v. Shamsher Printing Press, and observed :
'There is not much difference between the facts of that case and the facts now before us.'
40. It appears that counsel for the assessee, when replying to the appeal, took the stand that the assessee had sustained loss by virtue of his goodwill being impaired. The learned Judicial Member seized upon this contention and the rest of his order only deals with this question of goodwill. He observed that the assessee had nowhere claimed that he should be awarded compensation on the ground that the goodwill of the business had suffered, and that it was a case sought to be made out before him for the first time on behalf of the assessee. He pointed out that the stand taken on behalf of the assessee before the arbitrator, before the High Court and the income-tax authorities below was that the assessee's business had practically come to a standstill. Curiously enough he confirmed that finding and held :
'Apart form this there is evidence to show that soon after the requisition of the premises by the Government, the assessee's business practically came to a standstill. It did not make and new purchases but was only disposing of the stocks available with it.'
41. Then he proceeded further to consider whether there was any impairment to the goodwill and observed that the goodwill consists of a number of benefits and advantages, such as, good name, reputation and connection of the business and that it is the attracting force, which brings in customers, and held :
'It may be that the requisition has resulted in the cessation of the business of the assessee but it does not mean that it has impaired its good will or in any way incurred it. The requisition made by the government was temporary and was not of a permanent feature. The fact that the assessee was not able to carry on its business elsewhere materially affects the quantum of the compensation that has to be awarded to it but does not in any way change its nature. The fact that the assessee was not able to carry on its business elsewhere materially affects the quantum of the compensation that has to be awarded to it but does not in any was change its natured the fact that the assessee was not able to find any other place for storing its timber or the fact that it was prevented form carrying on the business on the same ] scale as before does not affect its goodwill. During the last war, many overseas businesses ceased to function on account of dearth of shipping facilities, etc., but this cessation in business has not impaired the goodwill of the business and the businesses continued to function thereafter the hostilities ceased. It sometimes happens that there is temporary in activity and us in the business, when the business is not busy but that does not affect the profit-making apparatus of the assessee. The loss which has been suffered by the assessee in not being able to carry on its business has been made good by the Government. It is thus a revenue receipt and as such it must be held liable to tax in the hands of the assessee'.
42. These findings of the learned Judicial Member clearly indicate that be misunderstood the case of the assessee as put forward in its pleadings before the arbitrator as also the foundation of its case before the tax authorities that the compensation received by it was in the nature of a capital receipt. Undoubtedly, in this he was assisted by the wrong emphasis placed by the representative for the assessee before the Tribunal, who urged that the goodwill of the business had been affected and compensation had been awarded for the loss or impairment of the goodwill. The correct case of the assessee, however, was also adumbrated before the tribunal, but in the emphasis which the counsel laid on the loss or impairment of the goodwill, the real case of the assessee was lost sight of. That the real case was put forward before the tribunal is shown by the statement in the order of the Judicial Member himself as follows :
'It is urged that from the very start the assessee has been claiming compensation on account of the business loss suffered by it for having not been able to carry on its trade for want of godowns.'
43. In the clearest possible language, therefore, the Judicial Member has himself stated that it was argued on behalf of the assessee that the compensation received by the assessee was on account of the business loss suffered by it for not having been able to carry on its trade for want of godowns. In other words, it was the loss or cessation of the business itself that was the ground for the award of compensation. That was the basis of the claim that the compensation paid should be treated as a capital receipt in the hands of the assessee. Having stated that part of the case, however, it does appear that counsel for the assessee stressed the fact that the goodwill had been lost and the compensation had been awarded for the goodwill and so induced the tribunal to reject that argument and forget the true point involved in the case.
44. From time to time one finds remarks in the order of the Judicial Member, which show that the two contentions were mix up in the arguments, as for instance, the remark :
'The fact that the assessee was not able to find any other place for storing its timber or the fact that it was prevented from carrying on the business on the same scale as before does not affect its goodwill.'
45. We are unable to see what the question of goodwill has got to do with the contention that his business had ceased to exist and that, therefore, the compensation awarded was a capital receipt. Though, no doubt, in some cases the censer of business may affect goodwill, the two were independent grounds for urging that the compensation awarded was in the nature of a capital receipt. The grounds ought to have been kept separate. When this was pointed out, Mr. Joshi on behalf of the department urged that the only stand taken before the tribunal was on the question of goodwill and, therefore, the Tribunal held that the compensation was not for the loss of the goodwill. We have already shown that the case that the compensation was paid to the assessee for the loss of its business was adumbrated before the tribunal in addition to the other question as to the goodwill. In the circumstances, therefore, we do not think that the findings given by the Judicial Member can be sustained, for the true case, which was sought to be made out from the very start on behalf of the assessee, has not been considered.
46. Turning to the findings of the Accountant Member, he has first of all stated that the whole effort of the counsel for the assessee was to convince the Tribunal that what the assessee received was on account of the loss of its goodwill and not on account of the loss of its business earnings. Now, it may be that the counsel for there assessee did stress before the tribunal that factor of loss of goodwill somewhat excessively, but it was incorrect on the part of the Accountant Member to say that it was urged that it was 'not on account of loss of its business earnings'. We have already shown that it was throughout the case of the assessee that the compensation was paid to him for the loss of the business itself resulting from the requisitioning of the godowns. What is more, we have shown that in stating what the counsel argued, the Judicial Member has in terms stated that from the very start the assessee has been claiming compensation on account of the business loss suffered by it for having not been able to carry on its trade for want of godowns. Thus there is clearly a conflict between the two Members as to what counsel for the assessee had argued and it seems to us that, in so far as the accountant Member has stated, the assessee's representative argued that it was not on account of loss of its business earnings, he had not correctly apprehended the argument. Moreover, in the order of the Accountant Member we find the following passage, which expressed his conclusion upon the facts :
'Even this business was carried on by the assessee-firm in its usual name and style from the same office premises from which it used to carry it on prior to the requisition of the godowns by the Government. One, therefore, certainly fails to understand how there was any loss of goodwill as such or and injury to that capital asset. If any injury was caused to the assessee's business, including the capital assets it held for the purpose of carrying on that business, it was to the volume of the business and not to the profit-making apparatus itself'.
47. The words we have underlined show that it was present to the mind of the Accountant Member that it was the contention on behalf of the assessee that the compensation awarded was for loss of business or damage to the profit-making apparatus.
48. In the conclusion which he drew from the facts before him, the Accountant Member completely overlooked three important facts, which had been concurrently found by the Income-tax Officer and the Appellate Assistant Commissioner. These facts were, firstly, that this was a business which could not be carried on without godowns or storage facilities and that it was essential that the assessee must have godowns in order to carry on his business at all; secondly, that with the taking away of the six sheds or godowns, all its storage facility was taken away from the assessee and there were no premises in which the timber belonging to the firm could be stored, and, thirdly, and that is an important fact which has been overlooked, that though the assessee had been allowed to retain its officer. His conclusion, therefore, that if any injury was caused to the carrying on of the assessee's business, it was only to the volume for the business and not to the profit-making apparatus is, in our opinion, wholly unsupported by any evidence and is contrary to the facts found. We shall, however, show presently that even assuming that the assessee continues part of his business, if any other part of it is lost as a result of requisitioning, the compensation paid for such loss would still be in the nature of a capital receipt.
49. As to what is a capital receipt and what is a revenue receipt, the principles are well settled and admit of no doubt or difficulty, but, as has been frequently pointed out, whatever doubt or difficult arises is in the application of these principles. The classic statement of the distinctions between 'capital' and 'revenue' is to be found in a passage in the judgment of Lord Macmillan in Van den Berghs Ltd. v. Clark, which passage is quoted with approval by the Supreme Court in Senairam Doongarmall v. Commissioner of Income-tax. Van den Berghs Ltd.'s case was a case where mutual trade agreements were rescinded between two companies and pounds 4,50,000 were paid to the assessee-company as damages. This was treated as capital receipt and not as an income receipt to be included in computing the profits of their business. Lord Macmillan stated the principles thus :
'On the contrary, the cancelled agreements related to the whole structure of the appellants' profit-making apparatus. They regulated the appellant' activities, defined what they might and what they might not do, and affected the whole conduct of their business. I have difficulty in seeing how money laid out to secure, or money received for the cancellation of, so fundamental an organisation of a trader's activities can be regarded as an income disbursement or an income receipt.'
50. If is from this classic statement that we find the expression 'the profit-making apparatus' taken in most of the cases.
51. In Commissioner of Income-tax v. Chari and Chari Ltd. referring to their earlier decision in Kettlewell Bullen and Company Ltd. v. Commissioner of Income-tax, the Supreme Court reiterated this principle as follows :
'It may be broadly stated that what is received for loss of capital is a capital receipt : what is received as profit in a trading transaction is taxable income. But the difficulty arises in ascertaining whether what is received in a given case is compensation for loss of a source of income, or profit in a trading transaction'.
52. And in a further passage :
'The test applicable to contracts for termination of agencies is : what has the assessee parted with in lieu of money or money's worth received by him which is sought to be taxed If compensation is paid for cancellation of a contract of agency, which does not affect the trading structure of the business of the recipient, or involve loss of an enduring asset, leaving the taxpayer free to carry on his trade released from the contract which is cancelled, the receipt will be a trading receipt : where the cancellation of a contract of agency impairs the trading structure, or involves loss of an enduring asset, the amount paid for compensation the loss is capital.'
53. The English case has used the expression 'profit-making apparatus' or 'so fundamental an organisation of a trader's activities' 'the Supreme Court has used the expressions 'cancellation of a contract of agency' which 'impairs the trading structure or involves loss of an enduring asset'. It is thus clear that if the injury or damage which the assessee suffers is of so fundamental a character as to impair its profit-earning structure or involves the loss of an enduring asset, whatever is received in lieu of such damage or injury would be in the nature of a capital asset.
54. Looked at from this point of view, we are quite unable to see how upon the facts found in the present case by all the authorities below (except, as we have shown, the conclusion of the Accountant member, which in our opinion was not a correct conclusion upon the facts), the compensation which was received by the assessee from the Government for the requisitioning of its godowns cannot but be in the nature of a capital receipt. The facts are relevant in themselves. Prior to the requisitioning the assessee possessed six godowns in which he used to store his timber and as a result of that storage facility being available to him, he could carry on his business. No doubt the assessee had also an office premise but it is clear that the office premises formed an infinitesimal part of its total business. The tax authorities had found as a fact that without the six gowns which were requisitioned the assessee could not carry on its business. Therefore, the taking away of the six godowns would clearly involve loss of an enduring asset so far as the assessee is concerned. There is the further finding also of fact that the assessee was unable to find any alternative storage facility for the six gowns lost; that he did make efforts to find sheds or godowns but none was available. The profit-making apparatus itself was thus affected. No doubt the assessee did, subsequent to the taking away of the sheds, dispose of its stock, which till then had been stored in the sheds. It appears that in all he had 5,000 c. ft. of timber stored with him at the time but that business activity, which he carried on, was not a business activity, which he undertook after the requisition. He already possessed a stock of timber and he disposed it of. Surely it was not to be expect that he would allow it to deteriorate. He was bound to try his best and sell it out. It can hardly be said that his business activity, which was carried on before the requisition, continued even thereafter, because he was only disposing of old stock.
55. In paragraph 6 of the order of reference, the Tribunal has adverted to certain further facts, which, curiously enough, do not find mention in any of the orders of the tax authorities previously, except in passing. In paragraph 6 of the order of reference the Tribunal has referred to the fact that in the assessment year 1949-50 and 1950-51 the assessee did carry on some trading activity; that in 1949-50 he incurred a loss in the timber business of Rs. 4,572 and in 1950-51 a loss of Rs. 498. The Tribunal has further stated that in 1951-52 the assessee-firm made sales of Rs. 40,011 and the Income-tax Officer computed the profit thereon at Rs. 10,000.
56. This is not a correct picture of the trading activity of the assessee in 1951-52. A mere perusal of the assessment order shows that the figure of the gross profits earned. As a matter of fact the assessee had sustained even in that year a business loss of Rs. 2,748 as assessed by the Income-tax Officer himself (see annexure 'A').
57. Now, what was contended by Mr. Joshi on the basis of these figures is that though the assessee may have incurred a loss, none-the-less it shows that he had carried on a business activity and to that extent, therefore, he supported the finding of the Accountant Member that it was only the volume of the business which was affected and not the profit-making apparatus, itself. We do not think that this conclusion can fairly follows from the facts found. In the Samvat year 2001 and the three proceeding years, we have shown that not only the arbitrator, the High Court, but also the Income-tax Officer accepted the position that the net annual average profit of the assessee was of the tune of Rs. 62,750, i.e. over Rs. 5,000 per month. Before the arbitrator the assessor on behalf of the assessee had pointed out that from the next year, i.e. from April 1, 1946, levy of excess profits tax had been withdrawn and that the corresponding earnings for subsequent years would be about Rs. 9,550 per month. This fact has nowhere been disputed. Therefore, here was a very affluent business, which was throughout making profits of the order of Rs. 1,50,600 a year, which, after the date of the requisitioning did not result in a change in the fundamental organisation of this trader's activities, within the meaning of the principle laid down in Van den Bergh's case. It is clear, in our opinion, that the profit-making apparatus itself was seriously affected by the requisitioning and that the taking away of the storage facility impaired the trading structure and involved loss of an enduring asset. Even, therefore, upon the facts stated by the Tribunal in paragraph 6 of their order of reference, the conclusion cannot be drawn that the compensation which the assessee received for such an injury was in the nature of a revenue receipt. It was undoubtedly, in our opinion, in the nature of the a capital receipt.
58. Even assuming that a part of the business continued after the requisitioning of the godowns of the assessee, we do not think that as a matter of law the compensation received, must necessarily be treated to be a revenue receipt. The compensation received, where part of the business is lost and been though substantial part of the business continues, would still be in the nature of a capital receipt is established by the decision of the Supreme Court in Commissioner of Income-tax v. Vazir Sultan & Sons. In that case M/s. Vazir & Co., the assessee, a registered firm, was appointed the sole selling agent and sole distributor of the manufacturing company of the well-known Charminar cigarettes for the Hyderabad State. Later on, that agreement was modified and the assessee was given a discount of 2% not only on the goods sold within the Hyderabad State but on all goods sold in and outside that State. Thus the territory was considerably enlarged. In 1950, however, the assessee and the company reverted to the old arrangement confining the sole agency to the Hyderabad State and, for the loss of its business outside Hyderabad State, the assessee was paid a sum of Rs. 2,19,343 by way of compensation. It was urged on behalf of the department in that case that the business of the assessee continued and, therefore, what was paid to the assessee was only to compensate the assessee for loss of its business profits and, therefore, the amount would be in the nature of a revenue receipt in the hands of the assessee. The Supreme Court negatived this argument and at page 187 observed :
'The agency agreements in fact formed a capital asset of the assessee's business worked or exploited by the assessee by entering into contracts for the sale of the Charminar cigarettes manufactured by the company to the various customers and dealers in the respective territories. This asset really formed part of the fixed capital of the assessee's business. It did not constitute the business of the assessee but was the means by which the assessee entered into the business transactions by way of distributing those cigarettes within the respective territories. It really formed the profit-making apparatus of the assessee's business of distribution of the cigarettes manufactured by the company.'
59. In a further passage on the same page the Supreme Court observed :
'It would not make the slightest difference for this purpose whether either one or both of the agency agreements were terminated or cancelled by the company. The position would be the same in either event.'
60. And then their Lordships quoted with approval another passage from the judgment of Lord Wrenbury in Glenboig Union Fireclay Co. Ltd. v. Commissioners of Inland Revenue, as follows :
'The matter may be regarded from another point of view : the right to work the area in which the working was to be abandoned was part of the capital asset consisting of the right to work the whole area demised. Had the abandonment extended to the whole area, all subsequent profit by working would, of course, have been impossible, but it would be impossible to contend that the compensation would be other than capital. It was the price paid for sterilising the asset from which otherwise profit might have been obtained. What is true of the whole must be equally true of part.'
61. Similarly in Godrej & Co. v. Commissioner of Income-tax, the assessee, who was the managing agent of a steel manufacturing company for a period of 30 years under an agreement dated 9th November, 1933, by agreement and, in consideration of the new terms of payment, the managing agents were given a lump sum compensation of Rs. 7,50,000, 'for releasing the company from the onerous term as to remuneration' contained in the original managing agency agreement. The question was whether this payment compensation to the managing agents was income in their hands or a receipt in the nature of a capital receipt. It was held that 'the sum was paid and received not to make up the difference between the higher remuneration and the reduced remuneration but was in reality paid and received as compensation for releasing the company from the onerous terms as to remuneration as it was in terms expressed to be. In other words, so far as the managed company was concerned, it was paid for securing immunity from the liability to pay higher remuneration to the assessee-firm for the rest of the term of the managing agency and, therefore, a capital expenditure and so far as the assessee-firm was concerned, it was received as compensation for the deterioration or injury to the managing agency by reason of release of its rights to get higher remuneration and, therefore, a capital receipt.......' Here again the entire business continued as before but the contract of managing agency, which was undoubtedly in the nature of a profit-making apparatus, so far as the assessee-firm was concerned, was damaged and, therefore, whatever sum was paid to cover that damage was held to be in the nature of a capital receipt in the hands of the assessee. In spite of the fact that the business of the managing agents continued intact as before, the compensation was held to be in the nature of a capital receipt because it was pad to compensate for the injury to the profit-making apparatus. The case therefore shows that the question whether the business continues or not to a greater or smaller measure is not relevant to the question whether the compensation paid would be a receipt of a capital nature of a receipt in the nature of a revenue receipt in the hands of the assessee.
62. The same question also came up for consideration before a Division Bench of this court in Commissioner of Income-tax v. Shamsher Printing Press, which was relied on by Mr. Joshi on behalf of the department. That was a case where the facts were somewhat peculiar. The business of the assessee consisted of purchasing and selling paper, stationery, etc., and it also carried on business as manufacturers of books, exercise books, diaries, etc. The premises in which the assessee carried on its business were requisitioned by the Collector of Bombay under the Defence of India Rules as in the present case, and the assessee filed a claim before the requisitioning authorities for Rs. 8,10,300 as compensation. A sum of Rs. 93,106 ultimately came to be awarded as compensation and the question was whether it was to be treated as a capital receipt in the hands of the assessee or a revenue receipt. A Division Bench of this court held that the receipt was either a capital receipt in the hands of the assessee or it amounted to a payment which was in the nature of a casual and non-recurring receipt. The question was reframed and answered in the affirmative and it was held that the receipt was of a casual and non-recurring nature. This case went up to the Supreme Court and came to be reversed in Commissioner of Income-tax v. Shamsher Printing Press, but the ground upon which it was reversed eloquently illustrates the principle : The crucial fact in the Shamsher Printing Press' case was that in spite of the loss of their business premises, the assessee was able to find other alternative accommodation and its business continued. This fact is noted by Chagla C.J., in his judgment at page 370. The Supreme Court held that this was an important circumstance. Before the Supreme Court it was urged that the requisition of the premises resulted in loss of the goodwill to the assessee but the Supreme Court pointed out that nowhere was the loss on account of the goodwill claimed; and that the assessee had only made a claim for loss of profits for two years and not on account of any injury or damage to their capital, which they could not really obtain, because they were able to secure alternative accommodation. At page 93, the Supreme Court held :
'In our view, the sum was received as compensation for loss of profits for the period during which, it was imagined, the respondent's business would remain stopped before it could be restarted at a new premises. That being so, it was clearly a revenue receipt.......'
63. The principle, therefore, adopted was the same as in the other case which we have referred to above.
64. All these authorities were considered afresh by the Supreme court in their decision in Senairam Doongarmall v. Commissioner of Income-tax. In this case the assessee owned tea gardens. Its business consisted of growing and manufacturing tea. During the war the factory and other buildings of the assessee were requisitioned for defence purposes by the military authorities and as a consequence the manufacture of tea was stopped. The assessee was paid compensation for two years, i.e., for 1944 and 1945. The Supreme Court held that the amount which the assessee received by way of compensation was undoubtedly in the nature of a capital in the hands of the assessee and the principle reason which weighed with them was that the assessee's business had come to an end for the time being. What is important to notice here is that the tea gardens with the plants standing therein still continued to be in the possession of the assessee and were being tended by the assessee. Therefore, part of the assets continued to exist and were in the hands of the assessee but they could not manufacture tea as a result of the loss of the buildings. The Supreme Court, relying upon a decision of the Privy Council in Commissioner of Income-tax v. Shaw Wallace & Co. and other cases, held that the amount which the assessee received was in the nature of a capital receipt. They observed at page 408 as follows :
'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 'profit and gains of a business' in respect of a business carried on by him. Where an assessee does not carry on business at all, the section cannot be made applicable, and the compensation that the receives cannot bear the character of profits of a business.'
65. In our opinion the ratio of this decision applies almost exactly to the facts of the present case. The business of the assessee, upon the findings of the tax authorities themselves, had practically come to a standstill.
66. The Income-tax Officer had relied upon a decision in Rai Bahadur H. P. Bannerji v. Commissioner of Income-tax for holding that the compensation paid to the assessee in the present case was in the nature of a revenue receipt in his hands. In that case the facts were wholly different from the facts in the present case. In that case the assessee had purchased about 13 bighas of land for the purpose of setting up a market and making profit. The said plot was requisitioned by the military authorities under the Defence of India Rules. The amount which was paid to the assessee, however, was not a lump sum compensation as in the present case, but it was a sum paid to the assessee by the military authorities per month. The amount was Rs. 1,100 per month as compensation for the use of the land and the question was whether that amount was taxable in the hands of the assessee. It was held that the amount was nothing more or less than a business profit because it was in the nature of a rental for the use of the plot. There was no question there of any damage or injury to the profit-making apparatus at all. The land had not been used for any business before it was requisitioned, though it may have been intended to be so used, and all that the compensation represented was the estimated mesne profits of the plot. If there had been a contract, and such a payment had been made under the contract, that payment would have been in the nature of rent and obviously the rent would be a revenue receipt in the hands of the assessee. On the facts that case can have no analogy with the present case. In our opinion it is clearly distinguishable.
67. In the circumstances we hold that the amount received by the assessees for the requisitioning of their six sheds or godowns was in the nature of a capital receipt in their hands paid to them for the damage sustained by their profit-making apparatus. It was not a revenue receipt and was not taxable in the hands of the assessees.
68. We answer the question referred to us as follows :
The amount of Rs. 1,05,074 received by the applicants-assessed as compensation from Government was not taxable as income of the applicants-assessed but was a capital receipt in their hands.
69. The Commissioner shall pay the costs of the assessees.