1. This is a reference under section 66(1) of the Indian Income tax Act, 1922, made at the instance of the revenue. It is a reference which can be sought and pressed on an assumption that there exists a complete vacuum of commonsense and a complete annihilation of law. It must, however, be stated to the credit of Mr. Joshi, the learned counsel for the revenue, that he has made his best, but very discreet, efforts on behalf of the revenue by merely formulating his points without advancing any argument. The facts have just to be stated to be a appreciated, no reference being necessary even to a text book of law, let alone decided cases.
2. The question of law referred is :
'Whether, on the facts and in the circumstances of the case, the amount of Rs. 95,620 received by the assessee-company as acquisition-compensation in respect of portion of the lands held by the assessee on a lease agreement, is a capital receipt ?'
3. The assessee is a private limited company which carries on the business of manufacture and sale of pharmaceuticals. The relevant assessment year is 1955-56, the corresponding accounting year being the year ended on 28th February, 1955. By an agreement dated 22nd December, 1948, the assessee agreed to take on lease for a period of 99 years from certain members of the Gamadia family a plot of land situated at the Gamadia Estate, Tardeo, Bombay, admeasuring 3,532 sq. yds. The assessee took the lease for the purpose of erecting factory for its business. The monthly rent agreed to be paid was Rs. 1,150. The agreement provided that the assessee was to construct on the land as provided in the agreement of lease within a period of two years from the date when the assessee obtained possession of the land or such extended period as may be granted by the lessors. As a matter of fact the assessee was put in possession of the plot of land on 1st October, 1948, i.e., even before the date of the execution of the agreement of lease.
4. Clause 24 of the agreement of lease provides as under :
'24. Upon completion of the said works the lessors will grant and the lessee shall accept a lease in duplicate of the said plot and the building and structures so erected thereon for the terms and at the rent hereinbefore mentioned..... In the event of there being a set-back pending execution of the lease the compensation monies shall be placed on deposit in the joint names of the lessor and the lessee and if the lessee shall become entitled to the grant of the said lease, the lessee shall be entitled to receive and be paid the whole of the compensation monies with any interest but no diminution shall be made in the agreement. If the lessee shall not become entitled to the grant of the said lease, the compensation monies with any interest shall be paid to the lessor. The lease shall contain a provision for the lessee to receive the whole of the compensation monies for any set-back during the lease, the lessee to continue to pay the full rent without reduction. In the event of any acquisition other than a set-back, the matter shall be governed by the land Acquisition Act for the time being in force.'
5. The Municipal Corporation of Greater Bombay gave a notice of a acquisition of a portion of the said land admeasuring 956.20 sq. yds. on 29th October, 1952. Thereafter, a regular deed of lease was executed on 13th January, 1964. Thereafter, during the relevant accounting year, the municipality paid to the assessee a sum of Rs. 95,620 as compensation for the said acquired area of 956.20 sq. yds. calculated at the rate of Rs. 100 per sq. yd. The assessee contended that this amount was in the nature of a capital receipt and was not taxable as forming part of his revenue or income. The Tribunal has upheld the contention of the assessee. The Tribunal rejected the contention of the revenue that this receipt of the assessee was out of business, the business being of the nature of a single adventure in the nature of trade. The Tribunal accepted the assessee's contention that the parties could not have foreseen when the acquisition would take place, what would be the extent of the land affected thereby or what would be the amount of compensation and that the agreement of lease merely provides as to what should happen as between the lessee and the lessors in the event of an acquisition in fact taking place.
6. The agreement provides the rights and obligations of the parties on an acquisition for a set-back. The acquisition was made by the Bombay Municipal Corporation. There is no evidence for what purpose the set-back was made. It being an acquisition was for a set-back for a road line. The Bombay Municipal Corporation Act, 1988, contains elaborate provisions for demarcating of a road line and after the road line a demarcated it has to be officially published. There is no evidence that at the date of the agreement of lease any road line or set-back line had already been published, not even that the preliminary proceedings had been started. It is quite clear that in the absence of any evidence or finding of such facts it must be assumed that at the date of the agreement there was not only no demarcated road line, but that even proceedings contemplating such demarcation had not been started. The Tribunal has observed :
'There is no evidence whatever that the rent was not fixed as whole for the entire plot of land as contended for the appellant or that it was excessive in order to off-set the amount of compensation which was to be retained by the lessee...' Under the agreement of lease the period of the lease was to be 99 years commencing from the date on which possession of the said land was given to the assessee. The assessee was given two years' period for building its factory on that plot of land. The assessee was to part the construction upon the land immediately after possession was given lease was to be granted to the assessee. The agreement requires that the assessee should start construction and incur expenditure even before the final document of lease was extended. The agreement foresees a contingency of there being a set-back and acquisition of a part of the land covered by the agreement of lease pending the execution of the lease. The agreement becoming entitled to the grant of the final lease and the other in respect of the lessee not becoming entitled to the grant of the final lease. It provides that, in the event of there being a set-back pending execution of the lease. The compensation monies shall be placed on deposit in the joint names of the lessor and the lessee. That is a provision in the nature of an interim arrangement. It then provides that if the lessee shall become entitled to the grant of the final lease, the lessee should be entitled to receive and be paid the whole of the compensation monies with any interest earned thereon, but no diminution shall be made in the agreement; 'diminution' obviously refers to the monthly rent of Rs. 1,150. It provides that if the lessee shall not become entitled to the grant of the final lease, the compensation monies with any interest earned thereon shall be paid to the lessor. The agreement also contains a provision as to the rights and obligations of the parties if the set-back and acquisition takes place during the period of the lease which must mean after the execution of the lease. If further provides that the lease shall contain a provision that the lessee shall receive the whole of the compensation monies for any set-back during the period of the lease, but that the lessee shall continue to pay the full rent of Rs. 1,150 per month without any reduction in respect of the land going in the set-back and acquired. In short, clause 24 merely provides what is to happen on the happening of the contingency of a set-back and acquisition as stated earlier. It is not established as a fact that any acquisition was definitely in the offing. This provision in respect of compensation cannot be held, from the point of view of the assessee as a lessee, to be an adventure in the nature of a trade or business. The assessee wanted to erect a factory. It needed land for that purpose. For that purpose it entered into this agreement to take the said plot of land on lease. Both the lessors and the lessee provided as to what should be the rights and obligations of the parties in the event of an acquisition for a set-back taking place. Various solutions can easily be imagined. The parties selected one. Their selection was that, in the event of a final lease being granted to the assessee, the liability of the lessee to pay the full rent of Rs. 1,150 per month should continue irrespective of any or all acquisitions for set-back. Now, inasmuch as the lessee would have to continue to pay even the rent which can be allocated to that lessee should before of that portion of the land, the parties agreed that the lessee should therefore be entitled to the amount of the compensation. The clear idea on a commonsense analysis is that the compensation and the interest thereon earned by the lessee on its investment would off- set the continued liability of the lessee to pay the said rent in full without any deduction for the plot of land the use of which the assessee would lose on its acquisition. It is nobody's case that acquiring lands, either outright or on lease, was the business of the assessee. In entering into this agreement of lease the assessee cannot be said to have traded in compensation on acquisition. The argument of the revenue that this sum of Rs. 95,620 is profit and liable to be brought to tax as such without even applying its mind whether it is a revenue or capital profit, completely ignores the basic consideration as to what is profit. Profit would be arrived at by deducting from that which is received the amount expended. The sum of Rs. 95,620 is what is received. But no attempt even has been made to find out whether any amount should be deducted from it as and by way of the liability to pay the full rent cannot be completely ignored. There is no material on record to show whether the receipt or this compensation would result in any profit to the assessee. In our opinion, the Tribunal was perfectly right in holding that the amount of compensation was a capital receipt in the hands of the assessee.
7. We should record what Mr. Joshi contended. He contended that the assessee had foreseen and anticipated that there was to be a set-back in the said plot of land and compensation would be receivable from the Bombay Municipal Corporation for such acquisition and that, therefore, the amount which the assessee was to receive on account of compensation was foreseen and anticipated and that it was not a windfall or a casual receipt. He next contended that the assessee was not the absolute owner of the land and it had only an agreement of lease in its favour and that therefore by reason of the set-back and acquisition there was no destruction or sterilization of any capital asset. He, thirdly, contended that entering into the agreement of lease with full knowledge that there was going to be a set-back and acquisition and payment of compensation would amount to an adventure in the nature of trade because the assessee had foreseen that there was going to be a profit. Mr. Joshi formulated these points, but he did not - and in our opinion quite correctly - elaborate any of these points. The third point assumes that there was going to be an acquisition, but that fact has not been established and the assumption is therefore not justified. All the arguments covered by these there points have to be stated to be rejected and do not deserve to be placed on the high pedestal of requiring a reply.
8. We, therefore, answer the question in the affirmative.
9. The revenue to pay the assessee's costs.
10. Question answered in the affirmative.