MANCHANDA J. - This is a case stated under section 66 (1) of the Income-tax Act of 1922 (hereinafter referred to as the Act). The question referred is :
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 26,000 was tax able income ?'
The material facts are these : The assessee, Ram Sarup, is the son of Lala Roshan Lal. Roshan Lal is the assessee in the connected I. T. Reference No. 245 of 1963. These two constitute one group representing one family. The other group is represented by Lala Purshottam Das and L. Jugul Kishore, who are brothers. The aforesaid four persons were the only shareholders of a private limited company, M/s. Ram Chand and Sons Sugar Mills Ltd. (hereinafter referred to as the mills company). This was, therefore, a family company. The aforesaid four persons had almost equal shareholdings of 25% each. In order to avoid friction between the two families of shareholders, it was agreed between them that the control and management of the mill company should be for a period of one year each by rotation. During the relevant assessment year of 1954-55, it was the turn of Lala Pushottam Das of the second group and he was the direction in charge. It appears that there was large accumulated stock of sugar with the mills for lack of buyers and the prices were falling. The Government was contemplating to give the sugar mills some subsidy in the matter of stocks of sugar lying with them. Lala Purshottam Das, however, did not know about any such move by the Government and he, therefore, considered it advisable to ask the Government to release some of the stocks of sugar lying with the mills so that it could be sold in the open market. This request was repeated two or three times and the Government ultimately agreed to release stock of sugar totalling 850 tons. However, just before the company received the Governments release order, it came to know from an unofficial source that the Government of India was planning to give a subsidy to the sugar mills and the same would be computed with reference to the unreleased stock of sugar lying with different mills. L. Purshottam Das, therefore, immediately wrote to the Government praying that the release order, if issued, be cancelled. The government, however, did not withdraw the release order, with result that the company was deprived of the subsidy which it might have otherwise received from the Government of India. The company thus did not receive any subsidy whatsoever and there was no alternative but to sell the released stocks of sugar in the open market. The sale proceeds so received were credited to the companys sale account. The assessee, Ram Sarup, and his father, Roshan Lal, claimed that a subsidy of Rs. 1,04,000 was lost as a result of Lala Purshottam Dass action in asking the Government to release stocks of sugar and threatened Lala Purshottam Das and L. Jugul Kishore that they would apply for the liquidation of the company. The latter, thereupon, it appears, agreed to make good the loss and entered into an agreement dated 29th March, 1954, with the members of the first group, i.e., the assessee, Lala Ram Sarup and his father, Lala Roshan Lal. The material portion of this agreement reads :
'That a sum of Rs. 52,000 (rupees fifty-two thousand only) paid to the first party (Roshan Lal and Ram Sarup) by the second party (Purshottam Das and Jugul Kishore) on account of 50% loss of the total losses sustained in getting released a sugar quota of 850 tons from the Government of India..... by the 2nd party without obtaining the necessary prior acceptance from the 1st party to the 2nd party, if and when the total amount of Rs. 1,04,000 is received by the company from the Central Government, as compensation under claim.
Sd. 1st party :
1. Roshan Lal,
2. Ram Sarup.
Sd. 2nd party :
1. Purshottam Das
2. Jugul Kishore.'
The sum of Rs. 52,000, which was received by the first party, was shared by the assessee and his father half and half according to their shareholding in the company.
The sum of Rs. 26,000 which the assessee received from the other group was treated as a revenue receipt by the Income-tax Officer, rejecting the contention that the amount was not income, profits or gains but only a non-recurring receipt. The Appellate Assistant Commissioner confirmed the assessment. Aggrieved, the assessee took the matter in second appeal to the Tribunal, contending, inter alia, that the amount of Rs. 26,000 received was only an amount received in suspense, pending the settlement of the claim put in by mill-company with the Central Government, and that the receipt was of a casual and non-recurring nature. The contention was rejected. Hence, this reference at the instance of the assesses.
'The question that falls to be considered relates to the nature and character of the receipt of Rs. 26,000. In other words, the question is : Is it a capital or a revenue receipt The relevant provisions having a bearing on this question are section 4 and section 4 (3) (vii) of the Act. The material portion of section 4 reads :
'(1) Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived....'
This provision appears to be advisedly worded vary widely and would enable almost everything to be swept into the net of taxation provided it has the quality of income, profits or gains. Undoubtedly, the sum of Rs. 26,000 was a gain and the source thereof, whether be it the company or the director-in-charge or a group of directors, would not be very material for purposes of the Act. That sum would require to be included in the total income of the assessee unless there was a provision in the Act. That sum would require to be included in the total income of the assessee unless there provision in the Act exempting such income, profits or gains from being included in the total income of the person to whom it accrues, arises or is received. Clause (vii) of sub-section (3) of section 4 is the provision which is pressed into service by the assessee in order to escape from the mischief of section 4 (1) of the Act. The material portion of this runs :
'(3) Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them.....
(vii) Any receipts... not being receipts arising from business or the exercise of a profession, vocation or occupation, which are of a casual and non-recurring nature, or are not by way of addition to the remuneration of an employee.'
Therefore, what has to be considered is whether the sum of Rs. 26,000 was a receipt arising from business or the exercise of a profession, vocation or occupation. If it was, then it is wholly immaterial whether it was casual and non-recurring. If, on the other hand, the receipt of Rs. 26,000 was not from a business or the exercise of a profession, vocation or occupation then only the question will arise as the whether the receipt was of a casual or non-recurring nature. In the instant case, the agreement, the relevant portion whereof has been reproduced hereinabove, is the only document or material on the record and that would appear to negative the assessees claim that the payment of Rs. 26,000 was not a loss from business but something wholly unconnected with it and it was also of a casual and non-recurring nature. The agreement dated the 20th March, 1954, clearly talks of a 'payment Made' to the first party by the second party 'on account of 50% loss of the total losses sustained in getting released a sugar quota of 850 tons from the Government of India....' The sugar was the stock in trade of the mills company, of which the aforesaid four persons were the only directors, and it was, as already observed, a family company. It is also quite clear that the company was being treated by the shareholders as a family affair subject, of course, to the legal requirements of the Companies Act. The losses were loss in business, albeit the result of a miscalculation by the director-in-charge. The impugned sum was paid to the assessee only because he was a director and a shareholder of the company which had suffered losses through the action of the director-in-charge. The payment was made not to a stranger who had nothing to do with the loss which had resulted but to a shareholder who was, if not directly, at least indirectly concerned with the loss. The agreement would certainly show that there was some kind of understanding, if not an agreement in writing, between the four directors, that in matters of policy the director-in-charge for that particular year would consult the other directors, and it is, therefore, that we find that an admission was made by Purshottam Das and Jugul Kishore to the effect that they were making payment of Rs. 52,000 to the assessee and his father representing 50% of the total losses sustained because of their getting the sugar released from Government 'without obtaining the necessary prior acceptance from the party.'
In these circumstances, the receipt in the hands of the assessee in the circumstances of the case was one which went to make good a hole which had been made in the profit making apparatus and in the capital structure of the company. The receipt was in the capacity of his being one of the four shareholders and a director of the mills company. It is wholly immaterial that the payment was not made first into the coffers of the company and then distributed as dividend or payment by the company to the shareholder. It is no doubt true that a company has a separate legal existence in law from its shareholders, but that does not mean that the director-in-charge of a private company cannot make good the loss resulting from his action outside the books of the company and compensate the other directors who may have suffered a loss thereby. It is quite clear, as already observed, that the four directors were treating the company as a family affair and were not really bothered by the technical or legal requirements of the Indian Companies Act. If the parties, be they shareholders of a company, want to settle their differences outside court or the pale of the Indian Companies Act, there is nothing in law to prevent them from doing so. That is precisely what was done by the parties concerned in the present case, and the receipt in the hands of the assessee being one for the loss of profits in business and not as a gift or as something falling from heaven, it has rightly been held to be a revenue receipt.
The Supreme Court, in Commissioner of Income-tax v. Shamsher Printing Press has held that, where the amount in question is paid as compensation for loss of profits, it will be a revenue receipt and liable to tax. No doubt the facts of that case were different, but, nevertheless, the ratio would be fully applicable to the facts of the present case, particularly, where the parties themselves describe the payment 'as on account of losses sustained in getting sugar released for sale.' it would be difficult, if not impossible, to hold that a receipt in the hands of the assessee which arose from the mode and manner in which the business was carried on by the director-in-charge was one which fell within clause (vii) of sub-section (3) of section 4. Even if it were conceded for the sake of argument that it was not a receipt from business, then it would be one which was directly correlated to the 'occupation' of the assessee as a director of the company or a shareholder thereof. In this view of the matter, it is unnecessary to consider whether the receipt was of a casual and non-recurring nature.
For the reasons given above, we would answer the question referred in the affirmative and against the assess. The assessee will pay costs of this reference which we assess at Rs. 150 in each case. Counsels fee is also assessed at Rs. 150 in each case.
Question answered in the affirmative.