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Commissioner of Income-tax Vs. M.B. Tyres - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMadhya Pradesh High Court
Decided On
Case NumberM.C.C. No. 36 of 1980
Judge
Reported in[1982]137ITR295(MP)
ActsIncome Tax Act, 1961 - Sections 28
AppellantCommissioner of Income-tax
RespondentM.B. Tyres
Appellant AdvocateR.C. Mukati, Adv.
Respondent AdvocateMahajan, Adv.
Excerpt:
.....can be raised, it cannot be said that onus shifts exclusively and heavily on him to prove his innocence. conviction of appellant is liable to be set aside. - 6. the facts as stated by the appellate tribunal clearly show that the business premises of the assessee were acquired resulting in a closure of the assessee's business after the acquisition. 3 as 'loss of goodwill due to change of place of business 'if this was the basis of compensation, clearly it could not be a revenue receipt. [1972]86itr29(sc) and contended that, in view of this decision, the earlier view of the supreme court should be treated as no longer good law......1975-76, for which the relevant previous year was the year ending diwali 1974. during the previous year the assessee's business premises were acquired for the purpose of construction of an overbridge at siyaganj, indore. the assessee received compensation amounting to rs. 55,291 from the government. the break-up of this amount was as follows :rs.(i) cost of structure acquired3,924(ii) cost of the structure (which) remained afterthe portion was acquired, i. e., the portion which became out of use2,376(iii) loss of goodwill due to change of place ofbusiness and also time to be taken for non-working period due to shifting,etc.40,165(iv) claim for excess rent required to be paid1,800(v) transportation expenses for shifting of placeof business2,00050,265(vi) add:10% of the claim allowed5,026.....
Judgment:

Shukla, J.

1. This is a reference under Section 256(1) of the I.T. Act, by the Income-tax Appellate Tribunal, Indore, stating the case and referring the same to us for opinion on the following question of law :

' Whether, on the facts and in the circumstances of the case, the sum of Rs. 48,361 out of the total amount of Rs. 55,291 received by the assessee as compensation was not liable to tax as a revenue receipt during the year 1975-76?'

2. The assessee is a registered firm carrying on business in the purchase and sale of tyres. The assessment year in question is 1975-76, for which the relevant previous year was the year ending Diwali 1974. During the previous year the assessee's business premises were acquired for the purpose of construction of an overbridge at Siyaganj, Indore. The assessee received compensation amounting to Rs. 55,291 from the Government. The break-up of this amount was as follows :

Rs.

(i) Cost of structure acquired

3,924

(ii) Cost of the structure (which) remained afterthe portion was acquired, i. e., the portion which became out of use

2,376

(iii) Loss of goodwill due to change of place ofbusiness and also time to be taken for non-working period due to shifting,etc.

40,165

(iv) Claim for excess rent required to be paid

1,800

(v) Transportation expenses for shifting of placeof business

2,000

50,265(vi) Add:10% of the claim allowed

5,026

Total claim allowed Rs.

55,291

3. The ITO treated the entire amount of compensation as business profit of the assessee for the previous year In question and added it in its income. The assessee had pleaded that the income was not chargeable to tax as it was a casual receipt and a non-recurring item. Alternatively, it was also pleaded that it was a capital receipt. The objection was overruled.

4. The assessee filed an appeal before the AAC. The learned AAC gave it partial relief and excluded a sum Rs. 6,930. The balance amount of Rs. 48,360 was treated as business income of the assessee.

5. The assessee filed a second appeal before the Appellate Tribunal. The Appellate Tribunal held that the sum of Rs. 48,361, which the AAC had added as the business income of the assessee for the previous year, was a capital receipt and, therefore, the same was not liable to be included as business income of the assessee for the previous year. The addition of Rs. 48,361, which was upheld by the AAC, was directed to be deleted. On an application by the revenue the aforesaid question has been referred for opinion.

6. The facts as stated by the Appellate Tribunal clearly show that the business premises of the assessee were acquired resulting in a closure of the assessee's business after the acquisition. It is clear that the assessee was unable to carry out its business of purchase and sale of tyres, even partially or on a reduced scale, after the acquisition of the premises. Section 28 of the I.T. Act charges the income received under the head ' Profits and gains of business or profession'. The first postulate for this charge is that the profits should have been received from business which was carried on by the assessee during the previous year. In other words, if the business was not carried on and the profits did not arise out of the business carried on during the previous year the same shall not be chargeable to tax under Section 28 of the Act.

7. In the instant case the amount of compensation was paid because the premises were acquired and the assessee had been displaced. According to the finding of fact recorded by the Appellate Tribunal, as a result of the acquisition, the assessee could not carry on its business during the previous year. The statement of the case, wherein the items of compensation awarded by the acquisition officer have been narrated, does not refer to payment of compensation towards the profits of business. Actually the acquisition officer has mentioned item No. 3 as ' loss of goodwill due to change of place of business '. If this was the basis of compensation, clearly it could not be a revenue receipt. This amount had been determined by taking into consideration the probable profits of the assessee in the light of its profits in the past; it was only a rough standard or yardstick for calculating the amount of compensation. It was not a case where the profits were assessed and paid by way of compensation.

8. Similar question had come up for consideration before the Supreme Court in Senairam Doongarmall v. CIT [1969] 42 ITR 392. The facts in the cited case are as follows : The assessee, which owned a tea estate consisting of tea gardens, factories and other buildings, carried on the business of growing and manufacturing tea. The factory and other buildings on the estate were requisitioned for defence purposes by the military authorities. Though the assessee continued to be in possession of the tea gardens and tended them to preserve the plants, the manufacture of tea was stopped completely. The assessee was paid compensation for the years 1944 and 1945 under the Defence of India Rules calculated on the basis of the out-turn of tea that would have been manufactured by the assessee during that period. The question was whether the amounts of compensation were revenue receipts taxable in the hands of the assessee.

9. The Lordships observed as follows (headnote) I

'(i) That the first consideration before holding a receipt to be profits or gains of business within Section 10 of the Income-tax Act was to see if there was a business at all of which it could be said to be income. The primary condition for the application of Section 10 was that tax was payable by an assessee under the head ' Profits and gains of a business ' in respect of a business carried on by him. Where an assessee did not carry on business at all, the Section could not be made applicable, and any compensation for requisition of assets that he received could not bear the character of profits of a business.

(ii) That ' business' denoted an activity with the object of earning profit. To say that a business was being carried on, meant no more than that profit was to be earned by a process of production. The business of a tea-grower and manufacturer was not merely to grow tea plants but to collect tea leaves and render them fit for sale. The tending of his tea gardens to preserve the plants, was not a continuation of the business of the assessee which had come to an end for the time being.

(iii) That the measure and method of its payment was not decisive of the character of a payment of compensation.

(iv) That the compensation paid to the assessee did not partake of the character of profits because, busiress not having been done by the assessee, no question of profits taxable under Section 10 arose.

(v) That the amounts of compensation received by the assessee were not revenue receipts and did not comprise any element of income.'

10. The learned counsel for the revenue relied on CIT v. Manna Ramji and Co. : [1972]86ITR29(SC) and contended that, in view of this decision, the earlier view of the Supreme Court should be treated as no longer good law. Facts in Manna Ramji's case were as follows : The assessee carried on business in timber and had an office and six sheds for storing timber. The premises were requisitioned by the Collector in 1944. On assessee's request the Collector allowed it to remain in possession of the office premises. The Appellate Tribunal had recorded a finding of fact that the business had not come to a standstill altogether, and that the assessee continued to carry on the business, though at a reduced scale, after the acquisition. In these circumstances, the amount of compensation paid as loss of earnings was treated as a revenue receipt.

11. Their Lordships observed that the statement of the case as found by the Appellate Tribunal was binding on the High Court and the Supreme Court and since it was held by the Appellate Tribunal that the assessee continued to carry on the business even after the acquisition, the amount paid as loss of earnings could be treated as revenue receipts.

12. It is clear that the case of Manna Ramji was distinguishable on facts inasmuch as in that case the business of the assessee had not stopped while in the case referred to us the Appellate Tribunal had found that the business of the assessee had stopped as a result of the acquisition. The argument that Manna Ramji's case : [1972]86ITR29(SC) overruled the earlier case of the Supreme Court in Senairam Doongarmall [1969] 42 ITR 392, is not correct.

13. In CIT v. J. Voyantizies : [1973]91ITR345(Bom) , the Bombay High Court considered both the above cited cases and highlighted the distinction between them. It was held that the dictum of Senairam Doongarmall [1969] 42 ITR 392 had to be applied in the case of an assessee who could not carry on business at all as a result of the acquisition. Manna Ramji's case : [1972]86ITR29(SC) will apply to an assessee who continued to carry on his business after acquisition, though at a reduced scale. The Bombay High Court referred to and followed the decision in CIT v. Shaw Wallace and Co. . Thisdeci-sion emphasised the fact that a profit arising out of business could be charged to income-tax only if the business was carried on during the previous year and compensation paid on account of cessation of business was not chargeable, as it was not the product of a business or, in other words, profit. Such compensation is ' some sort of solatium ' for not carrying on the business. According to their Lordships of the Privy Council such compensation was not revenue.

14. We are, therefore, of opinion that, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the sum of Rs. 48,361 out of the total amount of Rs. 55,291 received by the assessee as compensation was not chargeable to tax as a revenue receipt during the assessment year 1975-76. Our answer to that question is in the affirmative. Costs will be borne by the revenue. Advocate's fee Rs. 100.


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