The facts necessary for the decision of this income-tax reference may briefly be stated as under : Prabhu Dayal, working under the name and style of Ganeshi Lal Prabhu Dayal, Dadri, (in the erstwhile Jind State), was instrumental in discovering the existence of kanakar deposit in Jind State and in bringing about an agreement through his good offices between one Shanti Prasad Jain and theerstwhile Jind State (forming part of the Punjab State at the time of the reference and now, after the reorganisation, forming part of Haryana State), for the acquisation of the sole and exclusive monopoly rights of exploiting these deposits and manufacturing cement in the said Jind state, vide an agreement dated 2nd of April, 1938. This agreement was to be operative for 25 years in the first instance, and at the option of the aforesaid Shanti Prasad, was liable to be extended to 100 years. Later a public limited company, named Messrs. Dalmia Dadri Cement Limited (hereinafter referred to as the company), was incorporated and the benefits of the above-mentioned agreement were transferred to that public company. The assessee also assisted in the promotion of the aforesaid company. The assessee also assisted in the promotion of the aforesaid company. For the aforesaid services rendered by the assessee of the company entered into an agreement on 27th of May, 1938, by which it agreed to pay to the assessee by way of commission 1 percent. on the yearly net profits earned by the company from the said cement factory. The assessee was paid his 1 percent. commission regularly till 1950. As no commission was paid thereafter, the assessee filed a suit against the company, and in that suit a compromise was entered into by which the assessee was paid a total amount of Rs. 15,000 as commission for the year 1951 and 1952; another Rs. 15,000 as commission for the year 1953, and Rs. 70,000 were paid by way of compensation for the termination of the agreement dated 27th of May, 1933, and this amount was received by the assessee on 11th June, 1945, and the earlier agreement was to be terminated with effect from 1st January, 1954.
The Income-tax Officer treated the sum of Rs. 70,000 as remuneration paid to the assessee for the service rendered once and for all and taxed the same as revenue receipts in the hands of the assessee. This order was upheld by the Appellate Assistant Commissioner of Income-tax but, on appeal by the same as capital and not revenue in the hands of the assessee. At the instance of the Income-tax Commissioner, therefore, the following question of law was referred to this court :
'Whether, on the facts and in the circumstances of the case, the receipt of Rs. 70,000 by the assessee on June 11, 1954, was revenue or capital in nature ?'
The case was argued at great length and a number of cases, both English and Indian, were cited at the Bar. These cases fall mainly under three different heads. There is one set of cases which relates to agency contracts. In such cases the work of the agents is to bring together the supplier and purchaser. The agency is a machinery set up for making profits and is not a business in itself and for this reason, normally speaking, it compensation is paid for the termination of the agency, it may be generally a capital receipt though, as was stated by the Supreme Court, it will depend on whether the agency was in the nature of the capital in the hands of the assessee or whether it was only a part of his stock-in-trade. If it was a capital asset in the hands of the assessee, the compensation paid for the termination of such an agency would be capital receipt, and, if, on the other hand, it was a stock-in-trade in the hands of the assessee, the payment made will be a revenue receipt. It is, however, not necessary to discuss in detail the cases relating to the agency because in the present case the contract was not one of agency. Here the assessee had rendered certain services in the past and instead of receiving any payment in lump sum, this contract was entered into, as a result of which the assessee was to receive certain amount, which was to be calculated in a particular manner.
The second category of cases is the one where the assessee was to render some sort of services or has to supply certain articles, and, in lieu of something that is to be done by the assessee, he is to be paid certain remuneration, or for the supply of goods, he is to be paid certain amount. The remuneration received by him in one case and the profits made by him in the second are certainly of a revenue type, and if such contracts are terminated, the compensation paid would normally be of a revenue nature. The present case, however, also does not fall in this category. The assessee, in this case, was not to supply anything to the company, nor was he to render any service for which he was to be paid the commission as agreed in the contract. The cases, which deal with contracts of this type, therefore, are also not of any assistance in determining the question before us.
The third category of contracts can be those under which the assessee has not to do anything. Mr. Awasthy, learned counsel appearing for the department, vehemently urged that the case, which was on all fours with the present one, was Shove v. Dura . The Tribunal tried to distinguish this case with the following remarks :
'In that case the decision went in favour of the Commissioners of Inland Revenue because it was found that the contract was an agency contract which constituted a very large part of the taxpayers business.'
The learned Tribunal felt that the case really in point was Vanden Berghs Ltd. v. Clark. In Shove v. Dura ., the respondent company introduced a company by the name of Motor Component (Birmingham) Ltd. to Rolls-Royce, Ltd. The components company agreed to pay commission to the respondent-company on all the aero-valves supplied by them to Rolls-Royce Ltd. The commission so received was treated as revenue receipts and taxed as such. Subsequently, the components company and the respondent-company agreed to terminate this commission agreement and a sum of Pounds 1,500 was paid as compensation. The respondent-companys business was ' to polish steel and not introduce companies to each other'. It was held, however, that ' If the proceeds of a contract are of a revenue nature, I cannot think that it makes any difference whether the contract is usual, or not', and Lawrence J. observed that 'any intra vires contract, which is of a revenue nature is in the ordinary course of business', and, in view of the above, therefore, it was held that the compensation paid was a compensation for the termination of a contract entered into, in the ordinary course of business and, therefore, was a revenue receipt.
In the Van den Berghs case the appellant-company, which carried on business of manufacturing and dealing in margarine in the United Kingdom, entered into an agreement with a competing Dutch company, by which the two entered into an elaborate arrangement laying down the methods of their working so as to avoid harmful compensation. According to one of the terms, they were to receive or pay to each according to the profits made rescinded and a sum of Pounds 1,50,000 was paid to the assessee as damages. The case went to the House of Lords, and the amount was treated as capital receipts. Lord Macmillan observed :
'On the contrary, the cancelled agreements related to the whole structrue of the appellants profit-making apparatus. They regulated the appellants 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 traders activities can be regarded as an income disbursement or an income receipt.... In the present case,however, it is not the largeness of the sum that is important but the nature of the asset that was surrendered. In my opinion, that asset, the congeries of rights which the appellants enjoyed under the agreements and which for a price they surrendered, was capital asset.... The agreements formed the fixed framework within which their circulating capital operated; they were not incidental to the working of their profit-making machine but were essential part of the mechanism itself. They provided the means of making profits, but they themselves did not yield profits. The profits of the appellants arose from manufacturing and dealing in margarine.'
The learned counsel for that appellant urged that the learned Tribunal was in error in considering that this case was applicable to the facts of the present case. Here. there was no machinery set up affecting or, in any way, regulating the activities of the assessee or the conduct of his business. In fact, nothing was to be done by the assessee under the agreement. The contract only provided for payment of certain sum of money to the assessee every year for his past services, and the only thing detailed in the contract was the method of calculating the amount to be paid. It was urged, therefore, that it was the contract itself from which income or the proceeds of the assessee proceeded and that the facts of the present case are on all fours with those of Shove v. Dura ., I feel that there is force in this connection. Out of the two cases discussed above,the facts are similar to those in Shove v. Durga . and are quite distinct from those in Van den Berghs case. Reference was also made in support of his contention to Kelsall Parsons & Co. v. Commissioner of Inland Revenue, T. Sadasivam v. Commissioner of Income-tax and Commissioner of Income-tax v. R. B. Jairam Valji. In Kelsalls case the appellants carried on business as agents on commission basis for the sale in Scotland of the products of various manufacturers, and entered into agency agreement for that purpose. One of these agreements, which was for a period of three years, was terminated at the end of the second year and Rs. 1,500 were paid as compensation. This was held to be a revenue receipt. At page 623, Lord Moncrieff observed as follows :
'The question whether a sum received by the trader as compensation for the cancelling of one of his trading contracts is to be regarded as a capital or a revenue sum must in each case ... depend upon the particular circumstances under which the payment has been made... That distinction may perhaps be formulated as follows : (1) a contract may be made by a trader which is merely directed to result in trading profits being made; (2) a contract may be made by a trader which is directed to regulate the conditions under which he is to be carry on his trade.'
It was held that the case of Van den Berghs was an example of the latter class. The facts of this case were obviously different from those in the present case because that was a case where the assessees business was to take agencies for the sale of goods of manufacture in Scotland, which is not the case here. The learned counsel, however, wanted to take advantage of the two categories of contracts, as detailed by Lord Moncrieff. He urged that, in the present case, the contract does not fall under the second category, as the first category or whether it forms a category different even from that.
In Sadasivams case the appellant and his wife Subbulakshmi were preparing a picture and joined with them another party as financier. They entered into an agreement by which (1) Subbulakshmi was to continue to the act in the picture; (2) out of the net collections over and above the amount advanced by the financier, 50 percent was to be paid to Subbulakshmi and the assessee 'towards remuneration for services rendered by them'; (3) the copywrites in the songs, etc., were to vest in all the three jointly and the royalties were to be shared equally; and(4) the parties were to have the right of pre-emption. When accounts were taken into the two had overdrawn their account by a sum of nearly Rs. 29,000 and in consideration of this amount, both executed a release deed in favour of the financier, relinquishing all their rights in the picture and their copyrights in the songs, etc. A Bench of the Madras High Court had held that the consideration of Rs. 29,000 odd was paid for relinquishing three different rights, namely, giving up the right to 50 per cent. of the profits and the amount apportionable to this item must be treated as a revenue receipt, and consideration received in respect of the other two items, i.e. surrender of the right to royalty and the surrender of pre-emption rights,would be treated as capital receipts. This case is sought to be distinguished by the counsel on the other side on the ground that, according to the contract, Subbulakshmi was to continue rendering services by acting in the picture and the remuneration fixed in the contract at 50 per cent. of the profits was not only qua the services already rendered but were for services to be rendered and, in any case, the services that were to be rendered were of a professional type, i.e., as an actor. In the present case, it was urged that it was no part of the ordinary business or vocation of the assessee to search for or discover kanakar deposits or to use his good offices with the State authorities to get concessions for Shanti Prasad Jain or to assist in the promotion of the company.
In Valjis case, the case law on the subject was considered at length by the Supreme Court. In that case, an agreement was entered into between Valji and B. I. Co. in 1935, for supplying limestone, etc., at specified rates. This agreement was subsequently modified in 1940, by which an undertaking was given to have a railway siding and till then to pay Valji Rs. 4,000 every month, in addition to the payment for the limestone, etc., supplied and loaded in railway wagons at specified rates. The railway authorities not having agreed to construct a siding, fresh agreement was entered into in 1941, by which the company agreed (i) to pay a sum of Rs. 2,50,000 to the respondent as solatium besides the monthly installments of Rs. 4,000 remaining unpaid under the contract of 1940; (ii) to take the limestone required from the respondent for a period of 12 years on specified terms and (iii) to appoint the respondent as loading contractor for a period of 12 years for all its iron ore. The question before the court was whether the sum of Rs. 2,50,000 received by the respondent was capital or revenue in his hands.
Venkatarama Aiyar J. delivering the judgment of the Supreme Court, discussed the case law on the point at length and observed as follows :
'There is a difference between a payment made as compensation for the termination of an agency contract and an amount paid as solatium for the cancellation of a contract entered into by a businessman in the ordinary course of business. In an agency contract the actual business consists in the dealings between the principal and his customers, and the work of the agents is only to bring about that business. What he does is not the business itself but something which is intimately and directly linked up with it. The agency may, therefore, be viewed as the apparatus which leads to the business rather than the business itself. Considered in this light the agency right can be held to be of the nature of a capital asset invested in business. But this cannot be said of a contract entered into the ordinary course of business. Such a contract is part of the business itself, not anything outside it as is the agency, and any receipt on account of such a contract can only be a trading receipt...
Generally, payments made in settlement of rights under a trading contract are trading receipts and are assessable to revenue. But where a person who is carrying on business is prevented from doing so by external authority in exercise of a paramount power and is awarded compensation therefor, whether the receipt is a capital receipt or a revenue receipt will depend upon whether it is compensation for injury inflicated on a capital asset or on a stock-in-trade.'
In the light of this, it was held that the sum of Rs. 2,50,000 was not paid to the respondent as compensation for expense for expenses laid out for works at the quarry of a capital nature and could not be held to be a capital receipt on that account; that the agreements of 1940 and 1941 were merely adjustments made in the ordinary course of business; that there was no profit making apparatus set up by the agreement of 1941 apart from the business that was to be carried on under it and that at no time was there any agreement which operated as a bar to the carrying on of the business of the respondent. For this reason, it was held that the amount in question was a revenue receipt.
In the present case, the contract for the termination of which has been paid certainly does not fall under the category of an agency agreement, nor has the assessee been prevented from carrying on any business of his. The sole question, therefore, is whether the present payment has been made in settlement of rights under a trading contract. In Valjis case, as well as in the other cases, which were discussed by the Supreme Court, great stress is laid on the contract being one entered into in the ordinary course of business. At page 163 of the report, this is what is observed :
'In our opinion, therefore, when once it is found that the contract was entered into in the ordinary course of business, any compensation received for its termination would be a revenue receipt, receipt, irrespective of whether it performance was to consist of a single act or a series of acts spread over a period...'
The test, therefore, is whether the contract in question can be said to be one entered into by the assessee in the ordinary course of his business. There is nothing on the record to show what business was carried on by the assessee at the time when he entered into this contract. On behalf of the department the argument is that what was done by the assessee in discovering kankar or conveying the aforesaid discovery to the parties, who had sufficient means to exploit this discovery, and in helping the other party in getting concessions from the State Government and also in formally assisting in the promotion of the company which was ultimately to exploit the concessions, he was doing something with an eye to make money out of it and this was not an act or series of acts done by him without an eye to make profit or with a view to get something with an eye to make money out of it and this was not an act or series of acts done by him without an eye to make profit or with a view to get something that may be paid to him ex gratia. He, therefore, urged that what he did was a business activity and, was held by Lawrence J. in Shove v. Dura ., if such an activity is not ultra vires, the contract entered into by him must be taken to be in the ordinary course of business, provided it is a revenue-yielding contract. It cannot be denied that the facts in Shove v. Dura . are similar to those of the present case, There, the introduction of the aero-valves was made to the manufacturing company by the assessee-company and nothing further was to be done by the assessee. The assessee being a limited company, the sphere of its work was governed by its object and it was held that so long as this introduction of the party was not ultra vires the company, the contract must be taken to have been entered into in the ordinary course of business notwithstanding the fact that this was not the normal business that was being carried on by the company. The learned counsel for the respondent tried to draw a distinction to the effect this being a case relating to a limited company, anything done within its object clause must be treated to be done in the ordinary course of its business and that the same cannot be the case where only an individual is concerned. It must, however, be seen that the observations of Lawrence J. are not based on the ground that because of the object clause it was in the ordinary course of its business. So far as an individual is concerned, unlike a company, he is authorised to do anything which is otherwise not illegal or prohibited by law. In that respect,any activity likely to yeild income would be intra vires as on individual and, therefore, this distinction is not of much consequence.
However, the respondents counsel urged that the English cases cannot provide a good guide for cases which have to be decided under the statutory provisions of the Indian Income-tax Act. In this respect, he referred to the observations of Hidayatullah J. in the Supreme Court decision in Senairm Doongarmall v. Commissioner of Income-tax. At pages 397 and 398 of the report this is what the learned judge observed :
'Now it is necessary to point out that the English cases were decided under a different system of taxation,and must be read with care. A case can only be decided on its own facts, and the desire to base ones decision on another case in which the facts appear to be near enough, sometimes leads to error....
The English cases.....when cited before the Judicial Committee in Commissioner of Income-tax v. Shaw Wallace & Co. were put aside by Sir George Lowndes with this observation :...their Lordships would discard altogether the case law which has been so painfully evolved in the construction of the English Income Tax statutes - both the cases upon which the High Court relied and the flood of other decisions which has been let loose in this Board....
It is thus obvious that though the English cases may be of some help in an indirect way by focusing ones attention on what is to be regarded as relevant and what rejected, they cannot be regarded in any sense as precedents to follow.'
The learned counsel for the respondent urged that section 6 of the Indian Income-tax Act deals with six heads of income, profits and gains that are chargeable to income-tax. These are :
(ii) Interest on securities
(iii) Income on property
(iv) Profits and gains of business, profession or vocation
(v) Income from other sources
(vi) Capital gains.
Admittedly, the income arising from the contract before us cannot fall under the first three heads or the last one. We are, therefore, left with heads Nos. (iv) and (v). Under the contract the assessee was not carrying on any profession or vocation and the payment that was to be made to him was not in lieu of any service of that type. It was, therefore, urged that the question only arises whether income arising from this contract can be categorized under 'profits and gains of business ' or whether it was only an 'income form other sources'. Senairam Doongarmalls case referred to above gives us an idea as to what is to be considered a business. In that case the assessee owned a tea estate and carried on business of growing and manufacturing tea. The factory and other buildings on the estate were requisitioned for defence purposes. Actually, the assessee continued to be in possession of the tea gardens and maintained them though he could carry on the manufacture of tea. The assessee was paid compensation in the year 1944-45, which was calculated on the basis of the total out-turn of tea that would have been manufactured by the assessee during that period. The question arose whether the amounts so paid were revenue receipts in the hands of the assessee. The finding of the court, as given in the head-note, are as follows :
'(i) That the first consideration before holding a receipt to be profit or gains 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 of 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 debited ab activity with the object of earning profit. To say that a business was being carried on, meant no more that 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, business not having been done by the assessee, no question of profits taxable under section 10 arose.
(v) That the amount of compensation received by the assessee were not revenue receipts and did not comprise any element of income.'
On the basis of the above authority it was vehemently contended by the learned counsel for the respondent that obviously the income arising from this contract could not be treated as profits or gains of business because admittedly no business was actually being carried on by the assessee. If the income arising from the contract could not be treated as profits or gains of business then a fortiori the aforesaid contract cannot be taken to have been entered into in the ordinary course of business. At best, as a result of his contract, there came into existence a source of income and the income derived can be categorised as 'income from other sources.' Furthermore this source was of an enduring nature and, therefore, was, in a way, a capital asset and not a stock-in-trade, and if this source dries up and compensation is paid in respect thereof, the same must again be treated as capital. Reference in respect thereof, the same must again be treated as capital. Reference in this respect was made to Kettewell Bullen & Co. v. Commissioner of Income-tax. There, the appellant-company was formed with the object of carrying on the business, including the Fort William Jute company Ltd. An arrangement was entered into with another party whereby the party agreed to purchase the entire holding of shares of the appellant in the jute company and to procure repayments of all loans, etc., made by the appellant to the managed company. It was further agreed that the appellant-company was to be paid a sum of Rs. 3,50,000 as compensation if the company resigned it s managing agency. the appellant-company tendered resignation and received the sum of rs. 3,50,000 from the managed company. The question was whether the amount received was a revenue receipt. It was held :
'...the arrangement...was not in the nature of a trading transaction, but was one in which the appellant parted with an asset of an enduring value. What the assessee was paid was to compensate it for loss of a capital asset and was not, therefore, in the nature of a revenue receipt : It mattered little that the appellant did continue to conduct the remaining managing agencies after the determination of it agency with the Fort William Jute Company.'
At page 270 of the report it was observed as follows :
'Whether a particular receipt is capital or income from business, has frequently engaged the attention of the courts. 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.'
In the light of these observations we have to see whether what has been received can be termed as a profit in a trading transaction or whether it is received in lieu of loss of capital. As already indicated, income arising from this contract could not be termed as profits or gains from business and that being the case, it is rather difficult to categorise the contract as a trading or business contract entered into in the ordinary course of business. Shorn of all appendages, the contract provided the assessee with a source of income. As was urged by the learned counsel for the respondent, for the so-called services rendered or the assistance given by the assessee to Shanti Parsad Jain or the company, the company could have allotted him a number of its shares as fully paid up for consideration other than cash. This, the company was certainly entitled to do. It was urged that such shares could not be treated as revenue receipt but would be treated as capital though the income in the form of dividend accruing on those shares would certainly be income from other sources. If later the assessee had sold these shares,s the amount received as consideration would be treated as a capital receipt. I feel that there is force in this contention, and the contract entered into in the ordinary course of business and must be taken to be a source which was certainly of an enduring value, which yielded income to the assessee, which, of course, varied from year to year according to the amount of profits made by the company which, under the concessions given, could be for the 100 years. Now, this source dried up as a result of the agreement between the parties, and the compensation in respect thereof must be treated as capital. This capital, if invested, would replace the source which has dried and would start yielding income.
For the reason given above, I feel that, though for reason different from those given by the Income-tax Appellate Tribunal, the amount in question must be treated as capital receipt. Our answer to the question, therefore, is that the receipt of Rs. 70,000 by the assessee on 11th of June, 1954, was capital in nature. The assessee will have his costs of this reference from the department.
J. N. KAUSHAL. - I agree.