Ramachandra Iyer, J.
1. The following question has been referred under Section 66(1) of the Indian Income-tax Act;--
'Whether on the facts and in the circumstances of the case the sum of Rs. 63,259, received by the assessee from the Government is income and can be brought to tax under any of the provisions of the Indian Income-tax Act.'
The assessee is a private limited company, which commenced business at Madras in 1941, in the purchase and sale of groundnuts, kernel, oil and cake etc. Thereafter, it acquired R. S. No. 458/1, measuring 4 acres 15 cents in Ammanur village, Arkonam, for the purpose of erecting an oil mill. In course of time, a building was put up for housing the machinery for the manufacture of oil. The property was, however, requisitioned by the Collector of Chingleput by an Order dated the 20th May 1942, for the use of the Military personnel; possession was taken by the Government three day later.
The assessee, who normally would have commenced working of the mill, had not the requisition order intervened removed the machinery to Katpadi, where another building was put up and the factory established. The assessee began to work the new mill from the last week of October 1942. The building and the rest of the property at Arkonam were duly derequisitioned by the authorities and possession was given back towards the end of January 1945. The assessee preferred a claim against the Government for a sum of Rs. 1,65,275-5-6 as compensation for the use of the property by the Government. There being a dispute as to the amount of compensation payable, the matter was referred for adjudication by an arbitrator under Section 19(1)(b) of the Defence of India Act, 1939.
The arbitrator (the District Judge of North Arcot) made an award, holding that the assessee should be paid a sum of Rs. 63,249-12-0 as compensation. There was an appeal to this court from the decision of the Arbitrator, but without success. Even before the arbitrator, the Government pleaded that the compensation awarded would be liable to the deduction of the income-tax at source. The arbitrator held that the tax could not be so deducted, as income-tax, if leviable could be so done only in the next year. The compensation amount was received by the assessee on 31-5-1948. In the assessment year 1949-50 (year of account ending on 31st May 1948), the Income-tax Officer, First Circle, Madras, included the sum of Rs. 63,250 for assessment.
The inclusion of that sum was contested on behalf of the assessee on the ground that it represented only a capital receipt; the contention was, however, overruled both by the Income-tax Officer and on appeal by the Assistant Appellate Commissioner. On further appeal to the Tribunal, it was held that the requisition of the property at Arkonam by the Government was an incident in the business career of the assessee, and there being no deprivation of the profit earning asset as such, the compensation received would be a revenue receipt, and not a capital one. It is the propriety of that conclusion that is contested in this reference.
2. On behalf of the assessee, it is contended that the compensation of Rs. 63,249-12-0 could not be held to be received in the course of the business of the assessee, and that the nature of the payment was damages for the disturbance to the assessee's business at Arkonam. As the effect of the requisition of the property was to sterilise or destroy in part the profit making apparatus of the assessee, the compensation received therefor could, it was contended, be only a capital receipt.
3. To appreciate properly the nature and quality of the compensation amount, whether it was for the loss of a capital asset or for loss of profits, it is necessary to ascertain for what, the compensation was intended or paid. The assessee claimed that he was entitled to compensation under four heads:--
(1) the valuation of the lands and buildings, (2) loss of income, (3) for the transport of the machinery from Arkonam to Katpadi, and (4) war risk insurance premium. As the user of the property was only temporary, there was no question of the assessee getting its value; the Government offered to the assessee relit for the period of occupation. The expenses for transporting the machinery was also agreed to be paid. Therefore, at the time when the matter came up before the arbitrator, the only substantial points in dispute were the claim on the basis of loss of income and the insurance premium.
4. It is not, however, the nomenclature or the description by the assessee that will decide the nature and quality of the compensation amount. The assessee, became entitled to the compensation amount by virtue of the statute, and one has to look into the provisions of the statute to ascertain for what purposes or injuries the compensation was payable. The requisition was made under Rule 75-A of the Defence of India Rules. Section 19 of the Defence of India Act provides for compensation in cases where properties were taken over by the Government (acquired or requisitioned) under the Act or the rules made thereunder. The relevant portions of that section run:
'19(1). Where by or under any rule made under this Act any action is taken of the nature described in Sub-section (2) of Section 299 of the Government of India Act, 1935, there shall be paid compensation, the amount of which shall he determined in the manner, and in accordance with the principles, hereinafter set out, that if to say--
(b) Where no such agreement can be reached,
the Central Government shall appoint as Arbitrator a person qualified under Sub-section (3) of Section 220 of the above mentioned Act for appointment as a Judge of a High Court......
(c) The arbitrator in making his award shall have regard to --(i) the provisions of Sub-section (1) of Section 23 of the Land Acquisition Act, 1894, so far as the same can be made applicable; and (ii) whether the acquisition is of a permanent or temporary character.'
5. Under Section 23 of the Land Acquisition Act, one of the matters to be considered in determining compensation is 'damages (if any) sustained by the person interested, at the time of the Collector's taking possession of the land, by reason of the acquisition injuriously affecting his other property, moveable or immovable, in any other manner, or his earnings.' The compensation paid would, therefore, include damages for the injury caused to the owner in the enjoyment of his other property, for example, a business. The rent received by the assessee from the Government in respect of the property was assessed by the Income-tax Officer, and that is no longer in dispute.
The compensation would, therefore, represent only the loss occasioned to the assessee by reason of his being compelled to remove the machinery from Arkonam, that is, for being prevented in carrying on his business at the Arkonam factory premises. There was, however, no prevention of the business as such as, in spite of the requisition, the assessee could have located the factory at a different place in Arkonam itself. The assessee chose to take the factory to Katpadi. There was, no doubt, an inevitable delay in the commencing and carrying on the oil mill business, by reason of the requisition. But, at the same time, there was an injury to the assessee in the sense that he could not carry on the factory in his own premises at Arkonam, and that there was some delay occasioned in the commencement of the business.
6. The compensation was assessed by the arbitrator on the basis of the profits earned by the assessee at Katpadi. This could be understood only as affording a basis for the measure, or quantum of compensation and not as deciding the nature of it. In other words, from the mere fact that the compensation paid to the assessee was based on the foot of the income, it cannot be held that it was the income from the business. The character of the receipt has to be decided on a consideration of the legal basis of the claim, and on the other facts in the case.
7. It was argued on behalf of the assessee that the receipt was a capital one. According to the learned counsel for the assessee there was an injury to the profit earning asset of the assessee by reason of his being deprived the opportunity of starting his business at Arkonam, and to that extent, his capital asset should be deemed to have been sterilised. In Glenboig Union Fireclay Co. Ltd. v. Commissioner of Income-tax, (1922) 12 Tax Cas 427, the assessee company, who were manufacturers of fireclay goods, had a leasehold right over certain fireclay fields. A railway line ran over a part of the property. The railway company were, however, only the owners of the land (surface) but not of the minerals beneath, which vested in the assesse. The railway company, in the exercise of its statutory powers, required that the part of the fireclay area which was under the railway line should be left un-worked, and for that purpose, the assessee was paid a compensation.
A question arose whether the compensation amount received by the assessee would he liable to tax. It was held that the compensation received was a capital receipt, being one paid for the sterilisation of the fireclay deposits; the fact that actually the compensation amount was computed on the basis of the profit which would have been earned by working the fireclay, was held to be immaterial. In delivering judgment Lord President Clyde observed at page 448:
'In short, the position so far as the company was concerned was that it had been permanently excluded from the beneficial possession and enjoyment of certain portions of its fixed assets, and the value of its undertaking was correspondingly diminished. That is the injury which the statutory compensation is provided to repair. Can that compensation be said to be part of the 'profits arising from the trade or business' of the company, or of the 'annual profits or gains arising or accruing' to the company from its trade? It is obvious that it did not arise or accrue by or through any of the processes whereby the company's trade or businesses is carried on. On the contrary, it was paid because the company was prevented from applying any of those processes to the fireclay in the areas affected directly or indirectly by the embargo. It was not a profit derived from the carrying on of the Company's trade or business; it was paid because the company was wholly deprived of the opportunity to carry on its trade or business so far as the fire-clay in the affected area was concerned... But prima facie the sterilisation of parts of them seems to me to imply a capital loss and the payment of compensation to repair the injury to the Company's undertaking which flowed from that sterilisation seems to me to be a restoration of capital.'
Lord Mackenzie observed (p. 459) that a sum which was paid in place of profits which would not be made, would not fall within the definition of annual profits arising from trade, and that the sum received in that case was in the nature of a windfall. This view was affirmed by the House of Lords, which held that the compensation paid was to prevent the company from obtaining the full benefit of the capital value of that part of the mines which they were prevented from working by the company. Whether that was regarded as a sale of the asset nut and out, or merely one preventing the acquisition of profit that would otherwise be gained, it was capital in nature. It will be noticed that the case related to the permanent taking away of a part of trading asset, that is, the fireclay mines beneath the railway line. That portion of the fire-day was no longer available to the owner, and, though in form it was a prevention, in substance it deprived the user of that part of his asset for all time.
8. In Commissioner of Income-tax v. Vazir Sultan and Sons, : 36ITR175(SC) , the assessee was appointed originally as the sole agent for Hyderabad State in regard to cigarettes manufactured by a company, and allowed a discount of two per cent, on the gross selling price. The area of the assessee's activity was subsequently enlarged, so that they were able to earn the discount of two per cent not merely on the sale in Hyderabad State, but outside as well. Later, however, the assessee company reverted to the original arrangement, confining the agency to the Hyderabad State alone, and the assessee was paid a particular sum by way of compensation for the loss of agency in respect of territory outside the State. A question arose whether that sum was revenue receipt assessable to income-tax, or a capital receipt not so assessable.
It was held that the agency agreement, with respect to the territory outside the Hyderabad State, was as much a part of the assessee's profit earning apparatus, as that inside that State, and would form part of the capital, and that the compensation paid for terminating the portion of the agency would be a capital receipt. In rendering the judgment, the Supreme Court analysed the principles which should guide in the determination of the question whether a receipt for the termination of an agency contract was a capital Or a revenue receipt. It was held that decision of the question would depend on the further question, whether the agency agreement, for the cancellation of which the payment was made to the assesseey was a capital asset of the assessee's business, and constituted its profit making apparatus, or stock-in-trade of the agency business.
9. An agency contract need not always be a capital asset; it may be a stock-in-trade. For instance, where a sole agency is in connection with the business of the employer, the agreement would be a profit earning apparatus of the agent; but where on the other hand, the agent runs several businesses, one or more of which is done as an agent, such part of the activity could well be one in the course of his business, and that it would only be a stock-in-trade. Compensation paid for the termination of the contract in such cases would, in its nature, be different. In the former case, the compensation being for the destruction of the profit earning apparatus, will be a capital receipt. In the latter, the compensation will be for a part of the stock-in-trade, and it will he a trading receipt.
10. In Godrej and Co. v. Commr. of Income-tax, : 37ITR381(SC) , the assessee was appointed as managing agent of the company for a period of 30 years, and was entitled under the agreement to a commission at the rate of 20 per cent on the net profits of the company. Later, however, the company wanted to reduce the rate of commission and the parties entered into a contract, by which the commission was so reduced, on the company paying the assessee a sum of Rs. 7,50,000/ as compensation.
The Supreme Court held that that sum was paid and received not to make up the difference between the higher remuneration and the reduced remuneration for the unexpired period of service of the assessee, but as a compensation for releasing the company from the onerous terms as to remuneration, which it was found to pay under the existing contract, and that the assessee received the amount as compensation for deterioration or injury to the managing agency by reason of the release of its rights to get higher remuneration, and was, therefore, a capital profit. In that case, as a result of the revised contract, there was a distinct deterioration in the character and quality of the managing agency viewed as a profit making apparatus, and that deterioration being of an enduring kind was held only to be a capital receipt.
11. In both the cases cited above, there was a deprivation of the profit earning apparatus, though such deprivation related only to a part thereof, and it was held that compensation for such deprivation could only be a capital receipt and not a revenue receipt. That is to say there was a destruction of a part of an agency contract which was the capital asset of the assessee; the compensation received for the deprivation of that asset would not be a trading receipt, as it was not the trade that brought the money but the annihilation of it.
But as pointed out before, there may be eases where the termination of an agency contract could be considered only as an injury to the stock-in-trade. Commissioner of Income-tax v. Jairam Valji, : 35ITR148(SC) , at-fords an example of the latter category. In that case, the assessee had several contracts with various persons. One of the contracts was for the supply of limestone etc., to a company. That contract was terminated by paying a compensation to the assessee. The question whether the amount received by way of compensation was a revenue receipt was answered in the affirmative. The payment of compensation was held to be a solatium for the cancellation of a contract entered into by a businessman in the ordinary course of business.
12. It would follow that a mere destruction or prevention of a part of a business cannot, for that reason, alone, be held, to be a destruction of the profit earning apparatus. If there is a cancellation of a trading contract, any compensation received therefor would be a trading receipt. Even if the cancellation is that of an agency contract, the compensation paid would be a capital or revenue receipt accordingly as the business terminated was itself the structure of the assessee's business, or one which was entered into in the ordinary course of trade.
13. What then arises for consideration is, whether there is any difference in principle, if there is a deprivation of or injury to the business by a paramount power. In : 35ITR148(SC) , Venkatarama Aiyar. J., observed at p. 166 (of ITR): (at p. 300 of AIR):
'But apart from these and similar instances it might, in general, be stated that 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 an external authority in exercise of a paramount power and is awarded compensation therefor whether that receipt is a capital receipt or a revenue receipt will depend upon whether it is compensation for injury inflicted on a capital asset or on a stock-in-trade.'
14. The learned counsel for the appellant contended that, in the present case, it should be held there was an injury to the capital asset, in that assessee's business at Arkonam was stopped, and could not be commenced, as he intended to do. That, however, is not an accurate statement of the position. The property or building in which a manufacturer carries on his business would, no doubt, be a part of the assets of his business. In the present case, the business had not commenced. The machinery was not interfered with by reason of the requisition. The mere fact that an intended business premises were requisitioned by the Government, cannot amount to a sterilisation of a part of the business, unless it be that but for the premises, no business could be conducted.
In the present case, the order of the Government did not prohibit the assessee from either doing business at Arkonam or in any other place. It only took over the building. The assessee sifted the business, at his own choice to Katpadi. The fact that he did not return to Arkonam to establish the factory after the Government vacated the premises, would indicate that the conduct of the business at Arkonam was not the essence of the assessee's business activity. Therefore, it cannot be held that the structure of the business was, as such affected. The mere occupation of a building belonging to the assessee's business without more cannot amount to an injury to or sterilisation of any profit earning apparatus.
There is great force in the contention of the learned counsel for the Department, that a temporary user of the premises by the Government, or an interruption of the user thereof could not be held to be an injury of an enduring nature to amount to a sterilisation of the asset. It cannot be held in the circumstances of the case that the building at Arkonam constituted a vital part of the assessee's business structure or even affected the conduct of their business, though it may be that it was unable to realise the expected profit. The compensation awarded to the assessee cannot, therefore, be held to be a capital asset. What was received, therefore, should be income.
15. The question then arises, whether it is a business income or income belonging to a different head or category.
16. In Commrs. of Inland Revenue v. Newcastle Breweries Ltd., (1927) 12 Tax Cas 927, the assessee carried on a business as brewers, and in course thereof, kept large stocks of rum. Their business consisted in reducing the rum and blending it before sale. A part of the stock of the rum was taken over by the Admiralty, and compensation was paid. The question arose whether this compensation was assessable to tax as profit arising from the company's trade.
It was held that the result of the transaction was that a price was paid for certain part of their stock which was in no way a compensation for interference with the trade, and that a mere absence of the will to trade could not make any difference, if the transaction was in regard to a commercial transaction, giving rise to a profit. Treating the transaction as a commercial transaction, whereby the property of the goods passed on delivery in the accounting period to the Admiralty, it was held that the money payable for the stock taken over should be taken into account in ascertaining the profits of the company.
17. In Ensign Shipping Co. Ltd. v. Commrs. of Inland Revenue, (1928) 12 Tax Cas 1169, two ships belonging to the assessee, which were ready to proceed to sea with cargoes of coal, were detained in port by order of the Government for a short period on account of strike. The company laid a claim against the Government for compensation, and they received an amount in settlement of their claim. A question arose whether the amount was taxable.
It was held that the amount was paid upon the basis of reimbursement to the ship owners for the time that was lost by the detention of the vessels, and that it was paid to them in the course of their vessels being afloat and ready to earn as vessels under a charter, and the character and nature of payment was one which fell within the ambit of their ordinary trading account. In Burmah Steam Ship Co. Ltd. v. Commissioners of Inland Revenue, (1931) 16 Tax Cas 67, the assessee had placed his motor vessel for repair in the hands of repairers with a stipulation that repairs should be completed within a particular time. There was a delay in the delivering of the motor vessel after repair, and the assessee obtained a compensation for the delay. Lord President Clyde observed at pp. 72 and 73:
'In the present case, there can be no doubt that, when the appellant entered into the contract with the repairers, the consequences of a failure by the latter to deliver punctually, which were in the contemplation of both parties at the time, were that the appellant would be deprived of the opportunity of putting the vessel to immediate profitable use in his business. It was in respect of this deprivation that the damages were recovered. The contemplated 'hole' in the appellant's profits was unfortunately made, and in my opinion the damages recovered must go, as a matter of sound commercial accounting, to fill that 'hole' and therefore constitute a proper item of profit in the appellant's profit and loss account.'
It was held that the amount of damages recovered would be liable to be assessed. Gunn's Commonwealth Income-tax Law and Practice, 4th Edn., p. 49, gives reference to the decision in A. N. W. W. v. N. S. W. National Coursing Association, Ltd., 1951-5 ATR 114. In that case compensation was paid to the assessee for military occupation of a race course. As the assessee was prevented from conducting race meetings there during the period of occupation, it had to conduct the meetings elsewhere. The sum given as damages was calculated as representing the sum lost by reason of the race course having been conducted at a different place. It is stated that the Court held that the payment by way of compensation was in respect of the diminution of the assessee's profits, and therefore, of a revenue nature. The actual report of the case is not, however, available.
18. It is, therefore, clear (1) that an operation which produces income would be taxable, whether it was received in the course of the normal trading activity or by reason of a compulsory acquisition and (2) that what is received as a compensation for the loss of income of a trade or for an injury caused by reason of an interruption to a trade could be a revenue receipt.
19. In Commissioner of Income-tax and Excess Profits Tax v. South India Pictures Ltd., : 29ITR910b(SC) , the Supreme Court had to consider the essential characteristics of a trade receipt. The assessee in that case carried on business as distributor of films, and he had entered into agreements for advancing monies to producers for production of films, in which the assessee was to get distribution rights for a period of 5 years. After the assessee had exploited for sometime the distribution rights in films, the agreements were cancelled and the producers paid the assessee a stun of Rs. 20,000 towards commission.
This was sought to be brought to tax as forming profits during the accounting year which was the subject-matter of the compensation. It was held that the amount was received in the ordinary course of the distribution business of the assessee, and the amount represented the commission which would have been earned had the contracts continued without termination, and that, therefore, the sum was a revenue receipt. It was held that the material points to he considered in ascertaining whether a receipt of compensation for the termination of the contract was a trading receipt were (1) whether the agreements which were ultimately terminated were entered into in the course of carrying on of the business and (2) whether the termination of those agreements would be said to have been brought about in the ordinary course of its business.
Applying these tests to the present case, can it be held that there was any trade receipt? No business of the assessee was taken over or interrupted by the Government. The Appellate Tribunal held that there was a hole in the trading profits by reason of the acquisition, and the compensation which went in to fill that hole, would partake of its character. As we pointed out already, there was no interruption of the business of the assessee. The assessee had only one set of machinery, and that began functioning at Katpadi and earning profits. The capital asset existed intact and the assessee only lost the opportunity of earning profits at Arkonam. It may be that the receipts could be correlated to the ownership of the business which had to he transferred to Katpadi, but it cannot, for that reason, be said to arise out of the conduct of the business.
20. In Commissioner of Income-tax v. Shamsher Printing Press, : 23ITR363(Bom) , the premises of the assessee were requisitioned by the Government and compensation paid therefor. The Bombay High Court held that the case was one where there was an injury to the business (the assessee having continued to carry on the business) and that the receipt was of a capital nature. Chagla, C. J., observed at p. 370 (of ITR) : (at p. 139 of AIR):
'........ or if one takes the view that the payment was entirely independent of the business of the assessee as a capital or non-recurring receipt.'
In Higghs (H. M. Inspector of Taxes) v. Olivier, 1952-33 Tax Cas 136, the assesses, who was a well-known actor, entered into an agreement of service with a film company. Thereby he covenanted in consideration of a sum of money paid to him, not to act or produce or direct any film for any other persons for a period of 18 months. What arose for decision was whether the sum of money received in respect of the restrictive covenant was the profit of his vocation. It was held that the sum received was outside the scope of profits or gains arising or accruing from the assessee's profession or vocation as an actor, as it was payment for abstaining from following his vocation. The Master of the Rolls observed at p. 146:
'I think Sir Frank was disposed to agree that if a trader or a professional man for money consideration covenanted to give up his trade or profession for the rest of his life, then it would be difficult to say that the money received was 'profits or gains accruing or arising from his trade or profession'. On the other hand, it is not difficult to see that a restriction of a very limited or partial character might less easily be taken out of the ambit of the taxing provision. One example in the argument was that of an actor who covenanted for a limited period not to act for one particular company out of a larger number. I gave myself that example of an actor who covenanted for a limited period not to act under his own or well known stage name. But between the two extremes there is a large area, and for myself I am disposed to think that within that area it may well be a matter of degree. In so far as it is a matter of degree it could be, I think, a question of fact.'
The present is a case where the business at Arkonam had to be given up, and the compensation paid therefor cannot be said to be for the sterilisation of the business of the assessee, nor was it income received from the business. We have already pointed out that the mere fact that the income the assessee actually derived from the same business during a later period was taken as the basis for ascertaining the quantum, of compensation, cannot determine its quality or nature. In its essence, the compensation was for not carrying on the business for a period. Not being income from business the receipt should he held to fall under Section 6(v); income from other sources. The receipt, being of a casual, non-recurring nature, would be exempted from tax under Section 4(3) Clause (vii) of the Indian Income-tax Act.
21. We, therefore, answer the question in the negative, and in favour of the assessee. The assessee will be entitled to his costs. Advocate's fee Rs. 250/-.