P.B. MUKHARJI J. - In this Income-tax Reference under section 66(1) of the Income-tax Act the following questions have been aske :
'1. Whether there was any material on record for the President to give a finding to the effect that the contention of the assessee that it intended to buy the mills was without any basis whatsoever?
2. Was the receipt in question a revenue receipt from a venture in the nature of trade and has it been rightly brought to tax?'
The facts lie within a small compass though the case had a very chequered history. The assessee is a registered firm carrying on the business as share brokers, share dealers and paper merchants. The assessment year is 1947-48, corresponding to the previous year which is the calender year 1946. Early in 1946, the assessee, Mr. David Mitchell of Messrs. Lovelock & Lewis, chartered accountants, and Mr. Rowan Hodge of Messrs. Orr, Dignam & Co., solicitors, were found as a fact to be negotiating with Messrs. Harseman Brothers, proprietors of Swadeshi Cotton Mills, for acquiring the controlling interest in the said mills. In or about April, 1946, Messrs. Mangturam Jaipuria acting through its main partner, Anandram Guzdar, was also trying to acquire the controlling interest in the said Swadeshi Cotton Mills with a view to secure the controlling interest for itself. Messrs. Mangturam Jaipuria offered to pay Rs. 6,00,000 to the applicant, Mitchell, and Hodge, in order to dissuade them from competing with it in the negotiations for the purchase of the controlling interests in the Swadeshi Cotton Mills. The offer was made by Messrs. Mangturam Jaipuria as contained in their letter dated 29th April, 1946, addressed to David Mitchell and the material portion of that letter i :.. We confirm that we and our associates are desirous of purchasing the same (Swadeshi Cotton Mills Co. Ltd.) and in the event of your securing the same for us and upon your giving up all claims to purchase the same and assigning to us and our associates any interest that you may have acquired therein, we hereby agree to pay you and your colleagues a capital sum of Rs. 6,00,000, such payment to be made upon completion of the purchase by us.'
With a view to give effect to that Mangturam Jaipuria also secured an irrevocable letter of credit of the then Imperial Bank of India in favour of David Mitchell. Now this sum of Rs. 6,00,000 was duly received and divided amongst these three persons, the assessee, Mitchell and Hodge, and out of it the applicant had received the sum of Rs. 2,00,000. It is this amount over which the controversy rests. After payment of Rs. 25,000 to one Ratanlal Goel for services rendered in this deal the applicant-assessee credited the balance of Rs. 1,75,000 out of this Rs. 2,00,000 to the profit and loss account as 'brokerage and commission'. The assessee duly filed a return showing the receipt of this very money as income receipt. But then, later on, the assessee submitted a revised return excluding that amount from the income and claimed exemption on the ground that it was not a receipt 'arising from business or the exercise of a profession, vocation or occupation', and was of a 'casual and non-recurring nature' within the meaning of section 4(3)(vii) of the Income-tax Act.
Both the Income-tax Officer as well as the Appellate Assistant Commissioner rejected the claim of the assessee that the receipt of this sum of Rs. 1,75,000 was a non-recurring casual receipt exempt from tax under section 4(3)(vii) of the Act or that it was in any way a capital receipt as distinct from a revenue receipt. The assessee appealed to the Appellate Tribunal. Before the Appellate Tribunal the assessees main contention was that this sum of Rs. 2,00,000 was offered to it for staying away from the transaction and not competing with Messrs. Mangturam Jaipuria. In respect of this contention the assessee relied on the well known case of the British Shakesperian actor, Sir Lawrence Olivier. Reliance was also placed on such authorities as Commissioner of Income-tax v. Mills Store Co., Karachi and Fringford Estates Ltd. v. Commissioner of Income-tax.
There was difference of opinion between the Accountant Member and the Judicial Member of the Calcutta Bench of the Tribunal and the matter was referred to the President of the Tribunal for his opinion. The President was of opinion that more relevant material should be brought on record before he could express his opinion and, therefore, remanded the case to the Appellate Assistant Commissioner with a direction to examine certain persons and to submit his remand report. The President made the remand order on the 24th December, 1955. After remand the Appellate Assistant Commissioner examined certain persons and made his remand report to the President. It may only be added that the Accountant Member was of the view that the receipt was of a casual and non-recurring nature and that it had not arisen out of the appellant-assessees business and, therefore, it was exempt from tax under section 4(3)(vii) of the Income-tax Act. The Judicial Member, on the other hand, held that the assessee was a professional broker and the assessee in the first instance showed the amount in his brokerage account and also showed it as profit in the first return filed by the assessee. The Judicial Member held that the money received by these three professional persons was in the course of their joint venture in consideration of their not competing with the rival group and could not be considered to be casual within the meaning of section 4(3)(vii) of the Act.
After the remand report the President on a consideration of all the facts came to the conclusion that the receipt was a revenue receipt from a venture in the nature of trade and should be brought to tax by the income-tax authorities. In other words, the President agreed with the Judicial Members view on this point. This in short is the chequered history of this case on which the present reference has been made on the aforesaid two questions.
We shall now take up the first question referred to us. The President found that the contention of the assessee that it intended to buy the mills was without any basis whatsoever. The point of this reference is whether there is any material on record to support the finding of the President. We find there are ample materials to support this finding of the President.
The first significant fact is that the mills were really worth about four crores and three lakhs of rupees as stated by Mangturam Jaipuria in his evidence. The President finds that the assessee did not have the money to buy the mills at that price. The remand report also find :
'.... The appellant firm was short of capital at the time of the purchase of M/s. C.M. Co. Ltd. It is unlikely that when the firm was in this financial position, it would have negotiated the purchase of the controlling interest in Messrs. Swadeshi Cotton Mills on its own behalf.'
The President, therefore, was right in coming to the conclusion that the assessee had neither the money nor the intention to buy the mills. Secondly, it appears that the assessee of whom the senior partner was Sri Ram Kumar Agarwalla did not by himself or alone proceed to go in for this bargain but was associated with two other persons, namely, Mr. Mitchell, a chartered accountant, and Mr. Hodge, a solicitor. If the assessee himself had the money then there would be no point in associating with others. Indeed it is significant that Mr. Mitchell was a chartered accountant and whose firm, M/s. Lovelock & Lewis, was the auditor of the Swadeshi Cotton Mills and Mr. Hodge, a partner of the firm of M/s. Orr, Dignam & Co., who was the solicitor of the Swadeshi Cotton Mills. Thirdly, the subsequent facts show that the assessee in fact did not buy the mills at all. The mills were purchased by the firm of Bagla Jaipuria Co., one of whom is Mangturam Jaipuria, senior partner of Messrs. Anandaram Guzdar. Fourthly, the assessee had produced no document or material in writing and in fact there is no evidence of the senior partner, Ram Kumar Agarwalla, to show that the assessee in fact ever wanted to buy the mills. These facts and circumstances are, in our view, enough materials to support the finding of the President that the assessee had no intention to buy the mills.
Before leaving this question it is necessary to remark that the question is not really material. On the contrary, if the assessees contention is that the assessee had the intention to buy the mills then it becomes more difficult for the assessee to contend that it was not a part of the assessees business and in that event the income arising out of it would be taxable income, a conclusion which will prejudice the assessees main contention in this reference and which is the second question asked.
The second question is the main question in this reference. The question is whether the receipt is a revenue receipt from a venture in the nature of trade and liable to tax. On a consideration of the facts on record we are satisfied that the Presidents finding on this question that it is a revenue receipt from a venture in the nature of trade and liable to tax is correct. We shall state our reasons very briefly.
In the first place, the accounts of the assessee themselves show that he himself treated the sum of Rs. 2,00,000 as under the head of income from 'brokerage and commission' and that out of this sum he paid Rs. 25,000 as remuneration to Ratanlal Goel for services rendered in the above deal. This shows that the assessee himself treated it as his income liable to tax. No doubt, nomenclature is no safe guide to the intrinsic quality of a capital or revenue sum; false distinctions based on labels given to particular items cannot determine the issu : see Lord Simons Income Tax, Vol. 1, page 31, second edition. But this is not a question of the assessee making a mistake on any question of law or interpretation of law. It shows his conduct and treatment in dealing with this income. It is evidence of a fact. His treatment was that this receipt was income and not capital. Secondly, the assessee filed a revised return claiming to exclude this income but in doing so gave no explanation that the former inclusion was either due to any mistake or any misinterpretation of law. Complete lack of explanation why the assessee not only included this item in his account but also in his return before the Income-tax Officer as taxable income suggests, as rightly pointed out by the Appellate Assistant Commissioner, that it was an 'afterthought.' Thirdly, the payment of Rs. 25,000 out of this amount to Goel also shows the nature of this money to be income or revenue and not capital for no businessman could think of paying remuneration for services rendered from a capital amount. The Income-tax Officer, therefore, was right in saying that this was a revenue item received in the usual course of the business of the assessee as a broker and, therefore, it was put as income under the heading 'Brokerage & Commission.'
Obviously, the partnership deed shows that the assessee is a finance broker. On the facts here the assessee acted as a broker. He certainly arranged for the finances of the Jaipurias who purchased the mills by buying off a possible competitor. It is consistent with the finding of fact that the assessee had no intention nor the money to buy the mills himself. Indeed, the facts here are significant. The assessee and his two associates, Mitchell and Hodge, accepted the offer made by the Jaipurias and received the money in the course of their joint venture in consideration of their not competing with the rival group. The assessee was called upon to produce the correspondence but none was produced. The non-production of the correspondence by the assessee is significant. It also appears on record that the assessee had, at the end of 1946, acquired the controlling interest of another company, namely, Christian Mica Co. Ltd. Obviously, then, it was a part of the assessees business to go in for such ventures. That in the case of Mica Co. the assessee did ultimately acquire the controlling interests while in the case of the Swadeshi Cotton Mills under the present reference the assessee did not, cannot be used as proving that the attempted purchase of controlling interest in the Swadeshi Cotton Mills was outside the business purview of the assessee. The fact is that the assessee made a business of it although the assessee and his two associates did not ultimately in fact purchase the controlling interest in this Swadeshi Cotton Mills. Their chance and likelihood of getting that interest was bought off by the price paid by the Jaipurias to them. That being so it was a venture in the nature of trade. The assessee and his two associates made their claim to the purchase of Swadeshi Cotton Mills at least so strong that a businessman like Mangturam Jaipuria thought fit as a business proposition to pay a sum of not less than Rs. 6,00,000 to buy off their possible claim. It is part of normal business to keep off competition from a business rival and money paid to buy off competition from a possible rival is income in the hands of that business rival.
Mr. Banerjee appearing for the assessee tried to make a point that it was no part of the business of the assessee firm to acquire such controlling interests. In this, he faces the difficulty that the assessee firm had already bought controlling interests in another company mentioned above. But that is not the end of his difficulty. The attempt to purchase Swadeshi Cotton Mills was not by the firm of Ram Kumar Agarwalla, the senior partner and two other associates, Mitchell and Hodge. The assessee having been found not to have the means to buy the mills he could only then act as a broker. In fact, the sum of Rs. 6,00,000 was divided into three parts of Rs. 2,00,000 each. Mitchell and Hodge, we are told in arguments at the Bar, have treated their Rs. 2,00,000 as their respective incomes and they have been taxed accordingly. The assessee himself included it as business income in his accounts and also included it as his business income in his original return. Surely this would be a part of the income of the assessee as a 'finance broker' as stated in the partnership deed and which is shown to us both by the assessees counsel as well as the counsel of the income-tax authorities. This can only be consistent with the fact that this sum of Rs. 2,00,000 was earned by Ram Kumar Agarwalla as brokerage for arranging the Jaipurias as buyer and Swadeshi Cotton Mills as the seller through the help of Mitchell and Hodge.
On those facts it must be held that this receipt arises from business and is not of a casual or non-recurring nature within the meaning of section 43(3)(vii) of the Income-tax Act. It is not casual because it was deliberate, intended, arranged and secured with the intention of making an income. It was premeditated. It was not unforseen. There was regular offer, bargaining and acceptance as will be clear from the letter of offer from the Jaipurias quoted above and the subsequent acts and conduct of the assessee ultimately in receiving this sum of Rs. 2,00,000 out of Rs. 6,00,000. It is needless for us to reiterate that the definition of business in section 2(4) of the Income-tax Act is not an exhaustive definition but it is an inclusive one in the widest possible terms as including 'any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.' On the facts found in this reference and as indicated by us above we have no hesitation in holding that it is an adventure in the nature of trade and it cannot be in this context anything else.
Mr. Banerjee took, in our opinion, unnecessarily long time by his citation of cases which we consider mostly irrelevant. We do not, therefore, propose to discuss irrelevant authorities. We shall therefore select some of the more relevant and salient decisions on this point under reference. A Division Bench of this court (Derbyshire C.J. and Panckridge J.) in In re Susil C. Sen discussed a claim for exemption for the sum of Rs. 10,000 under section 4(3)(vii) of the Income-tax Act, where the learned Chief Justice, at page 271, observe :
'Commercial men rarely pay money without good reason and generally do so in return for property, goods, services or help. It is impossible for me to be believe that but for Mr. Sens help to them in smoothing out the shareholders difficulties and his advocacy of the claim of Indian shareholders, in both of which things he was acting as Mr. Khandelwalas lawyer and advocate, the payers would have made that payment of Rs. 10,000.'
Panckridge J., who delivered a separate judgment, agreeing with the learned Chief Justice, at page 274, rejected the suggestion that the sum of Rs. 10,000 was merely a gift or a casual receipt and observe :
'..... the money was paid not in appreciation of the benefit to the shareholders, but in appreciation of the part Mr. Sen had played in securing that benefit.'
Applying the reasoning of that decision and the observation of Derbyshire C.J. made in that case it can equally be said here that businessman like M/s. Jaipurias would not think of paying Rs. 6,00,000 as a gift or present to the assessee and his associates to the tune of Rs. 6,00,000 if it were not part of the business itself and the deal connected therewith.
Mr. Banerjee attempted to build up a theory that money paid for compensation in sterilising capital or for creating restrictive or negative covenants should be treated as capital and not as revenue receipt. For this purpose he first relied on the case of the English Court of Appeal in Higgs v. Olivier, Commissioner of Income-tax v. P.K. Das, and Radha Debi Jalan v. Commissioner of Income-tax. But these arguments and the basis of such authorities do not however arise on the facts of this case and are not relevant. In this case, on the facts of this reference, no question of sterilising any part of the capital, and no question of compensation for capital structure or managing agency, and no question of restrictive or negative covenant arise at all. Therefore, this line of cases, on such subjects which Mr. Banerjee cited, is entirely beside the point.
Mr. Banerjee contends for the assessee that the price paid for not competing with the rival group in acquiring the interest in Swadeshi Cotton Mills was a kind of a restrictive or negative covenant and was therefore a kind of compensation in the nature of capital. We do not consider that there is any substance in this contention. There is no covenant to restrict in this case. One group tried to purchase a mill and another rival group appeared on the scene to purchase it. One rival buys off another rival and acquires the interest in the mill. The business is complete. There is no question of any restrictive covenant. Restrictive covenant means that the use of a property or a right is restricted after its purchase or acquisition. Nothing is restricted in the present case. The assessee was not restricted generally not to compete with the Jaipurias to acquire any interest in other companies and mills. The particular interest in the particular mill which the assessee and his associates wanted to purchase was warded off by paying them a price. The assessee was always free and remained free to exercise his businsess of acquiring interest in other companies and in fact he did in the Christian Mining Company as stated before. A restrictive or negative covenant is always a part of the subject-matter of the contract or deal and cannot exist independently. A restrictive or negative covenant cannot be sold or purchased independently and by itself, and is always annexed to and goes with the subject-matter of contract or deal.
A Division Bench of the Allahabad High Court in In the matter of Chunni Lal Kalyan Das decided that a sum received by a businessman as brokerage on the sale of immovable property was held to be assessable to income-tax, although such a transaction was not apparently in the assessees ordinary line of business and might not be repeated. At page 371 of the judgment the following observation was made with which we respectfully concu :
'But the expression nature appears to us to be a word used independently of the accident of the event happening in fact once only, or more often in a fortunate year. It connotes a class of dealing which might occur only once, but which might occur several times. Now the adventure of a businessman, who is enabled, through his business associations, to negotiate a large transaction and thereby to earn a heavy commission, may undoubtedly be in fact non-recurring in the sense that so successful an adventure would not be likely to occur again. But, on the other hand, it is a class of transaction which might occur to any such businessman once only or half a dozen times again, during the course of the year.'
On this principle a single transaction or one out of two transactions cannot by the mere fact of its singularity or rarity alone be regarded as 'casual' or 'non-recurring' within the meaning of section 4(3)(vii) of the Income-tax Act. It is at best a circumstance but not decisive.
The recent decision of the House of Lords in Rolls-Royce Ltd. v. Jeffrey contains very useful discussion at pages 806-7 on the vexed question of capital and revenue. It would serve no useful purpose to plunge into the stream of cases bearing on the problem of capital versus revenue. No rigid formula or invariable test can be laid down on the point. It depends on a number of circumstances and the particular facts of a case. As pointed out in 20 Halsbury (Simonds Edition), article 265, the law can be stated as follow :
'Where an amount is received in lieu of and takes the place of an item which, if received, would have been revenue and a trade receipt, the amount so paid is, prima facie, a revenue trade receipt, and a receipt in the period in which the agreement for payment is made. The circumstances may show, however, that a particular receipt was not a receipt of the trade.'
In support of that proposition a number of cases are cited out of which we shall pick out only three or four major ones which can be said to have at least some resemblance with the facts of the present reference before us. In Vaughan v. Archie Parnell & Alfred Zeitlin Ltd. the respondent company carried on the business of theatrical agents and producers of plays. Under an agreement it purchased for pounds 1,000 the production of a play for a period of five years on payment of a royalty based on gross weekly receipts and a further royalty based on the net profits on each tour of the play, on account of which a sum of Pounds 2,500 (no part of which was to be returnable in any event) was to be paid before taking delivery of the production. The agreement provided that no film of the play should be made or done in the territory over which the licence extended. The respondent company accordingly commenced an action against the licensors and was awarded substantial damages for breach of contract. It was contended there that the sum received was a capital receipt and not a taxable profit of its trade but it was held that the measure of the damages was the companys loss of profit and that the damages were properly included in the computation of the companys profits for income-tax purposes. Similarly, in Shadbolt v. Salmon Estate Ltd., where Macnaghten J., at page 57, observe :
'The company objected that this notice was not a valid notice and, although the college did not admit that the notice was invalid, nevertheless they thought fit to pay the sum of Pounds 5,000 in order to induce the company to withdraw its objection to the validity of the notice. The result was that the company lost 87 plots, but received Pounds 5,000 instead. The question at issue i : Was the right to build on these 87 plots a trading asset? Was it part of their stock-in-trade? If the land had been actually bought by the company and then they had sold part of it for Pounds 5,000, it is admitted that the Pounds 5,000 received for the bit so sold would have been a trading receipt, and, as it seems to me, the right to build on the plots was likewise a trading asset.'
Applying similar logic, the right not to compete with the Jaipurias in purchasing Swadeshi Cotton Mills was similarly bought off in the present case before us and that was part of the business transaction and income arising thereof is taxable. Then again the English Court of Appeal in Thompson v. Magnesium Elektron Ltd. discussed this question of negative covenant and Lord Greene M.R., at page 11 of the report, observe :
'But it seems to me that there is no real necessity to introduce that argument into the solution of the problem. The problem, as I see it, is to be solved in a very simple way. A manufacturer of magnesium desires to obtain a firm contract for the supply of chlorine which he requires in manufacturing his magnesium. He gets that contract by entering into a complicated arrangement under which he agrees not to manufacture or be interested in the manufacture of chlorine or caustic soda; that undertaking being qualified, so to speak, by a payment made to him to cover either the whole or a part of the loss that he incurred by not manufacturing chlorine or caustic soda.... Regarded in that way the payments seem to me to be trade receipts, just the same as if, in order to get a contract for the supply of chlorine, they had entered into some collateral bargain, under which they incurred expense. Here they are getting their chlorine on terms under which with one hand they give away their covenant, and with the other at the same time they get these payments. That appears to me to stamp them with the character of trade receipts, and, in my opinion, the assessment was rightly made....'
It will be unnecessary to multiply decisions and authorities. Most of the cases to which reference was made by Mr. Banerjee for the assessee on the question of adventure in the nature of trade have already been discussed and distinguished in a recent decision of the Division Bench of this court in Mayfair Estates Private Ltd. v. Commissioner of Income-tax including the leading decision of our Supreme Court in Saroj Kumar Mazumdar v. Commissioner of Income-tax and G. Venkataswami Naidu & Co. v. Commissioner of Income-tax.
Mr. Banerjee, for the assessee, seeing these difficulties on his way, finally made a desperate attempt to develop a line of argument that if this amount was to be treated as revenue or income then the whole of Rs. 6,00,000 in the first place should have been taxed in the hands of the assessee and the two other persons. This argument is entirely fallacious. In the first place the assessee along with the two associates, Mitchell and Hodge, did not form together an association of individuals or any unit of income-tax assessment in this case. In the second place what is now being taxed as revenue receipt or income is not the whole sum of Rs. 6,00,000 but a portion thereof being only a sum of Rs. 2,00,000 which the assessee in this case had himself shown and included in his accounts and in his original return. So far as the assessee is concerned he only received this Rs. 2,00,000 and not the said sum of Rs. 6,00,000. Lastly, this point was never taken by Mr. Banerjee at any stage either before the Income-tax Officer or before the Appellate Assistant Commissioner or even before the Tribunal. We have, therefore, no hesitation in overruling this objection.
For these reasons we answer the second question in the affirmative and hold that the receipt in question was revenue receipt from an adventure in the nature of trade and was rightly brought to tax.
The assessee shall pay the costs of this reference. Certified for two counsel.
LAIK J. - I agree.