1952 (1) TMI 23 - HC - Income Tax

Summary

Issues Involved:
1. Nature of the receipt of Rs. 37,248-whether it is a revenue receipt or not.
2. Applicability of the decision in Commissioner of Income-tax, Bengal v. Shaw Wallace & Company.
3. Distinction between compensation for non-performance of a contract and compensation for discontinuance of business.

Issue-wise Detailed Analysis:

1. Nature of the receipt of Rs. 37,248-whether it is a revenue receipt or not:
The primary issue in this case was to determine whether the receipt of Rs. 37,248 by the assessee-firm was of the nature of a revenue receipt and thus taxable under the Indian Income-tax Act. The Income-tax Officer claimed the entire amount of Rs. 50,962 as taxable income, which included Rs. 37,248 as compensation for the termination of the contract. The assessee-firm contended that Rs. 13,694 was share of profits and Rs. 37,248 was compensation for the termination of the contract. The Tribunal held that the entire amount was taxable, stating that the sum received was for accrued as well as future profits. The High Court, however, concluded that the Rs. 37,248 was compensation for the termination of the contract and not a revenue receipt, thus not taxable.

2. Applicability of the decision in Commissioner of Income-tax, Bengal v. Shaw Wallace & Company:
The Tribunal's reliance on the decision in Bush, Beach and Gent Ltd., v. Road was deemed incorrect by the High Court. The High Court emphasized that the decision in Shaw Wallace's case was relevant and applicable. Shaw Wallace's case established that the Indian Income-tax Act is not in pari materia with the English Income Tax Act, and compensation for termination of business contracts is not taxable income. The Tribunal's statement that Shaw Wallace's case was under the English Income Tax Act was erroneous, as it was decided by the Calcutta High Court and the Privy Council.

3. Distinction between compensation for non-performance of a contract and compensation for discontinuance of business:
The High Court distinguished between compensation for non-performance of a contract and compensation for discontinuance of business. Citing the case of Short Brothers Ltd. v. Commissioners of Inland Revenue, the Court noted that compensation for the cancellation of a contract in the ordinary course of business is taxable. However, compensation for the termination of the business itself is not taxable. The Court also referred to Kelsall Paisons & Co. v. Commissioners of Inland Revenue, where it was held that compensation for termination of an agency agreement was taxable as it was a normal incident of business. The High Court concluded that the compensation received by the assessee-firm was for the termination of the business agreement and thus not taxable.

Conclusion:
The High Court held that the amount of Rs. 37,248 received by the assessee-firm as compensation for the termination of the contract was not a revenue receipt and thus not taxable. The Tribunal's reliance on non-relevant cases was corrected, and the principles established in Shaw Wallace's case were upheld. The assessee-firm was entitled to its costs assessed at Rs. 400, and the reference was answered accordingly.