1941 (7) TMI 22 - DSC - Income Tax

Summary

Issues Involved:
1. Nature of the Rs. 10,000 annual payment: whether it is a capital receipt or income liable to tax.
2. Applicability of Section 7 of the Indian Income-tax Act.
3. Applicability of Section 10 of the Indian Income-tax Act.
4. Applicability of Section 12 of the Indian Income-tax Act.

Issue-wise Detailed Analysis:

1. Nature of the Rs. 10,000 Annual Payment:

The primary issue is whether the Rs. 10,000 annual payment received by the Mills Store Company from Burmah-Shell Company is a capital receipt or income liable to tax. The assessee argued that the payment was a capital receipt, spread over ten years, as consideration for the restrictive covenant entered into by the partners of the Mills Store Company. The Income-tax Officer and the Assistant Commissioner, however, treated it as income.

2. Applicability of Section 7 of the Indian Income-tax Act:

The Income-tax Officer initially contended that the Rs. 10,000 annual payment was akin to commission and thus fell under the head 'Salaries' as per Section 7 of the Act. However, the Assistant Commissioner and the court disagreed, stating that the payment was not for any service rendered but was a consideration for the restrictive covenant. The court emphasized that there was no employer-employee or principal-agent relationship between the parties, which is essential for a payment to be considered 'salary' under Section 7. The court referenced the case of Commissioner of Income-tax, Bombay Presidency and Aden v. K.H. Katrak, distinguishing it on the grounds that there was no such relationship in the present case.

3. Applicability of Section 10 of the Indian Income-tax Act:

Section 10 pertains to 'profits and gains of business, profession or vocation.' The court held that the Rs. 10,000 payment did not fall under this head as it was not a direct consequence of any business carried on by the Mills Store Company. Instead, it was a consequence of the company agreeing not to carry on a particular business. The court referenced the Privy Council decision in Commissioner of Income-tax, Bengal v. Shaw Wallace & Company, which established that compensation for the cessation of business is not taxable as business income.

4. Applicability of Section 12 of the Indian Income-tax Act:

Section 12 deals with 'income from other sources.' The court examined whether the Rs. 10,000 payment could be considered income under this section. The court cited the Privy Council decision in Gopal Saran v. Income-tax Officer, which defined income as a periodical monetary return coming in with regularity from a definite source. The court concluded that the Rs. 10,000 payment did not fit this definition, as it was a capital payment spread over ten years to safeguard against breaches of the restrictive covenant. The court emphasized that the payment was not intended to produce a regular income for the assessee but was a method to ensure compliance with the restrictive covenant.

Conclusion:

The court concluded that the Rs. 10,000 annual payment received by the Mills Store Company from Burmah-Shell Company was a capital receipt and not income liable to tax under any of the heads specified in the Indian Income-tax Act. The payment was considered a part of the capital consideration for the restrictive covenant and not a periodical monetary return intended to produce income for the assessee. Therefore, the sum was not taxable under Sections 7, 10, or 12 of the Act.