1971 (10) TMI 4 - SC - Income Tax

Compensation for termination of agreement - compensation received was neither in respect of the services rendered by him in the past nor towards the accumulated commission due to him - receipt must be considered as a capital receipt

Summary

Issues Involved:
1. Nature of the receipt of Rs. 70,000 by the assessee: whether it is revenue or capital in nature.

Issue-wise Detailed Analysis:

1. Nature of the Receipt of Rs. 70,000: Revenue or Capital?

The primary question referred to the High Court was whether the receipt of Rs. 70,000 by the assessee on June 11, 1954, was revenue or capital in nature. The High Court determined that the receipt was a capital receipt. The Commissioner of Income-tax, aggrieved by this decision, appealed to the Supreme Court.

Material Facts:
The assessee was assessed as an individual for the assessment year 1955-56. The assessee discovered kankar deposits in Jind State and facilitated an agreement between Shanti Prasad Jain and the State of Jind for exclusive cement manufacturing rights. For his services, the assessee was promised a commission of 1% on the yearly net profits of the Dalmia Dadri Cement Co. However, the company ceased paying the commission after 1950, leading the assessee to file a suit, which ended in a compromise. Under the compromise decree, the assessee was to receive Rs. 70,000 as compensation for the termination of the agreement from January 1, 1954.

Tribunal's Decision:
The Income-tax Officer initially held that the Rs. 70,000 was taxable as a revenue receipt, a decision affirmed by the Appellate Assistant Commissioner. However, the Tribunal concluded that the compensation was for the termination of a contract that allowed the assessee to earn commission and thus was a capital receipt.

High Court's Opinion:
The High Court, agreeing with the Tribunal, held that the receipt was capital in nature. The revenue contended that the assessee was engaged in business activities, but the court found no evidence to support this claim. The court noted that the assessee's activities were stray acts and not part of a systematic business.

Supreme Court's Analysis:
The Supreme Court emphasized that determining whether a receipt is capital or income depends on the specific facts of each case. The court referred to the House of Lords' decision in Van den Berghs Ltd. v. Clark, where a lump sum received for the cancellation of pooling agreements was considered a capital receipt. The court noted that the agreements in question were not ordinary commercial contracts but fundamental to the company's profit-making structure.

Relevant Precedents:
The Supreme Court cited several cases, including Senairam Doongarmal v. Commissioner of Income-tax and Kettlewell Bullen and Co. Ltd. v. Commissioner of Income-tax, to distinguish between capital and revenue receipts. The court reiterated that compensation for the termination of an income-producing asset is a capital receipt.

Conclusion:
The Supreme Court concluded that the Rs. 70,000 received by the assessee was a capital receipt. The payment was for the destruction of an income-yielding asset, not for past services or accumulated commission. Therefore, the appeal by the Commissioner of Income-tax was dismissed, and the High Court's decision was upheld.

Final Judgment:
The appeal was dismissed with costs, affirming that the receipt of Rs. 70,000 was a capital receipt and not taxable as revenue.

Appeal dismissed.