1970 (8) TMI 16 - HC - Income Tax

Compensation received for resting of management - assessee-company could not carry on business with the object of earning profit - fact that the compensation paid was measured by its past profits did not make the compensation paid income of the assessee - not liable to tax

Issues Involved:
1. Whether the amount of Rs. 56,028 paid to the assessee-company by the Central Government represented income liable to tax.
2. Nature and characterization of the compensation amount under the Life Insurance (Emergency Provisions) Act, 1956.

Issue-wise Detailed Analysis:

1. Whether the amount of Rs. 56,028 paid to the assessee-company by the Central Government represented income liable to tax:

The core issue was whether the compensation amount of Rs. 56,028 paid to the assessee-company by the Central Government should be considered as income liable to tax. The compensation was paid under Section 7 of the Life Insurance (Emergency Provisions) Act, 1956, for the vesting of the management of the controlled business of the insurer in the Central Government.

The Tribunal had held that the compensation was a surrogatum for the profits that would have been earned during the period when the management vested in the custodian. Therefore, it was deemed to be income. However, the assessee-company contended that the compensation was for the loss or sterilization of a capital asset and should not be treated as income.

2. Nature and characterization of the compensation amount under the Life Insurance (Emergency Provisions) Act, 1956:

The judgment explored the nature and purpose of the compensation. The Life Insurance (Emergency Provisions) Act, 1956, was enacted to take over the management of life insurance businesses pending nationalization. The management of the assessee-company was vested in the Central Government, and compensation was provided for this divestment.

The court referred to the Supreme Court's decision in the second Sholapur case, where it was held that the right of management was equated to property, thereby attracting Article 31(2) of the Constitution. The right of management was considered part of the profit-making apparatus of the assessee-company. Therefore, compensation for divesting the company of its management was seen as compensation for the acquisition of a part of its profit-making apparatus, making it a capital receipt rather than a revenue receipt or income.

The revenue argued that the assessee-company continued its business despite the divestment of its management, relying on the Supreme Court decision in Commissioner of Income-tax v. Shamsher Printing Press, where compensation for requisitioning premises was held to be a revenue receipt. However, the court distinguished this case by noting that the assessee in the present case was divested of its management, which was a capital asset.

The court also referred to the Privy Council's decision in Commissioner of Income-tax v. Shaw Wallace and Co. Ltd., where compensation for cessation of agency was not considered income. The court emphasized that the compensation paid to the assessee-company was not for profits or gains of any business carried on by the assessee-company but for the loss of a capital asset.

The principles laid down by the Supreme Court in Senairam Doongarmall v. Commissioner of Income-tax were applied, which included:
(i) The primary condition for holding a receipt as profits or gains of business is the existence of a business.
(ii) Business denotes an activity with the object of earning profit.
(iii) The measure and method of payment are not decisive of the character of compensation.
(iv) Compensation cannot partake the character of profit if no business has been done by the assessee.

Applying these principles, the court concluded that the assessee-company, having been divested of its management, did not carry on business in the sense of earning profit by a process of production. The compensation was for the loss of a capital asset, and the method of quantification did not change its nature.

Conclusion:

The court answered the referred question in the negative, holding that the compensation amount of Rs. 56,028 was not income liable to tax. The compensation was for the loss of a capital asset, and the assessee-company was entitled to its costs, with counsel's fee assessed at Rs. 200.

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