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TMI Blog1959 (12) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... ttlement of its claim, but soon after these contracts were cancelled by the Political Department of the Government of India. The assessee, in 1945, filed a suit for the recovery of the balance of the debt amounting to ₹ 48,000 and further for the recovery of ₹ 50,000 on account of damages resulting from the cancellation of the liquor contracts. The last claim included interest on the loan advanced. In the meanwhile, a sum of ₹ 48,000 had been realised by the assessee. On April 10, 1948, the suit was compromised and the Rana of Koti agreed to pay a sum of ₹ 40,000 in full settlement of the assessee's claim on account of interest, litigation expenses and compensation for the cancellation of the contracts. The Income-tax Officer, Simla, when scrutinising the account of the assessee firm for the year 1949-50, held that out of ₹ 40,000 received by the assessee, ₹ 28,000 were taxable, being compensation for cancellation of the liquor contracts. On appeal, the Appellate Assistant Commissioner found that only ₹ 15,040 should be treated as compensation and not the balance. The Income-tax Appellate Tribunal, while allowing the appeal pro tanto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to one of its terms the company undertook to pay a sum of ₹ 2,50,000 to the respondent as solatium besides monthly instalments of ₹ 40,000. Pursuant to this agreement, the respondent received a sum of ₹ 2,50,000 as well as the balance due towards the monthly instalments. The question which was raised in that case was whether the sum of ₹ 2,50,000 received by the respondent was capital or revenue in his hands. The Supreme Court held that this was a revenue receipt and was, therefore, chargeable to tax, and could not be held to be a capital receipt. The Supreme Court observed that the sum of ₹ 2,50,000, which was admittedly paid as solatium for cancellation of the contract, represented the profit which the respondent could have made had the contract been performed and for this reason it was a revenue receipt. The following observations of Rowlatt J made in the case of commissioners of Inland Revenue vs Northfleet Coal and Ballast Co. Ltd. ( 1927 ) 12 Tax Cas. 1102 were cited with approval : If the contract had gone forward those sums would have come into profits every year and now that they are represented by a commutation, so far as that is con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ... It is, however, unnecessary to further elaborate this point, as we are concerned in this appeal, not with an agency agreement but with a contract entered into in the ordinary course of business, and, in our judgment, compensation received on account of such a contract must be held to be a revenue receipt. In the other case decided by the Supreme Court, commissioner of Income-tax vs South India Pictures Ltd. ( 1956 ) 29 ITR 910 certain agreements which had been entered into by the assessee who was carrying on the business of distribution of films, were cancelled by the producers who were the other contracting party and in lieu thereof an aggregate sum of ₹ 26,000 was paid to the assessee as compensation towards commission. It was held by majority that the sum paid to the assessee was not compensation for not carrying on its business but was a sum paid in the ordinary course of business, and the amount paid to the assessee was not compensation for the loss of commission which would have been earned had the agreements not been terminated. As the sum received by the assessee was not towards the price of any capital assets sold or surrendered or destroyed but in the cours ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tire business came to an end and therefore it was loss of capital. He also argued that the liquor contracts were not entered into - in the ordinary course of business - and therefore could not be in the nature of revenue receipt. Whether a particular amount falls in the category of a capital receipt or in the of a revenue receipt, depends on whether it was a fixed or a circulating capital. The facts in the case of Commissioner of Income-tax vs Vazir Sultan Sons ( 1959 ) 36 ITR 175 were that the assessee firm had the sole selling agency in respect of certain cigarettes in the Hyderabad State. By a subsequent agreement in 1939, the territory was extended to an area outside the Hyderabad State, but by a resolution of the manufacturing company passed in 1950, the second agency in respect of the territory outside the State was cancelled and the assessee firm received a little over rupees two lakhs by way of compensation for the termination of the agency. The question arose whether the amount was a revenue receipt and was taxable as such or it was a capital receipt. The majority view was that the agency agreements formed a capital asset of the assessee's business worked or explo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f such an agreement would be a capital receipt. It was argued with justification by Mr. Tuli that the sum received by the assessee on account of the termination of the liquor contracts was not in the ordinary course of business. The assessee's business of liquor contract if it had materialised would have been in the nature of an apparatus leading to business rather than as the business itself. If, however, taking of a liquor contract had been in the ordinary course of business of the assessee, then the receipt would have formed a part of the business itself and would have been in the nature of a trading receipt. The emphasis, therefore, is to be laid on the fact whether the contract was entered into in the ordinary course of business and if so then alone the termination of such a contract could be termed a revenue receipt. Whether such a contract has the character of a capital asset in the hands of an assessee would, therefore, depend on the test whether it was in the nature of a capital asset in the hands of the assessee or it was only a part of his stock-in-trade. The assessee in this case was prevented from carrying on the business of liquor contract by an external authority ..... X X X X Extracts X X X X X X X X Extracts X X X X
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