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TMI Blog1960 (3) TMI 51X X X X Extracts X X X X X X X X Extracts X X X X ..... or the use of the military personnel; possession was taken by the Government three days later. The assessee who normally would have commenced working of the mill had not the requisition order intervened removed the machinery to katpadi where another building was put up and the factory established. The assessee began to work the new mill from the last week of October, 1942. The building and the rest of the property at Arkonam were duly de-requisitioned by the authorities and possession was given back towards and end of January, 1945. The assessee preferred a claim against the Government for a sum of ₹ 1,65,275-5-6 as compensation for the use of the property by the Government. There being a dispute as to the amount of compensation payable, the matter was referred for adjudication by an arbitrator under section 19(1)(b) of the Defence of India Act, 1939. The arbitrator (the District Judge of North Arcot) made an award, holding that the assessee should be paid a sum of ₹ 63,249-12-0 as compensation. There was an appeal to this court from the decision of the arbitrator but without success. Even before the arbitrator, the Government pleaded that the compensation awarded wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asis of loss of income and the insurance premium. It is not, however, the nomenclature or the description by the assessee that will decide the nature and quality of the compensation amount. The assessee became entitled to the compensation amount by virtue of the statute and one has to look into the provisions of the statute to ascertain for what purposes or injuries the compensation was payable. The requisition was made under rule 75A of the Defence of India Rules. Section 19 of the Defence of India Act provides for compensation in case where properties were taken over by the Government (acquired or requisitioned) under the Act or the rules made thereunder. The relevant portions of that section runs : 19. (1) Where by or under any rule made under this Act any action is taken of the nature described in sub-section (2) of section 299 of the Government of India Act, 1935, there shall be paid compensation the amount of which shall bedetermined in the manner, and in accordance with the principles, hereinafter set out that is to say -.... (b) Where no such agreement can be reached the Central Government shall appoint as arbitrator a person qualified under subsection (3) of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ued on behalf of the assessee that the receipt was a capital one. According to the learned counsel for the assessee, there was an injury to the profit earning asset of the assessee by reason of his being deprived of the opportunity of starting his business at Arkonam and to that extent his capital asset should be deemed to have been sterilised. In Glenboig Union Fireclay Co. Ltd. vs Commissioners of Inland Revenue ( 1928 ) 12 Tax Cas. 427 the assessee company who were manufacturers of fireclay goods, had a leasehold right over certain fireclay fields. A railway line ran over a part of the property. The railway company were however, only the owners of the land (surface) but not of the minerals beneath which vested in the assessee. The railway company in the exercise of its statutory powers, required that the part of the fireclay area which was under the railway line should be left unworked and for that purpose the assessee was paid a compensation. A question arose whether the compensation amount received by the assessee would be liable to tax. It was held that the compensation received was a capital receipt being one paid for the sterilisation of the fireclay deposits; the fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the railway line. That portion of the fireclay was no longer available to the owner, and, though in form it was a prevention, in substance it deprived the user of that part of his asset for all time. In Commissioner of Income-tax vs Vazir Sultan and Sons ( 1959 ) 36 ITR 175 the assessee was appointed originally as the sole agent for Hyderabad State in regard to cigarettes manufactured by a company, and allowed a discount of two per cent., on the gross selling price. The area of the assessee's activity was subsequently enlarged so that they were able to earn the discount of two per cent not merely on the sale in Hyderabad State, but outside as well. Later however the assessee company reverted to the original arrangement, confining the agency to the Hyderabad State alone and the assessee was paid a particular sum by way of compensation for the loss of agency in respect of territory outside the State. A question arose whether that sum was revenue receipt assessable to income-tax, or a capital receipt not so assessable. It was held that the agency agreement, with respect to the territory outside the Hyderabad State, was as much a part of the assessee's profit earning apparat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deterioration or injury to the managing agency by reason of the release of its rights to get higher remuneration and was, therefore, a capital profit. In that case, as a result of the revised contract there was a distinct deterioration in the character and quality of the managing agency viewed as a profit making apparatus, and that deterioration being of an enduring kind was held only to be capital receipt. In both the cases cited above there was a deprivation of the profit earning apparatus, though such deprivation related only a part thereof, and it was held that compensation for such deprivation could only be a capital receipt, and not a revenue receipt. That is to say there was there was a destruction of a part of an agency contract which was the capital asset of the assessee; the compensation received for the deprivation of that asset would not be a trading receipt, as it was not the trade that brought the money but the annihilation of it. But as pointed out before there may be cases where the termination of an agency contract could be considered only as an injury to the stock-in-trade. Commissioner of Income-tax vs Jairam Valji ( 1959 ) 35 ITR 148 affords an example of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterfered with by reason of the requisitioned. The mere fact that an intended business premises were requisitioned by the Government cannot amount to a sterilisation of a part of the business, unless it be that but for the premises no business could be conducted. In the present case, the order of the Government did not prohibit the assessee from either doing business at Arkonam or in any other place. It only took over the building. The assessee shifted the business at his own choice to Katpadi. The fact that the did not return to Arkonam to establish the factory after the Government vacated the premises would indicate that the conduct of the business at Arkonam was not the essence of the assessee's business activity. Therefore, it cannot be held that the structure of the business was as such affected. The mere occupation of a building belonging to the assessee's business without more cannot amount to an injury to or sterilisation of any profit earning apparatus. There is great force in the contention of the learned counsel for the Department, that a temporary user of the premises by the Government, or an interruption of the user thereof could not be held to be an injury of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of payment was one which fell within the ambit of their ordinary trading account. In Burmah Steam Ship Co. Ltd. vs Commissioners of Inland Revenue ( 1930 ) 16 Tax Cas. 67 , the assessee had placed his motor vessel for repair in the hands of repairers with a stipulation that repairs should be completed within a particular time. There was a delay in the delivering of the motor vessel after repair, and the assessee obtained a compensation for the delay. Lord President Clyde observed at pages 72 and 73 : In the present case, there can be no doubt that, when the appellant entered into the contract with the repairers, the consequences of a failure by the latter to deliver punctually, which were in the contemplation of both parties at the time, were that the appellant would be deprived of the opportunity of putting the vessel to immediate profitable use in his business. It was in respect of this deprivation that the damages were recovered. The contemplated 'hole' in the appellant's profits was unfortunately made, and in my opinion the damages recovered must go, as a matter of sound commercial accounting, to fill that 'hole', and therefore constitute a proper item ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her a receipt of compensation for the termination of the contract was a trading receipt were whether the agreements which were ultimately terminated were entered into in the course of carrying on of the business and whether the termination of those agreements would be said to have been brought about in the ordinary course of its business. Applying these tests to the present case, can it be held that there was any trade receipt ? No business of the assessee was taken over or interrupted by the Government. The Appellate Tribunal held that there was a hole in the trading profits by reason of the acquisition, and the compensation which went in to fill that hole would partake of its character. As we pointed out already, there was no interruption of the business of the assessee. The assessee had only one set of machinery, and that began functioning at Katpadi and earning profits. The capital asset existed in tact and the assessee only lost the opportunity of earning profits at Arkonam. It may be that the receipts could be correlated to the ownership of the business which had to be transferred to Katpadi, but it cannot, for that reason, be said to arise out of the conduct of the business. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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