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TMI Blog2002 (6) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... e circumstances of the case, the Tribunal is right in law in holding that the above receipts are revenue in nature and cannot be characterised as a windfall or casual receipt falling under section 10(3) of the Income-tax Act, 1961?" - - - - - Dated:- 24-6-2002 - Judge(s) : V. S. SIRPURKAR., N. V. BALASUBRAMANIAN. JUDGMENT The judgment of the court was delivered by V.S.SIRPURKAR J.-This judgment shall govern two tax cases, they being T.C. Nos. 587 and 588 of 1984. In T.C. No. 587 of 1984, the questions referred are at the instance of the Revenue. They are: "1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding the sum of Rs. 97,94,949 being the amount received under the arbitration award for the work done in connection with the feeder canals for the Farakka Barrage Project during the period from January 1, 1967 to September 30, 1969, was not a revenue receipt but only a capital receipt in the hands of the assessee, Shri J. H. Tarapore, and, therefore, exempt from tax? 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the source being the work executed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ook over the business of the firm. The assessee, who had continued the business after the death of Loganatha Mudaliar, pursued the execution of the unfinished part of the contract and completed the unfinished reaches at points RD 10 to RD 68. The assessee had also commenced and completed the work in respect of reaches RD 97 to RD 103. The assessee pursued the matter of payment at the higher rates as the Government had rejected the claim of the assessee for compensation towards the work done up to September, 1969. At the instance of the assessee, in pursuance of clause 25 of the General Terms and Conditions of the Contract, the matter was referred to arbitration on the issue regarding the payment of higher rates for the work executed between January 1, 1967 and September 30, 1969. A gross amount of Rs. 1,21,87,559.45 was awarded by the arbitrator. The arbitrator, however, decreed that a sum of Rs. 23,92,610 was already paid from time to time to the firm, Tarapore and Co., towards increase in cost of petrol, HSD oil and lubricants was liable for deduction and thus awarded a net sum of Rs. 97,94,949. This amount which was received by the assessee during the relevant accounting yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration in this case is as to whether the said amount of Rs. 97,94,949 could be treated as "capital receipt" and thereby exempted from being taxed. Learned senior standing counsel for the Department, Mr. T.C.A. Ramanujam, in the first place contended that the amount of Rs. 97,94,949 which came to the assessee through the award passed in the arbitration proceedings was nothing but the profits earned by the erstwhile partnership firm Tarapore and Co. He pointed out that this amount was paid for the work done from January 1, 1967 to September 30, 1969, when the contract was being executed by the firm which was then very much in existence. Learned counsel further argues that the sum became payable only after the arbitration which was being pursued by the assessee. According to learned counsel, the assessee had taken over the entire business of the firm under the dissolution deed October 19, 1972 with all its claims and liabilities and he was continuing to execute the same contract right till 1973. He contends that the sum became payable to the assessee and only accrued to him during the accounting year. The resultant argument is that the amount received by the assessee through the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e firm but before April 1, 1976, could be assessed at the hands of the erstwhile individual partner. Learned counsel pointed out that this was an assessment of an "individual" who was a partner of the dissolved firm, who had taken over the whole assets of the firm after its dissolution. According to him, the amount in question was included in those assets and all those assets came to the assessee only by way of capital assets though the said amount materialised after the dissolution. Learned counsel relied on the ratio laid down in CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42 (SC); E. D. Sassoon and Co.. Ltd. v. CIT [1954] 26 ITR 27 (SC) and O.M.S.PL.A. Alagappa Chettiar v. CIT [1966] 59 ITR 440 (Mad). On these rival submissions, it will be for us to decide whether the said accrual could be in the nature of "capital asset" as held by the Tribunal. The Tribunal mainly went on the rationale that admittedly the amount awarded was for the work done by the firm and not by the assessee and as such, the work for which the payment was made was by a firm which was a different entity. It held that as per the settlement deed, the amount payable in respect of the work executed by the erstw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e money-lending business. It was this property which suffered damage due to enemy action and the claims were precisely in respect of the damage to that property. While holding that the amount received by each one of the assessees amounted to capital asset, the court found that at the time when the partition took place, the claim before the War Compensation Tribunal was already pending. Relying on the ruling in AL.VR.PV.VR. Veerappa Chettiar v. CIT [1950] 18 ITR 396, 401 (Mad) the learned judges quoted the following from that judgment: "What is divided at a partition is the entire family estate consisting of the original family estate with all subsequent accretions to that estate in the shape of income or profits, the whole thing constituting one composite property without allocation to capital or profits. On a partition, the sole right of a member of the family is to get an allotment of his share in the assets available after discharging the family debts. For the purpose of ascertaining the assets existing at the date of the partition it is quite immaterial whether the family possessed them by way of capital or by way of subsequent accretions in the shape of profits...What is distr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the fact that unlike in the reported decision, the whole business went into the hands of the assessee and it was only a continuation of the earlier business. In fact, in our opinion, the facts in Mettur Sandalwood Oil Co.'s case [1963] 47 ITR 781 (Mad), and the law laid down therein would more aptly apply to the present set of facts because after the dissolution the whole business came into the hands of the present assessee. In that case, the court had held that in truth there was only a succession of business and, therefore, the original bad debt of business which was written off by the successor fell within section 10(2)(xi) of the Act. In our opinion, the facts in Mettur Sandalwood Oil Co.'s case [1963] 47 ITR 781 (Mad), and the principles enunciated therein would more aptly apply to the present case than those of Ramaswamy Chettiar's case [1963] 48 ITR 771 (Mad). We are, therefore, unable to subscribe to the Tribunal's view that the principle laid down in the aforementioned ruling in Ramaswamy Chettiar's case [1963] 48 ITR 771 (Mad) is applicable to the present case. A paragraph from the decision of C.J. Sheth v. CIT [1962] 46 ITR 1052, 1054 (Mad) was relied upon in Mettur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cisely this notion of the quality of the receipt in the outgoing partners' hands which has been condemned in no uncertain terms by Lord Atkin in the passage we have quoted earlier. The idea that whatever is paid to a partner on a dissolution is only a capital receipt, overlooks the fundamental position of partnership law and practice that a partner is entitled to his share of the profits and also to his share of the capital, and when he gets out of the partnership he is entitled to demand his share in each and if they are paid to him, they partake of the same character as that from out of which the amount in each case is paid. Lord Atkin reminded us that if a partner is entitled to a share of profits, but has not withdrawn the amount, the fact that the amounts are paid to him on dissolution will not make any difference to the revenue character of that payment in his hands." In our opinion, the law laid down in M. Uttama Reddy's case [1984] 148 ITR 580 (Mad), would be another reason why the amount received by way of arbitration award would not amount to a capital receipt and would be termed as a revenue receipt. It must not be forgotten that firstly the whole business continued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reddy's case [1984] 148 ITR 580 (Mad) would clinch the issue. There could be no distinction made for this principle of the distribution of the assets on the basis that the income earned in M. Uttama Reddy's case [1984] 148 ITR 580 (Mad) was professional income and not emanating out of the capital. That was only an additional angle which the learned judges considered in that case to support their view. The basic principle, however, remained the same as having been enshrined in Muthu Karuppan Chettyar's case [1935] 3 ITR 208 (PC); C.J. Sheth's case [1962] 46 ITR 1052 (Mad) and M. Uttama Reddy's case [1984] 148 ITR 580 (Mad). In support of our holding that the amount awarded was business income, there is a decision of the Supreme Court in CIT v. Govinda Choudhury and Sons [1993] 203 ITR 881 where, under an identical situation, the income earned, was held to be business income. We must point out in this behalf that the award was given to compensate the loss of profits and, therefore, it must be remembered that it was not for compensating the loss of capital. We now must take stock of the other novel argument raised by learned senior counsel for the assessee. The contention raised w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bhagat and Co. [1990] 182 ITR 212 (Delhi), the assessee was the old firm. That is not the case here. The assessee here is an individual assessee who has received his share of the profits earned by the erstwhile firm. There can be no dispute that he has earned the income. The only question here is as to what is the nature of that receipt--whether it is a capital receipt or a revenue receipt? Such question is not considered in the aforementioned judgment. In our opinion, therefore, the judgment would be of no help to the assessee. As for the provision for assessment of such an assessee who was an erstwhile partner in a firm, it cannot be gainsaid that an individual assessee, would certainly be liable to be assessed for the income which he earns under the general principles of the Act in Chapter II. In that view, we are of the clear opinion that the Tribunal clearly went wrong in holding that the sum of Rs. 97,94,949 amounted to capital asset and was not liable to be taxed. In that view, we answer the question against the assessee and in favour of the Revenue. T.C. No. 588 of 1984: The facts need not be repeated regarding the formation of the partnership firm between the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same at the hands of the assessee. In the appeal also, the Appellate Assistant Commissioner found that the work done by the assessee was in respect of reaches RD 10 to RD 68 which was the unfinished portion of the work. In addition to this unfinished work which the assessee completed, he also undertook the work of RD 97 to RD 103 and he alone completed it and it was because of his completing the work that the enhancement of rates was given in respect of the said reaches. He also came to the conclusion that the work was carried out in the course of the assessee's business. He also noted that the assessee had not contested the rejection of the similar claim made by the assessee for the earlier assessment year 1972-73. He maintained the order and dismissed the appeal. The Tribunal also did not accept the contention of the assessee and did not view this amount to be a "windfall" or a "casual receipt" falling under section 10(3) of the Act. Hence the questions as mentioned above in paragraph 3 (page 308) of this judgment came to be referred to this. court. It is, therefore, to be seen as to whether the author ities below were right in holding this amount to be taxable income and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been tried to be claimed as an income of a casual and non-recurring nature. We fail to understand such a claim because obviously the amount was calculated from time to time and the payments were calculated at the increased rates. Learned counsel specifically relied on the reported decisions in CIT v. M. Balamuralikrishna [1988] 171 ITR 447 (Mad) and Mehboob Productions P. Ltd. v. CIT [1977] 106 ITR 758 (Bom). It will be interesting to see those cases. In M. Balamuralikrishna's case [1988] 171 ITR 447 (Mad), the famous musician M. Balamuralikrishna was an assessee. The question there was whether the amount gifted by the admirers and fans of this carnatic musician on completion of thirty years' of his service to the cause of music could be held to be the income. The learned judges came to the conclusion that the amount of Rs. 30,000 which was given to him in appreciation of his service to carnatic music could not be viewed as an income as it would be exempt under section 10(3) of the Act. We do not find any similarity on the facts with this decision. Learned senior counsel tried to get support by saying that even in the present case, the amount was paid in appreciation of the wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain extent, restricted the applicability of the discussion to be found in the above case; but, in my opinion, it must remain the starting point of all discussions on the question and it will be found referred to in all subsequent decisions both of the Supreme Court and other High Courts on this aspect of the matter." What was meant by the learned judge was probably that the receipt should first be "income" and then alone its exemptability could be considered. According to the learned judge, the amount received by the assessee in that case could not be income at all. In fact, the learned judge also made a reference to the subsequent decision of the Supreme Court in Raghuvanshi Mills Ltd.'s case [1952] 22 ITR 484, where the Supreme Court has clearly held that the observations in Shaw Wallace and Co.'s case [1932] 2 Comp Cas 276 (PC); AIR 1932 PC 138, must be read with reference to the particular facts of that case. In Raghuvanshi Mills Ltd.'s case [1952] 22 ITR 484 (SC), the aspect of non recurring nature of the receipt was given a complete go-by as the amount received by the assessee from the insurance company on account of the acci dent which had taken place in the mill was hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e question against the Revenue. We have deliberately quoted the judgment in Mehboob Productions P. Ltd.'s case [1977] 106 ITR 758 (Bom) in extenso because even if we choose to accept this judgment and agree with the propositions laid down therein, it will be not helpful to the assessee in the present case. Learned senior counsel argues on unduly broad outlines and suggests that though in Mother India's case, [1977] 106 ITR 758 (Bom), the receipt was out of the business activity yet it was viewed as a windfall and was held exempted from income-tax. In our opinion, such a broad reading of this decision would not be correct because even if we tend to agree with the decision, the quoted portions would suggest that the so-called windfall of our case was not relating to the "factum" of the receipt but to its "quantum". Going back to the facts of our case, the additional amount of Rs. 28,99,484 came to the hands of the assessee only because the assessee claimed the enhanced rates for the works done. It is not as if the amount came to his hands unclaimed. Again, the relation of that amount with the higher rates awarded by the Government would suggest that the assessee, on his representat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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