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TMI Blog1981 (1) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment proceedings the ITO noticed that the assessee-company had received a sum of Rs. 91,062 during the previous year from the First Land Acquisition Collector, Calcutta, being the compensation for the occupation of its land at Chowringhee Road. He found that the compensation was related to the period from 27th of May, 1947, to 4th of January, 1954. It was submitted before him, on behalf of the assessee, that the amount of compensation was not liable to tax being a receipt of a casual nature and not a recurring income. This was rejected by the ITO on the ground that the compensation was received by the assessee for the user of its land. Further, it was observed that though the amount was relatable to the period anterior to the relevant accounting year, the same was liable for inclusion in the total income of the instant year having been received during the relevant previous year. The sum of Rs. 91,062 was accordingly included in the income of the assessee. Dealing with this aspect the ITO observed, inter alia, as follows: " The assessee is an investment company deriving income mostly from house property. During the year under review the assessee-company received a sum of Rs. 91 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entions. It was further contended on behalf of the assessee that the premises No. 46A was appurtenant to premises No. 46B, which is known as King's Court and relying upon certain decisions of the Supreme Court, it was urged that tax was payable under the head " Property " in respect of its bona fide annual value with reference to the buildings and land appurtenant thereto of which the assessee was the owner and as such the compensation amount received during the previous year was referable to the earlier years relating to which the sum was paid. Finding that the building was not requisitioned but the land and the building had different numbers, the AAC rejected the assessee's contention. He also rejected the assessee's contention that the compensation amount was of a casual and non-recurring nature. He upheld the order of the ITO for assessing the amount under the residuary head "Other sources" as no income receivable on account of the requisitioned land was included in the return of income filed by the assessee or assessed as such in the past years and as the income receivable or received from the vacant land was not assessable under any specified head. We need not deal with other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest @ 3% p.a. from 1st June, 1947, to the date of derequisition, i.e., 4th January, 1954, and thereafter at the same interest rate from 5th January, 1954, till 31st December, 1956, i.e., the date of last offer less payments already made. October 31, 1961 The first Land Acquisition Collector informed the appellant-company that a sum of Rs. 91,062.90 was lying in deposit with the arbitrator and requested the appellant-company to withdraw the same. November 15, 1961. The appellant-compary withdrew the same amount." Several contentions were urged before the Tribunal. The Tribunal has noted the contentions and we will refer to some of those contentions which were urged before us. After hearing both the sides on the issues raised with reference to the facts and circumstances of the case, the Tribunal found that the assessee-company had purchased the land from M/s. D. N. Mallick Sons Ltd., with the knowledge that the land was under requisition and being occupied by the Defence Dept. The Tribunal was of the view that the Government could not be termed as a tenant in respect of the property requisitioned by it from a subject, but, for all purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the present source of income, in dispute, was concerned. The Tribunal further noted that though opportunities had been given, the assessee could not produce before the Tribunal any evidence as to how the aforesaid balance of the decretal amount had been accounted for in the assessee's books of account. The Tribunal noted that the Sam of Rs. 91,062 was entered in the books of account relevant to the assessment year 1962-63, and an extract from the journal for the year 1953-54, to show that the sum of Rs. 1,09,307 was adjusted against income-tax on 6th June, 1953, after the amount was deposited by the First Land Acquisition Collector with the Reserve Bank of India, on account of income-tax payable by the assessee-company. It may be worthwhile in this connection to refer to the relevant entries of the journal which read as follows : " The Nawn Estates Pvt. Ltd, Extract from the Journal for the year 1953-54 (Financial) True copy of the Journal entry made on June 6, 1953. Folio 57. June 6 Dr. Cr. Income-tax 1,23,261.10 To Debtors for K.C. Rent (King's Court) 1,09,307.10 " " M. R. Rent (Mercantile Buildings) 13,954 Being adjustment of amounts depo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sum of Rs. 15,094 as profits and gains derived from business assessable to tax in the assessment year 1962-63 ?" As the assessee was not satisfied with the questions referred, the assessee made an application to this court under s. 256(2) of the I.T. Act, 1961. The Tribunal was required by this court to refer the following two other questions : " 1. Whether the Tribunal's finding that the assessee had adopted cash basis as its method of accounting with regard to the compensation of Rs. 91,062 is based on no evidence and/or is perverse ? 2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 91,062 received by the assessee, as compensation in respect of vacant land situated at 46A, Chowringhee Road, Calcutta, requisitioned on October 18, 1944, under rule 75A, of the Defence of India Rules, 1939, can be brought to tax in the assessment year 1962-63, under any of the provisions of the Income-tax Act, 1961 ?" At the hearing before us, learned advocate for the , assessee did not press for an answer to question No. 2, mentioned in the reference application, under s. 256(1) of the I.T. Act, 1961. Therefore, we have to determine three questions, viz. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s taken of the nature prescribed in sub-s. (2) of s. 299 of the Govt. of India Act, 1935, there should be paid compensation, the amount of which should be determined in the manner and in accordance with the principles set out thereunder, and cl. (b) of that section provided that where no agreement between the parties could be reached as to what amount of compensation the Central Government should pay, the Central Govt. should appoint as arbitrator a person qualified under sub-s. (3) of s. 220 of the Govt. of India Act, 1935, for appointment as judge of a High Court. Clause (e) of the said section provided that the arbitrator in making his award should have regard to the provisions of sub-s. (1) of the section of the Land Acquisition Act, being Act I of 1894, so far as the same could be made applicable and whether the acquisition was of a permanent or temporary character and thereafter an appeal would lie to the High Court against an award of an arbitrator except in cases where the amount thereof did not exceed the amount prescribed by rules made by the Central Govt. We need not detain ourselves with the other provisions of the Act. Our attention was also drawn to s. 299 of sub-s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking adjustments for expenditure incurred by the assessee for pursuing the claim for compensation, the balance of Rs. 1,05,074 was brought to tax under s. 10 of the Indian I.T. Act, 1922. The Appellate Tribunal found that the business had not come to a standstill altogether, that the assessee had continued to carry on the business, though on a reduced scale after the requisition, and that, if any injury was caused to the respondent's business, it was to the volume of the business and not to the profit-making apparatus. The Tribunal accordingly held that a sum of Rs. 1,05,074 was a revenue receipt. On a reference, the High Court held that the amount received by the assessee was in the nature of a capital receipt. The Supreme Court, in appeal from the decision of the High Court, reversed the decision and held that the sum of Rs. 1,05,074 received by the assessee as compensation for loss of earnings was a revenue receipt in the hands of the assessee. This was not a case where the assessee was permanently deprived of a source of income. Dealing with the finding of the Tribunal, the Supreme Court observed at page 34 of the report as follows: " In the light of the above findings of fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived the owner permanently of his land; and requisition deprived him only of his right to present possession. So, in the case of acquisition the right goes completely. In the case Of requisition the right is taken over temporarily. In the case of Charanjit Lal Chowdhury v. Union of India, AIR 1951 SC 41, the Supreme Court bad observed in the context of a particular Act, namely, Sholapur Spinning and Weaving Company (Emergency Provisions) Act, 1950, that the Act did not infringe the fundamental rights conferred on a shareholder of the Sholapur Spinning and Weaving Company by art. 19(1)(f) and art. 31 of the Constitution of India and the Act was not unconstitutional or void on that ground. The right to dispose of the share and the right to receive dividend, if any, or to participate in the surplus in the case of winding up that had been left to the shareholder could not be said to be illusory or practically valueless, because the right to control the management by directors elected by him, the right to pass resolutions giving directions to the directors and the right to present a winding-up petition had, for the time being, been suspended. The rights still possessed by the shareholde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in [1964] 53 ITR 151. The Rajasthan High Court in the case of CIT v. Rao Raja Kalyansingh [1974] 97 ITR 690, had observed that where compensation was received for the sterilisation or destruction of a revenue yielding asset, the character of such receipt could not be anything but capital. There the assessee had the paramount right to levy excise duty within the limits of his jagir. This right was taken over by the State of Jaipur and the State Govt. agreed to pay him what was called a compensation. Subsequently, in 1952, when Jaipur merged in the State of Rajasthan, the Union of India decided to cancel the manufacture and distribution of liquor and other excisable articles and terminated the arrangement to pay the compensation. It was, however, clarified that the compensation payable in respect of the period prior to the issue of the termination order would continue to be paid up to the date preceding the resumption of the jagir. Accordingly, the assessee received a sum of Rs. 62,204 for the period from July 18, 1952, to February 16, 1954. On the question whether this sum was assessable it was held that the sum of Rs. 62,204 was paid to the assessee in compensation of the des ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid ratio of the said decisions should not be applied to these cases. In our opinion, so far as deciding the nature of the receipt, we have to bear in mind these principles enunciated by the decisions as to the difference between requisition and acquisition. We must, however, deal with the main decisions referred to by learned advocate for the assessee. Reliance was placed on the decision in the case of Simpson v. Executors of Bonner Maurice as Executor of Edward Kay [1929] 14 TC 580. There the court was dealing with the case where a naturalised British subject, domiciled and ordinarily resident in the United Kingdom had at various dates deposited securities, stocks and shares in banks in Germany with instructions under which the interest and dividends were collected and credited to his accounts at certain of the said banks. He died during the War. As a result of the Peace Treaty, claims on the part of his representatives were admitted in respect of amounts representing partly capital of securities realised by sale or redemption, partly interest and dividends and interest thereon, partly compensation under the Treaty computed on the basis of interest on certain amounts. For the q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if any question has been raised or would emerge as regards application of the average required by Case V or otherwise. In the result the appeal is dismissed with costs. This decision went up in appeal before the Court of Appeal and Lord Hanworth M. R. observed as follows at pages 601-602 of the report: " I want to add now one more word in reference to the sum which has been paid by way of compensation under article 297. It is said in reference to that ' hat, at least, arose at the time when it was paid under the order of the Mixed Arbitral Tribunal. It was a sum which was calculated as interest' I think it was five per cent.- 'and it is interest, and, therefore, it is within the words of the Schedule, which undoubtedly impose a tax upon interest which arises or accrues to a person liable to tax'. But is it interest ? Is that its quality, or is it compensation estimated and measured in terms of interest ? It appears to me quite clear that, apart from article 297, no such sum could have been recovered. It could not have been recovered, according to English law as interest. In the case of London, Chatham and Dover Railway v. South Eastern Railway Company which was before the Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... award and no previous history or anterior character could be attached to it. It was exactly like damages for the detention of a chattel and unless it could be said that damages for the detention of a chattel could be called rent or hire for the chattel during the period of detention this compensation could be called interest. Learned advocate for the assessee tried to apply the analogy of the ratio of the said observations to the facts of this case. In this case, however, the compensation that was paid was for the injury that was done by a temporary restriction on the possession and enjoyment by the owner of the land in question, which was a trading asset in the hands of the assessee, being the utility in land and buildings. If that is the position, then (a payment for) the injury done to the trading assets in the case of the utility and not a compensation for the deprivation of a right or source of asset, would be a revenue receipt. Reliance was also placed in this connection on certain observations of this court in the case of Calcutta Electric Supply Corporation Ltd. v. CIT [1951] 19 ITR 406. There, the assessees were an Electric Supply Co. During the war the government had req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mining whether the payment amounted to a return for the loss of a capital asset or was income, profits or gains liable to incometax, one must have regard to the nature and quality of the payment. If the payment was not really to compensate for the loss of profits of the business, the receipt in the hands of the assessee could not properly be described as income, profits or gains, as commonly understood. The Supreme Court noted that to constitute income, profits or gains, there must be the source from which particularly the receipt had arisen and a connection must exist between the quality of the receipt and the source. If the payment was by another person it must be found out why that payment had been made. Applying the ratio of the said observation it could be said that in this case the assessee being the owner of the land in question, viz., the premises No. 46B, Chowringhee Road, Calcutta, was being temporarily deprived of the right to use and occupy the premises in question without affecting his title to the premises in question. Now, if that is the position and the right of possession being one of the incidences of his ownership to the land in respect of which the assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fireclay fields. It was held by the House of Lords that the amount received for compensation in respect of the fireclay left unworked was not a profit earned in the course of the assessee-company's trade but was a capital receipt, being a payment made for the sterilisation of a capital asset. It was held by the majority in court of seven judges of the Court of Sessions that the amount received as damages for the wrong interdict was not a trading profit of the assessee-company but was merely the equivalent of expenditure incurred in protecting a capital asset which subsequently turned out to be unproductive owing to the exercise by the Railway company of its statutory powers. We may incidentally point out that we are not concerned with the second aspect. No decision, however, was given by the House of Lords on the damages point, an arrangement being reached between the parties by which a portion of the sum paid for damages was treated as trading receipt of the assessee-company. "We are, however, not concerned with this aspect of the matter. In support of the conclusion reached, the Lord President Clyde in the Court of Appeal observed at page 448 of the report that, in short, the pos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rea all subsequent profit by working would have been impossible but it would be impossible to contend that the compensation would be other than on the right of user or restriction of possession of one of the trading assets of the assessee-company. The compensation paid on that account cannot be treated on the same ground as a damage done to a capital asset. Reliance was also placed by learned advocate for the assessee on another decision of the House of Lords in the case of Ensign Shipping Co. Ltd. v. IRC [1928] 12 TC 1169. There, during a coal strike in 1920, two ships belonging to the assessee-company which were ready to proceed to sea with cargoes of coal were detained in port by order of the Government for periods of 15 and 19 days. The company immediately lodged a claim against the Government for compensation for loss of use of the ships and for wages, etc., and after prolonged negotiations they received in April, 1924, a sum of pounds 1,078 in settlement. This sum was treated in the company's accounts as a capital receipt, but was assessed to Excess Profits Duty as a trading receipt of the year ended 31st December, 1920. It was held that the sum in question had been properly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad no relation to the quality of the payment but in the case before his Lordship, his Lordship had to consider what was a case of a temporary interference. There was an appeal before the Court of Appeal and Lord Hanworth M.R. as well as Sargant L.J. agreed with the observations with the view of Rowlatt J. Reliance was placed on behalf of the assessee on another decision in the case of IRC v. Newcastle Breweries Ltd. [1927] 12 TC 927. There the respondent-company carried on the business of brewers and wine and spirit merchants, and in the course of this business kept large stocks of rum which had to be reduced and blended before sale. The blended product was sold either wholesale or retail in relatively small quantities. In January, 1918, the Admiralty, acting under the Defence of the Realm Regulations, took over about one-third of the stocks in question then owned by the respondent-company. Payment of pounds 10,315 was offered by the Admiralty, based on the actual cost of the rum and allowing a profit of about 1 sh. per proof gallon, and this amount was accepted on account by the respondent-company, without prejudice to its claim for larger amount. In regard to this claim litigat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the said case it would be instructive to remind ourselves of the observations made by Hidayatullah J., as the learned Chief justice then was, at page 406 of the report where his Lordship observed that after setting out the different cases before their Lordships that these cases did no more than stimulate the mind, but none could serve as a precedent without advertence to its facts. The nature of the business, or the nature of the outlay or the nature of the receipt in each case was the decisive factor, or there was a combination of these factors. Each is thus an authority in the setting of its own facts. This is a salutary advice which we find is very instructive to bear in mind specially in view of a large number of authorities cited before us. There what had happened was that the assessee, which owned a tea estate consisting of tea gardens, factories and other buildings, carried on the business of growing and manufacturing tea. The factory and other buildings on the estate were requisitioned for defence purposes by the military authorities. Though the assessee continued to be in possession of the tea gardens and tended them to preserve the plants, the manufacture of tea wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee. We are in this case not confined within the narrow question in view of the question that we have indicated. We are concerned with the question whether it is assessable under any head under the Act. Our attention was also drawn to the observations of the Supreme Court in the case of CIT v. Rai Bahadur Jairam Valji [1959] 35 ITR 148, where the Supreme Court noted that there is a difference between a payment made as a compensation for the termination of an agency contract and an amount paid as solatium for the cancellation of a contract entered into by the businessman in the ordinary course of business. Reliance was placed on the observations of Venkatarama Aiyar J. at page 166 of the report. Though this distinction has to be borne in mind the real difficulty arises in appreciating what is the effect of the right in respect of which certain payment is made. Learned advocate for the assessee strongly relied on the decision of the Supreme Court in the case of S. R. Y. Sivaram Prasad Bahadur v. CIT [1971] 82 ITR 527. There interim payments under s. 50(2) of the Madras Estates (Abolition and Conversion into Ryotwari) Act, 1948 (as applicable to Andhra Pradesh) received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preventing the assessee from making use of his capital asset. It was held that the amount of compensation received by the assessee was really a profit derived from the land and was, therefore, taxable. Similarly, reliance was placed on the case of Gobardhandas Jagannath v. CIT [1955] 27 ITR 225 (Pat), where the assessee had received a sum of Rs. 8,272 from the Central Public Works Dept. as compensation for the use and occupation of its land which was requisitioned by the Govt. of India. The assessee did not produce any material to show the nature of the payment or the period to which it related. No damage was inflicted on the land and the land was returned to the assessee after the period of requisition in the same condition as it was before. The assessee claimed that the amount was a capital receipt and was not liable to be taxed as income. It was held that as the assessee was only prevented for the period in question from enjoying the usufruct of the land and was not permanently deprived of the use of the land, the amount of Rs. 8,262 represented merely the loss of income suffered by the assessee for the period during which the Government was in occupation of the land and was l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 represented both interest as well as compensation, the entirety could not be treated as revenue receipt for the year in question, it was pointed that this point was not urged before the Tribunal and it was also urged that under s. 23(1) and s. 28 read with s. 34 of the Land Acquisition Act, 1894, the assessee was entitled to be paid interest for the period during which it has been paid and from another point of view in any event the interest that was paid was paid for the loss of user of the money. In order to determine the nature of receipt, it is important to bear in mind the nature of the right of deprivation for which the amount is paid. On this aspect reliance was placed on the observations of the Madras High Court in the case of Ramanathan Chettiar v. CIT[1963] 50 ITR 43, at pages 51 and 54. This decision was affirmed by the Supreme Court in its decision in the case of Ramanathan Chettiar v. CIT [1967] 63 ITR 458. In repelling the argument of the assessee that the payment was an ex gratia payment, learned advocate for the Revenue relied on the observations of the Madras High Court, in the case of CIT v. T. N. K. Govindarajulu Chetty [1964] 52 ITR 867, and relied on the obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al's finding. It is true that there is an adjustment. But adjustment in an appropriate case can be treated as receipt. In this connection, it may be instructive to refer to the observations in the case of IRC v. Paterson [1924] 9 TC 163, where at page 182 of the report, Scrutton L.J. observed as follows: " The question is whether, when a debtor buys property with borrowed money and charges the proceeds of the property in favour of creditors to repay the debt, those proceeds are income of the debtor on which he must pay super-tax; and I may ask, if they are not income of the debtor whose income are they ? Here the lady wanted to help her husband by buying some shares from him. She borrowed from the insurance company some money to buy the shares. She borrowed by giving them the security of, amongst other things, the dividends on the shares, out of which, in the language of clause 6 of the Scheme, 'So long as any money remains owing on the securities of these presents the dividends on all the said shares shall be received by the estate trustees and applied by them in paying the debt.' The result in any year was that debts of the debtor were discharged to the extent of the dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n reference under s. 256(2) of the I.T. Act, 1961, must be answered in the negative and in favour of the Revenue. Before we conclude we must observe that it was urged on behalf of the Revenue that if the answer to question No. (1) was in the negative and in favour of the Revenue, then automatically question No. (2) must be answered in favour of the Revenue, because, according to the learned advocate for the Revenue, whether the same was assessable at all was not the question, but whether it was assessable in a particular year. We have, however, considered this question from a broader point of view, as we have indicated before, and we have come to the conclusion that we have indicated before. In that view of the matter, question No. (1), under s. 256(1) reference, is answered in the affirmative and in favour of the Revenue. Question No. (1), under s. 256(2) reference, is answered in the negative and in favour of the Revenue and question No. (2), under s. 256(2) reference, is answered in the affirmative and in favour of the Revenue. In the facts and circumstances of the case, parties will pay and bear their own costs. SUDHINDRA MOHAN GUHA J.-I agree. - - TaxTMI - TMITa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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