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TMI Blog1978 (7) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... the extent of rupees one lakh. Clause 3 of the said agreement provided that in consideration of such advance, the firm was to give to the assessee a twenty-five per cent. share from the profits of the firm. The agreement was to be deemed to have commenced from the 1st day of January, 1958, and the share in the profits of the assessee was to be calculated from that date. The period of the agreement provided under cl. 6 was five years from 1st January, 1958. By the said clause, it was provided that the accounts should be made up in the first instance up to 30th September, 1958, and thereafter according to the accounting period of the partnership of Natsons, which was the year ending 30th September every year. Clause 7 made provision for what was to be paid to the assessee in case there were no profits of the firm. By the said clause, it was provided that interest would be payable on the sum advanced by her at 6% per annum. It was clarified by a later clause that the agreement was not deemed to constitute a partnership between the two persons constituting Natsons and the assessee or between the firm and the assessee. There was also a provision that if the firm required more capital, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urn for 1960-61 and the assessment was completed on 9th November, 1960. For the next year, i.e., assessment year 1961-62, the assessee filed her returns on 30th September, 1961, and in this return the sum of Rs. 50,000 was shown in Section " D " as " compensation received from Natson Manufacturing Co. for earlier termination of the agreement ". The ITO was of the view that this sum was received in the financial year 1959-60 and was properly assessable in the assessment year 1960-61. As the assessment for the said year had already been completed, the ITO reopened the assessment for the year 1960-61. In the reassessment proceedings after notice under s. 148, it was claimed on behalf of the assessee that the amount paid by the firm was in relinquishment of a capital asset and as such a capital receipt. In support of her contention, the assessee relied on the decision of the Supreme Court in P. H. Divecha v. CIT [1963] 48 ITR 222 (SC). The ITO distinguished the facts of the case of the assessee from the facts in the case before the Supreme Court and held that the compensation paid was for loss of profits and not for loss of capital assets. He also observed that the income from Natson M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Rs. 50,000 made under the later agreement (annexure "B") was being made for the premature cutting off of the source of income. In this view, according to the Tribunal, the receipt of Rs. 50,000 must be held to be for the loss of a capital asset and, hence, a capital receipt which would not constitute taxable income in the hands of the assessee. In the view that it had taken in favour of the assessee on this contention, the Tribunal did not go into the question as to whether the amount, if relevant, would be relevant in the assessment year 1960-61. It is from this decision that the reference has been made under s. 256(1) of the I.T. Act, 1961, at the instance of the Commissioner, and the following question has been referred to us : " Whether, on the facts and in the circumstances of the case, the Sum of Rs. 50,000 received by the assessee as per agreement dated 16-12-1959, with Natson Manufacturing Co. was a capital receipt ? " Mr. Joshi referred us to two Supreme Court decisions, which, in his submission, would establish that the conclusion which found favour with the Tribunal was totally erroneous and liable to be corrected in the reference. The first of these decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lways to be regarded as capital receipts. Mr. Joshi also relied on and referred us to various decisions of English courts : (1) Short Bros. Ltd. v. IRC [1927] 12 TC 955 (CA), (2) IRC v. Northfleet Coal and Ballast Co. Ltd. [1927] 12 TC 1102 (KB), (3) Van den Berghs Ltd. v. Clark [1935] 3 ITR (Eng Cas) 17 (HL) and (4) Bush Beach Gent Ltd. v. Road [1939] 22 TC 519 ; [1940] 8 ITR (Supp) 36 (KB). Most of these decisions have been noted in the two decisions of the Supreme Court and in some other decisions, to which immediate reference may now be made. Before the ITO and the AAC, it had been contended on behalf of the assessee that the facts were identical with the facts in P. H. Divecha's case [1963] 48 ITR 222(SC). Before us Mr.Joshi took us through this decision of the Supreme Court and submitted that the facts concerned therein were clearly distinguishable and there were special features noticed in P. H. Divecha's case [1963] 48 ITR 222 (SC) as a result of which it was held that the solatium paid to the three partners of Precious Electric Co. was not their income or paid as loss of profits. To a large extent Mr. Joshi's comment on that decision, viz., that the said decision will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly a capital receipt. " It may be noted that the Division Bench had considered the Supreme Court decisions in Jairam Valji's case [1959] 35 ITR 148, Godrej Co. v. CIT [1959] 37 ITR 381, P. H. Divecha's case [1963] 48 ITR 222 (SC) as also a later decision of the Supreme Court in Kettlewell Bullen Co. Ltd. v. CIT [1964] 53 ITR 261. It also extracted a passage from the speech of Lord Macmillan in Van Den Berghs Ltd. v. Clark [1935] 3 ITR (Eng Cas) 17 (HL), on which Mr. Joshi had relied before us. In its view, the agreement between the assessee and the Delhi company which had formed the genesis of a fundamental, new and separate organisation, had been cancelled and moneys received for such cancellation were to be treated as capital receipts and did not bear the impress of income. Mr. Dastur then referred us to an unreported decision of a Division Bench of this High Court, to which the learned Chief justice was a party, viz., Income-tax Reference No. 37 of 1965 (CIT v. Khushalbhai Patel Sons -decided on 19th July, 1974) [Since reported in [1979] 118 ITR 656 (Bom) infra]. The Division Bench was considering three finance agreements--two of which were the original agreements and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and it was held that the arrangement as evidenced by the three agreements could not be regarded as being one of the routine trade contracts entered into by the assessee- firm with the company in the ordinary course of its business. The arrangement was held to be one which created a steady source of income for the assessee, for the loss of which, upon the termination of the arrangement, the amount of Rs. 3 lakhs became payable to the assessee. In the result, the view taken by the Tribunal was approved and the question answered in favour of the assessee. The various authorities which were cited at the bar before us on behalf of the revenue have been fully and exhaustively discussed in the above decision and, in our opinion, it is unnecessary to enter into a similar exhaustive discussion in our case. Mr. Dastur on behalf of the assessee has emphasised that the assessee was a lady and in the year under consideration she had no income from business and had only income from other sources. There is no finding that at any time previous to this she had entered into similar finance agreements. Although the finance agreement with which we are concerned (annex. A to the statement of case) do ..... X X X X Extracts X X X X X X X X Extracts X X X X
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