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TMI Blog1961 (3) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... ness. Once it is held that this was not profit at all, it is clear that rules 23 and 24 of the Indian Income-tax Rules could not apply, and there was no question of apportioning the amount, as laid down in rule 24. The whole of the amount received by the assessee was not assessable. Appeal allowed. - C.A. 535 OF 1958 - - - Dated:- 13-3-1961 - Judge(s) : J. L. KAPUR., M. HIDAYATULLAH., J. C. SHAH JUDGMENT The judgment of the court was delivered by HIDAYATULLAH, J.----This appeal which has been filed with a certificate under section 66A(2) granted by the High Court of Assam against its judgment and order dated March 29, 1955, concerns the assessment of the appellants, a Hindu undivided family, for the assessment years 1945-1946 and 1946-1947. The appellants owned a tea garden called the Sewpur Tea Estate in Assam. They had on the estate factories, labour quarters, staff quarters, etc. On February 27, 1942, the military authorities requisitioned all the factory buildings, etc., under rule 79 of the Defence of India Rules. Possession was taken sometime between March 1 and March 8, 1942. The tea garden was, however, left in the possession of the appellants. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x on 40 per cent. of their receipts in both the years after deduction of the sums paid for repairs of buildings and the admissible expenditure. He accepted the estimate of expenditures for the account year 1944, at Rs. 1,05,000, and directed that the admissible expenditure for the succeeding year be determined and deducted before the application of rule 24. It appears that through some inadvertence these two orders, which were not unanimous, were sent to the appellants and the Department. The Commissioner of Income-tax filed an application under section 66(1) for a reference, while the appellants filed an application under section 35 for rectification of the orders, since many other matters in appeal were not considered at all. When these two applications came before the Tribunal, it was realised that the matter had to go to a third member for settling the difference. The President then heard the appeal, and agreed with the Accountant Member. Though he expressed a doubt whether the appellants were entitled to the benefit of rules 23 and 24, he did not given an opinion, because this point was not referred) to him. The Tribunal then referred the case to the High Court of Assam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng carried on, means no more than that profit is to be earned by a process of production. The business of a tea-grower and manufacturer is not merely to grow tea plants but to collect tea leaves and render them fit for sale. During the years in question, the appellants were tending their tea garden to preserve the plants, but this activity cannot be described as a continuation of the business, which had come to an end for the time being. It would have hardly made any difference to the carrying on of business, if instead of the factories and buildings, the garden was requisitioned and occupied, because in that event also, the business would have come to a standstill. The compensation which was paid in the two years was no doubt paid as an equivalent of the likely profits in those years ; but, as pointed out by Lord Buckmaster, in Glenboig Union Fireclay Co. Ltd. v. Commissioners of Inland Revenue and affirmed by Lord Macmillan in Van den Berghs Ltd. v. Clark, " there is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the application of that test. " This proposition is as s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e considered from the angle whether they formed capital or revenue items. The observations which have been made are sometimes appropriate to the nature of the business to which the case related and the quality of the payment in relation to that business. Similarly, the corporation profits tax was a tax intended to be imposed upon the profits of British companies (which included some other corporate bodies) carrying on trade or business including the business of investments. The profits which were taxed under section 52 of the English Finance Act were required to be determined according to the principles laid down in that Act. It is thus obvious that though the English cases may be of some help in an indirect way by focussing one's attention on what is to be regarded as relevant and what rejected, they cannot be regarded in any sense as precedents to follow. Since this court on other occasions used these cases as an aid, we shall refer to them briefly ; but we have found it necessary to sound a warning, because the citation of these authorities has occasionally outrun their immediate utility. We begin with the oft-cited case of Glenboig Union Fireclay Co. Ltd. That was a case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year, when the original compensation was paid. The observations of Rowlatt, J., though made to distinguish the case from one in which the compensation is paid for destruction of business, are instructive. We shall refer to them later. The learned judge held that this was a case of compulsory sale of rum, and that a compulsory sale was also a sale. The receipt was held to be a profit. The decision was affirmed by the Court of Appeal. This case also, so far as its facts go, was very different, and the actual decision has no relevance. Commissioners of Inland Revenue v. Northfleet Coal and Ballast Co. Ltd. was a case like Short Bros.' case. Pounds 3000 in a lump sum were paid to be relieved from a contract, and as the business was a going business, it was held to be profit. In fact, Short Bros.'case was applied. Ensign Shipping Co. Ltd. v. Commissioners of Inland Revenue, a case of excess profits duty, is interesting. During the Coal Strike of 1920, two ships of the company were ready to sail with cargoes of coal. They were detained for 15 and 19 days respectively by orders of Government. In April, 1924, pounds 1,078 were paid as compensation, and were held to be trading receip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one which laid down a principle applicable here. We do not agree. The payment there was made towards loss of profits of a going business, which business was not destroyed. As a source of income, the business was intact, and the business instead of being worked for the whole period, was worked for a period less by a few days and the profit of that period was made up. That may be true if one is going to determine standard profits of a particular period, because what is paid goes to profits in the period but is of no significance in a case like the present, where during the whole of the year no business at all was done nor profits made. This case also does not help to solve the problem. Charles Brown Co. v. Commissioners of Inland Revenue is yet another case of excess profits duty. In that case, the business of the taxpayer was carried on under the control of the Food Controller from 1917 to 1921, and he was compelled to buy and sell at prices fixed by the Controller. By agreement a " mill standard " was fixed, and the taxpayer was allowed to retain profits up to that standard, and if there was a shortfall, it was to be made up by the Controller. This amount which the taxpayer re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the taxpayer to make the third group applicable. We shall next see some cases which involved corporation profits tax. In Gloucester Railway Carriage and Wagon Co. Ltd. v. Commissioners of Income Tax, the company was doing business of selling wagons and of hiring them out. The company then sold all the wagons which it was using for purposes of hiring. The receipt was treated as profit of trade, there being but one business and the wagons being the stock-in-trade of that business. In Green v. Gliksten Son Ltd. stocks of timber were destroyed. Their written down value was pounds 160,824 but the insurance company paid pounds 477,838. The company credited pounds 160,824 in its trading account but not the balance. The House of Lords held that the timber, though burnt, was realised, and that the excess of the sum over the written down book value must be brought into account. These two cases throw no light upon the problem with which we are faced, and any observations in them are so removed from the facts of this case as to be of no assistance. The cases under Schedule D of the Income Tax Act like Burmah Steamship Co. Ltd. v. Commissioners Inland Revenue, a case of late deliv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tially run out, the agreement for distribution was cancelled, and the South India Pictures Ltd. received Rs. 26,000 as commission. The question was whether this sum was on capital or revenue account. Das, C.J., and Venkatarama Aiyar, J., held that it was the latter, while Bhagwati, J., held that it was the former. The learned Chief Justice came to his conclusion on four grounds : (i) that the payment was towards commission which would have been earned ; (ii) that it was not the price of any capital asset sold, surrendered or destroyed ; (iii) that the structure of the business, which was a going business, was not affected ; and (iv) that the payment was merely an adjustment of the relation between the South India Pictures Ltd. and the Jupiter Pictures. The learned Chief Justice thus rested his decision on Short Bros.' and Kelsall Paysons' cases and not upon Van den Berghs' or Barr Crombie's case. Bhagwati, J., who dissented, judged the matter from the angle of business accountancy. He observed that money advanced to produce the cinema pictures, if returned, would have been credited on the capital side as a return of capital, just as expenditure for distribution work was revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In Commissioner of Income-tax v. Vazir Sultan Sons, the assessee held the sole selling agency and distribution rights of a particular brand of cigarette in the Hyderabad State on foot of a 2 per cent. discount on all business done. Subsequently, the area outside Hyderabad State was also included on the same terms. Later still, the area was again reduced to the Hyderabad State. Rs. 2,19,343 were paid by way of compensation " for loss of territory outside Hyderabad. " Bhagwati, J., and Sinha, J. (as he then was), held that the compensation was on capital account, while Kapur, J., held otherwise. The reason given by the majority was that the agency agreement was a capital asset and the payment was in lieu of the loss of a portion of the capital asset. Kapur, J., on the other hand, held that the loss which was replaced was the loss of agency commission and bore its character. The case furnishes a difficult test to apply. If what was adjusted was the relationship between the parties and if there was a going business as, in fact, there was, the case comes within the dicta in the South India Pictures Ltd. case and Jairam Valji's case. The case can only be a decision on the narrow gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore us, and have tried to demonstrate that these cases do no more than stimulate the mind, but none can 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. Before we deal with the facts of this case and attempt to answer the question on which there is so much to guide but nothing to bind, we will refer to two cases of the Judicial Committee, one of which is Commissioner of Income-tax v. Shaw Wallace Co., to which we have referred in another connection. In that case, all the authorities prior to 1935 to which we have referred (and some more) were used in aid of arguments ; but the Judicial Committee, for reasons which are now illustrated by this judgment, declined to comment on them. Shaw Wallace and Co. did many businesses, and included in them was the managing agency of two oil-producing companies. This agency was terminated, and compensation was paid for it. The usual question arose about capital or revenue. The Full Bench of the Calcutta High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompensate the assessee, no doubt the measure was the out-turn of tea which would have been manufactured ; but that has little relevance. The assessee was not compensated for loss or destruction of or injury to a capital asset. The buildings were taken for the time being but the injury was not so much to the fixed capital as to the business as a whole. The entire structure of business was affected to such an extent that no business was left or was done in the two years. This was not a case where the interruption was caused by the act of a contracting party so that the payment could be regarded as an adjustment of a contract by payment. It was a case of compulsory requisition, but the requisition did not involve the buying of tea either as raw material or even as a finished product. If that had been the case, it might have been possible to say that since business was done, though compulsorily, profits had resulted. It was not even a case in which the business continued, and what was paid was to bring up the profits to normal level. The observations of Rowlatt, J., in Newcastle Breweries' case, distinguish a case where business is carried on and one in which business comes to an end. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness and compensation paid for stoppage of a business altogether. This distinction was emphasised in the dissenting opinion in Vazir Sultan's case. Though the payment in question was not made to fill a hole in the capital of the assessee, as in the Glenboig case, nor was it made to fill a hole in the profits of a going business as in the Shamsher Printing Press case, it cannot be treated as partaking the character of profits because business not having been done, no question of profits taxable under section 10 arose. The Privy Council described such a payment as a solatium. It is not necessary to give it a name ; it is sufficient to say that it was not profit of a business. Once it is held that this was not profit at all, it is clear that rules 23 and 24 of the Indian Income-tax Rules could not apply, and there was no question of apportioning the amount, as laid down in rule 24. The whole of the amount received by the assessee was not assessable. It remains to consider whether the payment could be treated as income from property under section 9 of the Income-tax Act. That this was never the case of the Department is clear from the fact that the income was not processed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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