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TMI Blog1958 (10) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... um of Rs. 2,50,000 received by the respondent on August 2, 1941, is chargeable to income-tax. While, according to the Department, the amount in question is a revenue receipt liable to be included in the chargeable income, according to the respondent it is capital receipt not liable to tax. The Appellate Tribunal held, affirming the decisions of the Income-tax Officer and the Appellate Assistant Commissioner, that the amount in question was a trading receipt, and was income liable to be assessed. On the application of the respondent, it referred the following question for the decision of the High Court : " Whether in the circumstances of the case the sum of Rs. 2,50,000 received by the assessee as damages or compensation for the premature termination of the contract of 9th May, 1940, is income assessable within the meaning of the Indian Income-tax Act." The reference was heard by Sen and Deo, JJ. who held, disagreeing with the Tribunal, that the sum of Rs. 2,50,000 was a capital receipt in the hands of the respondent, and that it was not liable to be taxed. The appellant then filed an application under section 66A(2) of the Act for a certificate to appeal to this court, but th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In 1936, the company went into liquidation, and its assets and liabilities were taken over by another company called the Indian Iron and Steel Company, Ltd. under a scheme of amalgamation dated September 8, 1936. This company continued to purchase limestone and dolomite from the respondent for some time, but later on, finding that the rates were uneconomic owing to increase in the railway freight, it decided to purchase its requirements from other sources, and by notice dated May 29, 1939, informed the respondent accordingly. Thereupon, the respondent filed Suit No. 211 of 1940 in the High Court of Calcutta for specific performance of the contract dated January 5, 1935, as modified on December 21, 1935, and for an injunction restraining the Indian Iron and Steel Company Ltd. from purchasing limestone or dolomite from any person other than the plaintiff, and on March 13, 1940, an injunction, in those terms was actually issued against the company. Thereafter, the company and the respondent entered into an agreement in settlement of all the disputes between them, and the same was embodied in a document dated May 9, 1940. As it is this document that forms the source for the paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the parties came together, and on August 2, 1941, entered into a new agreement and it is with this that we are directly concerned in this appeal. The agreement recites that the company feeling difficulty in working their mines referred to in the contract dated May 9, 1940, made a proposal for termination of the said contract on certain terms, and that was agreed to. The terms of the agreement are (1) that the company should pay "Rs. 2,50,000 to the sellers as solatium besides the monthly instalments of Rs. 4,000", remaining unpaid under the contract dated May 9, 1940 ; (2) that the company should take all the limestone required for its furnaces at Kulti from the respondent for a period of 12 years on terms and conditions set out in an agreement ; (3) that the respondent was to be appointed the loading contractors of the company for loading all iron ore at Monoharpore for a period of 12 years from January 1, 1942, on the terms and conditions specified in a separate agreement. Pursuant to this agreement, the respondent was paid a sum of Rs. 2,50,000 and the two agreements relating to the purchase of limestone and the loading of iron ore at Monoharpore were also executed. The bala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have made had the contract been performed, and that it is therefore a revenue receipt : and a number of authorities were quoted in support of this contention. We shall now refer to the more important of them. In Short Bros. Ltd. v. Commissioners of Inland Revenue, the facts were that the appellant company which was carrying on business as shipbuilders had entered into a contract to build two steamers and, later on, agreed to its cancellation on receipt of a sum of pound 100,000. The question was whether this was a capital or revenue receipt. Rowlatt, J., held that it was merely a receipt in a going concern and was revenue, and that was affirmed by the Court of Appeal, Lord Hanworth, M.R., observing that such a contract as the one before him was liable in the ordinary course of business to be altered or terminated on terms, and the payment of pound 100,000 in settlement of the rights under the contract was an adjustment made between the appellants and their clients in the ordinary course of business. Similar observations are to be found in the judgment of Sargant, L. J., and Lawrence, L. J. It may be noted on the facts of the present case that the agreement of January 5, 1935, was m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stranger to the contract to one of the parties thereto for an assignment of his rights thereunder. In Jesse Robinson Sons v. Commissioners of Inland Revenue, the appellant had entered into two contracts for the sale of yarn. The purchaser cancelled the contract and paid pound 12,500 in settlement of the claims. The contention of the appellant was that this payment was not a trading receipt or profit arising from his trade. In rejecting this contention, Rowlatt, J., observed : " It seems to me that there is no reason why the sum received in that respect for breach of contract is not a sum which is part of the receipts of the business for which that contract was made." Examining the facts of the present case in the light of the above decisions, the question to be considered is whether the contract dated May 9, 1940 was entered into by the respondent in the usual course his business. If it was, then the amount paid for the termination of the contract must be held to be a trading receipt. That the respondent has been carrying on business in the production and supply of limestone is amply established. The record shows that he had been supplying limestone and dolomite to the Beng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the respondent and the compensation paid for the closure of that business would not be a revenue receipt but a capital receipt on account of sterilisation of a capital asset. It is argued by Dr. Radha Binode Pal that the features stated above were not present in the contracts which came up for consideration in the decisions cited for the appellant, and that they are, therefore, distinguishable, and he relied on other authorities as applicable to the facts of this case. These contentions and the authorities cited in support thereof must now be considered. (1) Is the receipt of Rs. 2,50,000 a capital receipt for the reason that it was compensation for settlement of a contract which had a long life before it ? The argument of the respondent is that there is in the income-tax law a well-defined distinction between fixed capital and circulating capital, vide John Smith Son v. Moore, that where there is a contract the performance of which is to be not once and for all but spread over a period of years, it is in the nature of a fixed capital and a payment on account of it must be held to be capital receipt. Reliance is placed in support of this contention on the decisions in Commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice paid upon the purchase and sale of the main asset of a business." In Kelsall's case, the assessee carried on business as commission agents and acquired a number of agencies in the course of that business. One of these agencies which was for a period of three years was cancelled at the end of the second year on payment of pound 1,500 as compensation. The question was whether this was a capital or a revenue receipt. In holding that it was the latter, the Lord President Normand observed that the business of the appellant was to acquire as many agencies as it could, that it was incidental to that agency that it should be modified, altered or discharged and that as the period outstanding was one year, it could not be said that the appellant was parting with an enduring asset of the business. Lord Fleming in agreeing with this conclusion stated that he attached importance to the fact that the agreement had only one year to run and that different considerations might arise if the outstanding period was considerable. "A different case would have arisen for decision", he observed, (at page 622) "if the agreement had been terminated when it had still, say, a period of 10 years to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s all the difference in the character of the receipt. In an agency contract, the actual business consists in the dealings between the principal and his customers, and the work of the agent is only to bring about that business. In other words, what he does is not the business itself but something which is intimately and directly linked up with it. It is therefore possible to view the agency as the apparatus which leads to business rather than as the business itself on the analogy of the agreements in Van Den Berghs Ltd. v. Clark. Considered in this light, the agency right can be held to be of the nature of a capital asset invested in business. But this cannot be said of a contract entered into in the ordinary course of business. Such a contract is part of the business itself, not anything outside it as is the agency, and any receipt on account of such a contract can only be a trading receipt. That there is a distinction between an agency agreement and a contract made in the usual course of business will further be clear, if we have regard to one of the reasons on which the conclusion that compensation paid for the cancellation of agency rights is a capital receipt is sometimes re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply whatever goods are ordered by the purchaser during a certain period, let us say, 10 years, the price received for the goods ordered and delivered will be revenue receipt. Now, if the purchaser under this contract puts an end to the contract after some time, say, at the end of two years and pays compensation for the breach of the contract as regards the remaining period, does the receipt thereof become a capital receipt ? It sounds illogical so to hold. How does it affect the true position, whether the contracting parties agree to carry on business in the sale and purchase of goods for a stated period on terms settled between them, or whether they enter into a succession of contracts for that purpose ? Two decisions have been quoted before us as showing that payments under a contract entered into in the ordinary course of business would be revenue receipts, even though the agreement may be for a period. In Commissioners of Inland Revenue v. Northfleet Coal and Ballast Co. Ltd. cited above, the contract was for the supply of chalk for a period of ten years, and the compensation paid was for the cancellation of the contract for the unexpired period of four years, and it was hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealing with them. The principle was thus stated by Romer, L.J., in Golden Horse Shoe (New) Ltd. v. Thurgood : " The determining factor must be the nature of the trade in which the asset is employed. The land upon which a manufacturer carries on his business is part of his fixed capital. The land with which a dealer in real estate carries on his business is part of his circulating capital. The machinery with which a manufacturer makes the articles that he sells is part of his fixed capital. The machinery that a dealer in machinery buys and sells is part of his circulating capital, as is the coal that a coal merchant buys and sells in the course of his trade. So, too, is the coal that a manufacturer of gas buys and from which he extracts his gas." Therefore, when a question arises whether a payment of compensation for termination of an agency is a capital or a revenue receipt, it would have to be considered whether the agency was in the nature of capital asset in the hands of the assessee, or whether it was only part of his stock-in-trade. Thus, in Barr Crombie Sons Ltd. v. Commissioners of Inland Revenue, the agency was found to be practically the sole business of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, who delivered the leading judgment : " The three agreements which the appellants consented to cancel were not ordinary commercial contracts made in the course of carrying on their trade ; they were not contracts for the disposal of their products, or for the engagement of agents or other employees necessary for the conduct of their business ; nor were they merely agreements as to how their trading profits when earned should be distributed as between the contracting parties. On the contrary the cancelled agreements related to the whole structure of the appellants' profit-making apparatus. They regulated the appellants' activities, defined what they might and what they might not do, and affected the whole conduct of their business." Thus the agreements in question were intended to ensure that the business in margarine was carried on to the best advantage, but did not, in themselves, form part of the business. They were merely collateral to it. For the reasons given in discussing the nature of agency agreements, the agreements between the two companies must be regarded as not pertaining to the trading activities, which yielded profits, and the payment on account of those agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , has been held to be a revenue receipt, because it arises out of the carrying on of the business. Vide Thompson v. Magnesium Elektron Ltd. It might also happen that one of the parties to the contract might have, in the carrying out thereof, incurred expenses of a capital character and as a result of the cancellation of the contract, those expenses would have been thrown away. A payment made on account of these expenses would bear the character of a capital receipt. But apart from these and similar instances it might, in general, be stated that payments made in settlement of rights under a trading contract are trading receipts and are assessable to revenue. But where a person who is carrying on business is prevented from doing so by an external authority in exercise of a paramount power and is awarded compensation therefor whether that receipt is a capital receipt or a revenue receipt will depend upon whether it is compensation for injury inflicted on a capital asset or on a stock-in-trade. The decision in Glenboig Union Fireclay Co. Ltd. v. Commissioners of Inland Revenue applies to this category of cases. There, the assessee was carrying on business in the manufacture of fireclay ..... X X X X Extracts X X X X X X X X Extracts X X X X
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