Commissioner of Income-Tax Poona v. M/S. Manna Ramji & Co.

Khanna, J, This appeal on certificate granted by the Bom-bay High Court is dir!!"ted against the judgment of that court whereby it answered th~ question referred to it under section 66 ( 1) of the Indian Income Tax Act, 1922 (hereinafter referred to as the Act) in favour of the respondent assessee.

The reference arose out of the assessment made upon the res-pondent firm for the assessment year 1951-52, the account year for which is the Samvat year 2006 (that is, October 22, 1949 to November 9, 1950). The respondent was carrying on business for several years in the past in timber unaer the name and style of Manna Ramji & Co. in Bhavani Peth Poona City. The busi-ness premises consisted of an office and six sheds used for storing wood and timber of all kinds. The respondent firm constructed the six sheds for the purpose of its business after taking the &ite thereof on a long lease. On May 19, 1944 the Collector of Poona requisitioned the premises of the respondent under the Defence of India Act as froln May 19, 1944 for the purpose of using them as store houses for food grains. Initially the requisi-tion order covered the six sheds as well as the office of the respon-dent, but at the request of the respondent firm the Collector agreed to allow it to remain in possession of the office premises. In October, 1944 the respondent made a claim for Rs. 1,85,200 on account of compensation for the requisitioned premises. In June, 1946 the Collector offered referred to pay compensation at the rate of Rs. 310 per month. The respondent feeling dissatisfied with the offer of the Collector, moved the Government for a refe-rence to arbitration under the provisions of the Defence of India Act. The Civil Judge, Senior Division, Poona was thereafter appointned arbitrator on November 10, 194 7. The_ Government appointed its Consulting Surveyor as an assessor to help the arbi-trator in determining the amount of compensation. A's ag_ainst that the respondent appointed an architect aS' its assessor. There was considerable difference in the estimaks of the two assessors regarding the amount of compensation payable to the respondent. The Civil Judge, who had been appointed arbitrator, gave his award on April 15, 1948. The -0perative part of the award of the arbitrator was as under :

"The Government do pay compensation to the claimants as follows :

( 1 ) Rs. 210 / - per month for rent of the premises

from the 15th May. 1944 till the date of restoring the premises to the claimants.

(2) A lump sum of Rs. 1,25,500/-for loss .of earn-

ings.

(3) A sum of Rs. 100/- in .;espect of the wooden

frames.

(4) Interest at 3% on Rs. 1,25,500/- from the 15th

November, 1944 till the date of actual payment." The Government was also ordered to pay Rs. 2,000/- as costs to the respondent. The Government filed an appeal against the award of the arbitrator, but the same was dismissed by the High Court on August 7, 1949. The respondent was thereafter paid the amount of Rs. 1,70,330-10-0 in the Sa1:uat.year 2006. The. above amount included Rs. 1,25,500 on account of lump sum for loss of earnings and Rs. 2,000 on account of costs of arbitration.

In computing the respondent's total income the Income Tax Officer brought to tax the two sums of Rs. 22,180/- on account of rent receipts and Rs. 20,551 on account of interest. Besides that, the Income Tax Officer brought to tax the sum of Rs. 1,50,074/- under section 10 of the Act by attributing it to the respondent's business in timber. This figure of Rs. 1,05,074/- was arrived at by deducting out of Rs. 1,25,500 a sum of Rs. 20,426/ whiCh, according to the Income Tax Officer, had been spent by the res-pondent in the claim proceedings against the Government over and :;bove the amount of Rs. 2,000/- which had been awarded as costs by the arbitrator. The respondent feeling aggrieved by the finding of the Income Tax Officer tha.t the sum of Rs. 1,05,074 was busi-ness and taxable receipt filed appeal against the order of the Income Tax Officer. The Appellant Assistant Commissioner accepted the respondent's appeal and held that the above amount was capital receipt. On further appeal by the department, the Income Tax Appellate Tribunal held that the sum of Rs. 1,25,500 was a revenue receipt as it hai been received on account of the loss of earnings of the timber business. The respondent was, how-ever, allowed to set off the losses of Rs. 4,572 and Rs. 490, which bad been brought forward from the assessment years 1949-50 and 1950-51, against the sum of Rs. 1,05,074. O~ being 1.noved by the respondent, the Tribunal referred the followmg question to the High Court:

"Whether, on the facts and in the circumstances of the case, the ~um of Rs. 1,05,074/- "eceived by the applicant as compensation from the Government is taxa-ble as income of the applicant or is a capital receipt in its hands ?"

The High Court held that the amount received by the respondent for the requisitioning of the six sheds or godowns was in the nature of capital receipt in the hands of the respondent-firm for the dama-ge sustained in the profit making apparatus. It was, in the opinion of the High Court, not a revenue receipt and as such, not taxable.

In appeal Mr. Ahuja on behalf of the appellant has assailed the judgment of the High Court and has urged that the sum of Rs. 1,05,074 received by the respondent was a revenue receipt and not a capital receipt as the amouut represented the compensa-tion payable for loss of earnings consequent upon the requisition of the sheds of the respondent. As against that, Mr. Hajarnavis on behalf of the respondent has urged that the amount in question was a capital receipt and the decision of the High Court in this respect was correct. In our opinion, the contention advanced on behalf of the appellant is well foupded and that the sum in ques-tion represents a revenue receipt and not a capital receipt.

In order to resolve the controversy as to whether the sum of Rs. 1,05,074 received by the responde::~ was a revenue receipt or a capital receipt, we must try to ascertain the true nature and character of the payment. Although the distinction between capital receipt and revenue receipt is well recognised, the task of assigning it to the appropriate head in border line cases is not free from difficulty and becomes one of such refinement. Decided cases can provide illustratioru; and afford indications of the kind of considerations which may relevantly be borne in mind in approaching the problem. In the final analysis, however, the controversy would have to be resolved in the light of the facts and circumstances of each individual case. It would, therefore, be relevant to look into the circumstances under which the payment was made. In this respect we find that after the sheds of the res-pondent had been requisitioned, the respondent commenced pro-ceedings for claiming compensation. The Civil Judge Poona was appointed arbitrator to determine the amount of compensation. In II the course of proceedings before the arbitrator. the responr!ent

filed written statement claiming compensation, inter alia, for loss of profits. The arbitrator by his nward dated April 15, 1948 awarded a sum of Rs. 1,25,500 for loss of earnings to the respon-dent; In addition to that we have the finding of the Tribunal that the respondent firm during the period for which the claim for corr.· pensation was made had been carrying on. business in its usual name.and style in the same office premises in which it used to carry on business prior to the requisition of the godowns by the Govern-ment. The effect of the requisition of the godowns, according to the Tribunal, was not to stop the business of the respondent. On <he contrary, the respondent continued to carry on the busi-ness though at a reduced scale. The finding of the Tribunal in this respect was as under :

"As already pointed out, the office premises remained with the assessee firm and the business of disposing of the stock-in-trade continued to be directed from that place. Thus this was not a case of a business coming to a standstill altogether but it is a case of carrying on the same business on a smaller scale. Even this business was carried on by the assessee firm in its usual name and style from the same office premises from which it used .to carry it on prior to the requisition of the go-downs by the Government ...... If any injury was caus-ed to the assessee's business, including the capital assets it held for the purpose of carrying on that business, it was to the volumes of the business and not to the profit-making apparatus itself."

In the light of the above findings of fact, we have no doubt that the amount received by the respondent for the loss of earnings was revenue receipt. It can hardly be disputed that if the respondent firm had been earning profits as a result of its business during the years the premises in question remained under requisition, the said profit would have been treated as revenue receipt and liable to be taxed as such. The amount received in lieu of the profits which woulg have been earned if the premises had not been reguisitioned, in our opinion, would partake of the same character as the profits. The present is not a case wherein the respondent firm was per-manently deprived of a source of income. On the contrary, the present is a case arising out of requisition of the premises. Requi-sition, unlike acquisition, is of a te1hporary nature and though it may extend over some years, it has not the element of perma-nence. The compel'lsation paid to the respondent represents the supposed profit which the respondent would have earned during the years the premises remained under requisition but which profit th.e rl:lspondent could not earn because of the requisitions.

A case somewhat similar to the present case is Commissioner of Income Tax/Excess Profits Tax, Bombay City v. Shamsher Printing Press(1). The respondent finn in that. case had for the purpose of its business a printing press. · The premises in which the press was housed were requisitioned by the Government and the respondent had to shift its business to another place. Of the various sums paid· as compensation for the requisition, the Govero· ment paid.Rs. 57,435 towards the claim of the respondent "on n r.ccount of the compulsory vacation of the premises, disturbance

and loss of business". It was held by this Court that the sum of Rs. 57,434 had not been received by the respondent for any injury to its capital assets, including goodv.ill. The above sum, it was further held, had been received as compensation for los> of profit and '"as a revenue receipt liable to tax.

Reference has been made by Mr. }lajarnavis to the observations in the award of the arbitrator regarding the manner of computing the compensations payable to the respondent for the loss of .earn-ing. The arbitrator in this connection took the view that the ;imount of two years purchase made by the respondent would be the most equitable and fair figure for determining the amount of compensation. The lump sum payable to the respondent for loss of earning was thus found to be Rs. 1,25,500. The important thing to note is that the above sum was paid to the .respondent on account of loss of earning. The method of computing the com-i pensation payable for the loss of earning would not in our opinion,

alter the real character or the essential nature of the receipt of the 'aid compensation in the hand of the respondent. As observed by Lord Buckmaster in the case of The Glennboig Union Fireclay Co. Ltd. v. The Commissi<mers of Inland Revenue(') "there is no relation between the measure that is used for the purpose of calculating a particular result and thr-quality of the figure that is arrived at by means of the-applicati ~u. of that test". The above observation was quoted· with approval by this Court in the case of Sonairam Doongerma/l v. Commissioner of Income Tax(') and it was held that it is the quality of payment that is decisive of the character of the payment and not the meµiod of the payment or its measure as makes it fall within capital or revenue. -

Reliance has been placed by Mr. Hajarnavis on the ratio of the decision of this Court in tqe case of Senairam Doongarmall (supra). The assessee family in that case owned a tea estate consisting of tea gardens, factories and other buildings and carried on the busine;ss of growing and manufacturing tea. The factory and other bµildings on the estate were requisitioned for defence purposes by military authorities.. Though the assessee continued in possession of the tea gardens and tended them to preserve the plants, the manufacture of tea was stopped completely. The (l) [1960] 39 I. T. R. 90. (?. .) 1 2 T. C. 42. 7 19-L172Sup.CI/73. (3) [1961] 42 I. T. R. 392, 387.

assessee was paid compe.nsation for the years 1944 and 1945 under the Defence of India Rules, calculated on the basis of the out-turn .of tea that would have been manufactured by the assessee during that period. This Court held that the amount of compen-sation received by the assessee was not revenue receipt and did not comprise any element of income. In arriving at that conclusion, the Court took note of the fact that tax was payable by. an assessee under the head "Profits and gains of ·a business" in respect of a bminess carried on by him. As the assessee had not carried on any business at all, the compensation received by the assessee wao held to be not profit of business. This case, in our opinion, can-not be of much help to the respondent because in the present case, as observed earlier, the Tribunal has expressly found that the res-pondent was carrying on the business during the relevant years.

Reliance has also been placed by Mr. Hajamavis upon the decision of House of Lords in the case of The Glenboig Union Fireclay Co. Ltd. (supra). The assessee in that case was carry-ing on business for the manufacture of fireclay goods and had taken in connection with that business a fireclay field on lease, over part of which ran the lines of the Caledonian Railway. The railway administration prohibited the assessee from excavating the field within a certain distance of the rails and paid compensation there-for in accordance with die provisions of a statute. It was held by the House of Lords that this was a capital receipt as the com-pensation was really the price paid "for sterlising the assets from which otherwise profit might have ~en obtained". It would follow from the above that the fireclay field was accepted to be a capital asset which was to be utilised for the carrying on of the business of manufacturing firec!ay goods. When the assessee was prohi-bited from exploiting the field, it was considered to be an injury inflicted on his capital asset. The case of The Glenboig Union Firecla:r· Co. Ltd. (supra) was cited before this Court in Commis-sioner of Income Tax, Nagpur v. Rai Bahadur Jairam Valji and Others(') and Senairam Doongarmall (supra) and was· distin-guished on the ground that it related to the sterlisation and des-truction of a capital asset. In the present case there has been no sterlization and destruction of the capital asset of the respondent firm. As such, the case of ·The Glenboig Union Fireclay Co. Ltd. cannot afford much assistance in the present case.

Reference has also been made by Mr. Hajarnavis to the cases of S. R. Y. Sivaram Prasad Bahadur v. Commissioner of Income Tax, Andhra Pradesh(") and Commissioner of Income Tax. Punjab, Haryana, .Tammtt & Kashmir and Himachal Pradesh v. Prabhu Dayal("). Siva ram Prasad Bahadur' s case related to II {I) {19S9j 35 I. T. R. 14R. (1) [1971] 82 I. T. R. '1". interim payments made under the Madras Estates (Abolition and Conversion into Ryotwari) Act, 1948 to a former holder of an estate which had been abolished during the period between the taking over of the estate and the final ~etermination and. deposit. of campensation under that Act. It was held to be a capital receipt and not liable to tax. Prabhu Dayal's case related to an assessee who had discovered by chance the existence of kankar in the Jind State. The assessee brought about an agreement between the State and one Shanti Prasad Jain for the acquisition of sole and exclusive monopoly rights for manufacturing cement. Shanti Prasad Jain transferred his rights under the agreement to a com-pany of '.''hich the assessee was one of the promoters. For the services rendered by hin1, the company agreed to pay the assessee a commission of 1 per cent on the yearly net profits earned by the company. The agreement was acted upon till 1950 whereafter the company did not pay the commission to the assessee. The assessee filed a suit which ended in a compromise. In terms of the compromise, the assessee was paid certain amounts as commis-sion for the years 1951, 1952 and 1953 and a further sum of Rs. 70,000 by way of compensation for the determination of the agreement between him and the company as from January 1, 1954. Question which arose for determination was whether the sum of Rs. 70,000 was capital receipt in the hand of the as,:essee. The assessee, it was found, had not engaged either in the business of discovering kankar or any minerals or in the business of bring-ing about agreement between the parties. There was, indeed, no evidence that he was a business man. It was held that none of the activities of the assessee could be considered of to be business activitv." in-The compromise, in the opinion this Court, destroyed an come yielding asset of the assessee and in its place he was given Rs. 70,000 as compensation. The sum o.f Rs. 70,000 was accord-ingly held to be capital receipt. It is manifest from the narration of the facts of Sivaram Prasad Bahadur and Prabhu Dayal's cases that there is no similaritybetween those cases and the present case. As suclt, these two decisions cannot be of any avail to the respon-dent.

It may also be mentioned that Mr. Hajarnavis has assailed the findings of fact of the Tribunal. In this respect we are of the view that the Tribunal is the final fact finding authority. It is for the Tribunal to find facts and it is for the High Court and this Court to lay down the law applicable to the facts found. Neither the High Court nor this Court has jurisdiction to go behind or ti) ques-tion the statement of facts made by the Tribunal. The statement of case is binding on the parties and they are not entitled tLl go behind the facts of the Tribunal in the statement. When the question refer1ed to the High Court speaks of "on the facts and circumstances of the case", it means on the facts and circumstances found by the Tribunal and not on the facts and circwnstances as may be found by the High Court [see Karnani Properties Ltd. v. Commissioner of Income Tax, West Bengal(1)].

As a result of the above, we accept the appeal, set aside the judgment of the High Court and answer the question referred by the Tribunal in favour of the department. In our opinion, the sum of Rs. 1,05,074 received by the respondent as compensation from the Government was taxable as income of the respondent and was not a capital receipt. In the circumstances of the case, we leave the parties to bear their own costs or this Court as well as in the High Court.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 156 of 1969.

Appeal by certificate from the judgment and order dated the 10th and 11th February, 1967 of the Bombay High Court in Income-tax Reference No. 35 of 1962.

B. B. Ahuja, R. N. Sachthey and S. P. Nayar, for the appel~ !ant.

R. M. Hajarnevis, S. Balakrishnan, G. P. Sahasrabhudhe and N. M. Ghatate, for the respondent.

The ! udgment of the Court was delivered by