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SUPREME COURT OF INDIA
K.S. HEGDE, A.N. GROVER AND H.R. KHANNA, JJ.
The Commissioner of Income-tax, Punjab, Haryana, J. and K., and H.P., Appellant
Versus
Prabhu Dayal (dead) by his legal representatives, Respondents.
Civil appeal No. 1693 of 1968, D/- 6-10-1971.
Advocates appeared
Mr. O. P. Malhotra, Senior Advocate, (M/s. R. N. Sachthey and B. D. Sharma, Advocates, with him), for Appellant; Mr. V. S. Desai, Senior Advocate, (Mr. A. G. Ratnaparkhi, Advocate, with him), for Respondent (LR No. 2).
Indian Income-tax Act, 1922 - Section 66 (1) and 10 - Agreement - Manufacturing Cement - Assessment Year - Claiming Commission - Whether on facts and in circumstances of case, receipt of Rs. 70,000/- by assessee was revenue or capital in nature - Whether a particular receipt is capital or an income, it is not possible to lay down any single test as infallible or any single criterion as decisive - Whether amounts of compensation were revenue receipts taxable in hands of assessee - Whether income in question could have been considered as income from other sources – Held, It is now well settled that a distinction has to be drawn between a payment made for past services or discharge of past liabilities and that made for compensation for termination of an income producing asset - Former does not lose its revenue nature but the latter being a payment for destruction of a capital asset, must be considered as capital receipt - This court held that the first consideration before holding a receipt to be profits or gains of business within S. 10 of Income-tax Act was to see if there was a business at all of which it could be said to be income - Primary condition of application of section 10 was that tax was payable by an assessee under head "Profits and gains of a business" in respect of a business carried on by him Where an assessee did not carry on business at all section could not be made applicable and any compensation for requisition of assets that he received could not bear character of profits of a business - Court further held that amounts of compensation received by assessee were not revenue receipts and did not comprise any element of income - These decisions lay down tests to be applied in distinguishing a capital receipt from a revenue receipt - With guidance thus afforded, let Court now take a second look at facts found for answering question referred - Assessee, possibly, by some fortuitous circumstances discovered Kankar in some place in Jind State - This circumstances. gave him an opportunity to bring about an agreement between State of Jind and Shanti Prasad Jain and when Shanti Prasad Jain transferred his right to a new company, in formation of which assessee had a hand, he was promised certain yearly commission on net profits earned by company - None of these activities of assessee can be considered as a business activity but yet he had acquire an income yielding asset as a result of his activities - But compromise decree destroyed that asset and in its place he was given Rs. 70,000 as compensation - This payment was neither in respect of services rendered by him in past nor towards accumulated commission due to him - It was paid as compensation to him because he gave up his right to get commission in future to which he was entitled under agreement - It was a price paid for surrendering a valuable right which in Court opinion was a capital asset - Therefore that receipt must be considered as a capital receipt - Appeal dismissed.
Judgment
HEGDE, J.:- This is an appeal by certificate from the decision of the High Court of Punjab and Haryana in a Reference under Section 66 (1) of the Indian Income-tax Act, 1922 (to be hereinafter referred to as the Act). The question referred to the High Court for its opinion was:
"Whether on the facts and in the circumstances of the case, the receipt of Rs. 70,000/- by the assessee on 11-6-1954 was revenue or capital in nature."
2. The High Court held that the said receipt was capital receipt. Aggrieved by that decision the Commissioner of Income-tax came up in appeal to this Court.
3. We shall now refer to the material facts found by they Income-tax Appellate Tribunal as can be gathered from the case stated. The assessee was assessed as an individual. The relevant assessment year is 1955-56, the accounting period for the same ended on Asad Sudi 1, S. Y. 2011.
4. The assessee was instrumental in discovering the existence of Kankar deposits in Jind State. He also brought about an agreement between one Shanti Prasad Jain and the erstwhile state of Jind, now a part of Punjab State for the acquisition of sole and exclusive monopoly rights of manufacturing cement in the said Jind state. That agreement was entered into on April 2, 1938. The same was to remain operative for a period of 25 years, which term was liable to be extended to 100 years all the option of the said Shanti Prasad Jain or his nominee. Shanti P)arsad Jain transferred his rights under that agreement to a public limited company by name M/s. Dalmia Dadri Cement Ltd. on May 4, 1938. The assessee was one of the promoters of the said company.
5. For the services rendered by the assessee, the Dalmia Dadri Cement Co. by an agreement dated May 27, 1938 agreed, to pay him a commission of 1% on the yearly net profits earned by the company from the said cement factory. That agreement was to subsist so long as the original agreement dated April 2, 1938 subsisted.
6. The agreement dated May 27, 1938 between the assessee and the Dalmia Dadri Cement Co. was acted upon till 1950 and thereafter the company did not pay the commission agreed to be paid. Consequently the assessee filed a suit against the company claiming the commission due to him. The said suit ended in a compromise and the compromise was made a decree of Court. Under that decree the assessee was to be paid Rs. 15,000/- as commission for the years 1951 and 1952 and Rs. 15,000/- as commission for the year 1953. Further he was to be paid Rs. 70,000/- by way of compensation for the termination of the agreement between him and the company as from January. 1,1954. That compensation was received by the assessee on June 11, 1954.
7. The assessee s claim that the sum of Rs. 70,000/- was capital receipt and hence not taxable in his hands was rejected by the Income-tax Officer. That officer held that the said sum of Rs. 70,000/- was a remuneration paid once and for all for the services rendered by the assessee and as such taxable in his hands. This decision was affirmed by the Appellate Assistant Commissioner, who held that the amount of Rs. 70,000/- was a lump sum compensation received for the services rendered, hence the same was a receipt in the ordinary course of assessee s business and consequently it was taxable as a revenue receipt.
8. Aggrieved by that order the assessee took up the matter in appeal to the Tribunal. The Tribunal held that the company by paying the said compensation of Rs. 70,000/- terminated the contract which enabled the assessee to receive from the said company a commission of one per cent of the net profits and as scuh the said receipt by the assessee was capital not revenue.
9. Thereafter at the instance of the Commissioner the question set out earlier was referred to the High Court for its opinion which, as mentioned earlier, was answered in favour of the assessee.
10. It was not the case of the Revenue that the assessee was engaged in the business of discovering Kankar or any other mineral. He appears
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