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1932 Supreme(SC) 16
PRIVY COUNCIL [ON APPEAL FROM THEEAST INDIES]
LORD BLANESBURGH, LORD TOMLIN, AND SIR GEORGE LOWNDES.
COMMISSIONER OF INCOME-TAX - Appellant
Versus
SHAW, WALLACE AND COMPANY - Respondents
On appeal from the High Court at Calcutta.
Decided On : Mar. 14. 1932.
Solicitor for appellant:Solicitor, India Office. Solicitors for respondents: Linklaters & Paines.
Compensation received for the termination of a business agency is a capital receipt, not taxable as business income, as it is a solatium for the cessation of the activity rather than a profit derived from carrying on the business.
Headnote:(A) Indian Income-tax Act, 1922 - Sections 2(4), 4(3)(v), 4(3)(vii), 6(iv), 10 and 12 - Income, profits and gains - Compensation for termination of agencies - Whether compensation received for the cessation of a business agency constitutes taxable income or a capital receipt - Income connotes a periodical monetary return coming in with some sort of regularity from definite sources - Profits of business are those earned by a process of production through the continuous exercise of an activity - Compensation received as a solatium for the compulsory cessation of an agency is not the produce of carrying on the business and is therefore a capital receipt not chargeable to tax. (Paras 20-25)
(B) Interpretation of "Income" - The term refers to the produce of a source, likened to the fruit of a tree or crop of a field, excluding windfalls or payments received in lieu of the source itself. (Para 20)
(C) Business Profits - To be taxable under the head "business", the receipt must be the result of carrying on the business; a sum received for the termination of a specific agency, even if other business activities continue, is not a profit of the business if it has no connection with the continuing activities. (Paras 26-28)
Facts of the case:
A firm of merchants and agents received compensation from two companies following the termination of their distributing agencies. The tax authorities treated the net sum as business profits or gains for the relevant assessment year. The firm contended that the receipt was capital in nature and thus not taxable.
Findings of Court:
The sum received was not the result of carrying on the agencies but was a solatium for their cessation. It cannot be regarded as profit or gain from carrying on the business.
Issues: Whether compensation paid for the termination of business agencies constitutes "income, profits or gains" within the meaning of the Act, or whether it is a capital receipt exempt from tax.
Ratio Decidendi: Income is a periodical return from a source. Business profits must arise from the continuous exercise of an activity. Compensation for the cessation of an agency is a payment in place of the business or source, not a product of it. Just as the sale of a business is not taxable as business profit, compensation for its termination is a capital receipt.
Result: Appeal dismissed with costs.
Legal Category Hierarchy
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taxation
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income tax
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business income
- capital vs revenue receipts
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business income
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income tax
Judgement
Appeal (No. 108 of 1931) from a judgment of the High Court (January 1.3, 1931) upon a reference by the Commissioner of Income-tax under s. 66, sub-s.2, of the Indian Income-tax Act, 1922.
The matter for consideration in the appeal was, in substance, whether the respondents, who carried on business as merchants and agents in Calcutta and elsewhere in India, were chargeable to income-tax under the above Act in respect of compensation paid to them for the termination of agencies for two oil-producing companies,
The facts of the case and the three questions referred appear from the judgment of the Judicial Committee.
The High Court, by a judgment delivered by Rankin C.J. and concurred in by C. C. Ghose and Buckland JJ., answered the first question in the affirmative, thereby holding that the sum of Rs.9, 83,361 (being the compensation received less admitted deductions) was a capital receipt and therefore did not come within the computation of the profits of the respondents business. Having regard to that conclusion no answer was returned to the second and third questions. The Court was however of opinion, upon the authority of In re Turner Morrison & Co. (( 1928) I. L. R. 56 C 211.), that the receipt arose out of the business; also, that the exemption in s. 4, sub-s. 3 (vii), of the Act did not apply to the case. The proceedings are reported at I. L. R. 58 C. 1053.
1932. Feb. 5, 9, 11. Dunne K.C. and R. P. Hills for the appellant. The compensation (less the admitted deductions) is chargeable to tax under s.6 (iv) of the Indian Income-tax Act, 1922, under the head "business." The agencies in respect of which the compensation was paid were part only of the respondents business, and their business as merchants and agents continued after the payment; the compensation was a profit of the business in the year of account. There was no transfer of goodwill or any other dealing with the capital assets. As both the Commissioner and the High Court found that the compensation arose out of the business, it was chargeable to tax unless the assessees showed that it came within the exemptions in s. 10 or that it was a capital receipt not chargeable to tax. The Indian Act does not make the clear distinction between capital and income which there is under the English statutes; that is shown by s. 4, sub-s.3 (v). The judgment of the High Court is not consistent with its judgment in In re Turner Morrison & Co, (( 1928) I. L. R. 56 C. 211) It was based upon Glenboig Union Fireclay Co. v. Commissioner of Inland Revenue (( 1922) 12 Tax Cas. 427 (H. L.).) and Chibbett v. Joseph Robinson & Son (( 1924) 9 Tax Cas. 48.), both of which are distinguishable. The former was decided upon the ground that there had been a sterilization of a capital asset. In the latter case the assessees had rights under the articles of association and received a capital sum to release them. The decision was merely that there was evidence to support the finding of the Commissioner, whereas in the present case the Commissioner held that the receipt was not of a capital nature; the observations of Rowlatt J., relied on, were obiter. That the compensation received in this case was chargeable to tax is supported by Hancock v. General Reversionary and Investment Co. ([ 1919] 1 K. B. 25.); Commissioners of Inland Revenue v. Newcastle Breweries (( 1926) 12 Tax Cas. 927.); Short Brothers v. Commissioners of Inland Revenue (( 1926) 12 Tax Cas. 955; 136
L. T. 689.); Commissioners of Inland Revenue v. Gloucester Railway Carriage and Wagon Co. (( 1925) 12 Tax Cas. 720; [ 1925] A. C. 469); Ensign Shipping Co. v. Commissioners of Inland Revenue (( 1928) 12 Tax Cas. 1169.); Burmah Shipping Co. v. Commissioners of Inland Revenue (( 1930) 16 Tax Cas. 67.); J. Gliksten & Son v. Green.([ 1929] A. C. 381.) In Anglo-Persian Oil Co.
v. Dale ([ 1932] 1 K. B. 124.) it was held that compensation paid by the then appellant company in the same circumstances as in this case was a revenue payment an
