SENAIRAM DOONGARMALL versus COMMISSIONER OF INCOME-TAX, ASSAM

1 s.c.R. SUPREME COURT REPORTS

SENAIRAM DOONGARMALL ·

COMMISSIONER OF INCOME-TAX, ASSAM

(J. L. KAPUR, M. HIDAYATULLAH and J. c.

SHAH, JJ.)

Income Tax-Capital or Revenue-Tea estate-Requisition of factories and buildings-Stoppage of tea business-Compcnsation-Nature of-Indian Income-tax Act, 1922 (II of 1922), s. IO.

The assessee, Hindu undivided family, owned tea estate in Assam comprising tea garden, factories, labour quarters, staff quarters etc. On February 27, 1942, the military autho-rities requisitioned all the factory buildings etc., under the Defence of India Rul~s but the tea garden, however, was left in the possession of the assessee. The possession of the military continued till the yearr945 and during that period, though the assessee looked after its tea garden, its business as tea-growers and tea-manufacturers could not be continued. Under the Defence of India Rules, the military authorities paid the assessee as compensation sum of Rs. 2,22,080 for the year 1944· which included Rs. 10,000 for repairs to quarters for labourers, and sum of Rs. 2,46,794 for the year 1945, which included Rs. 15,231 for repairs. For the assessment years 1945-1946 and 1946-47 the question arose as to whether the aforesaid sums or any por-tion thereof were capital receipts or were revenue receipts and Jiable to tax. The facts showed that the business, which the assessee had been carrying on, consisted in growing tea plants and in making tea out of the leaves by manufacturing process into commercial commodity, that without the factory and the premises the tea leaves could not be dried, smoked and cured to become tea, and that the result of the requisition of the fac-tories was to stop the business.

Held, that the amounts paid by the military authorities were received by the assessee not as compensation for the loss of profits of the business which it had been carrying on but for the injury to the business as whole, because the entire structure of business was affected to such an extent that no business was carried on by the assessee during the two years in question. Accordingly, the compensation could not bear the character of profits of business and was not liable to tax under s. IO of the Indian Income-tax Act, 1922.

Income-tax Commissioner v. Shaw Wallace & Co., (1932) L.R. 59 I.A. 206, referred to and applied.

Case law reviewed.

Mat'ch IJ.years minus these admitted sums, or any portion z96z thereof, were received on revenue or capital account. Senairam The assessments for the two years were made by Doongarmall different Income-tax Officers. For the assessment v. year, 1945-1946, the Income-tax Officer deducted from Commission" of Rs. 2,22,080, sum of Rs. 1,05,000 on account of Income-tax, Assam admissible expenses. He then applied to the balance, Ilidayatullah ]. Rs. 1,17,080, R. 24 of the Indian Income-tax Rules, 1922, and brought to tax 40 per cent of that sum amounting to Rs. 46,832. The assessment was made under s. 23(4). For the assessment year, 1946-1947, the assessment was made under s. 23(3) of the Income-tax Act. The Income-tax Officer excluded the sum paid on account of repairs and treated the whole of the amount as income taxable under the provisions of the Income-tax Act, after deduction of admissible expenditure. The appeals filed by the appellants to the Appellate Assistant Commissioner against both the assessments were unsuccessful. On further ap-peal, the Income-tax Appellate Tribunal (Calcutta Bench) was divided in its opinion. The Judicial Member held that the receipts represented revenue but on account of "use and occupation" of the pre-mises requisitioned. He, therefore, computed the net compensation attributable to such use and occupation at 20 per cent of the total receipts in both the years. He, however, observed that if the receipts included income from the tea estate he would have been in-clined to apply R. 24 in the same way as the first Income-tax Officer. The Accountant Member was of the opinion that the appellants were liable to pay tax 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 expenditure for the account year, 1944, at Rs. 1,05,000, and directed that the admissible expen-diture for the succeeding year be determined and deducted before the application of R. 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 s. 66(1) for

196[1 ]reference, whiie the appellants filed an application under s. 35 for rectification of the orders, since many Senairam Doongarmall other matters in appeal were not considered at all. v. When these two applications came before the Tri-Commissioner of bunal, it was realised that the matter had to go to In,ome-tax, Assam third Member for settling the difference. The Presi-dent then heard the appeal, and agreed with the Hidayatullah f. Accountant Member. Though he expressed doubt whether the appellants were entitled to the benefit of rr. 23 and 24, he did not give an opinion, because this point was not referred to him.

The Tribunal then referred the case to the High

Court of Assam on the following two questions:

"(l). Whether the sums of Rs. 2,12,080 and

Rs. 2,31,563 paid by the Government to the assessce

in 1945 and 1946 respectively (exclusive of the sums paid specifically for building repairs) were revenue receipts in the hands of the assessee comprising any element of income?

(2). If so, whether the whole of the said sums

less the expenses incurred by the assessee in fond-ing the tea bushes constituted agricultural income in his hands exempt from tax under the Indian Income-tax Act, 1922?"

The reference was heard by Sarjoo Prasad, C.J., and Ram Labhaya, J., along with two writ petitions, which had also been filed. They delivered separate judg-ments, but concurred in their answers. The High Court answered both the questions against the appel-lants. The writ petitions were also dismissed.

Before we deal with this appeal, we consider it necessary to state at this stage the method of calcula-tion of compensation adopted by the Military authori-ties. It is not necessary to refer to both the years, because what was done in the first year was also done in the following year except for the change in the amounts. This method of calculation is taken from the order of the Judicial Member, and is as follows:

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Rs. A. P. I9[6]I Orop-2lll20 lbs. at 17.85d (half) Senairam and at 18.35d (half) 2,12,292 14 0 Doong.,mall 15480 lbs. at Rs. 0-11-10 11,449 12 0 v. 52600 lbs. at Rs. 0-15-6 50,956 4 0 Commissionet of ______ lncome'..ta.x, Assam 2,74,698 14 0 Hidayatullah ].

Less-Saving of plucking and manufacturing:-Rs.

(a) Expenses at annas 3 per lb. 49,209 (b) Sale of export rights, 1,32,935 lbs. 4,924 ( c) Purchase of export rights 78,185 lbs. at annas 4. 1,629 ( d) Food and clothing concessions 7,000 62,762 0 0

2,11,936 0 0 Add-For fees of assessors, Rs.144 Coolie lines repairs, Rs. 10,000 10,144 0 0

Rs. 2,22,080 0 0

From the admitted facts which have been sum. marised above, it is clear that the business of the appellants as tea-growers and tea-manufacturers had come to stop. The word "business" is not defined exhaustively in the Income-tax Act, but it has been held both by this Court and the Judicial Committee to denote an activity with the object of earning profit. To say that business is being carried on, means no more than that profit is to be earned by process of production. The business of tea-grower and manu-facturer 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 continuation of the business,

'9[61 ]which had come to an end for the time being. It Senairam would have hardly made any difference to the carry-Doongarmall ing on of business, if, instead of the factories and · v. buildings, the tea garden was requisitioned and Commissioner of occupied, because in that event also, the business In,ome-tox. Assam would have come to standstill. H'a The compensation which was paid in the two years 11 ' ayatu ah f. was no doubt paid as an equivalent of the likely pro-fits in those years; but, as pointed out by Lord Buck-master in The Glenboig Union Fireclay Go. Ltd. v. The Commissioners of Inland Revenue ([1]) 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 particular result aud the quality of the figure that is arrived at by means of the application of that test".

This proposition is as sound as it is well-expressed, and has been followed in numerous cases under the Indian Income-tax Act and also by this Court. It is the quality of the payment that is decisive of the character of the payment and not the method of the payment or its measure, and makes it fall within capital or revenue.

We are thus required to determine what was it that was paid for, or, in other words, what did the two payments replace, if they replaced anything. The arguments at the Bar followed the pattern which has by now become quite familiar to Courts. We were taken to the 12th Volume of the Tax Cases series, where are collected cases dealing with Excess Profits Duty and Corporation Profits Tax in England follow-ing the First World War, and to other English cases reported since. These cases have been eonsidered and applied on more than one occasion by this Court, and we were referred to those cases as well.

Now, it is necessary to point out that the English cases were decided under different system of taxa-tion, and must be read with care. case can only be decided on its own facts, and the desire to base one's decision on anather case in which the facts appear to be near enough, sometimes leads to error. It is well to (1) (1922) 12 T.C. 427. (2) (1935) A.C. 431.

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remember the wholesome advice given by Lord r96r Dunedin in Green v. Gliksten &: Son Ltd. ([1]) that "in Senairam these Income Tax Act cases one has to try, as far as Doongarmall possible, to tread narrow path, because there are v. quagmires on either side into which one can easily Commissioner of be led ......... ". Income-ta~. Assam

Income-ta~. Assam

The English cases to which we were referred, were used even in England by Lord Macmillan in Van Den Hidayatullah J. Berghs' case (') as mere illustrations, and when cited before the Judicial Committee in Income-Tax Commis-sioner v. Shaw Wallace&: Co.(') were put aside by Sir George Lowndes with this observation:

"their Lordships would discard altogether the case law which has been so painfully evolved in the construction of the English income-tax sta,tutes-both the cases upon which the High Court relied and the flood of other decisions which has been let loose in this Board".

Most of the cases cited before us deal with Excess Profits Duty and Corporation Profits Tax. In the former group, pre-war profits had to be determined, so that they might be compared with post-war busi-ness for the purpose of arriving at the excess profits, if any. In dealing with the pre-war profits, diverse receipts were 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 Corpora ti on Profits Tax was tax intended to be imposed upon the profits of British Companies (which included some other cor-porate bodies) carrying on trade or business including the business of investments. The profits which were taxed under s. 52 of the English Finance Act were required to be determind 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

(11 (1929) 14 T.C. 364, 384, (2J [1935] A.C. 431.

(3) (1932) L.R. 59 I.A. 206.

r96r and what rejected, they cannot be regarded in any Senairam sense as precedents to follow. Since this Court on Doongarmall other occasions used these cases as an aid, we shall v. refer to them briefly; but we have found it necessary Commissioner of to sound warning, because the citation of these Incom,-tax, Assam authorities has occasionally outrun their immediate utility. Hidayatullah f. We begin with the oft-cited case of oft-cited case of The Glenboig

We begin with the oft-cited case of oft-cited case of The Glenboig Union Fireclay Co. Ltd. (1). That was case under the Excess Profits Duty. The facts are so well-known that we need not linger over them. seam of fire-clay could not be worked, and compensation was paid for it. That the clay was capital asset was indis-putable, and the portion lost was slice of capital. The hole made in the capital was filled up by the compensation paid. It was said that portion of the capital asset was sterilised and destroyed, and even though the business went on, the payment was treated as on capital account. The case cannot be used as precedent, because here, no doubt, the facto-ries and buildings were part of fixed capital, but the payment was not so much to replace them in the hands of the appellants as to compensate them for the stoppage of business. The Glenboig case ([1]) does not apply.

The case of Short Bros. Ltd. v. The Commissioners of Inland Revenue ('), another case under the Excess Profits Duty, illustrates contrary principle. The Company had agreed to build two ships, but the contracts were cancelled and £. 100,000 were paid for cancellation of the contracts. This was held to be receipt in the ordinary course of the Company's trade. Rowlatt, J., said that it was "simply receipt, in the course of going business, from that going business-nothjng else". In the Court of Appeal, Lord Hanworth, M.R., affirmed the decision, observing:

"Looked at from this (business) point of view it appears clear that the sum received was received in ordinary course of business, and that there was not in fact any burden cast upon the company not to carry on their trade. It was not truly compensation (1) (1922) 12 T,C. 427, (2) (1927) 12 T.C. 955.

1 S.C.R. SUPREME COURT REPORTS

for not carrying on their business; it was sum paid in ordinary course in order to adjust the relation between the shipyard and their cmitomers."

Senairam Doongarmall

The payment was by customer to the shipyard. v. Whether the amount was paid for ships built or Commissioner of because the contract was cancelled, it was business Income-tax, Assam receipt and in the course of the business. In the Hiday;;;;:;1ah J. present case, the payment is not of this character, and Short Bros. case(') does not apply.

The next case-also of Excess Profits Duty-is The Commissioners of Inland Revenue v. Newcastle Brewe. ries, Ltd. ([2]). In that case, the admiralty took over one-third stock of rum of the Brewery, and paid to the Company the cost plus 1 s. per proof gallon. Later, the compensation was increased by an amount of £. 5,309 and was brought to tax in the earlier year, when the original compensation was paid. The observations of Rowlatt, J., though made to distinguish the case from one in which the compensa-tion is paid for destruction of business, are instructive. We shall refer to them later. The learned Judge held that this was case of compulsory sale of rum, and that compulsory sale was also sale. The receipt was held to be 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.

The Commissioners of Inland Revenue v. The North-jleet Coal and Ballast Co. Ltd. (') was case like Short Bros. case (1). £. 3,000 in lump sum were paid to be relieved from contract, and as the business was going business, it was held to be profit. In fact, Short Bros. case (1) was applied.

Ensign Shipping Co. Ltd. v. The Commissioners of Inland Revenue('), 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, £. 1,078/-were paid as compensation, and were held to be (1) (1927) 12 T.C. 955. (2) (1927) 12 T.C. 927. (3) (1927) u 1".C. IIO>. (4) (1927) 12 1".C. nag. 3<\

'9[[6]]' trading receipts. Rowlatt, J., laid down that if there Senairam was an operation which produced income, it was none Doongarmall the less taxable, because it was compulsory opera-•· tion. The learned Judge then obsflrved that he could Commissioner of not hold that thiB was case of hire, like Sutherland Income-lax, Assam v. The Commissioners of Inland Revenue ([1 ]), because Hidayatullah J.· the ships lay idle and their use wall interrupted. The learned Judge then concluded:

"Now it is quite clear that if n source of income is destroyed by the exercise of the paramount right ... and compensation is paid for it, that that is not income, although the amount of the compensation is the same sum as the total of the income that has been lost ... but in this case I haYe got to decide the case of temporary interferencE" .. Here these ships remained as ships of the concern ... they merely could not sail for certain number of days, and in lieu of the value of the use which they would have been to their owners in their profit-earning capacity during those days, in lieu of that receipt, this money was paid to the owners, o:tlthough they were not requisitioned, as if requisitioned ... I think I ought to regard this sum, a:; the Commissioners have obviously regarded it, as 2, sum paid which to the shipowners stands in lieu of the receipts of the ship during the time of the interruption."

This decision was approved by the Court of Appeal. Now, the case was one of loss of time during which the ships would have been usefully and profitably employed. It was argued in the Court of Appeal with the assistance of the Glenlwig case ('), and it was suggested that the vessels we:re 'sterilised' for the period of detention. Lord Hanwor~h said that that was rather metaphorical word to use, and that the correct way was to look at the matter differently. The Master of the Rolls observed:

"But ·in the present case if' seems to me that, looked at from business point of view, all that has happened is that the two vessels arrived much later at the ports to which they were consigned than they would have done, with the consequent result (1) (1918) u T.C. 63. (2) (192>) u T.C. 427.

1 S.C.R. SUPREME COURT REPORTS

that for the certain number of days which they x96x were late they could not possibly make any earn-Scnairam ings, and it is in respect of that direct loss by Doongarmall reason of the interference with the rights exercised v. on behalf of His Majesty that they made claim Commissioner of and have been paid compensation." Income-tax, Assam

x96x Scnairam Doongarmall v. Commissioner of Income-tax, Assam

This ruling was strongly relied upon by the Depart. Hiday-;,:iah J. ment as one which laid down principle applicable here. We do not agree. The payment there was made towards loss of profits of going business, which business was not destroyed. As source of income, the business was intact, and the business instead of being worked for the whole period, was worked for period less by few days and the profit of that period was made up. That may be true if one is going to determine standard profits of particular period, because what is paid goes to profits in the period but is of no significance in 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 ch Co. v. The Commissioners of Inland Revenue (') is yet another case of Excess Profits Duty. In that case, the business of the tax. payer 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 'mill standard' was fixed, and the tax-payer was allowed to retain profits up to that standard, and if there was shortfall, it was to be made up by the Controller. This amount which the taxpayer retain-ed together with the amount paid towards shortfall was regarded as profits. The principle applicable is easily discernible. There can be little doubt that the trade was being carried on, and what was received was rightly treated as profits. Rowlatt, J., observed that this was clearer case than the Ensign case ('). The matter was covered by s. 38 of the Finance (No. 2) Act of 1915, Fourth Schedule, Part I (1), where the words were "The profits shall be taken to be the actual profits arising in the accounting period".

(r) (1929) 12 T.C. 1256.

(r) (1927) rz T.C. u69.

'9[[6]]' In Barr Crombie & Co. Ltd. v. The Commissioners of Senairnm Inland Revenite ([1]), the Company's business consisted Doongarmall almost entirely of managing shipping for another v. Company. When the shipping Company went into Commissioner of liquidation, sum was paid as compensation to the Incomo-tax. Assam managing Company. It was held that this was Hidayatullah J. capital receipt. The reason for holding thus was that the structure of the managing Company's whole business was affected and destroyed, and this was not profit but compensation for loss of capital. Kelsall Parsons & Co. v. The Commissioners of Inland Revenue ('), to which we shall refer presently, was distinguished on the ground that, though in that case the agency was cancelled, the payment was for one year and that too, the final year. This case is impor-tant in one respect, and it is that if the entire business structure is affected and destroyed, the payment may be regarded as replacing capital, which is lost.These are cases of Excess Profits Duty where pro-fits for particular period had to be determined and also the character of the payments in relation to the kind of business, to determine whether to treat them as excess profits or not. In the Glenboig case ([3]), the payment was not regarded as profit, because it re-placed lost capital and so also, in Barr Crombie ca.se([1 ]). These form the first group. Short Bros. case('), North-fleet case(') and Ensign Shipping Co's case (') were of going business, and what was paid was towards lost profits in going concern. These form the second group. Newcastle Breweries case(') and Charles Brown and Co's case ([8]) were of business actually done and profits therefrom. None of these rulings is directly in point. In the case with which we are concerned, the payment was not towards any capital asset to attract the first group, there was no going business so as to attract the second, and nothing was bought nor any business done with the taxpayer to make the third group applicable.

(1) (1945) 26 T.C. 406.

(2) (1938) 21 T.C. 608.

(3) (1922) 12 T.C. 427.

(4) (1927) 12 T.C. 955.

(5) (1927) 12 T.C. II02.

(6) (1927) 12 T.C. n69.

(7) (1927) 12 T.C. 927.

(8) (1929) 12 T.C. 1256.

> ;,' _,..

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We shall next see some cases which involved Cor-196r poration Profits Tax. In The Gloucester Railway Senairam Carriage and Wagon Co. Ltd. v. The Commissioners of Doongarmall Inland Revenue('), the Company was doing business v. of selling wagons and of hiring them out. The Com- Commissioner of pany then sold all the wagons which it was using for Inoomo-tax, Assam purposes of hiring. The receipt was treated as profit of trade, there being but one business and the wagons Hidayatullah f. being the stock-in-trade of that business. In Green v. Gliksten & Son Ltd.('), stocks of timber were destroyed. Their written down value was£. 160,824 but the In-surance Cothpany paid £. 477,838. The Company credited£. 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 observa-tions in them are so removed from the facts of this case as to be of no assistance.

The cases under Sch. of the Income-tax Act like Burmah Steam Ship Co. Ltd. v. The Commissioners of Inland Revenue('), case of late delivery of ships sent for overhaul, Greyhound Racing Association (Liverpool) Ltd. v. Cooper('), which was case of surrender of an agreement in which the amounts were treated as trad-ing receipts, are not cases of stoppage of business and are not relevant. Kelsall Parsons case('), where one of the agreements of commission agency which was to run for 3 years was terminated at the end of the second year and compensation of £. 1500/- was paid for the last and final year, was held on its special facts to involve taxable profits of trading. Though the business came prematurely to an end, the struc. ture of the business was not affected because the pay-ment was in lieu of profits in the final year of the business as if business had been done. The payment was held to be within the structure of the business in the same way as in Shove v. Dura Manufacturing Co. Ltd. ('). The converse of these cases is the well-known

(1) (1925) 12 T.C. 720.

(2) (r929) 14 T.c. 364.

(3) (1930) 16 T.C. 67.

(4) (1936) 20 T.C. 373.

(5) (1938) 21 T.C. 608.

(6) (1941) 23 T.C. 779.

I96z Van Den Berghs Ltd. v. Clark('), where mutual trade agreements were rescinded between two Companies Senairatn Doongarmall and £. 450,000 were paid to the assessee Company as v. "damages". This was treated as capital receipt and Commissionn of not as income receipt to be included in computing the Income·tax. Assam profits of trade under Sch. Case I of the Income-tax Act of 1918. Lord Macmillan observed: Hidayatullah J. "On the contrary the cancelled agreements related the contrary the cancelled agreements related contrary the cancelled agreements related

"On the contrary the cancelled agreements related the contrary the cancelled agreements related contrary the cancelled agreements related to the whole structure of the appellants' profit. making apparatus. They regulated the appellant's activities, defined what they might and what they might not do, and affected the whole conduct of their business. I have difficulty in seeing how money laid out to secure, or money received for the can-cellation of, so fundamental an organisation of trader's activities can be regarded as an income disbursement or an income receipt".

We have referred to these cases to show that none of them quite covers the problem before us. The facts are very dissimilar, and the observations, though attractive, cannot always be used with profit and often not without some danger of error. We shall now turn to the cases of this Court, which were referred to at the hearing.

The first case of this Court is The Commissioner of Income Tax and Excess Profits Tax, Madras v. The South India Picture~ Ltd., Karaikudi ('). The South India Pictures, Ltd., held distribution rights for 5 years of three films towards the completion of which they had advanced money to film. producing Com-pany, called the Jupiter Pictures. When the term had partially 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 (1) [1935] A.C. 431. (2) [1956] S.C.R. 223.

.. :..'.

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asset sold, surrendered or destroyed; (iii) that the '96' structure of the business, which was going business, Senairam was not affected; and (iv) that the payment was Doongarmall merely an adjustment of the relation between the v. South India Pictures, Ltd. and the Jupiter Pictures. Commission" of The learned Chief Justice thus rested his decision on Income-ta•, Assam Short Bros'([1]) and Kelsall Parsons' ([2]) cases and not upon Van den Berghs (')or Barr Grombie's case('). Hidayatullah f. 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 return of capital, just as expenditure for distribution work was revenue expenditure and the commission, revenue receipt. On parity of reason-ing, the learned Judge held that. money spent in acquiring distribution rights was capital outlay, and that when distribution rights were surrendered, it was capital which was returned, since the agreement was composite one, the films were capital asset and the payment for their release was return of capital.With due respect, it is difficult to see how the pay-ment could be regarded as capital in that case. The fact which seems to have been overlooked in the minority view was that the entire capital outlay had, in fact, been previously recouped and even the security held by the South India Pictures had been extinguish-ed. It was portion of the running business which ceased to be productive of commission and by the payment, the commission which would have been earned and would have constituted revenue re-ceipt when so earned, was put in the pockets of the South India Pictures. The business of the South India Pictures was still going business, one portion of which instead of being fruitful by stages became fruitful all at once. What was received was still the fruit of business and thus revenue. The case, though interesting, is difficult to apply in the present context of facts, where no business at all was done and what was received was not the fruit of any business.

(2) (1938) 21 T.C. 608.

(1) (1927) I2 T.C. 955·

(4) (1945) 26 T.C. 406.

(3) [1935] A.C. 431.

z96z The next case'of this Court, Commissioner of Income Tax v. Jairam Valji ([1]), may be seen. The assessee Senairam there was contractor, and received Rs. 2,50,000 as Doongarmall v. compensation for premature termination of contract. Commissioner of This was held to be revenue receipt. The assessee Income-tax, Assam had many businesses including many contracts, and the receipt was considered as one in the ordinary course of Hidayatullah f. business. All the English decisions to which we have referred, were examined in search for principles, but the principle on which the decision was rested, was that the payment was an adjustment of the rights under the contract and must be referred to the pro-fits which could be made if the contract had instead been carried out. The payment not being on account of capital outlay and the assessee not being prevented from carrying on his business, the receipt was held to be revenue, that is to say, related to income from contract terminated prematurely. In sense, the case is analogous to The South India Pictures, Ltd. case('), which it follows.

In The Commissioner of Income-tax, Hyderabad-Deccan v. Messrs. Vazir Sultan & Sons('), the asses-see held the sole selling agency and.distribution rights of particular brand of cigarette in the Hyderabad State on foot of 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 compensa- · tion "for loss of territory outside Hyderabad". Bhag-wati, 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 capital asset and the payment was in lieu of the loss of 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 difficult test to apply. If what was adjus-ted was the relationship between the parties and if

(I} [1959] Supp. 1 S.C.R. 110. (2) [1956] S.C. R. 223.

(3) [1959] Supp. 2 S.C.R. 375.

there was going business as, in fact, there was, the z96r case comes within the dicta in The South India Pic-Senairam tures, Ltd. case ([1]) and Jairam Valji's case('). The case Doongarmall can only be decision on the narrow ground that v. portion of the 'fixed capital' was lost and paid for. Commissioner of In Godrej & Co. v. Commissioner of Income-tax('), Income-tax, Assam the assessee firm, which held managing agency, Hidayatullah J. released the managed Company from an onerous agreement and in consideration, was paid Rs. 7,50,000. It was held that the payment was not made to make up the difference in the remuneration of the managing agency firm but to compensate it for the deterioration or injury of an enduring kind to the managing agency itself. The injury being thus to capltal asset, the ~ compensation paid was held to be on capital account.

The last case of this Court to which reference may be made is Commissioner of Income-tax v. Shamshere Printing Press ('). That was very special case. There, the premises of the Press were requisitioned by Government, but the Press was allowed to set up its business elsewhere, the charges for shifting the machines, etc., being paid by Government. In addi-tion, Government paid sum claimed as loss of profits, which was expected to bring up the profits to the level of profits while the business was in its old place. The assessee claimed that this sum was paid as compensa-tion forloss of good will arising from its old locality. There was, however, nothing to show that the payment .was for goodwill, and it was held that the compensa-tion paid must be regarded as money arising as profits in the course of business. It was like putting money in the till to bring the profits actually made to the level of normal profits.

All these cases were decided again on their special facts. Though they involved examination of other decisions in search for the true principles, it cannot be said that they resulted in the discovery of a•y prin-ciple of universal application. To summarise them: South India Pictures' case(') was so decided because (1) [rg56] S.C.R. 223. (2) [1959] Supp. l S.C.R, no.

(3) [1960] l S.C.R. 527.

(4) [1960] 39 l.T.R. go.

'9[6]' the money received was held to be in lieu of commis-senairam sion which would have been earned by the business Doongarmall which was still going, and the receipt was treated as v. the fruit of the business. The same reason was given Commissioner of in J airam Valji' s case ([1]) and Shamshere Printing Press Income-tax, Assam case('). In Vazir Sultan's case('), the compensa-Hidayatullah J. tion was held to replace loss of capital, and in Godrej's case('), the compensation was said not to have any relation to the likely income or profits but to loss of capital. Each case was thus decided on its facts.

We have so far shown the true ratio of each case cited before us, and have tried to demonstrate that these cases do no more than stimulate the mind, but none can serve as 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 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 Income-Tax Commissioner v. Shaw Wallace & Oo. ('), 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 manag-ing 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 Court related the payment to goodwill, but the Judicial Commit;ee rejected that ground because no goodwill seemed to have been transferred. The Judicial Com-mittee also rejected the contention that it was com-pensation in lieu of notice under s. 206, Indian {1) [1959] Supp. r S.C.R. rro. (2) [1960] 39 I.T.R. 90. (3) [1959] Supp. 2 S.C.R. 375. (4) [1960] 1 S.C.R. 527.

(5) (1932) L.R. 59 I.A. 206.

I S.C.R. SUPREME COURT REPORTS

Contract Act, as there was no basis for it either. The r96r Judicial Committee held that income meant periodi-Senairam cal moneta,ry return coming in with some sort of regu-Doongarmall larity or expected regularity from definite source v. and in business was the produce of something "loosely Commissioner of spoken of as ca,pital". In business, income is profit Income-ta., Assam earned by process of production, or, in other words, H"d --;-;1 1 by the continuous exercise of an activity. In this ' •ya" • · sense, the sum sought to be charged could not be regarded as income. It was not the product of busi-ness but some kind of sofatium for not ca,rrying on business and thus, not revenue.

The case is important, inasmuch as this ana,lysis of 'income' has been accepted by this Court a,nd has been cited with the further remark made in Gopal Saran Narain Singh v. Income Tax Commissioner ([1 ]) tha,t the words "profits and gains" used in the Indian Income-ta,x Act do not restrict the meaning of the word "income" and the whole expression is 'income', writ large. From this ca,se, it follows tha,t the first consideration before holding receipt to be profits or gains of business withins. 10 of the Indian Income-tax Act is to see if there was business at all of which it could be said to be income.

We shall now take up for consideration the facts of our case, and see how far any principle out of the several which have governed earlier cases can be use-fully applied. The assessee was tea-grower and tea-manufacturer. His work consisted in growing tea and in preparing leaves by manufacturing process into commercial commodity. The growing of tea plants only furnished the raw material for the busi-ness. Without the factory and the premises, the tea leaves could not be dried, smoked and cured to become tea, as is known commercially, and it could not be packed or sold. The direct and immediate result of the requisition of the factories was to stop the busi-ness. That the tea was grown or that the plants were tended did not mean that the business was being continued. It only meant that the source of the raw material was intact but the business was gone.

(I) (1935) L.R. 62 I.A. 207.

1961 Now, when the payment was made to compensate the assessee, no doubt the measure was the outturn of Senairam Doongarmall tea which would have been manufaetured; but that v. has little relevance. The assessee was not compensat-Commissioner of ed for loss or destruction of or injury to capital asset. Ineome-tax, Assam The buildings were taken for the time being, but the -injury was not so much to the fixed capital as to the Hidayatullah f. business as 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 case where the interruption was caused by the act of contracting party so that the payment could be regarded as an adjustment of contract by payment. It was case of compulsory requisition, but the requi-sition did not involve the buying of tea either as raw material or even as 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 case in which the business continued, and what was paid was to bring up the pofits to normal level. The observations of Rowlatt, J., in Newcastle Breweries case(') distinguish case where business is carried on and one in which business comes to an end. The learned Judge observes: "Now I have no doubt that Government re-quisition, such as took place during the war, could destroy trade, and anything which was paid would be compensation for such destruction. I can understand, for instance, if they had requisitioned in this case the people's building and stopped them either brewing and selling or doing anything else, and paid sum, that could not be taken as profit; they would have destroyed the trade pro tempore and paid compensation for that destruction; and in fact I daresay if they take the whole of the raw materials of man's trade and prevent him carry-ing it on, and pay sum of money, that is to be taken, not as profit on the sale of raw materials, which he never would have sold, but as compensa-tion for interfering with the trade altogether." These observations, though made under different (1) (1927) I2 T.C. 927.

I S.C.R. SUPREME COURT REPORTS

statute, are, in general, true of business as such, i9[6]i and can be usefully employed under the Indian Senairnm Income-tax Act. Our Act divides the sources of Doong••mall income, profits and gains under various heads in s. 6. v. Business is dealt with under s. 10, and the primary Commission" of condition of the application of the section is that tax In'om,-lax, Assam is payable by ~n ass.essee under the he!1d 'profit~ and Hida)'atullah J. gains of busmess' m respect of business carried on · by him. Where an assessee does not carry on busi-ness at all, the section cannot be made applicable, and the compensation that he receives cannot bear the character of profits of business. It is for this reason that the Judicial Committee in Shaw Wallace's case ([1]) observed that the compensation paid in that case was not the product of business, or, in other words, profit, but some kind of solatium for not carry-ing on business and thus, not revenue. It is to be noted that Das, C.J., in South India Pictures' case('), in dis-tinguishing Shaw Wallace's case ([1 ]), made the following observation:

"In Shaw Wallace's case the entire distributing agency work was completely closed, whereas the termination of the agreements in question, did not have that drastic effect on the assessee's business at all ............ In Shaw Wallace's case, therefore, it could possibly be said that the amount paid there represented capital receipt."

The observation is guarded, but it recognises the difference made in the Privy Council case and others between payment to compensate interference with going business and compensation paid for stoppage of business altogether. This distinction was emphasi-sed in the dissenting opinion in Vazir Sultan's case(').

Though the pityment in question was not made to fill hole in the capital of the assessee, as in the Glenboig case('), nor was it made to fill hole in the profits of going business as in Shamshere Printing Press case('), it cannot be treated as partaking the character of profits because business not having

(II (1932) L. R. 59 I.A. 206. (2) [1956] S.C.R. 223. (3) [1959] Supp. 2 S.C.R. 375. (.1) (1922) 12 T.C. 427. (5) [1960] 39 !.T.R. 90.

been done, no question of profits taxable under s. 10 arose. The Privy Council described such payment as solatium. It is not necessary to give it name; it is sufficient to say that it was not profit of

Senairam

Doongarmall v. it Commissioner of business.

Income-tax, Assam Once it is held that this was not profit at all, it is H'd -11 [h ]1 [clear ][that ][Rules ][23 ][and 24 ][of ][the ][Indian ][Income-tax ]' ayatu ·Rules could not apply, and there was no question of apportioning the amount, as laid down in R. 24. The whole of the amount received by the assessee was not assessable.

Income-tax, Assam

It remains to consider whether the payment could be treated as income from property under s. 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 under that section, and even the Judi-cial Member of the Tribunal, who entertained this opinion, did not express it as his decision in the case. This aspect of the matter not having been considered in the case before, we cannot express any opinion upon it.

In our opinion, the answers to the two questions

ought to have been:

Question (1)-no

Question (2)-does not arise.

In the result, the appeal is allowed with costs here

and in the High Court.

Appeal allowed.