TMI Blog1986 (4) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure aggregating to Rs. 173.94 lakhs and according to the assessee, it sustained a loss of Rs. 57,85 lakhs in the venture. Correspondence was had between the U.K. company and the assessee in 1966 and on January 20, 1967, the U.K. company passed a resolution as follows: " It was resolved that although the company had no legal obligation to do so, in all the circumstances, it was proper for the company, without admission of liability, to indemnify S L of I (Stewarts Lloyds of India) against such loss up to a maximum of Rs. 25 lakhs for a period of two years. In the event that the total loss on this contract has not been established by the end of two years from the date of this resolution, the company will, on the request of S L of I, transfer the said sum of Rs. 25 lakhs to S L of I in consideration of S L of I agreeing, in the event of the total loss subsequently being established to be less than the said sum, to repay to the company the difference between the said sum and the total loss established." After further discussions between the assessee and the U.K. company on the quantum of loss suffered by the assessee in the said venture, it was recorded in a l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ast practice of any traditional or contractual or legal obligation and that the payment was merely a casual and windfall gift. He held that the said amount could not be treated as income subject to assessment in India. He allowed the appeal and directed the Income-tax Officer to exclude the said amount from the total income of the assessee. The Revenue preferred an appeal against the order of the Appellate Assistant Commissioner to the Tribunal. It was contended before the Tribunal on behalf of the Revenue that the said receipt was connected with and referable to the business carried on by the assessee and further that the said amount was paid to compensate the assessee for loss sustained by it in a particular business venture. It was contended that the assessee had in fact invited the receipt by sending reports of its loss to the U.K. company. It was contended further that the receipt could not be treated as a windfall as negotiations and discussions had preceded the receipt and the receipt was the result of a concluded agreement. It was further contended that a right to receive the amount had accrued to the assessee during the relevant assessment year under the resolution o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce to the Baroda Refinery project was not of the character of income ? " The said question has come up in Income-tax Reference No. 218 of 1977. On an application of the Revenue under section 256(2) of the Incometax Act, 1961, this court directed the Tribunal to refer the following question of law arising out of the order of the latter for the opinion of this court: " Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that Rs. 22.5 lakhs credited to the profit and loss account of the assessee for the previous year ended September 28, 1968, did not accrue as income of the assessee during the previous year ?" This question has come up in Income-tax Reference No. 155 of 1982. The learned advocate for the Revenue contended at the hearing that in the instant case, the assessee had suffered a loss and injury in its business. Any amount recovered to fill the gap or whole should properly be entered in the profit and loss account. In the instant case, the loss was suffered by the assessee in actually carrying on its business by executing the contract with the Indian Oil Corporation. The learned advocate submitted that from the cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cisions: (a) Susil C. Sen, In re [1941] 9 ITR 261 (Cal). In this case, the assessee, an attorney and advocate, in the course of acting for a shareholder of a company rendered certain services which resulted in substantial issue of new shares of the company to the public. A firm of stock brokers who were benefited by the issue of new shares paid Rs. 10,000 to the assessee though the latter had not acted for them and they were not legally bound for anything. On a reference by the Commissioner, it was held by a Division Bench of this court that the assessee had received the amount in the exercise of his profession as a lawyer and advocate and though the receipt was casual and non-recurring, it was not exempt from income-tax. (b) P. Krishna Menon v. CIT [1959] 35 ITR 48 (SC). In this case, the assessee, who used to study and teach the philosophy of Vedanta, received from one of his foreign disciples sums of money from time to time. The question was whether the said amounts were assessable to income-tax in the hands of the assessee. It was held by the Supreme Court in the facts that the teaching imparted by the assessee was a vocation and by reason of imparting of teaching, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipt liable to tax it was, however, held that the amount could not be included in the subsequent assessment year. (e) Senairam Doongarmall v. CIT [1961] 42 ITR 392 (SC). The facts in this case were that the assessee owned a tea estate and carried on the business of growing and manufacturing tea. The factory and other buildings of the assessee were requisitioned by the military authorities for defence purposes. The assessee continued to be in possession of the tea gardens which were preserved but manufacture of tea was stopped. The assessee was paid compensation under the Defence of India Rules for the years 1944 and 1945 calculated on the basis of the out-turn of tea which could have been manufactured by the assessee during the period. The question was whether the compensation paid was a revenue receipt taxable in the hands of the assessee. On these facts, it was held by the Supreme Court that the assessee did not continue his business of growing and manufacturing tea at the relevant time and, therefore, the compensation received by it could not be taxed as profits and gains of his business. The measure and method of payment could not determine the character of such payment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts, it was held by the English Court of Appeal that the sum received as consequential damages was a revenue receipt assessable to income-tax. The amount was received under a legal right and as compensation for the trader's inability to use the jetty. The sum which it received from the owner of the tanker would have been credited to the profits. (j) H. R. Sugar Factory (P.) Ltd. v. CIT [1970] 77 ITR 614 (All). In this case, the Government, in order to encourage early crushing of sugarcane, decided to allow factories which started such crushing by specified date a concession of 4 annas per maund of cane crushed up to particular date. The assessee received a sum from the Government for early start of crushing of sugarcane under the scheme. On these facts, it was held by the Allahabad High Court that the amount received by the assessee was by way of a subsidy to encourage early crushing. The payment was closely connected with the business of the assessee. The amount was held to be a trading receipt and taxable as income. (k) CIT v. Dr. K. George Thomas [1974] 97 ITR 111 (Ker). In this case, the assessee was engaged in a religious movement. The assessee received in his perso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 473 (Bom). In this case, on the recommendation of the Tariff Board, the Government directed that the manufacturers of soda ash should be allowed subsidy of Re. 1 per cwt. of soda ash produced and sold from the date of the decision provided the soda ash was sold at a fair selling price recommended by the Tariff Board. The assessee who manufactured soda ash during the relevant period claimed the subsidy. The amount of subsidy was recovered on a compromise after a suit was filed. On these facts, it was held by the Bombay High Court that the subsidy received by the assessee was a receipt of revenue nature as they were supplementary trade receipts. The whole object of payment of subsidy was to enable the manufacturers to carry on their business profitably. The subsidy was, therefore, to be included in the taxable profit of the assessee. The position was the same even if the subsidy was payable for a limited period and could not be regarded as casual or non-recurring. (o) CIT v. Sirpur Paper Mills Ltd. [1978] 112 ITR 776 (SC). In this case, the building, plant and machinery of the assessee were covered by insurance against loss by fire. The said assets were partly damaged by fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and of a benevolent nature given by the Government for the purpose of earning foreign exchange and not with the object of enabling the assessee to carry on its export business or to cover losses arising out of such business. On these facts, it was held by a Division Bench of this court on a reference that the nature of the business, the nature of the income and the nature of the rights to receive and the relations between the payer and the payee cannot be decisive to determine the controversy. It was found that by making exports, the assessee had received the subsidy which had the nature of assistance and the subsidy was inextricably connected with the exports. It was held that the cash assistance was incidental to and supplemental to the trading receipts and was a taxable revenue receipt. The learned advocate for the Revenue cited the following English decisions : (a) Reed v. Seymour [1927] 11 TC 625 (HL). In this case, the assessee, a professional cricketer, received an amount of money being the proceeds of a benefit match held in his favour which had remained invested by the trustees of the club. It was held that the assessee was not assessable in respect of the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he shipowners claimed damages from the shipbuilders, assessed on the estimated profits which the ship would have earned during the period of delay. The claim was compromised by payment of an amount, by the shipbuilders. It was held that the amount received was compensation for loss of trading profit and the same constituted income on which the shipowners were liable to pay income-tax. (f) Higgs v. Wrightson [1944] 26 TC 73 (KB). The assessee in this case was the owner of an agricultural land where he had carried on the business of dairy farming. During the war, the assessee had ploughed up a portion of his land which previously had been used for pasture. In respect for such land, the assessee received from the Government a " ploughing grant " under the Agricultural Development Act, 1939. It was held that this grant was a trading receipt and liable to be taxed as income. (g) Federal Farms Ltd. v. Minister of National Revenue [1959] Ex. C.R. 91. In this case, the assessee carried on business as a grower, packer and shipper of vegetables. In a particular year, there was a hurricane in the area which destroyed large quantities of vegetables ready for marketing and damaged t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s docks. Payments were received from time to time over several years. Assessments of income were made upon the company on the footing that the payments were part of its annual profits or gains. It was held by the House of Lords that such payments were not profits and gains of the trade carried on by the company and were not liable to income-tax. (b) Federal Farms Ltd.'s case [1959] Ex. C. R. 91. This case has been noted earlier. (c) Simpson v. John Reynolds Co. (Insurances) Lid. [1975] Simon's Tax Cases 271. In this case, the taxpayer company carried on business as insurance brokers. For many years, the taxpayer had acted as adviser to a company in all its insurance matters and pension schemes. In 1965, the other company came under the control of ICI Ltd. and was required by the latter as the controlling company to place all its insurance matters with another insurance company. The company informed the taxpayer that its services would no longer be required and volunteered to pay to the taxpayer company pounds 1,000 per annum for a period of five years commencing from March, 1966. It was recorded that the payment was being made in recognition of the past services of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be declared as exempt from entertainment duty and that as the producer, the assessee would be entitled to that part of the proceeds of the exhibition of the film which represented entertainment duty. The claim of the assessee was accepted by the State Government and the assessee recovered from various exhibitors the amount which had been collected by way of entertainment duty. The assessee claimed that the amount so recovered was not liable to be included in its total income as it was not a trading receipt but was an amount received by way of a testimonial and in any event it was a casual and non-recurring receipt and, therefore, exempt under section 4(3)(vii) of the Indian Income-tax Act, 1922. On these facts, it was held by the Bombay High Court that the receipt in dispute was not an income in the ordinary or normal sense of the term. The assessee had produced the film without any expectation that the same would be exempt from entertainment duty or that the amounts of entertainment duty collected would be directed to be returned to the assessee. It was held that the amount received was in the nature of a windfall not in the contemplation of the assessee and that the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as receivable from the U.K. company with reference to the Baroda Refinery Project. It has been found by the Tribunal that the said amount of Rs. 22,5 lakhs had been received by the assessee from the U.K. company. From the facts found as aforesaid, it was contended that the said income of Rs. 22.5 lakhs had accrued to the assessee during the relevant accounting year. In support of his contentions, the learned advocate for the Revenue cited the following decisions: (a) E. D. Sassoon and Company Ltd. v. CIT [1954] 26 ITR 27 (SC): This decision was cited for the following observations of the Supreme Court (at pages 51, 54 and 55): " It is clear, therefore, that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in praesenti, solvendum in futuro : see W. S. Try Ltd. v. Johnson (Inspector of Taxes) [1946] 1 All ER 532 at 539 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ption from payment of sales tax for three years. The State Government was, therefore, bound to honour the assurance and grant the exemption. The assessee was unsuccessful in the High Court but on a final appeal before the Supreme Court, it was held that, on the facts, promissory estoppel had been established against the Government and the Government was bound to carry out its promise and allow such exemption to the assessee. The learned advocate for the assessee contended on the other hand that it appeared from the said resolution dated January 28, 1967 that the U.K. company had only expressed its intention to pay the said amount. No legal right could or did accrue in favour of the assessee on the basis of the said resolution. The position remained the same after the U.K. company issued the said letter dated September 20, 1968. All that the said letter indicated was that on the basis of the said resolution, arrangements for settlement would be made with the assessee. The learned advocate for the assessee contended further that the fact that the said amount had been entered in the books of account of the assessee was of no consequence inasmuch as no income had in fact accrued to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The U.K. company and the assessee at all material times were and remained different entities. Similarly, the fact that there were prior discussions between the assessee and the U.K. company regarding the method and manner of the payment and determination of the quantum to be paid would not affect the character of the receipt. As the Tribunal correctly noted, there can be nothing to bar consultation and discussion between a donor and a donee. In the conspectus, as above, it appears that the principles laid down both in the English law and in Indian law in the decisions cited on behalf of the assessee noted hereinabove would apply to the facts of this case. It appears to us that the payment received by the assessee from the U.K. company was a casual receipt in the nature of a windfall. The payment was benevolent and constituted a gesture of goodwill on the part of the U.K. company. It cannot be said that the said payment had the character of a trading or a revenue receipt. The fact that the amount received from the U.K. company had been shown in the profit and loss account of the assessee for the relevant assessment year under the head " Income from other sources " would also n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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