1967 (1) TMI 21 - HC - Income Tax

Capital recipt - contract cannot possibly be treated as a trading contract entered into in the ordinary course of business and must be taken to be a source which was certainly of an enduring value which yielded income to the assessee - compensation in respect thereof must be treated as capital receipt

Summary

Issues Involved:
1. Nature of the Rs. 70,000 payment (whether it is revenue or capital in nature).

Issue-wise Detailed Analysis:

1. Nature of the Rs. 70,000 Payment:

The primary issue for determination was whether the Rs. 70,000 received by the assessee on June 11, 1954, should be classified as a revenue receipt or a capital receipt. This question arose following a series of transactions and agreements involving the assessee and a company, leading to the termination of a commission agreement.

Background and Facts:
Prabbu Dayal, operating under the name Ganeshi Lal Prabbu Dayal, facilitated an agreement between Shanti Parsad Jain and the erstwhile Jind State for the exploitation of kanakar deposits and cement manufacturing. Subsequently, a company named Dalmia Dadri Cement Limited was formed, and the benefits of the agreement were transferred to this company. For his services, the assessee was entitled to a 1% commission on the yearly net profits of the company, as per an agreement dated May 27, 1938. This commission was paid regularly until 1950. Following a dispute, a settlement was reached, and the assessee received Rs. 70,000 as compensation for the termination of the agreement.

Arguments and Legal Precedents:
The Income-tax Officer treated the Rs. 70,000 as revenue receipt, a decision upheld by the Appellate Assistant Commissioner of Income-tax. However, the Income-tax Appellate Tribunal classified it as a capital receipt. The matter was referred to the High Court to determine the correct nature of the receipt.

The court examined various legal precedents, categorizing them into three types of contracts:
- Agency Contracts: Typically, compensation for termination of an agency contract may be a capital receipt if the agency is a capital asset, or a revenue receipt if it is part of the stock-in-trade.
- Service or Supply Contracts: Compensation for termination of such contracts is generally of a revenue nature.
- Contracts Requiring No Further Action: The court found that the present case did not fit neatly into any of these categories.

Key Cases Discussed:
- Shove v. Dura Manufacturing Co. Ltd.: This case involved a company receiving compensation for terminating a commission agreement, which was deemed a revenue receipt.
- Van den Berghs Ltd. v. Clark: The House of Lords treated compensation for terminating an agreement affecting the entire business structure as a capital receipt.
- Kelsall Parsons & Co. v. Commissioners of Inland Revenue: Distinguished between contracts resulting in trading profits and those regulating business conditions.
- T. Sadasivam v. Commissioner of Income-tax: Differentiated between revenue receipts for services rendered and capital receipts for relinquishing rights.
- Commissioner of Income-tax v. R. B. Jairam Valji: The Supreme Court emphasized the difference between compensation for agency termination (capital) and cancellation of a business contract (revenue).

Court's Reasoning:
The court concluded that the present contract did not fall under the category of an agency agreement, nor was the assessee prevented from carrying on any business. The contract provided the assessee with a source of income, and the income derived could be categorized as "income from other sources." The contract was not a trading contract entered into in the ordinary course of business but rather a source of enduring value. The compensation received for the termination of this source of income was therefore a capital receipt.

Conclusion:
The court held that the Rs. 70,000 received by the assessee on June 11, 1954, was capital in nature. The assessee was entitled to costs from the department.

Separate Judgment:
J. N. Kaushal concurred with the judgment.