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TMI Blog1963 (4) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... egulation, 1358 Fasli, are income and therefore liable to tax ? " The question was answered against the appellant by the High Court and hence this appeal. The point at issue is whether these payments constituted capital or income. The answer to this question will have to be found in the Abolition Regulation under which the payments were made and another Regulation called the Hyderabad Jagirs (Commutation) Regulation, 1359 F. (hereafter called the Commutation Regulation), which was intended to be supplementary to the earlier Regulation. The material provisions of these Regulations may, therefore, be referred to at once. We shall first take up the Abolition Regulation. Under section 6 of this Regulation, the Jagirs were included in the " Diwani " (Government) as from the " appointed day " to be fixed under section 5 and thereupon the powers, rights and liabilities of the Jagirdars in relation to the Jagirs ceased to be exercisable by or against them. Section 3 provided for the appointment of an officer called the Jagir Administrator. Section 8 provided for payment to Government of a specified percentage of the gross revenue, which for practical purposes may be taken to be the tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the real point for decision is whether the payments were of income nature or of the nature of capital. If they were made as compensation for the deprivation of the Jagir, they would undoubtedly be capital. It may be stated that it is common case of the parties that the commutation sum payable under the Commutation Regulation was paid as such compensation. The first thing that we wish to observe is that the two regulations made a clear distinction between the interim maintenance allowances and the commutation sum. The allowances were paid under the Abolition Regulation which said nothing about the right to the payment of the commutation sum; that right was created only by the Commutation Regulation. The allowances were measured as a fraction of the current income while the commutation was a multiple of annual revenue. The allowances were recurring payments for a certain time while the commutation sum was a fixed sum payable at once or by installments. Then we find that under section 14 of the Abolition Regulation the interim maintenance allowances were " payable until such time as the terms for the commutation of Jagirs are determined ". In other words, after the terms for commutat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave shown earlier, they could not be. " Final commutation " meant the only commutation that the Jagirdar was to get in respect of his rights in the Jagir, that is to say, he was to get no other commutation. In fact, as already stated, if any interim maintenance allowance was paid after the commutation became payable, that was to be recovered from and not added to, the commutation. We have earlier said that it is not in dispute that the commutation sum was paid as compensation for the loss of the Jagir and was, therefore, capital which was not liable to be taxed. We thus find that the Regulations make a clear distinction between the commutation sum or compensation and the interim maintenance allowances. These allowances were obviously not intended to be compensation. The question then arises, if these allowances were not paid as compensation for the loss of the Jagir and were not of the nature of capital as such, what was their nature? We think that if we have regard to the provisions of the Regulations under which they were paid, as we must, there is no doubt that they were of the nature of income. No doubt they were not income of any of the kinds that are commonly found, but are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assets transferred to the Government and to certain payments called " revenue payments " and " interim income " for the period between what was called the primary vesting date and the date on which compensation for the assets taken away was fully satisfied. The question was with regard to these payments. The assessee company had contended in the beginning that the payments were not of income nature at all. In the Court of Appeal however that contention was abandoned and it was conceded that the payments were of income nature. The only dispute was whether they were income chargeable to profits tax as profits of a trade or business carried on by the assessee company. The decision was that the payments were not income or profit of any trade or business. We will first read from a part of the judgment of Jenkins L. J. in the Court of Appeal. He said [1955] 36 Tax Cas. 411, 437 " The Act of 1946 studiously avoids describing the interim income as interest on or income of the compensation" Then the learned Lord Justice pointed out that the payments were to be calculated by reference to the past earning of the concern and bore no relation at all to the amount of the compensation and pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t were fixed either as a proportion of the profits which they had been earning in the colliery trade before the date of vesting or by a computation of interest at varying rates before sums received from time to time by way of capital compensation. But, when all that is said, the fact remains that the only identifiable origin of the payments was the statute which authorised them and at the same time defined their terms and methods of computation. It is natural enough that moneys paid in this way, described by their instrument of creation as ' interim income ', should be regarded as inherently of an income nature when the question arises of subjecting them to any tax that bears upon income as a chargeable subject. But I do not think that in any proper use of the words can they be said to arise from a source of income, in the sense that income or profits (for the moment I am not concerned with any difference between the two terms) can be said to arise from a trade or a business or an investment or some other piece of property that admits of use or enjoyment. " He also observed [1956] 36 Tax Cas. 411, 451, 452: " I have already explained why they were not income from investments. By ..... 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