TMI Blog1958 (10) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany which owned a factory at Kanjirapilly in the Travancore State to process rubber from latex and smoked sheets and manufacture rubber goods therefrom. It leased out the factory to P.C. Abraham and others, hereinafter referred to as the lessees, by a lease deed dated May 1, 1941, copy whereof is annexure 'A' and forms part of the case, for a period of 15 years therefrom. 3. Clauses 14 and 16 of the aforesaid annexure are as follows: 14. The lessees further covenant and guarantee that during the continuance of the lease and for a period of three years after the expiration of the lease, the lessees or any of them shall not directly or indirectly work for, advise or be in any manner connected with any other rubber goods manufacturing concern or themselves carry on any such concern except continuing the business of manufacturing goods from rubber latex now carried on by them at Kanjirapilly and that on the breach of any of the above guarantees the lessees shall pay the lessors a lump sum of ₹ 10,000 only as compensation therefore. 16. If the lessees discontinue the lease before the efflux of the period herein provided or cause such discontinuance by their de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber 31, 1950. There is no evidence of either the arbitration itself or of the details of the award, if any. 7. It is common ground that the aforesaid appropriation of the compensation received as damages for breach of clause 14 and 16 even though in odd annas and pies, are only arbitrary and without any basis. 8. In its return for the calendar year 1950, the previous year for relevant assessment year 1951-52, the assessee showed the aforesaid receipt of damages of ₹ 15,125-3-0 in page 'C' therein as casual and non-recurring income not liable to tax. The Income-tax Officer, however, held that the compensation in question was only income, as it had been received for breach of the terms of the agreement annexure 'A' aforesaid. His detailed reasons are to be found in annexure 'B' extracted from his order dated 6th August, 1953, annexed hereunto and forms part of the case. 9. The assessee's appeal to the Appellate Assistant Commissioner having been unsuccessful, it appealed to the Tribunal contending as before that the compensation was only capital and not assessable. The Tribunal found, on the above facts, that the compensation in question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 was also determined under the Indian Income-tax Act. In the return of the assessee for the calendar year 1950, the previous year for assessment year 1951-52 aforesaid, the assessee claimed under section 24(2) of the Indian Income-tax Act a set-off of the loss of ₹ 4,032 in respect of the assessment year 1123 aforesaid in addition to the losses of the later assessment years 1124, 1125 and 1950-51. The Income-tax Officer set off the losses for the assessment years 1124 and 1125 determined under the Travancore Income-tax Act as also the loss for the assessment year 1950-51 determined under the Indian Income-tax Act against the aforesaid assessment for 1951-52 but refused to set off the aforesaid loss of ₹ 4,032 determined for the assessment year 1123 under the Travancore-Income-tax Act, as under section 32(2) of the Travancore Income-tax Act, the loss in question could be carried forward only for two years, viz., till the assessment year 1125 and no further. The assessee's appeal to the Appellate Assistant Commissioner was unsuccessful. Thereupon it appealed to the Tribunal. In this appeal it was conceded that if the Travancore Act had continued to apply to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iod of three years after the expiration of the lease, the lessees or any of them shall not directly or indirectly work for, advise or be in any manner connected with any other rubber goods manufacturing concern or themselves carry on any such concern except continuing the business of manufacturing goods from rubber latex now carried on by them at Kanjirapally and that on the breach of any of the above guarantees the lessees shall pay the lessors a lump sum of ₹ 10,000 only as compensation therefor. 16. If the lessees discontinue the lease before the efflux of the period herein provided or cause such discontinuance by their default to observe or by their breach of any of the terms of this agreement to be observed or performed by them, the lessees shall become liable and shall pay to the lessors a sum of ₹ 10,000 by way of liquidated damages for such discontinuance... Disputes and dissensions arose between the lessees and the company shortly after the grant of the lease, and these disputes and dissensions gave rise to four suits between them in the District Court of Kottayam: (1) O.S. No. 134 of 1117 and (2) O.S. No. 126 of 1121 instituted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company has claimed depreciation for furniture, machinery, etc. but the factory was not working during the accounting period. Hence no depreciation can be allowed. Net adjusted loss for 1950-51. ₹ 1,887-8-0 Add Loss of 1123 carried over ₹ 4,031-10-0 1124 5,479-1 0 1125 2,604-13-0 ₹ 12,115-9-0 Total 14,003-1-3 This will be carried forward. The accounting period for the next assessment, namely, the assessment for 1951-52, was the year 1950. In making the return for that assessment the company again showed a net loss. The Income-tax Officer refused to accept this return as correct. Out of the sum of ₹ 23,311-3-0 which the company had received in 1950, under the compromise with the lessees, it had credited in its accounts ₹ 15,125-3-0 as damages for breach of clauses 14 and 16 of the lease deed, ₹ 7,075-1-6 as damages for breach of clause 14 and ₹ 8,050-1-6 as damages for breach of clause 16. The Income-tax Officer treated this amount of ₹ 15,125-3-0 as an item of profit or gain liable to tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l on October 11, 1954. That appeal also was dismissed and then the company applied for a reference to the High Court under section 66(1) of the Indian Income- tax Act. The Tribunal refused to make a reference on the ground that the case involved only questions of fact and not questions of law. Thereupon the company field Original Petition No. 194 of 1955 in the High Court of Travancore-Cochin for compelling the Tribunal to make a reference under section 66(2) of the Indian Income-tax Act, and on February 2, 1956, the High Court allowed that original petition and directed the Tribunal to make a reference. This reference has been made accordingly, and the questions referred are: (1) Whether under the provisions of the Indian Income-tax Act the petitioner is entitled to carry forward the loss for a period of six years not withstanding the fact that during the period when the loss had occurred the law applicable was the Travancore Income-tax Act? and (2) Whether the amount of ₹ 15,125-3-0 received by the petitioner from the lessees of the factory is assessable or not? Question No. 1 relates to the company's complaint as regards the omission to give relief to it in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E. cannot to set off against the profits of the assessment years subsequent to 1125 M.E. As the assessment of 1951-52 is for a period subsequent to 1125 M.E. (the corresponding dates according to the Malabar Era for April 1, 1951, and March 31, 1952, are 18-8-1126 and 18-8-1127), the company would not be entitled under section 32(2) of the Travancore Income-tax Act to carry forward the loss of 1123 and set it off against the profits and gains of 1951-52 for the purposes of the assessment of that year. The company's case is that, as the assessment for 1951-52 was made under the Indian Income-tax Act, the set-off of the losses of the previous years has to be made under section 24(2) of the Indian Act and not under assessment of 1951-52 it was entitled to have the loss of 1123 taken into account and set off against the profits of 1951-52. The Appellate Tribunal overruled this contention saying: The carry forward of losses has to be determined under the law as it existed at the time when the loss occurred, which in this case is in 1123 M.E., and this had admittedly lapsed by 1125 M.E. long before the Indian Income-tax Act was ever thought of being applied to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of ₹ 67,040 received as interest exempts from tax under the Government notification of 1922, and took up the case, by way of a reference to the Chief Court. During the course of the arguments in the Chief it transpired that there was another notification of the 2nd November, 1935, also prescribing the same maximum limit, i.e., ₹ 22,500, for such exemptions. In repelling the assessee's contention, after mentioning the fact that besides the notification of 1936 there was also the earlier notification of 2nd November, 1935, Davis, C.J., observed in his judgment: But we do not think that if there had been no notification of 1935 but only the notification of 1936, that would have helped the assesses at all, because while it is true that the quantum of the income for the assessment of the year 1936-37, was the income of the year 1935-36, the assessment was not for the year 1935-36, but for the year 1936-37, and it appears to us that the law and statutory rules applicable for determining the assessment must be statutory laws and rules in force in the year of the assessment, i.e., in 1936-37, when the assessee's would clearly be entitled only to the limited e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rivy Council. The Privy Council also overruled the assessee's contention saying: In the first place, it is clear to their Lordships that under the express terms of section 3 of the Indian Income-tax Act, 1922, the subject of charge is not the income of the year of assessment, but the income of the previous year. This is in direct contrast to the English Income Tax Acts, under which the subject of assessment is the income of the year of assessment, though the amount is measured by a yardstick based on previous years. The difference is well illustrated by the distinction that in England the source of income must still be extant in the year of assessment but that is not of relevance in India. Their Lordships may refer to the able judgment of Rankin, C.J., in Behari Lal Mullick v. Commissioner of Income-tax [1927] I.L.R. 54 Cal. 630; 2 I.T.C. 328 with which they agree. In the second place, it should be remembered that the Indian Income-tax, 1922, as amended from time to time, forms a code, which has no operative effect except so far as it is rendered applicable for the recovery of tax imposed for a particular fiscal year by a Finance Act. This may be illustr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and income of the assessment years also has to be determined, in the absence of any express provision to the contrary, according to the law as it is in the assessment year and not as it was at the time the losses occurred. The Indian Income-tax Act was extended to Travancore cochin and the Travancore Income-tax Act was repealed by sections 3 and 13 of the Indian Finance Act 1950. Section 13(1) If immediately before the 1st day of April, 1950, there is in force in any part B State other than Jammu and Kashmir or in Manipur, Tripura or vidhya pradesh or in the merged territory of Cooch Behar any law relating to income-tax or super-tax on profit of business, that law shall cease to have effect except for the purpose of the levy, assessment and collection of income-tax and super-tax in respect of any period not included in the previous year for the purpose of assessment under the Indian Income-tax Act, 1922 (XI of 1922), for the year ending on the 31st day of March, 1951, or for any subsequent year, or, as the case may be, the levy, assessment and collection of the tax on profits of business for any chargeable accounting period ending on or before the 31st day of March, 1949. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned counsel for the Department is wrong. According to the company's learned counsel, section 3 of the Taxation Laws (part B states) (Removal of Difficulties) order, 1950, was enacted for the purpose of securing to the assessee's newly brought inset the Indian Income-tax Act such larger rights as would have been available to them; under provisions of the repealed state laws has continued to be in force and had not been superseded by the Indian Income-tax Act. His contention was that section 3 of the Taxation laws (part B states) (Removal of Difficulties) order, 1950, does not curtail, but enlarges, so far as these new assesses are concerned, the rights under section 24(2) of the Indian Act. In our opinion the contention of the company's learned counsel is sound and has to be accepted. The power given by section 12 of the Finance Act. 1950, to the central Government is to make orders for removing any difficulty which arises in giving effect to the provisions of the Acts extended to the part B states or merged territories by section 3 or II of that Act. So far as the Income-tax Department is concerned, there can be no difficulty at all in giving effect to sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be that such part of the loss as would fall under the item capital gains (referred to hereinafter as capital loss ) can be set off only against capital gains of the subsequent years and not against all the income under the head profits and gains of the same business, profession or vocation; and the effect of the proviso to sub-section (2B) will be that even the right to carry forward capital loss of the previous year is avilable only when such losses exceed ₹ 15,000. There are no provisions in the Travancore Income- tax Act similar to section 24 (2A) and 24 (2B) and the proviso thereto in the Indian Income-tax Act, and so before the extension of the Indian Income-tax Act to Travancore-cochin the assesses in Travancore were entitled to carry forward capital loss of previous years even when such loss was below ₹ 15,000 and to set off the capital loss against all the income in the subsequent year or years under the head profits and gains of business, profession or vocation , subject, of course to the restrictions as regards the period for which the losses of 1122,1123, 1124,1125 and 1126 could be carried forward under section 32(2) of the Travancore Act. The ef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during which losses other than capital loss could be carried forward under section 24(2) and 24(2B) to be set off against income other than capital gains, it was provided in section 3 of the Taxation Laws (part B states) (Removal of Difficulties) order, 1950, that the loss would be set off in the same manner, to the same extent, and up to the same year of assessment as it would have been set off had the state laws continued to be in force. In our opinion, it is to meet cases like this, and not for curtailing the right which an assessee would get under-section 24(2) of the indian Act upon the extension of that Act to part B sates, that section 3 of the Taxation laws (part B states) (Removal of Difficulties) order, 1950, has been enacted. If the intention in enacting this section was to curtail any larger rights which the assessee's might get under section 24(2) as a result of the extension of the Indian Act, the word only or some such expression would undoubtedly have been used before the expression in the same manner occurring in the clause such loss would be so set off only in the same manner, etc., making that clause read: such loss would be so set off in the same ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e system which the stature purpose to be regulating; and that alternative is to be rejected which will introduce uncertainty, friction or confusion into the working of the system'. It is also pointed out, in the same page, that Language is rarely so free form ambiguity as to be incapable of being used in more than one sense, and to adhere rigidly to its literal and primary meaning in all cases would be to kiss its real meaning... The following observation of Maxwell at pages 18 and 19 of the same book are also worth quoting in this connection: General words admit of indefinite extension or restriction, according to the subject to which they relate, and the scope and object in contemplation. They may convey faithfully enough all that was intended, and yet comprise also much that was not;........The literal construction then has, in general, but prima facie preference. To arrive at the real meaning, it is always necessary to get an exact conception of the aim, scope, and object of the whole Act; to consider, according to Lord Coke: 1. What was the law before the Act was passed; 2. What was the mischief or defect for which the law had not p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 12 of the Finance Act, 1950, which itself was enacted for the purpose of providing a machinery for removing difficulty in giving effect to the provisions of the extended Act, the right and proper construction of section 3 of that order appeals to us to be the construction contended for by the company's counsel and not the construction the Department's counsel seeks to put upon it. There is no case that any capital loss in respect of which the company would be entitled to the larger relief under section 32(2) of the Travancore Income-tax Act is included in the loss of 1123 which, as has been stated already, the company seeks to carry forward and set off against the income of 1951-52 and which has also been ascertained and fixed in the assessment order of 1950-51. Therefore, for the reasons stated in paragraphs 8 to 14 above we hold that the company is entitled to carry forward the loss of 1123, mentioned in the assessment order of 1950-51 and disallowed in the order of 1951-52, for a period of six years as provided in section 24(2) of the Indian income-tax Act and not merely for the period of two years mentioned in section 32(2) of the Travancore income-tax Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax [1943] 11 I.T.R. 513, is a word of the broadest connotation and difficult and perhaps impossible to define in any precise general formula. Lord Macmillan said in Van Den Berghs Ltd. v. Clark (Inspector of Taxes [1935] 3 I.T.R. (Eng. Cas. ) 17) that though in general the distinction between an income and capital receipt was well recognised and easily applied, cases did arise where the item by lay on the border line and the problem had to be solved on the particular facts of each case. No infallible criterion or test can be or has been laid down and the decided cases are only helpful in that they indicate the kind of consideration which may relevantly be borne in mind in approaching the problem. The character of the payment received may very according to the circumstances. Thus the amount received as consideration for the sale of a plot of land may ordinarily be a capital receipt but if the business of the recipient is to buy and sell lands, it may well be his income. The problem that confronts us has to be approached keeping in mind the different kinds of consideration taken into account in the different cases. The assessee before us is a company carrying on a busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee had distribution rights in respect of eleven films including these three. These three agreements would have come to an end on the expiration of the period of five years from the respective dates of release of films and had only a part of the period to run, a fact which may also be relevantly borne in mind. The cancellation of these agreements must have left the assessee free, if it so chose, to secure other films which could be distributed in the place of these films and which might have brought in better boxoffice collections. In the language of Lord Hanworth, M.R. in Short Bros. Ltd. v. commissioners of Inland Revenue [1927] 12 Tax Cas. 955. 973 the sum paid to the assessee was not truly compensation for not carrying on its business but was a sum paid in the ordinary course of business to adjust the relation between the assessee and the producers of the films. The agreements which were cancelled were by no means agreements on which the whole trade of the assessee had for all practical purposes been built and the payment received by the assessee was not for the loss such a fundamental asset as was the ship managership of the assessee in Barr, Crombie Co., Ltd. v. commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot also granted any other lease either before this lease was granted or during the period it was in force. The lease transaction with the lessees was practically the only source of its income after the lease was granted till the termination thereof. In other words, after the factory was leased to the lessee the business of the company consisted only of this lease which it had given to the lessees and nothing else. Since the company had stopped its normal activities when it granted the lease and was doing no other business thereafter, the termination of the lease by the lessees before the expiry of the period fixed in the lease deed would necessitate fresh outlays of capital expenditure for restarting the workings of the factory by it at a time when, under normal circumstances, it would not have been ready or prepared to incur such expenditure. This was the reason for the provision in clause 16 of the lessees deed that if the lessees discontinued the lease before the efflux of the period they should pay ₹ 10,000 by way of liquidated damages. In the light of the principles laid down by the supreme court in the passage extracted above from commissioner of Income-tax v. South Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Kailash co. v. Commissioner of Income-tax**, Malik, C.J. says: Lord Moncrieff divided two classes of cases of compensation paid for termination of contracts as follows: (1) a contract may be made by a trader which is merely directed to a result in trading profits being made; (2) a contract may be made by a trader which is directed to regulate the conditions under which he is to carry on his trade.' In the first class of cases, if the contract is terminated or a breach thereof is made and compensation or damages are received it might be treated as trading profits. In the second class of cases, compensation received for the termination of a business cannot be treated as trading profits as it was paid for the termination of trade or business. The amount received in such a case would ordinary fall within the rule laid down in shaw Wallace's case* and would not be taxable. In the one case one gives up the source from which the income arises; in the other one merely gives up anticipated profits, which would have accrued to him if the contract had not been discontinued or terminated, for cash payment. In the case before us, there was a contract entered into by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the lessees before the expiry of the period, therefore was unworked coal in the coal mines, and the amount paid by the lessees to the lessors represented the amount which they were to pay in respect of this coal under the agreement mentioned above. The High court held that on a consideration of the substance of the transaction it was clear that the estate received the payment not as consideration for the termination it was clear that the estate received the payment not as abandoned coal pursuant to the terms of the agreement but as such it was a revenue receipt and not a capital receipt. The facts of the present case are entirely different. The sum of ₹ 8,050-1-6 received under clause 16 could have been received, and was actually received, only as consideration for the termination of the lease which was the main framework or structure of the companies business and the only source of its income. The present case, so far as the payment under clause 16 is concerned, is governed by the principles laid down in commissioner of Income-tax v. South Indian Picture Ltd. and Hari Kailash co. v. commissioner of Income-tax and cossimbazar Raj wards Estate v. commissioner of Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eguard against competition and, therefore, the payment of compensation thereunder cannot be said to be one not arising from business. We, therefore, hold that the amount of ₹ 7,075-1-6 is clearly liable to assessment. Towards the close of paragraph 3 of the order of the Appellate Tribunal, disposing of the appeal, it has said: It is stated that the matter was ultimately refereed to arbitrators who awarded ₹ 23,000 odd which is received by the assesses in full and settlement of all claims. Out of this, in the books of the assesses, after adjusting rents etc., due, ₹ 7,075-1-6 and ₹ 8,050-1-6 totaling ₹ 15,125-3-0 have been shown as compensation received in respect of damages sustained under clauses 14 and 16 respectively. The assessee however has not filed a copy of the award and it is said that the award was oral. In paragraph 4 of its order the Tribunal has said further: It is admitted by the assessee that the residue of ₹ 15,125-3-0 out of the aforesaid award of ₹ 23,000 odd received, has been allocated as ₹ 7,075-1-6 and ₹ 8050-1-6 between compensation for breach of clauses 14 and 16 respective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total damages paid by the lessees was ₹ 15,125-3-0 and the maximum damages which could be claimed under each of the clauses 14 and 16 was only ₹ 10,000, it is obvious that the award must have been made under both clauses. Since the award was the result of an arbitration the probabilities are that the maximum amount of damages under each clause would not have been awarded, and the correctness of the appropriation of the amount towards the two clauses (i.e., ₹ 7,075-1-6 towards clause 14 and ₹ 8,050-1-6 towards clause 16) was not, as has already been stated, disputed by the Department at any time. Although, in view of the conclusion we have reached in paragraphs 23 and 24 above regarding the amount of Rs, 7,075-1-6 credited in the company's accounts as damages received under clause 14 it is not necessary to consider the correctness of the Tribunal's observation to the effect that the company could not have suffered any damages at all under clause 14 and that there was, therefore, no scope for award of damages by the arbitrator under the said clause, it may be pointed out that in this matter also the Tribunal was laboring under a misapprehension. The T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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