TMI Blog1967 (2) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the last war, the Collector of Poona requisitioned the above premises for the purpose of godowns for storage of food grains. Originally, the entire premises of the assessee were requisitioned but upon request from the firm, the Collector agreed to allow the office premises to remain in their possession as before. Consequent upon the requisition, the assessee put in a claim for compensation under section 19 of the Defence of India Act, claiming Rs. 1,85,200 some time in October, 1944. The Collector on his part, however, offered them only rent at the rate of Rs. 310 per month some time in June, 1946. Not satisfied with this offer the assessee-applicant claimed reference to arbitration and on November 10, 1947, the Civil Judge, Senior Division, Poona, was appointed the arbitrator. The Government appointed its consulting surveyor as an assessor to aid the arbitrator and the assessee on its part appointed one Mr. J. P. Parekh as its assessor. On April 15, 1948, the arbitrator gave his award and be awarded the following sums of money as compensation to the assessee: (1) Rs. 310 per month as rent from the 15th May, 1944, till the date on which the premises would be restored to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------------ Now, so far as this amount is concerned, the Income-tax Officer held that the amount was business income and liable to be taxed. In appeal by the assessee the Appellate Assistant Commissioner, Poona, held that the amount represented a capital receipt and was not a revenue receipt in the hands of the assessee and therefore not liable to tax. The Tribunal has, in appeal by the Income-tax Officer, Poona, reversed the decision of the Appellate Assistant Commissioner, and held that the amount was a business or revenue receipt and as such liable to be taxed in the hands of the assessee. Now in order to ascertain the true nature of this amount of compensation granted to the assessee by the authorities, it is necessary to consider what was the nature of the claim made by the assessee in resport of which it was granted. Counsel for both the parties have taken us through the statements and the order of the arbitrator and the appellate judgment of this court, in order to show what was the true nature of this amount in the hands of the assessee. It is necessary, therefore, to refer to the documents, which indicate the nature of the claim made and what in essence was gran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 310 the assessee would be entitled to a lump sum compensation for loss of earnings. He added : " The recognised method for assessing compensation for loss of earnings is to allow a sum equal to from 6 months to 3 years' earnings. Three years is the maximum which is allowed when the whole business is totally acquired." Then he pointed out that the Government had decided to exclude the main business office together with some storing space and that the portion retained with the claimant formed the most prominent and important part of the whole premises where the claimant could carry on business, though he would have to make other arrangements for storage of timber, etc. He then added : " I do not believe the contention now put forth that he cannot carry on business for want of storing space which need not necessarily be attached to the office premises." He, therefore, recommended that a lump sum compensation of Rs. 31,374 should be paid to the claimants, calculated at Rs. 5,229 per month for six months. With the rest of the claim made we are not here concerned. When the matter went before the arbitrator, the assessor for the assessee pointed out that the firm had been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a much larger amount than he was actually awarded. But he pointed out that the arbitrator did not accept this basis of computation of compensation and the arbitrator has adopted a completely different mode of assessment. We thus turn to the findings of the arbitrator and of the High Court. After stating the respective claims, the arbitrator found in paragraph 4 as follows : " The main premises consisted of six sheds erected for storing timber and wood.... Out of these 6 sheds, the Government have demolished 4 and have made alterations in the remaining two, so as to make them more suitable for storing bags of food grains. " He also found in paragraph 5 of his order that a timber business could not be carried on without grounds for storing the timber and an office for meeting the customers and for settling bargains, and that in the present case the claimants were allowed to retain their office, but they were deprived of their godowns, where they had stored considerable quantities of timber at the date of the requisition. As regards the status of the firm, he found that the assessee had been in this business for more than 40 years and that they had been occupying the requisitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pensation. Now, no doubt, the assessee had claimed the loss of earnings on the basis of the average annual profits lost to him for a period of three years, but nevertheless the arbitrator did not award this amount. In paragraph 12 he held: "Apart from that purshis, I think it is clear that when a running business is stopped or discontinued on account of the requisitioning of the premises in which the business had been carried on, the owner of the business is entitled to be compensated, not only for the loss of the premises but also for the loss of his earnings resulting from the discontinuance of the business " (Underlining is ours). After referring to some of the authorities, he proceeded to consider what were the principles deducible from the authorities and in that connection observed : " . . . the first point which deserves to be noted is that the claimants' business was practically stopped on account of the loss of the storage godowns. It is obvious that a timber business cannot be carried on without provision for storing wood in suitable sheds or godowns. It is pointed out that the claimants were allowed to continue to have the use of their office at the same old place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the premises will mean total extinction of trade, or where there are no other premises to which the trader can move, the full value of the goodwill may be allowed as compensation. In the case of most retail businesses this will seldom exceed three years' purchase of the net profits, and may be less." He dealt with the arguments urged on behalf of the Government that the assessee could not have, in the war years, carried on business on the same scale and on the same profits as before, because of various restrictions and war-time difficulties, but rejected the said contention and held that the assessee could have maintained the same volume of business. He then awarded damages as follows: " Considering all the circumstances and especially the delay in determining compensation, I think I should allow two years' purchase of the net annual average profits by way of compensation in this case." Accordingly, he awarded a sum of Rs. 1,25,500 which is twice the figure of annual average profits as given by the assessees of Rs. 62,750. The matter was then taken to the High Court. Before the Division Bench the Government pleader had urged on behalf of the Government that the assessees co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "purchase" is significant and it shows, in our opinion, that compensation was awarded as if the business were at an end or taken over by the Government. This conclusion is further strengthened by the findings which the arbitrator has given that the claimants' business was practically stopped on account of the loss of the storage godowns consequent upon the requisition and that the assessees could not carry on their timber business without provision for storing wood in suitable sheds or godowns. No doubt, the arbitrator has used in his discussion the expression " loss of earnings ", but loss of earnings may equally well imply merely a loss of profits or loss of earnings consequent upon the cessation of the business itself, and he has shown that the compensation which the arbitrator ultimately awarded was really for the compulsory cessation of the business consequent upon the requisitioning of the premises and not merely for the loss of profits. Indeed it seems to us that the very principle which he extracted from the opinion of Lawrence and May on " Modern Methods of Valuation ", which we have quoted above, shows that he awarded the compensation for the taking over of the premises, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany by reason of quitting the premises and consequent disorganisation of the business; in the present case the appellant had closed down the business and could not start it anywhere else for want of suitable place and, therefore, the compensation paid was for loss of earnings resulting from the discontinuance of business and he held the same to be liable to tax relying on the Patna High Court decision in the case of Rai Bahadur H. P. Bannerji v. Commissioner of Income-tax." He distinguished the Pure Products Limited's case and observed: " In that case, the appellants were able to carry on the business in other premises and still it was held that the payment was not for carrying on the business, whereas in the present case, on the Income-tax Officer's own admission, the business could not be carried on by the appellant and the compensation received was thus for loss of business; and I should, therefore, think that the amount so received represents a capital receipt and not a revenue receipt. . ." Here again, the Appellate Assistant Commissioner, therefore, has found that the assessee's business was closed down as a result of the requisitioning or as the Income-tax Officer ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carry on its business elsewhere materially affects the quantum of the compensation that has to be awarded to it but does not in any way change its nature. The fact that the assessee was not able to find any other place for storing its timber or the fact that it was prevented from carrying on the business on the same scale as before does not affect its goodwill. During the last war, many overseas businesses ceased to function on account of dearth of shipping facilities, etc., but this cessation in business has not impaired the goodwill of the business and the businesses continued to function thereafter as the hostilities ceased. It sometimes happens that there is temporary inactivity and lull in the business, when the business is not busy but that does not affect the profit-making apparatus of the assessee. The loss which has been suffered by the assessee in not being able to carry on its business has been made good by the Government. It is thus a revenue receipt and as such it must be held liable to tax in the hands of the assessee ". (Underlining is ours). These findings of the learned Judicial Member clearly indicate that he misunderstood the case of the assessee as put forwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a capital receipt. Though, no doubt, in some cases the cesser of business may affect goodwill, the two were independent grounds for urging that the compensation awarded was in the nature of a capital receipt. The grounds ought to have been kept separate. When this was pointed out, Mr. Joshi on behalf of the department urged that the only stand taken before the Tribunal was on the question of goodwill and, therefore, the Tribunal held that the compensation was not for the loss of the goodwill. We have already shown that the case that the compensation was paid to the assessee for the loss of its business was adumbrated before the Tribunal in addition to the other question as to the goodwill. In the circumstances, therefore, we do not think that the findings given by the Judicial Member can be sustained, for the true case, which was sought to be made out from the very start on behalf of the assessee, has not been considered. Turning to the findings of the Accountant Member, he has first of all stated that the whole effort of the counsel for the assessee was to convince the Tribunal that what the assessee received was on account of the loss of its goodwill and not on account of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... storage facilities and that it was essential that the assessee must have godowns in order to carry on his business at all; secondly, that with the taking away of the six sheds or godowns, all its storage facility was taken away from the assessee and there were no premises in which the timber belonging to the firm could be stored, and, thirdly, and that is an important fact which has been overlooked, that though the assessee had been allowed to retain its office premises, they could not find alternative storage facility. All these three facts had been accepted by the authorities below the Tribunal and yet none of these facts is found referred to in the Accountant Member's order. His conclusion, therefore, that if any injury was caused to the carrying on of the assessee's business, it was only to the volume of the business and not to the profit-making apparatus is, in our opinion, wholly unsupported by any evidence and is contrary to the facts found. We shall, however, show presently that even assuming that the assessee continues part of his business, if any other part of it is lost as a result of requisitioning, the compensation paid for such loss would still be in the nature of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, or involve loss of an enduring asset, leaving the taxpayer free to carry on his trade released from the contract which is cancelled, the receipt will be a trading receipt: where the cancellation of a contract of agency impairs the trading structure, or involves loss of an enduring asset, the amount paid for compensating the loss is capital. " The English case has used the expression " profit-making apparatus" or " so fundamental an organisation of a trader's activities " ; the Supreme Court has used the expressions "cancellation of a contract of agency" which "impairs the trading structure or involves loss of an enduring asset". It is thus clear that if the injury or damage which the assessee suffers is of so fundamental a character as to impair its profit-earning structure or involves the loss of an enduring asset, whatever is received in lieu of such damage or injury would be in the nature of a capital asset. Looked at from this point of view, we are quite unable to see how upon the facts found in the present case by all the authorities below (except, as we have shown, the conclusion of the Accountant Member, which in our opinion was not a correct conclusion upon the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit thereon at Rs. 10,000. This is not a correct picture of the trading activity of the assessee in 1951-52. A mere perusal of the assessment order shows that the figure quoted is the figure of the gross profits earned. As a matter of fact the assessee had sustained even in that year a business loss of Rs. 2,748 as assessed by the Income-tax Officer himself (see annexure " A "). Now, what was contended by Mr. Joshi on the basis of these figures is that though the assessee may have incurred a loss, none-the-less it shows that he had carried on a business activity and to that extent, therefore, he supported the finding of the Accountant Member that it was only the volume of the business which was affected and not the profit-making apparatus itself. We do not think that this conclusion can fairly follow from the facts found. In the Samvat year 2001 and the three preceding years, we have shown that not only the arbitrator, the High Court, but also the Income-tax Officer accepted the position that the net annual average profit of the assessee was of the tune of Rs. 62,750, i.e., over Rs. 5,000 per month. Before the arbitrator the assessor on behalf of the assessee had pointed out that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State, the assessee was paid a sum of Rs. 2,19,343 by way of compensation. It was held that the amount was a capital receipt. It was urged on behalf of the department in that case that the business of the assessee continued and, therefore, what was paid to the assessee was only to compensate the assessee for loss of its business profits and, therefore, the amount would be in the nature of a revenue receipt in the hands of the assessee. The Supreme Court negatived this argument and at page 187 observed: "The agency agreements in fact formed a capital asset of the assessee's business worked or exploited by the assessee by entering into contracts for the sale of the Charminar cigarettes manufactured by the company to the various customers and dealers in the respective territories. This asset really formed part of the fixed capital of the assessee's business. It did not constitute the business of the assessee but was the means by which the assessee entered into the business transactions by way of distributing those cigarettes within the respective territories. It really formed the profit-making apparatus of the assessee's business of distribution of the cigarettes manufactured by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ging agency by reason of the release of its rights to get higher remuneration and, therefore, a capital receipt.. . . . . " Here again the entire business continued as before but the contract of managing agency, which was undoubtedly in the nature of a profit-making apparatus, so far as the assessee-firm was concerned, was damaged and, therefore, whatever sum was paid to cover that damage was held to be in the nature of a capital receipt in the hands of the assessee. In spite of the fact that the business of the managing agents continued intact as before, the compensation was held to be in the nature of a capital receipt because it was paid to compensate for the injury to the profit-making apparatus. The case therefore shows that the question whether the business continues or not to a greater or smaller measure is not relevant to the question whether the compensation paid would be a receipt of a capital nature or a receipt in the nature of a revenue receipt in the hands of the assessee. The same question also came up for consideration before a Division Bench of this court in Commissioner of Income-tax v. Shamsher Printing Press, which was relied on by Mr. Joshi on behalf of the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich we have referred to above. All these authorities were considered afresh by the Supreme Court in their decision in Senairam Doongarmall v. Commissioner of Income-tax. In this case the assessee owned tea gardens and had a factory and other buildings in those tea gardens. Its business consisted of growing and manufacturing tea. During the war the factory and other buildings of the assessee were requisitioned for defence purposes by the military authorities and as a consequence the manufacture of tea was stopped. The assessee was paid compensation for two years, i.e., for 1944 and 1945. The Supreme Court held that the amount which the assessee received by way of compensation was undoubtedly in the nature of a capital receipt in the hands of the assessee and the principal reason which weighed with them was that the assessee's business had come to an end for the time being. What is important to notice here is that the tea gardens with the plants standing therein still continued to be in the possession of the assessee and were being tended by the assessee. Therefore, part of the assets continued to exist and were in the hands of the assessee but they could not manufacture tea as a r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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