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TMI Blog1971 (3) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... engaged in the manufacture and sale of carbon dioxide, it was permitted under the Industries (Development and Regulation) Act to erect a factory for the manufacture of sugar in Kaikalur Taluk of Krishna District in the year 1954. As the assessee found it difficult to develop the area in Kaikalur, it obtained permission from the State Government to change the location of the proposed factory to Kovvur. On March 5, 1957, the licence was issued in favour of the assessee by the Government. The company invested approximately a sum of Rs. 41 lakhs towards the construction and establishment of the sugar factory at Kovvur. At or about the same time, a proposal to establish a factory for the manufacture of fertilizers was under active consideration of the assessee-company, pursuant to which a factory for fabrication of machinery was also set up by the company whose policies and activities are reflected in its annual reports for the years ending with September 30, 1954, to September 30, 1960. In the year of accounting ending with September 30, 1960, the entire undertaking of the sugar factory was transferred by the assessee partly in favour of K.C.P. Ltd. and partly to the Jeypore Sugar Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the Income-tax Officer, the assessee preferred an appeal to the Appellate Assistant Commissioner who differed from the view taken by the Income-tax Officer. According to him, the assessee was not engaged in the business of purchasing or erecting new factories and selling the same. That apart, the admitted fact that the assessee had originally intended to run the factory and make a profit out of it excluded the theory of venture in the nature of trade. He, therefore, agreed with the assessee's contention that the amount of Rs. 41,219 constituted capital gains in its hands and allowed the appeal. The Income-tax Officer, aggrieved by the decision of the Assistant Commissioner, appealed to the Income-tax Appellate Tribunal before whom the contention of the department was two-fold, viz., (1) that the transaction amounted to an adventure in the nature of trade, and (2) that the sum of Rs. 41,219 which represented a share of the profits made by the transferee-company, should be treated as income of the assessee. Rejecting the submission of the Income-tax Officer, the Tribunal, on a consideration of the entire facts and circumstances, came to the conclusion that the assessee was not e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y make the transaction an adventure in the nature of trade and cited the decisions in William John Jones v. Commissioners of Inland Revenue, National Cement Mines Industries v. Commissioner of Income-tax and Travancore Sugars & Chemicals Ltd. v. Commissioner of Income-tax in support of his pleas. The learned counsel, Sri J. V. Srinivasarao, appearing for the assessee contended contra. It was urged by him that the transaction in substance is a sale of a capital asset whereunder the amounts of Rs. 41,219 and Rs. 1,11,312 agreed to be paid and in fact paid to the assessee by the transferee-company form part of consideration for the very sale, but not adventure in the nature of trade. The income-tax being a tax on the real income computed as per the provisions of the Act, it is necessary to advert to what an income or capital receipt is and the difference and distinction between the two before adverting to the respective contentions of the parties. This distinction has to be borne in mind for the purpose of arriving at the real and taxable income of an assessee as per the provisions of the Act. The tax being levied on the income of a person in the year of account, the capital receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments of pound 100 each and as to the balance of pound 450 by a " royalty ". It was also agreed by the purchasers to pay by way of additional consideration a " further royalty " of 10 per cent. upon the invoice price of all machines constructed under the said inventions and sold during a period of ten years. The question that fell for decision was whether the further royalty payable to Jones and his co-inventors by the purchasers was a capital or revenue receipt. We may usefully notice as to how the problem was approached by the learned judge, Rowlatt J. : " I therefore think that what one has to do is to look and see what the sum payable really is. I think that Mr. Latter is right in this sense, that the ascertaining of an antecedent debt is not the only thing that governs it. It does not govern it by magic, but it is a very valuable guide in a great many cases, undoubtedly. Here, when we look at it, I do not think there is any difficulty in seeing what was intended. The property was sold for a certain sum, and in addition the vendor took an annual sum which was dependent, in effect, on the volume of business done ; that is to say, he took something which rose or fell with the ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luctuating sum if, as may be the case, and no doubt was the case here, there are sufficient reasons of convenience or other considerations which make it desirable to adopt that method of payment. The mere fact that in the result the amount paid may be greater or less than what is called here the primary debt, that is to say, a specified balance, does not seem to me in itself to throw light on the position one way or the other. " The test laid down by Lord Wright M. R. in Ramsay's case has been approved by Lord Sorn in Commissioners of Inland Revenue v. Pattison. Therein it fell for decision whether the periodical payments made in pursuance of an agreement for transfer of business were deductible in computing trading profits under the Income Tax Act, 1952. The learned law Lord pointed out : " ..... that merely to stipulate for instalment payments in no way alters the character of the payment itself, ...... Next, does it matter that the amount of the payment is not fixed once and for all, and that it might fluctuate in the course of time according to the shape of events ? Again, I think that this is not inconsistent with the payments being capital payments, and the case of Commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f freight, are, in my opinion, in their nature capital sums. " See Trustees of Earl Haig v. Commissioners of Inland Revenue, where receipts by trustees of the estate of a deceased for use of his diaries by a biographer were held to be of capital nature for a partial realisation of an estate. We may also notice the following observations of Lord Greene M. R. in Commissioners of Inland Revenue v. 36/49 Holdings Ltd. : " ...... there are many cases in which, applying the proper principles, periodical payments have nevertheless been held, having regard to all the circumstances there present, to be in the nature of capital payments. " The learned Master of the Rolls, Lord Greene, had clearly laid down in the aforesaid case that the length of time during which a payment is agreed to be paid towards the consideration of a capital asset is a very important and germane factor in determining the nature and character of the instalment paid, as can be seen from the following passage at page 183 : " I find it myself very difficult to class under the category of 'capital' a perpetual payment. The length of time during which a payment is to endure may be a very important factor in determinin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the principle enunciated by Rowlatt J. is applicable to that case where the facts were closely parallel. But, however, as the High Court had not dealt with the other question arising under the reference, the case had been remanded to the High Court observing that as the commission paid by the assessee to the Government was not capital but revenue expenditure, certain other questions would arise for consideration. In Commissioner of Income-tax v. Devidas Vithaldas & Co., the amounts payable to or received by a retiring chartered accountant for sale of his goodwill on payment of a share of profits for life and to his widow and son after his death, under a covenant by the new firm, were held to be capital expenditure to acquire a capital asset and were not deductible expenditure. The foregoing discussion may be summed up thus : The income-tax being a tax on the real income computed as per the provisions of the Act of a person earned during the previous year relevant for the assessment year in question, the receipts of capital nature during the same period and others exempted as per the provisions of the Act are not liable to be taxed. Hence, whether a particular receipt is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment or not is again a question of fact depending upon the facts of each case. A capital asset may be sold for consideration, be it cash or otherwise. Where the payments are made by the purchaser to the seller towards the sale price of the capital asset, they are invariably of capital nature notwithstanding the nature and method or form of such payments. The sale price may be paid either in lump sum or by periodical payments or in any other form as agreed upon by the contracting parties. The instalments may be periodical for an indefinite period or for a few years or for some months. The mode of payment to a great extent depends upon the terms and conditions agreed upon by the contracting parties. There is no prohibition for the contracting parties to receive a sum of money either in lump sum or to accept a fluctuating sum depending upon the rise or fall with the volume and chances of business, where sufficient reasons, convenience and other considerations justify or the parties thought fit proper and desirable to adopt such a mode of payment. The mere fact that the ultimate amount received in the bargain is really more than or exceeds what was originally called the primary de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by a regular registered deed of sale and the transaction is nothing but an adventure in the nature of trade amounting to business and the receipts in question are of income nature. True, there is no registered deed of sale in respect of movables and the sale deed dated July 1, 1960, is confined only to the transfer of immovable property alone. The Act and Rules made thereunder do not prohibit the income-tax authorities from gathering evidence, oral and documentary, from all sources although they are bound to disclose the material and afford a reasonable opportunity to the assessee to explain before using the same in support of their conclusion in the orders of assessment and other proceedings. It is well settled that the provisions of the Evidence Act are not strictly applicable to the proceedings before the income-tax authorities whose powers and functions are circumscribed and regulated by the very provisions of the Act and the Rules made thereunder. Indisputably, the resolutions passed by the vendor and vendee companies, the correspondence that passed between them at the relevant time and the entries in their accounts and the balance-sheets are relevant and germane evidence and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o agree with the submission of the learned standing counsel for the department that the case on hand falls within the dicta enunciated by Rowlatt J. in Jones case for reasons more than one. Firstly, the principle enunciated by Rowlatt J. in Jones case, as pointed out by Lord Wright M.R. in Ramsay's case, can have no universal application but has to be confined to the facts of that case. Secondly, the periodical payments agreed upon in Jones case were for a period of 10 years which is a material factor to determine the nature of the payment. Thirdly, a portion of the sale price was treated as a capital invested in the business of the purchaser who agreed to pay for a period of 10 years certain amounts periodically. In the present case, the transferee-company has, according to the terms of the agreement, to pay 25% of its net profits only for a period of two years after the commencement of its business. Indisputably the assessee had spent Rs. 4,10,051 which was the book value of its business so transferred to the transferee-company. The real price of the entire business asset including the goodwill and the buildings would have certainly been more than the book value of Rs. 4,10,051. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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