http://JUDIS.NIC.IN
SUPREME COURT OF INDIA
Page 1 of 8
PETITIONER:
J.& K., HIMACHAL PRADESH
Vs.
RESPONDENT:
PRABHU DAYAL
DATE OF JUDGMENT06/10/1971
BENCH:
HEGDE, K.S.
BENCH:
HEGDE, K.S.
GROVER, A.N.
KHANNA, HANS RAJ
CITATION:
1972 AIR 386
CITATOR INFO :
RF
1973 SC 515
1972 SCR
(1) 911
(10)
ACT:
Income-tax-Capital or Revenue-Compensation for giving up
capital asset is capital receipt.
a
HEADNOTE:
The assessee was instrumental in discovering the existence
of Kankar deposits in the erstwhile Jind State.
He also
ordinary course of the company’s business ....
But it seems to me that where one gets, as one
does here, not a contract made in the course
of the company’s business--for it is not the
business of this company to make pooling
agreements or to make agreements whereby they
acquired shares in the business of another
company-it seems to me that where one gets a
payment made in respect of the cancellation of
that agreement, that, truly is a sum received
by way of capital and not an income receipt at
all."
Lord Macmillan who delivered the leading judgment of House
Page 5 of 8
http://JUDIS.NIC.IN
SUPREME COURT OF INDIA
Lords put the case thus
"Now what were the appellants giving up? They
gave
up
their whole rights
under
the
agreements for thirteen years ahead.
These
agreements are called in the stated cases
’pooling agreements’ but that is a
very
inadequate description of them, ’for they ’did
much more than merely embody a system of
pooling
and
sharing
profits.
If
the
appellants were merely receiving in one sum
down aggregate of profits which they would
otherwise have received over a series of
years, the lump sum might be regarded as of
the same nature as the ingredients of which it
was composed. But even if payment is measured
by annual receipts, it is not necessarily in
itself an item of income..... The
three
agreements which the appellants consented to
cancel were not ordinary commercial contracts
made in the course of carrying on their trade;
they were not contracts for the disposal of
their products or for the engagements of
agents or other employees necessary for the
.lm15
conduct of their business : nor were they merely agreements
as to how their trading profits when earned should be
distributed as between the contracting parties.
On the
contrary, the cancelled agreements related to the whole
structure of the appellant’s profit making apparatus.
They
regulated the appellant’s activities, defined what they
might and what they might not do, and affected the whole
conduct of their business. I have difficulty in seeing how
money laid out to secure, or money received for the
cancellation of, so fundamental an Organisation of
a
trader’s
activities
can be regarded
as
an
income
disbursement or an income receipt.... In my opinion that
asset, the congeris of rights which the appellants enjoyed
under the agreements and which for a price they surrendered
was a capital asset."
It is now well settled that a distinction has to be drawn
between a payment made for past services or discharge of
past
liabilities and that made for compensation
for
termination of an income producing asset. The former does
not lose its revenue nature but the latter being a payment
for destruction of a capital asset, must be considered as
capital receipt.
The distinction between a capital receipt and a revenue
receipt came up for consideration before this Court in
Senairam Doongarmal v. Commissioner of Income-tax, Assam(1).
The assessee therein owned tea estate consisting of tea
gardens, factories and other buildings, carried on
a
business of growing and manufacturing tea. The factory and
other buildings on the estate were requisitioned for defence
purposes
by the military authorities.
The
assessee
continued to be in possession of the tea gardens and tended
them to preserve the plants but the manufacture of tea was
completely stopped. The assessee was paid compensation for
the year 1944-45 under the Defence of India Rules calculated
on the basis of the out-turn of tea that would have been
manufactured by the assessee during that period.
The
question was whether the amounts of compensation were
revenue receipts taxable in the hands of the assessee. This
Court held that the first consideration before holding a
receipt to be profits or gains of business within s. 10 of
Page 6 of 8
http://JUDIS.NIC.IN
SUPREME COURT OF INDIA
the Income-tax Act was to see if there was a business at all
of which it could be said to be income’ The primary
condition of the application of section 10 was that tax was
payable by an assessee under the head "Profits and gains of
a business" in respect of a business carried on by him.
Where an assessee did not carry on business at all the
section could not be made applicable and any compensation
for requisition of
(1) 42, I.T.R. 392.
assets that he received could not bear the character of
profits of a business. The Court further held that the
amounts of compensation received by the assessee were not
revenue receipts and did not comprise any element of income.
It is true that in that case the Court did not consider
whether the income in question could have been considered as
income from other sources but, the ratio of that decision is
that the compensation paid being in respect of sterilisation
of an income producing asset, the same should be considered
as a capital receipt.
The only other decision we need make; reference is the decision of this Court in Kettlewell Bullen and Co. Ltd. v.
Commissioner of Income-tax, Calcutta(1). Therein this Court
observed that it cannot be said as general rule that what is
determinative of the nature of a receipt on the cancellation
of a contract of agency or office is extinction
or
compulsory cessation of the agency or office. Where payment
is made to compensate a person for cancellation of a
contract which does not affect the trading structure of his
business or deprive him of what in substance is his source
of income, termination of the contract being a normal
incident of the business, and such cancellation leaves him
free to carry on his trade though freed from the contract
terminated,
the
receipt is revenue;
where
by
the
cancellation of an agency the trading structure of the
assessee is impaired, or such cancellation results in loss
of what may be regarded as the source of the assessee’s
income, the payment made to compensate for cancellation of
the agency agreement is normally a capital receipt., These
decisions lay down the tests to be applied in distinguishing a capital receipt from a revenue receipt. With the guidance thus afforded, let us now take a second look at the facts found for answering the question referred. The assessee, possibly, by some fortuitous circumstance discovered Kankar in some place in Jind State. This circumstance gave him an oportunity to bring about an agreement between the State of Jind and Shanti Prasad Jain and when Shanti Parsad Jain transferred his right to a new company, in the formation of which the assessee had a hand, he was promised certain yearly commission on the net profits earned by the company. None of these activities of the assessee can be considered as a business activity but yet he did acquire an income yielding asset as a result of his activities. But the compromise decree destroyed that asset and in its place he was given Rs. 70,000 as compensation. This payment was neither in respect of the services rendered by him in the past nor towards the accumulated commission due to him. It was paid as compensation to him because he gave up his right to get commission in future to which (1) 53, I.T.R. 261. he was entitled under the agreement. It was a price paid for surrendering a valuable right which in our opinion was a capital asset. Therefore that receipt must be considered as a capital receipt. Page 7 of 8 http://JUDIS.NIC.IN SUPREME COURT OF INDIA For the reasons mentioned above this appeal fails same is dismissed with costs. G.C. Appeal dismissed and the Page 8 of 8