M. R. Goyel, Prop. M/S Milkhiram Bros.
Bombay Vs. The Commissioner of Income Tax, Bombay City, Bombay  INSC 34
(12 February 1969)
12/02/1969 GROVER, A.N.
CITATION: 1969 AIR 859 1969 SCR (3) 669 1969
SCC (1) 659
Income-tax-Person entering into contract for
purchase of goods--Thereafter transferring benefit of contract for
consideration-Whether consideration received was capital receipt or revenue.
The appellant entered into a contract for the
purchase of a large quantity of parachutes from the T. Company. The agreed
purchase price was over Rs. 93 lacs and the assessee was required to deposit a
sum of Rs. 10 lacs by way of earnest money. As he did not have enough funds, he
entered into an arrangement with certain other persons whereby the amount of
Rs. 10 lacs was to be deposited by them and they were to receive a "net
profit share of 9 annas in a rupee".
The financiers later withdrew from the
arrangement and the benefit of the contract for the purchase of parachutes was
transferred to a firm for a sum of Rs. 3 lacs on November 30, 1946. A few days
later another partnership took over the contract of purchase. The Income-tax
Officer reopened the appellant's assessment for the assessment year 1947-48 on
the ground that the income of Rs. 3 lacs had escaped assessment. After the
appellant had failed in an appeal to the Appellate Assistant Commissioner, the
Tribunal found that the appellant had in fact only received a sum of Rs.
1,87,000/and rejected his contention that
this amount was in the nature of a premium for giving up his right to do
business in parachutes and was, therefore in the nature of a capital receipt
and not revenue. It held that the assessee had received profit in respect of a
venture in the nature of trade. The High Court, upon a reference, upheld the
view taken by the Tribunal.
In appeal to this Court it was contended on
behalf of the appellant that the agreement which he had entered into with the
T. Company was a capital asset or a source of possible income and the transfer
which was made, was not of the goods which were to be acquired under the
contract but the source itself, namely the appellant's share, right, title and
interest was transferred and furthermore the amount in question was received by
the appellant for relinquishing his right to participate in the partnership
which had been formed and from which he withdrew. It could not, therefore,
partake of the character of a revenue receipt.
HELD : Dismissing the appeal, The Tribunal
had rightly held that the appellant intended "to do and did a venture in
the nature of trade". When the appellant agreed to accept a sum of Rs.
1,87,000/in consideration for transferring the benefits of the contract, he
could well be said to have concluded a deal which represented the profit which
he anticipated by acquiring the parachutes.
The High Court had rightly found that the
arrangement made by the appellant with certain parties to finance the
transaction in return for a share of 9 annas in a 'rupee, was one which had
been made between a person in need of money and certain financiers and that no
partnership had come into force. Accordingly there could be no question of the
appellant having relinquished a share in the partnership. [673 C] L10Sup./69-8
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 681 of 1968.
Appeal by special leave from the judgment and
order dated September 29, 1961 of the Bombay High Court in Income-tax Reference
No. 46 of 1969.
I. N. Shroff, for the appellant.
S. K. Mitra, S. A. L. Narayan Rao and B. D.
Sharma, for the respondent.
The Judgment of the Court was delivered by
Grover, J. This is an appeal by special leave from a judgment of the Bombay
High Court answering the following question referred to it by the Income Tax
Appellate Tribunal in the affirmative and against the assessee :
"Whether on the facts and circumstances
of the case the receipt of Rs. 1,87,000 in the hands of the assessee is a
revenue receipt and liable to income-tax ?" The assessee used to carry on
his business under the name and style of Milkhiram Bros. He was being assessed
from the year 1945-46 onwards. On October 31, 1946 he secured a contract for
the purchase of approximately 1,28,499 parachutes from Tata Aircraft Ltd. The
parachutes belonged to the Government of India and the Tata Aircrafts Ltd. was
acting as the agent of the Government. The agreed purchase price of the
parachutes was approximately Rs. 931 lakhs.
The contract was entered into by means of
letters. The assessee addressed a letter, dated October 29, 1946 to Tata
Aircraft Ltd. containing an offer. Tata Aircraft Ltd. sent a reply, dated.
November 1, 1946, confirming the sale on the terms and conditions given in that
letter. The assessee had to make a deposit by way of earnest money of a sum of
Rs. 10 lakhs. The assessee did not have enough funds with him. He entered into
an arrangement with M/s. Nathmal Nihalchand, Pokhraj Hirachand and Harilal
Hargovandas for financing the business. The details of this arrangement were contained
in a letter, dated October 31, 1946. The amount of Rs. 10 lakhs was to be
deposited by the latter who were to receive a "net profit share of 9 As.
in a rupee".
The assessee later on arranged on November
30, 1946 with the financiers to withdraw from the old arrangement recorded in
the letter, dated October 31, 1946. The benefits if the contract of purchase of
parachute were transferred to the firm styled as Pokhraj Hirachand for a sum of
Rs. 3,00,000 on November 13, 1946. On November 14, 1946 the parties approached
Tata Aircraft Ltd. who agreed to accept M/s. Pokhraj Hirachand as purchasers of
parachutes on the terms and conditions originally agreed to between the
assessee and that company.
671 On November 22, 1946 an agreement of
partnership was entered into between six persons, namely, Nathmal, Pokhraj,
Chandumal, Prithviraj, Shapoorji & Co. Ltd. and Jamalbhai.
This partnership took over the contract of
purchase entered into by Pokhraj Hirachand. It was registered by the Income tax
authorities for the assessment year 1948-49.
M/s. Pokhraj Hirachand in their assessment
claimed a deduction of Rs. 3,00,000 being the payment made to the assessee
under the arrangement mentioned above. The Income tax authorities disallowed
the claim on the ground that it was a capital payment. The aforesaid firm
appealed to the Tribunal which held that only a payment of Rs. 1,87,000 had
been proved to have been made to the assessee. For the assessment year 1947-48
the Income Tax Officer reopened the assessment of the assessee under S. 34 of
the Income Tax Act, hereinafter called the "Act" on the ground that
the income of Rs. 3,00,000 had escaped assessment. The assessee contended that
only a sum of Rs. 1,87,000 had been received by him and not Rs. 3,00,000. The
Tribunal decided that point in his favour in appeal after he had failed before
the Appellate Assistant Commissioner. The assessee's contention before the
Tribunal was that the nature of the receipt of Rs. 1,87,000 was capital and not
revenue. According to him the amount received was in the nature of a premium
for giving up his right to do business in parachutes. The Tribunal did not
accede to his contention and held that the assessee had received profit in
respect of a venture in the nature of trade. Thereupon the assessee moved the
Tribunal and the question of law was referred.
The High Court entertained no doubt on the
facts which had been found that the receipt of Rs. 1,87,000 was a trading
receipt. This was so because the assessee was a businessman dealing in articles
including parachute silk. In the opinion of the High Court the contract which
he entered into with Tata Aircraft Ltd. was a contract for the purchase of
stock-in-trade for the business which he was carrying on.
It was argued before the High Court that the
amount in question had been received for relinquishing his right to
participation in the profits of the partnership from which the assessee
withdrew. According to the High Court such an argument had not been presented
before the Appellate Tribunal. The letters which were exchanged between the
concerned parties were also considered and the conclusion at which the High
Court arrived was that the benefit of the contract which the assessee had
entered into with M/s. Tata Aircraft Ltd. had been transferred by him in favour
Pokhraj Hirachand for a consideration of Rs.
3,00,000 out of which a sum of Rs. 1,87,000 only had been found to have been
actually received by the assessee. That sum, therefore represented a receipt
for transferring the 672 benefits of the contract entered into by the assessee
in the ordinary course of the business.
On behalf of the assessee who is the
appellant before us it is submitted that the sum of Rs. 1,87,000 received by
him could not be regarded as income. The agreement which had been entered into
by the appellant with M/s. Tata Aircraft Ltd. was a capital asset or a source
of possible income and the transfer which was made was not of the goods which
were to be acquired under the contract but the source of income itself, namely,
the appellant's share, right, title and interest was transferred. The second
contention which was also raised before the High Court is that the amount in
question were received by the appellant for relinquishing his right to participate
in the partnership which had been formed and from which he withdrew. It could
not therefore partake of the character of a revenue receipt.
It appears that before the Tribunal only the
first contention was raised. The Tribunal found as a fact that it was the
appellant who had entered into a contract with M/s. Tata Aircraft Ltd. for the
purchase of parachutes for a fixed sum. He intended "to do and did a
venture in the nature of trade". The Tribunal took into consideration the
well-known normal method of doing supply business in our country. According to
it, highly influential parties instead of doing the business themselves manage
to secure contracts and pass on the actual execution of the business to others
in return for a fixed sum of money. This is what the appellant did and the
income which he received was liable to income tax. It is difficult to see how
on these findings the appellant could legitimately argue that the amount of Rs.
1,87,000 was a capital receipt. It is true that by means of the letter, dated
October 31, 1946 M/s.
Nathumal Nihalchand, Pokhraj Hirachand etc.
were given 9 As.
share in a rupee in the transaction and a
partnership agreement was purported to have been entered into. But this letter
mere embodied an arrangement for financing a business venture into which the
appellant had entered. He did not have the funds and a deposit of Rs. 10 lakhs
had to be made immediately. M/s. Nathumar Nihalchand, Pokhraj Huachand and
others agreed to pay that amount to M/s. Tata Aircraft Ltd. It must be
remembered that it was the appellant who had entered into the contract with M/s
Tata Aircraft Ltd. in respect of the purchase of parachutes. When he agreed to
accept a sum of Rs. 1,87,000 from the aforesaid persons as consideration for
transferring the benefits of the contract the appellant can well be said to
have concluded a deal which represented the profit which he anticipated by acquiring
It has been submitted on behalf of the
appellant that he was not carrying on the business of transferring or selling
the benefits 673 of contracts and therefore the contract entered into with M/s.
Tata Aircraft Ltd. could not be regarded as a part of his stock-in-trade It
would seem that the Tribunal proceeded more on the footing that the contract
relating to the parachutes was a venture in the nature of trade than on the
basis that it constituted stock-in-trade of the appellant.
It is, therefore, unnecessary to examine this
aspect of the matter.
It seems to us that the second contention of
the appellant ought not to have been entertained by the High Court. It was not
raised before the Tribunal. At any rate, the High Court examined it fully and
came to the conclusion that the arrangement contained in the letter, dated October 31, 1946 was one which had been made between a person in need of money and certain
financiers and that no partnership had come into existence. In that view of the
matter there could be no question of the appellant having relinquished a share
in the partnership.
We would accordingly hold that the answer
returned by the High Court was correct. The appeal fails and is dismissed with
R.K.P.S. Appeal dismissed.