J.& K., Himachal Pradesh Vs.
Prabhu Dayal  INSC 274 (6 October 1971)
KHANNA, HANS RAJ
CITATION: 1972 AIR 386 1972 SCR (1) 911
RF 1973 SC 515 (10)
Income-tax-Capital or Revenue-Compensation for
giving up a capital asset is capital receipt.
The assessee was instrumental in discovering
the existence of Kankar deposits in the erstwhile Jind State. He also brought
about an agreement between one S and the State of Jind for the acquisition of
sole and exclusive monopoly rights of manufacturing cement in the State. The
agreement was entered into an April 2, 1938 and was to remain operative
initially for a period of 25 years which could be extended to 100 years at the
option of S. The latter transferred his rights to a public limited company on
May 4, 1938. For the Services rendered by the assessee the company by agreement
dated May 27, 1938 agreed to pay him a Commission of 1 % on the yearly net
profits earned by the company from the said cement factory. The agreement was
to subsist so long as the original agreement dated April 2 , 1938 subsisted.
The company paid the assessee's commission up to 1950 but not thereafter. The
assessee filed a suit which resulted in a compromise decree under which the
assessee was to be paid Rs. 15,000 as commission for the years 1951 & 1952
and Rs. 15,000 as commission for the year 1953. Further he was to be paid Rs.
70.000 by way of compensation for the termination of the agreement between him
and the company as from January 1, 1954. That compensation was received by the
assessee on June 11, 1954.
The Income-tax Officer held that the sum of
Rs. 70,000 was a remuneration paid once and for all for the services rendered
by the assessee and as such taxable in his hands. The Appellate Assistant
Commissioner upheld the said order. The Tribunal however held that the amount
in question was a capital receipt and the same view was taken by the High Court
in answering the reference. In appeal to this Court by the Revenue,
HELD : (i) Business as understood in the
income-tax law connotes some real, substantial and systematic or organised
course of activity or conduct with a set purpose. Even a single transaction may
sometimes amount to a business transaction but the present transaction was not
This was a case dealing with the stray
activity of a nonbusiness man. Hence it was difficult to agree with the Revenue
in its contention that the agreement entered into by the assessee with the
company should be considered as a business activity. [994 E-F] In the
determination of the question whether a particular receipt is capital or an
income it is not possible to lay down any single test as infallible or any
single criterion as decisive. The question must ultimately depend on the facts
of the particular case and the authorities hearing on the question are valuable
only as indicating the matters that have to be taken into account in reaching a
That however is not to say that the question
is one of fact, for these questions between capital and income. trading profit
and non-trading profit, are questions which though they may depend to a very
great extent on the particular facts of each case do involve conclusions of law
to be drawn from those facts. 994 G-H] 992 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 a capital receipt. [997 D] The assessee possibly by some
fortuitous circumstance discovered Kankar in some place in Jind State. This
circumstance gave him an opportunity to bring about an agreement between the
State of Jind and S, and when S transferred his right to a new.company in the
formation of which the assessee had a hand, be 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 did acquire an income yielding
asset as a result of these 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 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 he was entitled under
the agreement. It was a price paid for surrendering a valuable right which was
a capital asset. Therefore the receipt must be considered as a capital receipt.
[998 F-H] Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits I
tax, 26 1. T. R. 765, Commissioner of Income-Tax, Nagpur v. Rai Bahadur Jairam
Valji & Ors., 35 I.T.R. 148.
Yan Den Berghs Ltd. v. Clark, 19 T.C.
390-(1935) 2 I.T.R.
Supp. 17, Senairam Doongarmal v. C.I.T.,
Assam, 42 I.T.R.
392 and Kettlewell Bullen & Co. Ltd. v.
C.I.T., Calcutta, 53 I.T.R. 261, applied.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 1693 of 1968.
Appeal from the judgment and order dated
January 4, 1967 of the Punjab and Haryana High Court in Income-tax Reference
No. 44 of 1962.
O. P. Malhotra, R. N. Sachthey and B. D.
Sharma, for the appellant.
V. S. Desai and A. G. Ratnaparkhi, for the
The Judgment of the Court was delivered by
Hegde, J. This is an appeal by certificate from the decision of the High Court
of Punjab and Haryana in a Reference under s. 66(1) of the Indian Income-tax
Act, 1922 (to be hereinafter referred to as the Act). The question referred to
the High Court for its opinion was :
"Whether on the facts and in the
circumstances of the case, the receipt of Rs. 70,000/by the assessee on
11-6-1954 was revenue or capital in nature." 993 The High Court held that
the said receipt was capital receipt. Aggrieved by that decision the
Commissioner of Income-tax came up in appeal to this Court.
We shall now refer to the material facts
found by the Incometax Appellate Tribunal as can be gathered from the case
stated. The assessee was assessed as an individual.
The relevant assessment year is 1955-56, the
accounting period for the same ended on Asad sudi 1, S.Y. 201 1.
The assessee was instrumental in discovering
the existence of Kankar deposits in Jind State. He also brought about an
agreement between one Shanti Parsad Jain and the erstwhile State of Jind, now a
part of Punjab State for the acquisition of sole and exclusive monopoly rights
of manufacturing cement in the said Jind State. That agreement was entered into
on April 2, 1938. The same was to remain operative for a period of 25 years,
which term was liable to be extended to 100 years at the option of the said
Shanti Parsad Jain or his nominee. Shanti Parsad Jain transferred his rights
under that agreement to a public limited company by name M/s. Dalmia Dadri
Cement Ltd. on May 4, 1938. The assessee was one of the promoters of the said
For the services rendered by the assessee, the
Dalmia Dadri Cement Co. by an agreement dated May 27, 1938 agreed, to pay him a
commission of 1 % on the yearly net profits earned by the company from the said
cement factory. That agreement was to subsist so long as the original agreement
dated April 2, 1938 subsisted.
The agreement dated May 27, 1938 between the
assessee and the Dalmia Dadri Cement Co. was acted upon till 1950 and
thereafter the company did not pay the commission agreed to be paid.
Consequently the assessee filed a suit against the company claiming the
commission due to him. The said suit ended in a compromise and the compromise
was made a decree of court. Under that decree the assessee was to be paid Rs. 15,000/
as commission for the years 1951 and 1952 and Rs. 15,000/as commission for the
year 1953. Further he was to be paid Rs. 70,000/by way of compensation for the
termination of the agreement between him and the company as from January 1,
1954. That compensation was received by the assessee on June 11, 1954.
The assessee's claim that the sum of Rs.
70,000/was capital receipt and hence not taxable in his hands was rejected by
the Income-tax Officer. That officer held that the said sum of Rs. 70,000/was a
remuneration paid once and for all for the services rendered by the assessee
and as such taxable in his hands. This decision was affirmed by the Appellate
Assistant Commissioner, who held that the amount of Rs. 70,000/was a lump sum
994 compensation received for the services rendered; hence the same was a
receipt in the ordinary course of assessee's business and consequently it was
taxable as a revenue receipt.
Aggrieved by that order the assessee took up
the matter in appeal to the Tribunal. The Tribunal held that the company by
paying the said compensation of Rs. 70,000/terminated the contract which
enabled the assessee to receive from the said company a commission of one per
cent of the net profits and as such they said receipt by the assessee was
capital and not revenue.
Thereafter at the instance of the
Commissioner the question set out earlier was referred to the High Court for
its opinion which, as mentioned earlier, was answered in favour of the
It was not the case of the Revenue that the
assessee was engaged in the business of discovering Kankar or any other mineral.
He appears to have found Kankar by mere chance.
It is also not the case of the Revenue that
the assessee was engaged in the business of bringing about agreements between
parties. In fact. it is not the case of the Revenue that the assessee "as
engaged in any business. There is no evidence to show that he was a business
man. His discovery of Kankar as well as his part in bringing about the
agreement mentioned earlier were stray acts, possibly occasioned by fortuitous
Business as understood in the income-tax law
connotes some real, substantial and systematic or organised course of activity
or conduct with a set purpose-see the decision of this Court in Narain Swadeshi
Weaving Mills v. Commissioner of Excess Profits Tax(1). By this statement we do
not mean to say that under no circumstance a single transaction cannot amount
to a business transaction. But this is not one such. Herein we are dealing with
the stray activity of a non-business man. Hence it is difficult to agree with
the Revenue in its contention that the agreement entered into by the assessee
with the Dalmia Dadri Cement company should be considered as a business
In the determination of the question whether
a particular receipt is capital or an income, it is not possible to lay down
any single test as infallible or any single criterion as decisive. The question
must ultimately depend on the facts of the particular case and the authorities
bearing on the question are valuable only as indicating the matters that have to
be taken into account in reaching a decision.
That, however, is not to say that the
question is one of fact, for these questions between capital and income,
trading profit or no trading profit, are questions which, though they may
depend to a very great extent on the particular (1) 26 I.T.R. 765.
995 facts of each case, do involve
conclusions of law to be drawn from those facts--see Commissioner of Income-tax
Nagpur v. Rai Bahadur Jairam Valij and ors.(1).
The controversy whether a particular receipt
is capital or revenue has engaged the attention of this Court as well as of the
High Courts in numerous cases. It is, by no means an easy question to decide.
It is neither feasible nor profitable to refer to those cases because in the
ultimate analysis the decision in those cases rests on the facts of each case.
But the case nearest to the case before us is that decided by the House of
Lords in Van Den Berghs Ltd. v. Clark(2). The facts of that case were as
The assessee therein received a sum of pound 450,000
in full settlement of all claims and counter-claims which existed between the
assessee and a Dutch company. Both the companies had been engaged in the
business of manufacturing and dealing in margarine and similar products. They
had entered into pooling arrangements at as early a date as in 1908 under which
they bound themselves to work in friendly alliance and to share their profits
of their respective business in margarine in specified proportions. This basic
agreement of 1908 was being added to and varied from time to time particularly
in 1913 and 1920 and, under this, the agreement was to subsist until 1940. In
1922 the assessee made a claim against the Dutch company for about pound
450,000 as the amount due to it by the Dutch company under the agreements
recited just previously. This was however repudiated and the Dutch company
claimed that far from owing any moneys to the assessee, moneys were owing to
them. One of the methods suggested for putting an end 'to the dispute was by a
termination of the agreement between the two companies but this was resisted by
the assessee company. A settlement was, however, reached in 1927 whereby in
consideration of the payment by the Dutch company of pound 450,000 to the
assessee as damages, the agreements were determined as at 31st December, 1927
and each party released the other from all claims thereunder. The question was
whether this sum of pound 450,000 was a revenue receipt on which the income-tax
could be levied against the assessee.
The matter came up before Finlay J. He held
against the Crown. According to him the sum received was not a revenue receipt.
This decision was reversed by the Court of Appeal but was restored on a further
appeal by the House of Lords.
Finlay J. in the course of his judgment formulated
the question to be considered by him in these terms "I agree with Mr.
Latter that there are three questions here. The first is : What was this
payment for? (1) 35 I.T.R. 148.
(2) 19 Tax Cases 390= (1935) 3, I.T.R. Supp.
996 The second is : If a Payment for future
rights, is it assessable ? The third question is : Ought it to go into the year
1927." The learned judge's answer to the first question was that it was a
payment for future rights. He held that it was really a payment for cancelling
such rights as subsisted in the assessee between 1928 and 1940. Having answered
the first question in that manner the learned judge held on the second question
that it was not assessable. In arriving at that conclusion he reasoned thus
"Not without hesitation, I have come to the, conclusion that it is not
liable to assessment. I think that the agreement being an agreement whereby
this company had a share in the profits of another company, was a capital
asset. I think that the case is to be distinguished from the case where there
is a cancellation of a contract made in the ordinary course of the company's
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 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
they were not contracts for the disposal of
their products or for the engagements of agents or other employees necessary
for the 997 .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 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.
998 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,
999 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.
For the reasons mentioned above this appeal
fails and the same is dismissed with costs.