Commissioner of Income-Tax Poona Vs.
M/S. Manna Ramji & Co  INSC 198 (29 August 1972)
KHANNA, HANS RAJ KHANNA, HANS RAJ HEGDE, K.S.
REDDY, P. JAGANMOHAN
CITATION: 1973 AIR 515 1973 SCR (1)1068 1973
SCC (3) 43
CITATOR INFO :
F 1976 SC 640 (12) RF 1982 SC1153 (12) R 1987
SC 500 (39)
Indian Income Tax, 1911-Capital Receipts and
Revenue Receipts--Compensation paid by Govt. for loss of earning where the
business premises are requisitioned-Whether Revenue Receipts.
The respondent was carrying on timber
business in premises consisting of office room and six sheds, In 1944, the
premises were requisitioned under the Defense of India Act for storing food
grains. On request of the respondent, however, the office room was released
wherein the appellant continued to carry on the timber business. The respondent
claimed compensation of Rs. 1,25,500 for loss of earnings which was awarded.
The Income Tax Officer brought to tax the said amount attributing the earning
to business of timber, as revenue receipts. On respondent's motion, the
following question was referred to the High Court by the Income Tax Appellate
Tribunal : "whether, on facts and circumstances of the case, the sum of
Rs. 1,05,074 received by the applicant as compensation from the 'Government is
taxable as income of the applicant or is a capital receipt in its hands."
The High Court answered the question against the Revenue.
On appeal by the revenue,
HELD: On the facts found by the Tribunal,
namely, that the compensation was claimed and awarded for loss of profits the
respondent continued the said business in its usual name and style in the same
office premises, and the profit making apparatus itself was not destroyed, the
compensation amount partakes the character of profits and therefore Revenue
receipts. [1072E] Held further, the present is not a case wherein the
respondent firm was permanently deprived of a source of income. On the
contrary, the present is a case arising out of requisition of the premises.
Requisition unlike acquisition, is of a temporary nature. The compensation paid
to the respondent represents the supposed profit which the respondent would
have earned during the years the premises remained tinder requisition.[1072G]
but which profit the respondent could not earn because of the requisition.
Commissioner of Income Tax/Excess Profits
Tax, Bombay City v. Shamsher Printing Press,  39 I.T.R. 90., referred to.
Also held, the method of computing the
compensation payable for loss of earnings does not alter the real character of
essential nature of the receipt of the compensation in the hands of the
respondent. The Arbitrator awarding the compensation on the basis of two years'
purchases cannot be assailed. [1073E] The Glembold Union Fireclay Co. Ltl. v.
The Commissioner of Inland Revenue, 12 T.C, 427 and Senairan Doongarmall v. Commissioner
of Income Tax,  42 I.T.R. 392 (on p. 397), relied upon.
Commissioner of Income Tax, Nagpur v. Rai
Bahadur Jairam Vahi and Others  35 I.T.R. 148, S.R.Y. Sivaram Prasad
Bahadur v. Commissioner of Income Tax, Andhra Pradesh,  82 I.L.R. 527 and
Commissioner of Income Tax, Punjab Haryana, Jammu and Kashmir and Himachal
Pradesh v. Prabhu Dayal  82 I.T.R. 804, held not applicable.
Karnani Properties, Ltd. v. Commissioner of
Income Tax, West Bengal  82 I.T.R. 547, referred to.
The appeal was allowed, 1069
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 156 of 1969.
Appeal by certificate from the judgment and
order dated the 10th and 11th February, 1967 of the Bombay High Court in
Income-tax Reference go. 35 of 1962.
B. B. Ahuja, R. N. Sachthey and S. P. Nayar,
for the appellant.
R. M. Hajarnevis, S. Balakrishnan, G. P.
Sahasrabhudhe and N. M. Ghatate, for the respondent.
The Judgment of the Court was delivered by
Khanna, J. This appeal on certificate granted by the Bombay High Court is
directed against the judgment of that court whereby it answered the question
referred to it under section 66(1) of the Indian Income Tax Act, 1922
(hereinafter referred to as the Act) in favour of the respondent assessee.
The reference arose out of the assessment
made upon the respondent firm for the assessment year 1951-52, the account year
for which is the, Samvat year 2006 (that is, October 22, 1949 to November 9,
1950). The respondent was carrying on business for several years in the past in
timber under the name and style of Manna Ramji & Co. in Bhavani Peth Poona
City. The business premises consisted of an office and six sheds used for
storing wood and timber of all kinds.
The respondent firm constructed the six sheds
for the purpose of its business after taking the site thereof on a long lease.
On May 19, 1944 the Collector of Poona requisitioned the premises of the
respondent under the Defence of India Act as from May 19, 1944 for the purpose
of using them as store houses for food grains. Initially the requisition order
covered the six sheds as well as the office of the respondent, but at the
request of the respondent firm the Collector agreed to allow it to remain in
possession of the office premises. In October, 1944 the respondent made a claim
for Rs. 1,85,200 on account of compensation for the requisitioned premises. In
June, 1946 the Collector offered referred to pay compensation at the rate of
Rs. 310 per month. The respondent feeling dissatisfied with the offer of the
Collector, moved the Government for a reference to arbitration under the
provisions of the Defence of India Act. The Civil Judge, Senior Division, Poona
was thereafter appointed arbitrator on November 10, 1947. The Government
appointed its Consulting Surveyor as an assessor to help the arbitrator in
determining the amount of compensation. As against that the respondent
appointed an architect as its assessor. There was considerable difference in
the estimates of the two assessors regarding the amount of compensation payable
to the respondent.
1070 The Civil Judge, who had been appointed
arbitrator,, gave his award on April 15, 1948. The operative part of the award
of the arbitrator was as under :
"The Government do pay compensation to
the claimants as follows :
(1) Rs. 210/per month for rent of the
premises from the 15th May 1944 till the date of restoring the premises to the
(2) A lump sum of Rs. 1,25,500/for loss of
(3) A sum of Rs. 100/in respect of the wooden
(4) Interest at 3% on Rs. 1,25,500/from the
15th November, 1944 till the date of actual payment." The Government was
also ordered to pay Rs. 2,000/as costs to the respondent. The Government filed
an appeal against the award of the arbitrator, but the same was dismissed by
the High Court on August 7, 1949. The respondent was thereafter paid the amount
of Rs. 1,70,330-10-0 in the Samvat year 2006. The above amount included Rs.
1,25,500 on account of lump sum for loss of earnings and Rs. 2,000 on account
of costs of arbitration.
In computing the respondent's total income
the Income Tax Officer brought to tax the two sums of Rs. 22,180/on account of
rent receipts and Rs. 20,551 on account of interest. Besides that. the Income
Tax Officer brought to tax the sum of Rs. 1,50,074/under section 10 of the Act
by attributing it to the respondent's business in timber. This figure of Rs.
1,05,074/was arrived at by deducting out of Rs. 1,25,500 a sum of Rs. 20,426/
which, according to the Income Tax Officer, had been spent by the respondent in
the claim proceedings against the Government over and above the amount of Rs.
2,000/which had been awarded as costs by the arbitrator. The respondent feeling
aggrieved by the finding of the Income Tax Officer that the sum of Rs. 1,05,074
was,business and taxable receipt filed appeal against the order of the Income
Tax Officer. The Appellant Assistant Commissioner accepted the respondent's
appeal and held that the above amount was capital receipt. On further appeal by
the department, the Income Tax Appellate Tribunal held that the sum of Rs.
1,25,500 was a revenue receipt as it had been received on account of the loss
of earnings of the timber business. The respondent was, however. allowed to set
off the losses of Rs. 4,572 and Rs. 490, which bad been brought forward from
the assessment years 1949-50 and 1071 1950-51, against the sum of Rs. 1,05,074.
On being moved by the respondent, the Tribunal referred the following question
to the High Court "Whether, on the facts and in the circumstances of the
case, the sum of Rs.
1,05,074/received by the applicant as
compensation from the Government is taxable as income of the applicant or is a
capital receipt in its hands ?" The High Court held that the amount
received by the respondent for the requisitioning of the six sheds or godowns
was in the nature of capital receipt in the hands of the respondent-firm for
the damage sustained in the profit making apparatus. It was, in the opinion of
the High Court, not a revenue receipt and as such, not taxable.
In appeal Mr. Ahuja on behalf of the
appellant has assailed the judgment of the High Court and has urged that the
sum of Rs. 1,05,074 received by the respondent was a revenue receipt and not a
capital receipt as the amount represented the compensation payable for loss of
earnings consequent upon the requisition of the sheds of the respondent. As
against that, Mr. Hajarnavis on behalf of the respondent has urged that the
amount in question was a capital receipt and the decision of the High Court in
this respect was correct.
In our opinion, the contention advanced on
behalf of the appellant is well founded and that the sum in question represents
a revenue receipt and not a capital receipt.
In order to resolve the controversy as to
whether the sum of Rs. 1,05,074 received by the respondent was a revenue
receipt or a capital receipt, we must try to ascertain the true nature and
character of the payment. Although the distinction between capital receipt and
revenue receipt is well recognised, the task of assigning it to the appropriate
head in border line cases is not free from difficulty and becomes one of such
refinement. Decided cases can provide illustrations and afford indications of
the kind of considerations which may relevantly be borne in mind in approaching
the problem. In the final analysis, however, the controversy would have to be
resolved in the light of the facts and circumstances of each individual case.
It would, therefore, be ,relevant to look into the circumstances under which
the payment was made. In this respect we find that after the sheds of the
respondent had been requisitioned, the respondent commenced proceedings for
claiming compensation. The Civil Judge Poona was appointed arbitrator to determine
the amount of compensation. In the course of proceedings before the arbitrator,
the respondent filed written statement claiming compensation, inter alia, for
loss of profits. The arbitrator by his award dated April 15, 1948 1072 awarded
a sum of Rs. 1,25,500 for loss of earnings to the respondent. In addition to
that we have the finding of the Tribunal that the respondent firm during the
period for which the claim for compensation was made had been carrying on
business in its usual name and style in the same office premises in which it
used to carry on business prior to the requisition of the godowns by the
Government. The effect of the requisition of the godowns, according to the
Tribunal, was not to stop the business of the respondent. On the contrary, the
respondent continued to carry on the business though at a reduced scale. The
finding of the Tribunal in this respect was as under :
"As already pointed out, the office
premises remained with the assessee firm and the business of disposing of the
stock-in-trade continued to be directed from that place.
Thus this was not a case of a business coming
to a standstill altogether but it is a case of carrying on the same business on
a smaller scale. Even this business was carried on by the assessee firm in its
usual name and style from the same office premises from which it used to carry
it on prior to the requisition of the godowns by the Government...... If any
injury was caused to the assessee's business, including the capital assets it
held for the purpose of carrying on that business, it was to the volumes of the
business and not to the profit making apparatus itself." In the light of
the above findings of fact, we have no doubt that the amount received by the
respondent for the loss of earnings was revenue receipt. It can hardly be
disputed that if the respondent firm had been earning profits as a result of
its business during the years the premises in question remained under
requisition, the said profit would have been treated as revenue receipt and
liable to be taxed as such. The amount received in lieu of the profits which
would have been earned if the premises had not been requisitioned, in our
opinion, would partake of the same character as the profits. The present is not
a case wherein the respondent firm was permanently deprived of a source of
income. On the contrary, the present is a case arising out of requisition of
the premises. Requisition, unlike acquisition, is of a temporary nature and
though it may extend over some years, it has not the element of permanence. The
compensation' paid to the respondent represents the supposed profit which the
respondent would have earned during the years the premises remained under
requisition but which profit the respondent could not earn because of the
A case somewhat similar to the present case
is Commissioner of Income Tax/Excess Profits Tax, Bombay City v. Shamsher 1073
Printing Press(1). The respondent firm in that case had for the purpose of its
business a printing press. The premises in which he press was housed were
requisitioned by the Government and the respondent had to shift its business to
another place. Of the various sums paid as compensation for the requisition,
the Government paid Rs. 57,435 towards the claim of the respondent "on account
of the compulsory vacation of the premises, disturbance and loss of
It was held by this Court that the sum of Rs.
57,434 had not been received by the respondent for any injury to its capital
assets, including goodwill. The above sum, it was further held, had been
received as compensation for loss of profit and was a revenue receipt liable to
Reference has been made by Mr. Hajarnavis to
the observations in the award of the arbitrator regarding the manner of
computing the compensations payable to the respondent for the loss of earning.
The arbitrator in this connection took the view that the amount of two years
purchase made by the respondent would be the most equitable and fair figure for
determining the amount of compensation.
The lump sum payable to the respondent for
loss of earning was thus found to be Rs. 1,25,500. The important thing to note
is that the above sum was paid to the respondent on account of loss of earning.
The method of computing the compensation payable for the loss of earning would
not in our opinion, alter the real character or the essential nature of the
receipt of the said compensation in the hand of the respondent, As observed by
Lord Buck master in the case of The Glennboig Union Fireclay Co. Ltd. v. The
Commissioners of Inland Revenue (2 ) "there is no relation between the
measure that is used for the purpose of calculating a particular result and the
quality of the figure that is arrived at by means of the application of that
test". The above observation was quoted with approval by this Court in the
case of Sonairam Doongermall v. Commissioner of Income Tax(3) and it was held
that it is the quality of payment that is decisive of the character of the
payment and not the method of the payment or its measure as makes it fall
within capital or revenue.
Reliance has been placed by Mr. Hajarnavis on
the ratio of the decision of this Court in the case of Senairam Doongarmall
(supra). The assessee family in that case owned a tea estate consisting of tea
gardens, factories and other buildings and carried on the business of growing
and manufacturing tea. The factory and other buildings on the estate were
requisitioned for defence purposes by military authorities. Though the assessee
continued in possession of the tea gardens and tended them to preserve the
plants, the manufacture of tea was stopped completely. The (1)  39 I. T.
(2) 12 T. C. 427.
19-LI72Sup.CI/73, (3)  42 I. T. R. 392,
1074 assessee was paid compensation for the
years 1944 and 1945 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. This Court held that the amount of compensation received by the
assessee was not revenue receipt and did not comprise any element of income.
In arriving at that conclusion, the Court
took note of the fact 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. As the assessee had not carried on any business at all, the
compensation received by the assessee was held to be not profit of business.
This case, in our opinion, cannot be of much help to the respondent because in
the present case, as observed earlier, the Tribunal has expressly found that
the respondent was carrying on the business during the relevant years.
Reliance has also been placed by Mr.
Hajarnavis upon the decision of House of Lords in the case of The Glenboig
Union Fireclay Co. Ltd. (supra). The assessee in that case was carrying on
business for the manufacture of fireclay goods and had taken in connection with
that business a fireclay field on lease, over part of which ran the lines of
the Caledonian Railway. The railway administration prohibited the assessee from
excavating the field within a certain distance of the rails and paid
compensation there for in accordance with the provisions of a statute. It was
held by the House, of Lords that this was a capital receipt as the compensation
was really the price paid "for sterlising the assets from which otherwise
profit might have been obtained". It would follow from the above that the
fireclay field was accepted to be a capital asset which was to be utilised for
the carrying on of the business of manufacturing fireclay goods. When the
assessee was prohibited from exploiting the field, it was considered to be an
injury inflicted on his capital asset. The case of The Glenboig Union Fireclay
Co. Ltd. (supra) was cited before this Court in Commissioner of Income Tax,
Nagpur v. Rai Bahadur Jairam Valji and Others(1) and Senairam Doongarmall
(supra) and was distinguished on the ground that it related to the sterlisation
and destruction of a capital asset. In the present case there has been no
sterlization and destruction of the capital asset of the respondent firm. As
such, the case of The Glenboig Union Fireclay Co. Ltd. cannot afford much
assistance in the present case.
Reference has also been made by Mr.
Hajarnavis to the cases of S. R. Y. Sivaram Prasad Bahadur v. Commissioner of
Income Tax, Andhra Pradesh (2 ) and Commissioner of Income Tax.
Punjab,, Haryana, Jammu & Kashmir and
Himachal Pradesh v.
Prabhu Dayal(3). Sivaram Prasad Bahadur's
case related to (1)  35 I. T. R. 148.
(2)  82 I. T. R. 527.
(3)  82 I. T. R. 604.
1075 interim payments made under the Madras
Estates (Abolition and Conversion into Ryotwari) Act, 1948 to a former holder
of an estate which had been abolished during the period between the taking over
of the estate, and the final determination and deposit of compensation under
It was held to be a capital receipt and not
liable to tax.
Prabhu Dayal's case related to an assessee
who had discovered by chance the existence of kankar in the Jind State. The
assessee, brought about an agreement between the State and one Shanti Prasad
Jain for the acquisition of sole and exclusive monopoly rights for
Shanti Prasad Jain transferred his rights
under the agreement to a company of which the assessee was one of the
promoters. For the services rendered by him, the company agreed to pay the
assessee a commission of 1 per cent on the yearly net profits earned by the
company. The agreement was acted upon till 1950 where after the company did not
pay the commission to the assessee. The assessee filed a suit which ended in a
compromise. In terms of the compromise, the assessee was paid certain amounts
as commission for the years 1951, 1952 and 1953 and a further sum of Rs. 70,000
by way of compensation for the determination of the agreement between him and
the company as from January 1, 1954.
Question which arose for determination was
whether the sum of Rs. 70,000 was capital receipt in the hand of the assessee.
The assessee, it was found, had not engaged either in the business of
discovering kankar or any minerals or in the business of bringing about
agreement between the parties. There was, indeed, no evidence that he was a
business man. It was held that none (if the activities of the assessee could be
considered to be business activity.
The compromise, in the opinion of this Court,
destroyed an income yielding asset of the assessee and in its place he , was
given Rs. 70,000 as compensation. The sum of Rs. 70,000 was accordingly held to
be capital receipt. It is manifest from the narration of the facts of Sivaram
Prosad Bahadur and Prabhu Dayal's cases that there is no similarity between
those cases and the present case. As such, these two decisions cannot be of any
avail to the respondent.
It may also be mentioned that Mr. Hajarnavis
has assailed the findings of fact of the Tribunal. In this respect we are of
the view that the Tribunal is the final fact finding authority. It is for the
Tribunal to find facts and it is for the High Court and this Court to lay down
the law applicable to the facts found. Neither the High Court nor this Court
has jurisdiction to go behind or to question the statement of facts made by the
Tribunal. The statement of case is binding on the parties and they are not
entitled to go behind the facts of the Tribunal in the statement. When the
question referred to the High Court speaks of "on the facts and
circumstances of the case", it means on the facts and circumstances 1076
found by the Tribunal and not on the facts and circumstances as may be found by
the High Court (see Karnani Properties Ltd. v. Commissioner of Income Tax, West
As a result of the above, we accept the
appeal, set aside the judgment of the High Court and answer the question
referred by the Tribunal in favour of the department. In our opinion, the sum
of Rs. 1,05,074 received by the respondent as compensation from the Government
was taxable as income of the respondent and was not a capital receipt.
In the circumstances of the case, we leave
the parties to bear their own costs of this Court as well as in the High Court.
S.B.W. Appeal allowed.
(1)  82 I. T. R. 547.