# SENAIRAM DOONGARMALL · v. COMMISSIONER OF INCOME-TAX, ASSAM

- **Citation:** [1962] 1 S.C.R. 257
- **Court:** Supreme Court of India
- **Decided:** 1962
- **Case number:** Civil Appeal No. 535 of 1958
- **Bench:** J. L. Kapur, M. Hidayatullah, J. c. SHAH
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/senairam-doongarmall-v-commissioner-of-income-tax-assam-2012
- **Pages:** 22

## Headnote

Income Tax-Capital or Revenue-Tea estate-Requisition of
factories and buildings-Stoppage of tea business-CompcnsationNature of-Indian Income-tax Act, 1922 (II of 1922), s. IO.
The assessee, a Hindu undivided family, owned a tea estate
in Assam comprising a tea garden, factories, labour quarters,
staff quarters etc. On February 27, 1942, the military authorities requisitioned all the factory buildings etc., under the
Defence of India Rul~s but the tea garden, however, was left in
the possession of the assessee. The possession of the military
continued till the yearr945 and during that period, though the
assessee looked after its tea garden, its business as tea-growers
and tea-manufacturers could not be continued. Under the
Defence of India Rules, the military authorities paid the assessee
as compensation a sum of Rs. 2,22,080 for the year 1944· which
included Rs. 10,000 for repairs to quarters for labourers, and a
sum of Rs. 2,46,794 for the year 1945, which included Rs. 15,231
for repairs. For the assessment years 1945-1946 and 1946-47
the question arose as to whether the aforesaid sums or any portion thereof were capital receipts or were revenue receipts and
Jiable to tax. The facts showed that the business, which the
assessee had been carrying on, consisted in growing tea plants
and in making tea out of the leaves by a manufacturing process
into a commercial commodity, that without the factory and the
premises the tea leaves could not be dried, smoked and cured to
become tea, and that the result of the requisition of the factories was to stop the business.
Held, that the amounts paid by the military authorities
were received by the assessee not as compensation for the loss of
profits of the business which it had been carrying on but for
the injury to the business as a whole, because the entire structure
of business was affected to such an extent that no business was
carried on by the assessee during the two years in question.
Accordingly, the compensation could not bear the character
of profits of a business and was not liable to tax under s. IO of
the Indian Income-tax Act, 1922.
Income-tax Commissioner v. Shaw Wallace & Co., (1932) L.R.
59 I.A. 206, referred to and applied.
Case law reviewed.
33
Mat'ch IJ.
Senairatn
258
SUPREME COURT REPORTS
(1962]

## Text

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1 s.c.R. SUPREME COURT REPORTS
257
SENAIRAM DOONGARMALL ·
v.
COMMISSIONER OF INCOME-TAX,
ASSAM
(J. L. KAPUR, M. HIDAYATULLAH and J. c.
SHAH, JJ.)
Income Tax-Capital or Revenue-Tea estate-Requisition of
factories and buildings-Stoppage of tea business-CompcnsationNature of-Indian Income-tax Act, 1922 (II of 1922), s. IO.
The assessee, a Hindu undivided family, owned a tea estate
in Assam comprising a tea garden, factories, labour quarters,
staff quarters etc. On February 27, 1942, the military authorities requisitioned all the factory buildings etc., under the
Defence of India Rul~s but the tea garden, however, was left in
the possession of the assessee. The possession of the military
continued till the yearr945 and during that period, though the
assessee looked after its tea garden, its business as tea-growers
and tea-manufacturers could not be continued. Under the
Defence of India Rules, the military authorities paid the assessee
as compensation a sum of Rs. 2,22,080 for the year 1944· which
included Rs. 10,000 for repairs to quarters for labourers, and a
sum of Rs. 2,46,794 for the year 1945, which included Rs. 15,231
for repairs. For the assessment years 1945-1946 and 1946-47
the question arose as to whether the aforesaid sums or any portion thereof were capital receipts or were revenue receipts and
Jiable to tax. The facts showed that the business, which the
assessee had been carrying on, consisted in growing tea plants
and in making tea out of the leaves by a manufacturing process
into a commercial commodity, that without the factory and the
premises the tea leaves could not be dried, smoked and cured to
become tea, and that the result of the requisition of the factories was to stop the business.
Held, that the amounts paid by the military authorities
were received by the assessee not as compensation for the loss of
profits of the business which it had been carrying on but for
the injury to the business as a whole, because the entire structure
of business was affected to such an extent that no business was
carried on by the assessee during the two years in question.
Accordingly, the compensation could not bear the character
of profits of a business and was not liable to tax under s. IO of
the Indian Income-tax Act, 1922.
Income-tax Commissioner v. Shaw Wallace & Co., (1932) L.R.
59 I.A. 206, referred to and applied.
Case law reviewed.
33
Mat'ch IJ.
Senairatn
258
SUPREME COURT REPORTS
(1962]
CIVIL APPELLATE JURISDICTION: Civil Appeal No.
535 of 1958.
Doongarmall
Appeal from the judgment and order dated March
v.
29, 1955, of the Assam High Court in I.T.R. No. 1 of
Commissioner of 1954.
·
Income-ta~. Assam
A. V. Viswanatha Sastri and D. N. Mukherjee, for
the appellants.
Hardayal Hardy and D. Gupta, for the respondent.
1961. March 13. The Judgment of the Court was
delivered by
Hidayatullah ].
HIDAYATULLAH, J.-This appeal which has been
filed with a certificate under s. 66(A)(2) granted by
the High Court of Assam against its judgment and
order dated March 29, 1955, concerns the assessment
of the appellants, a Hindu undivided family, for the
assessment years, 1945-1946 and 1946-1947.
The appellants owned a tea garden called the
Sewpur Tea Estate in Assam. They had on the Estate,
factories, labour quarters, staff quarters etc.
On
February 27, 1942, the Military authorities requisitioned all the factory buildings, etc., under R. 79 of
the Defence of India Rules. Possession was taken
sometime between March 1 and March 8, 1942. The
tea garden was, however, left in the possession of the
appellants. The possession of the military continued
till the year 1945, and though the appellants looked
after their tea garden, the manufacture of tea was
completely stopped. Under the Defence of India
Rules, the Military authorities paid compensation.
For the year 1944, corresponding to the assessment
year, 1945-1946, they paid a total sum of Rs. 2,22,080
as compensation including a sum of Rs. 10,000 for
repairs to quarters for labourers and Rs. 144 which
represented the assessor's fee.
For the year 1945,
corresponding to the assessment, year, 1946-1947, the
Military authorities paid a sum of Rs. 2,46, 794 which
included a sum of Rs. 15,231 for other repairs. The
sums paid for repairs appear to have been admitted
as paid on capital account, and rightly so.
The
question was whether the two sums paid in the two
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l S.C.R. SUPREME COURT REPORTS
259
years minus these admitted sums, or any portion
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thereof, were received on revenue or capital account.
Senairam
The assessments for the two years were made by
Doongarmall
different Income-tax Officers.
For the assessment
v.
year, 1945-1946, the Income-tax Officer deducted from Commission" of
Rs. 2,22,080, a sum of Rs. 1,05,000 on account of Income-tax, Assam
admissible expenses. He then applied to the balance, Ilidayatullah ].
Rs. 1,17,080, R. 24 of the Indian Income-tax Rules,
1922, and brought to tax 40 per cent of that sum
amounting to Rs. 46,832. The assessment was made
under s. 23(4). For the assessment year, 1946-1947,
the assessment was made under s. 23(3) of the Incometax Act. The Income-tax Officer excluded the sum
paid on account of repairs and treated the whole of
the amount as income taxable under the provisions of
the Income-tax Act, after deduction of admissible
expenditure. The appeals filed by the appellants to
the Appellate Assistant Commissioner against both
the assessments were unsuccessful. On further appeal, the Income-tax Appellate Tribunal (Calcutta
Bench) was divided in its opinion. The Judicial
Member held that the receipts represented revenue
but on account of "use and occupation" of the premises requisitioned. He, therefore, computed the net
compensation attributable to such use and occupation
at 20 per cent of the total receipts in both the years.
He, however, observed that if the receipts included
income from the tea estate he would have been inclined to apply R. 24 in the same way as the first
Income-tax Officer.
The Accountant Member was of
the opinion that the appellants were liable to pay tax
on 40 per cent of their receipts in both the years after
deduction of the sums paid for repairs of buildings
and the admissible expenditure.
He accepted the
estimate of expenditure for the account year, 1944, at
Rs. 1,05,000, and directed that the admissible expenditure for the succeeding year be determined and
deducted before the application of R. 24.
It appears that through some inadvertence these
two orders, which were not unanimous, were sent to the
appellants and the Department. The Commissioner of
Income-tax filed an application under s. 66(1) for a
260
SUPREME COURT REPORTS
[1962]
1961
reference, whiie the appellants filed an application
under s. 35 for rectification of the orders, since many
Senairam
Doongarmall
other matters in appeal were not considered at all.
v.
When these two applications came before the TriCommissioner of bunal, it was realised that the matter had to go to a
In,ome-tax, Assam third Member for settling the difference.
The President then heard the appeal, and agreed with the
Hidayatullah f. Accountant Member.
Though he expressed a doubt
whether the appellants were entitled to the benefit of
rr. 23 and 24, he did not give an opinion, because this
point was not referred to him.
The Tribunal then referred the case to the High
Court of Assam on the following two questions:
"(l). Whether the sums of Rs. 2,12,080 and
Rs. 2,31,563 paid by the Government to the assessce
in 1945 and 1946 respectively (exclusive of the sums
paid specifically for building repairs) were revenue
receipts in the hands of the assessee comprising any
element of income?
(2). If so, whether the whole of the said sums
less the expenses incurred by the assessee in fonding the tea bushes constituted agricultural income
in his hands exempt from tax under the Indian
Income-tax Act, 1922?"
The reference was heard by Sarjoo Prasad, C.J., and
Ram Labhaya, J., along with two writ petitions, which
had also been filed.
They delivered separate judgments, but concurred in their answers. The High
Court answered both the questions against the appellants. The writ petitions were also dismissed.
Before we deal with this appeal, we consider it
necessary to state at this stage the method of calculation of compensation adopted by the Military authorities. It is not necessary to refer to both the years,
because what was done in the first year was also done
in the following year except for the change in the
amounts. This method of calculation is taken from
the order of the Judicial Member, and is as follows:
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261
Rs. A. P.
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Orop-2lll20 lbs. at 17.85d (half)
Senairam
and at 18.35d (half)
2,12,292 14 0
Doong.,mall
15480 lbs. at Rs. 0-11-10
11,449 12 0
v.
52600 lbs. at Rs. 0-15-6
50,956 4 0
Commissionet of
______ lncome'..ta.x, Assam
Less-Saving of plucking and
manufacturing:-
Rs.
(a) Expenses at annas 3
per lb.
49,209
(b) Sale of export rights,
1,32,935 lbs.
4,924
( c) Purchase of export
rights 78,185 lbs. at
annas 4.
1,629
( d) Food and clothing
concessions
7,000
2,74,698 14 0
62,762 0 0
2,11,936 0 0
Add-For fees of assessors, Rs.144
Coolie lines repairs, Rs. 10,000
10,144 0 0
Rs. 2,22,080 0 0
From the admitted facts which have been sum.
marised above, it is clear that the business of the
appellants as tea-growers and tea-manufacturers had
come to a stop. The word "business" is not defined
exhaustively in the Income-tax Act, but it has been
held both by this Court and the Judicial Committee to
denote an activity with the object of earning profit.
To say that a business is being carried on, means no
more than that profit is to be earned by a process of
production. The business of a tea-grower and manufacturer is not merely to grow tea plants but to collect
tea leaves and render them fit for sale. During the
years in question, the appellants were tending their
tea garden to preserve the plants, but this activity
cannot be described as a continuation of the business,
Hidayatullah ].
262
SUPREME COURT REPORTS
[1962]
'961
which had come to an end for the time being. It
Senairam
would have hardly made any difference to the carryDoongarmall
ing on of business, if, instead of the factories and ·
v.
buildings, the tea garden was requisitioned and
Commissioner of occupied, because in that event also, the business
In,ome-tox. Assam would have come to a standstill.
H'a
11
The compensation which was paid in the two years
' ayatu ah f. was no doubt paid as an equivalent of the likely profits in those years; but, as pointed out by Lord Buckmaster in The Glenboig Union Fireclay Go. Ltd. v. The
Commissioners of Inland Revenue (1) and affirmed by
Lord Macmillan in Van Den Berghs Ltd. v. Clark('),
"there is no relation between the measure that is
used for the purpose of calculating a particular
result aud the quality of the figure that is arrived
at by means of the application of that test".
This proposition is as sound as it is well-expressed,
and has been followed in numerous cases under the
Indian Income-tax Act and also by this Court. It is
the quality of the payment that is decisive of the
character of the payment and not the method of the
payment or its measure, and makes it fall within
capital or revenue.
We are thus required to determine what was it that
was paid for, or, in other words, what did the two
payments replace, if they replaced anything. The
arguments at the Bar followed the pattern which has
by now become quite familiar to Courts. We were
taken to the 12th Volume of the Tax Cases series,
where are collected cases dealing with Excess Profits
Duty and Corporation Profits Tax in England following the First World War, and to other English cases
reported since. These cases have been eonsidered and
applied on more than one occasion by this Court, and
we were referred to those cases as well.
Now, it is necessary to point out that the English
cases were decided under a different system of taxation, and must be read with care. A case can only be
decided on its own facts, and the desire to base one's
decision on anather case in which the facts appear to
be near enough, sometimes leads to error. It is well to
(1) (1922) 12 T.C. 427.
(2) (1935) A.C. 431.
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1 S.C.R. SUPREME COURT REPOR'l'S
263
remember the wholesome advice given by Lord
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Dunedin in Green v. Gliksten &: Son Ltd. (1) that "in
Senairam
these Income Tax Act cases one has to try, as far as
Doongarmall
possible, to tread a narrow path, because there are
v.
quagmires on either side into which one can easily Commissioner of
be led ......... ".
Income-ta~. Assam
The English cases to which we were referred, were
used even in England by Lord Macmillan in Van Den Hidayatullah J.
Berghs' case (') as mere illustrations, and when cited
before the Judicial Committee in Income-Tax Commissioner v. Shaw Wallace&: Co.(') were put aside by Sir
George Lowndes with this observation:
"their Lordships would discard altogether the
case law which has been so painfully evolved in the
construction of the English income-tax sta,tutesboth the cases upon which the High Court relied
and the flood of other decisions which has been let
loose in this Board".
Most of the cases cited before us deal with Excess
Profits Duty and Corporation Profits Tax. In the
former group, pre-war profits had to be determined,
so that they might be compared with post-war business for the purpose of arriving at the excess profits,
if any. In dealing with the pre-war profits, diverse
receipts were considered from the angle whether they
formed capital or revenue items. The observations
which have been made are sometimes appropriate to
the nature of the business to which the case related
and the quality of the payment in relation to that
business. Similarly, the Corpora ti on Profits Tax was
a tax intended to be imposed upon the profits of
British Companies (which included some other corporate bodies) carrying on trade or business including
the business of investments. The profits which were
taxed under s. 52 of the English Finance Act were
required to be determind according to the principles
laid down in that Act.
It is thus obvious that though the English cases
may be of some help in an indirect way by focussing
one's attention on what is to be regarded as relevant
(11 (1929) 14 T.C. 364, 384,
(2J [1935] A.C. 431.
(3) (1932) L.R. 59 I.A. 206.
264
SUPREME COURT REPORTS
[1962]
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and what rejected, they cannot be regarded in any
sense as precedents to follow.
Since this Court on
Senairam
Doongarmall
other occasions used these cases as an aid, we shall
v.
refer to them briefly; but we have found it necessary
Commissioner of to sound a warning, because the citation of these
Incom,-tax, Assam authorities has occasionally outrun their immediate
utility.
Hidayatullah f.
We begin with the oft-cited case of The Glenboig
Union Fireclay Co. Ltd. (1). That was a case under the
Excess Profits Duty. The facts are so well-known
that we need not linger over them. A seam of fireclay could not be worked, and compensation was paid
for it. That the clay was capital asset was indisputable, and the portion lost was a slice of capital.
The hole made in the capital was filled up by the
compensation paid. It was said that a portion of
the capital asset was sterilised and destroyed, and even
though the business went on, the payment was
treated as on capital account. The case cannot be
used as precedent, because here, no doubt, the factories and buildings were a part of fixed capital, but the
payment was not so much to replace them in the
hands of the appellants as to compensate them for the
stoppage of business. The Glenboig case (1) does not
apply.
The case of Short Bros. Ltd. v. The Commissioners
of Inland Revenue ('), another case under the Excess
Profits Duty, illustrates a contrary principle.
The
Company had agreed to build two ships, but the
contracts were cancelled and £. 100,000 were paid for
cancellation of the contracts. This was held to be a
receipt in the ordinary course of the Company's trade.
Rowlatt, J., said that it was "simply a receipt, in the
course of a going business, from that going businessnothjng else". In the Court of Appeal, Lord Hanworth,
M.R., affirmed the decision, observing:
"Looked at from this (business) point of view it
appears clear that the sum received was received in
ordinary course of business, and that there was not
in fact any burden cast upon the company not to
carry on their trade. It was not truly compensation
(1) (1922) 12 T,C. 427,
(2) (1927) 12 T.C. 955.
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265
for not carrying on their business; it was a sum
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paid in ordinary course in order to adjust the relation
Senairam
between the shipyard and their cmitomers."
Doongarmall
The payment was by a customer to the shipyard.
v.
Whether the amount was paid for ships built or Commissioner of
because the contract was cancelled, it was a business Income-tax, Assam
receipt and in the course of the business. In the Hiday;;;;:;1ah J.
present case, the payment is not of this character, and
Short Bros. case(') does not apply.
The next case-also of Excess Profits Duty-is The
Commissioners of Inland Revenue v. Newcastle Brewe.
ries, Ltd. (2). In that case, the admiralty took over
one-third stock of rum of the Brewery, and paid to
the Company the cost plus 1 s. per proof gallon.
Later, the compensation was increased
by an
amount of £. 5,309 and was brought to tax in the
earlier year, when the original compensation was paid.
The observations of Rowlatt, J., though made to
distinguish the case from one in which the compensation is paid for destruction of business, are instructive.
We shall refer to them later. The learned Judge held
that this was a case of compulsory sale of rum, and
that a compulsory sale was also a sale. The receipt
was held to be a profit. The decision was affirmed by
the Court of Appeal. This case also, so far as its facts
go, was very different, and the actual decision has no
relevance.
The Commissioners of Inland Revenue v. The Northjleet Coal and Ballast Co. Ltd. (') was a case like Short
Bros. case (1). £. 3,000 in a lump sum were paid to be
relieved from a contract, and as the business was a
going business, it was held to be profit. In fact, Short
Bros. case (1) was applied.
Ensign Shipping Co. Ltd. v. The Commissioners of
Inland Revenue('), a case of Excess Profits Duty, is
interesting. During the Coal Strike of 1920, two ships
of the Company were ready to sail with cargoes of coal.
They were detained for 15 and 19 days respectively
by orders of Government. In April 1924, £. 1,078/-
were paid as compensation, and were held to be
(1) (1927) 12 T.C. 955.
(2) (1927) 12 T.C. 927.
(3) (1927) u 1".C. IIO>.
(4) (1927) 12 1".C. nag.
3<\
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SUPREME COURT REPORTS
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trading receipts. Rowlatt, J., laid down that if there
Senairam
was an operation which produced income, it was none
Doongarmall
the less taxable, because it was a compulsory opera-
•·
tion. The learned Judge then obsflrved that he could
Commissioner of not hold that thiB was a case of hire, like Sutherland
Income-lax, Assam v. The Commissioners of Inland Revenue (1 ), because
Hidayatullah J.· the ships lay idle and their use wall interrupted. The
learned Judge then concluded:
"Now it is quite clear that if n source of income
is destroyed by the exercise of the paramount right
... and compensation is paid for it, that that is not
income, although the amount of the compensation
is the same sum as the total of the income that has
been lost ... but in this case I haYe got to decide the
case of a temporary interferencE" .. Here these ships
remained as ships of the concern ... they merely
could not sail for a certain number of days, and in
lieu of the value of the use which they would have
been to their owners in their profit-earning capacity
during those days, in lieu of that receipt, this
money was paid to the owners, o:tlthough they were
not requisitioned, as if requisitioned ... I
think
I ought to regard this sum, a:; the Commissioners
have obviously regarded it, as 2, sum paid which to
the shipowners stands in lieu of the receipts of the
ship during the time of the interruption."
This decision was approved by the Court of Appeal.
Now, the case was one of loss of time during which
the ships would have been usefully and profitably
employed. It was argued in the Court of Appeal
with the assistance of the Glenlwig case ('), and it
was suggested that the vessels we:re 'sterilised' for the
period of detention. Lord Hanwor~h said that that was
rather a metaphorical word to use, and that the correct
way was to look at the matter differently. The Master
of the Rolls observed:
"But ·in the present case if' seems to me that,
looked at from a business point of view, all that has
happened is that the two vessels arrived much later
at the ports to which they were consigned than
they would have done, with the consequent result
(1) (1918) u T.C. 63.
(2) (192>) u T.C. 427.
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1 S.C.R. SUPREME COURT REPORTS
267
that for the certain number of days which they
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were late they could not possibly make any earnScnairam
ings, and it is in respect of that direct loss by
Doongarmall
reason of the interference with the rights exercised
v.
on behalf of His Majesty that they made a claim Commissioner of
and have been paid compensation."
Income-tax, Assam
This ruling was strongly relied upon by the Depart. Hiday-;,:iah J.
ment as one which laid down a principle applicable
here. We do not agree. The payment there was
made towards loss of profits of a going business, which
business was not destroyed. As a source of income,
the business was intact, and the business instead of
being worked for the whole period, was worked for a
period less by a few days and the profit of that period
was made up. That may be true if one is going to
determine standard profits of a particular period,
because what is paid goes to profits in the period but
is of no significance in a case like the present, where
during the whole of the year no business at all was
done nor profits made. This case also does not help to
solve the problem.
Charles Brown ch Co. v. The Commissioners of
Inland Revenue (') is yet another case of Excess
Profits Duty. In that case, the business of the tax.
payer was carried on under the control of the Food
Controller from 1917 to 1921, and he was compelled
to buy and sell at prices fixed by the Controller.
By
agreement a 'mill standard' was fixed, and the taxpayer was allowed to retain profits up to that standard,
and if there was a shortfall, it was to be made up by
the Controller. This amount which the taxpayer retained together with the amount paid towards shortfall
was regarded as profits. The principle applicable is
easily discernible.
There can be little doubt that the
trade was being carried on, and what was received
was rightly treated as profits. Rowlatt, J., observed
that this was a clearer case than the Ensign case (').
The matter was covered by s. 38 of the Finance (No. 2)
Act of 1915, Fourth Schedule, Part I (1), where the
words were "The profits shall be taken to be the
actual profits arising in the accounting period".
(r) (1929) 12 T.C. 1256.
(r) (1927) rz T.C. u69.
268
SUPREME COURT REPORTS
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In Barr Crombie & Co. Ltd. v. The Commissioners of
Senairnm
Inland Revenite (1), the Company's business consisted
Doongarmall
almost entirely of managing shipping for another
v.
Company. When the shipping Company went into
Commissioner of liquidation, a sum was paid as compensation to the
Incomo-tax. Assam managing Company. It was held that this was a
Hidayatullah J. capital receipt. The reason for holding thus was that
the structure of the managing Company's whole
business was affected and destroyed, and this was not
profit but compensation for loss of capital. Kelsall
Parsons & Co. v. The Commissioners of Inland
Revenue ('), to which we shall refer presently, was
distinguished on the ground that, though in that case
the agency was cancelled, the payment was for one
year and that too, the final year. This case is important in one respect, and it is that if the entire business
structure is affected and destroyed, the payment may
be regarded as replacing capital, which is lost.
These are cases of Excess Profits Duty where profits for a particular period had to be determined and
also the character of the payments in relation to the
kind of business, to determine whether to treat them
as excess profits or not. In the Glenboig case (3), the
payment was not regarded as profit, because it replaced lost capital and so also, in Barr Crombie ca.se(1 ).
These form the first group. Short Bros. case('), Northfleet case(') and Ensign Shipping Co's case (') were of
a going business, and what was paid was towards lost
profits in a going concern. These form the second
group. Newcastle Breweries case(') and Charles Brown
and Co's case (8) were of business actually done and
profits therefrom. None of these rulings is directly in
point. In the case with which we are concerned, the
payment was not towards any capital asset to attract
the first group, there was no going business so as to
attract the second, and nothing was bought nor any
business done with the taxpayer to make the third
group applicable.
(1) (1945) 26 T.C. 406.
(3) (1922) 12 T.C. 427.
(5) (1927) 12 T.C. II02.
(7) (1927) 12 T.C. 927.
(2) (1938) 21 T.C. 608.
(4) (1927) 12 T.C. 955.
(6) (1927) 12 T.C. n69.
(8) (1929) 12 T.C. 1256.
...
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I S.C.R. SUPREME COURT REPORTS
269
We shall next see some cases which involved Cor196r
poration Profits Tax.
In The Gloucester Railway
Senairam
Carriage and Wagon Co. Ltd. v. The Commissioners of
Doongarmall
Inland Revenue('), the Company was doing business
v.
of selling wagons and of hiring them out. The Com- Commissioner of
pany then sold all the wagons which it was using for Inoomo-tax, Assam
purposes of hiring. The receipt was treated as profit
of trade, there being but one business and the wagons Hidayatullah f.
being the stock-in-trade of that business. In Green v.
Gliksten & Son Ltd.('), stocks of timber were destroyed.
Their written down value was£. 160,824 but the Insurance Cothpany paid £. 477,838.
The Company
credited£. 160,824 in its trading account but not the
balance. The House of Lords held that the timber,
though burnt, was realised, and that the excess of the
sum over the written down book value must be brought
into account. These two cases throw no light upon
the problem with which we are faced, and any observations in them are so removed from the facts of this
case as to be of no assistance.
The cases under Sch. D of the Income-tax Act like
Burmah Steam Ship Co. Ltd. v. The Commissioners of
Inland Revenue('), a case of late delivery of ships sent
for overhaul, Greyhound Racing Association (Liverpool)
Ltd. v. Cooper('), which was a case of surrender of an
agreement in which the amounts were treated as trading receipts, are not cases of stoppage of a business
and are not relevant. Kelsall Parsons case('), where
one of the agreements of a commission agency which
was to run for 3 years was terminated at the end of
the second year and compensation of £. 1500/- was
paid for the last and final year, was held on its special
facts to involve taxable profits of trading. Though
the business came prematurely to an end, the struc.
ture of the business was not affected because the payment was in lieu of profits in the final year of the
business as if business had been done.
The payment
was held to be within the structure of the business in
the same way as in Shove v. Dura Manufacturing Co.
Ltd. ('). The converse of these cases is the well-known
(1) (1925) 12 T.C. 720.
(2) (r929) 14 T.c. 364.
(3) (1930) 16 T.C. 67.
(4) (1936) 20 T.C. 373.
(5) (1938) 21 T.C. 608.
(6) (1941) 23 T.C. 779.
270
SUPREME COURT REPORTS
[1962]
I96z
Van Den Berghs Ltd. v. Clark('), where mutual trade
agreements were rescinded between two Companies
Senairatn
Doongarmall
and £. 450,000 were paid to the assessee Company as
v.
"damages". This was treated as capital receipt and
Commissionn of not as income receipt to be included in computing the
Income·tax. Assam profits of trade under Sch. D Case I of the Income-tax
Act of 1918.
Lord Macmillan observed:
Hidayatullah J.
"On the contrary the cancelled agreements related
to the whole structure of the appellants' 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".
We have referred to these cases to show that none
of them quite covers the problem before us. The facts
are very dissimilar, and the observations, though
attractive, cannot always be used with profit and often
not without some danger of error. We shall now turn
to the cases of this Court, which were referred to at
the hearing.
The first case of this Court is The Commissioner of
Income Tax and Excess Profits Tax, Madras v. The
South India Picture~ Ltd., Karaikudi ('). The South
India Pictures, Ltd., held distribution rights for
5 years of three films towards the completion of which
they had advanced money to a film. producing Company, called the Jupiter Pictures. When the term
had partially run out, the agreement for distribution
was cancelled, and the South India Pictures, Ltd.,
received Rs. 26,000/- as commission. The question
was whether this sum was on capital or revenue
account. Das, C. J., and Venkatarama Aiyar, J., held
that it was the latter, while Bhagwati, J., held that it
was the former. The learned Chief Justice came to
his conclusion on four grounds: (i) that the payment
was towards commission which would have been
earned; (ii) that it was not the price of any capital
(1) [1935] A.C. 431.
(2) [1956] S.C.R. 223.
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I S.C.R. SUPREME COURT REPORTS
271
asset sold, surrendered or destroyed; (iii) that the
'96'
structure of the business, which was a going business,
Senairam
was not affected; and (iv) that the payment was
Doongarmall
merely an adjustment of the relation between the
v.
South India Pictures, Ltd. and the Jupiter Pictures. Commission" of
The learned Chief Justice thus rested his decision on Income-ta•, Assam
Short Bros'(1) and Kelsall Parsons' (2) cases and not
upon Van den Berghs (')or Barr Grombie's case(').
Hidayatullah f.
Bhagwati, J., who dissented, judged the matter
from the angle of business accountancy. He observed
that money advanced to produce the cinema pictures,
if returned, would have been credited on the capital
side as a return of capital, just as expenditure for
distribution work was revenue expenditure and the
commission, a revenue receipt. On a parity of reasoning, the learned Judge held that. money spent in
acquiring distribution rights was a capital outlay, and
that when distribution rights were surrendered, it was
capital which was returned, since the agreement was
a composite one, the films were a capital asset and the
payment for their release was a return of capital.
With due respect, it is difficult to see how the payment could be regarded as capital in that case. The
fact which seems to have been overlooked in the
minority view was that the entire capital outlay had,
in fact, been previously recouped and even the security
held by the South India Pictures had been extinguished. It was a portion of the running business which
ceased to be productive of commission and by the
payment, the commission which would have been
earned and would have constituted a revenue receipt when so earned, was put in the pockets of the
South India Pictures.
The business of the South
India Pictures was still a going business, one portion
of which instead of being fruitful by stages became
fruitful all at once. What was received was still the
fruit of business and thus revenue. The case, though
interesting, is difficult to apply in the present context
of facts, where no business at all was done and what
was received was not the fruit of any business.
(1) (1927) I2 T.C. 955·
(3) [1935] A.C. 431.
(2) (1938) 21 T.C. 608.
(4) (1945) 26 T.C. 406.
272
SUPREME COURT REPORTS
[1962]
z96z
The next case'of this Court, Commissioner of Income
Tax v. Jairam Valji (1), may be seen. The assessee
Senairam
there was a contractor, and received Rs. 2,50,000 as
Doongarmall
v.
compensation for premature termination of a contract.
Commissioner of This was held to be a revenue receipt. The assessee
Income-tax, Assam had many businesses including many contracts, and the
receipt was considered as one in the ordinary course of
Hidayatullah f. business.
All the English decisions to which we have
referred, were examined in search for principles, but
the principle on which the decision was rested, was
that the payment was an adjustment of the rights
under the contract and must be referred to the profits which could be made if the contract had instead
been carried out. The payment not being on account
of capital outlay and the assessee not being prevented
from carrying on his business, the receipt was held to
be revenue, that is to say, related to income from a
contract terminated prematurely. In a sense, the case
is analogous to The South India Pictures, Ltd. case('),
which it follows.
In The Commissioner of Income-tax, HyderabadDeccan v. Messrs. Vazir Sultan & Sons('), the assessee held the sole selling agency and.distribution rights
of a particular brand of cigarette in the Hyderabad
State on foot of a 2 per cent discount on all business
done.
Subsequently, the area outside Hyderabad
State was also included on the same terms. Later
still, the area was again reduced to the Hyderabad
State. Rs. 2,19,343 were paid by way of compensa- ·
tion "for loss of territory outside Hyderabad". Bhagwati, J., and Sinha, J., (as he then was), held that the
compensation was on capital account, while Kapur, J.,
held otherwise. The reason given by the majority
was that the agency agreement was a capital asset
and the payment was in lieu of the loss of a portion of
the capital asset. Kapur, J., on the other hand, held
that the loss which was replaced was the loss of
agency commission and bore its character. The case
furnishes a difficult test to apply. If what was adjusted was the relationship between the parties and if
(I} [1959] Supp. 1 S.C.R. 110.
(2) [1956] S.C. R. 223.
(3) [1959] Supp. 2 S.C.R. 375.
I S.C.R. SUPREME COURT REPORTS
273
there was a going business as, in fact, there was, the
z96r
case comes within the dicta in The South India PicSenairam
tures, Ltd. case (1) and Jairam Valji's case('). The case
Doongarmall
can only be a decision on the narrow ground that a
v.
portion of the 'fixed capital' was lost and paid for.
Commissioner of
In Godrej & Co. v. Commissioner of Income-tax('), Income-tax, Assam
the assessee firm, which held a managing agency, Hidayatullah J.
released the managed Company from an onerous
agreement and in consideration, was paid Rs. 7,50,000.
It was held that the payment was not made to make
up the difference in the remuneration of the managing
agency firm but to compensate it for the deterioration
or injury of an enduring kind to the managing agency
itself. The injury being thus to a capltal asset, the ~
compensation paid was held to be on capital account.
The last case of this Court to which reference may
be made is Commissioner of Income-tax v. Shamshere
Printing Press (').
That was a very special case.
There, the premises of the Press were requisitioned by
Government, but the Press was allowed to set up its
business elsewhere, the charges for shifting the
machines, etc., being paid by Government. In addition, Government paid a sum claimed as loss of profits,
which was expected to bring up the profits to the level
of profits while the business was in its old place. The
assessee claimed that this sum was paid as compensation forloss of good will arising from its old locality.
There was, however, nothing to show that the payment
.was for goodwill, and it was held that the compensation paid must be regarded as money arising as profits
in the course of business. It was like putting money
in the till to bring the profits actually made to the
level of normal profits.
All these cases were decided again on their special
facts.
Though they involved examination of other
decisions in search for the true principles, it cannot be
said that they resulted in the discovery of a•y principle of universal application. To summarise them:
South India Pictures' case(') was so decided because
(1) [rg56] S.C.R. 223.
(2) [1959] Supp. l S.C.R, no.
(3) [1960] l S.C.R. 527.
(4) [1960] 39 l.T.R. go.
35
274
SUPREME COURT REPORTS
[1962]
'96'
the money received was held to be in lieu of commissenairam
sion which would have been earned by the business
Doongarmall
which was still going, and the receipt was treated as
v.
the fruit of the business. The same reason was given
Commissioner of in J airam Valji' s case (1) and Shamshere Printing Press
Income-tax, Assam case('). In Vazir Sultan's case('), the compensaHidayatullah J. tion was held to replace loss of capital, and in Godrej's
case('), the compensation was said not to have any
relation to the likely income or profits but to loss of
capital. Each case was thus decided on its facts.
We have so far shown the true ratio of each case
cited before us, and have tried to demonstrate that
these cases do no more than stimulate the mind, but
none can serve as a precedent, without advertence to
its facts. The nature of the business, or the nature
of the outlay or the nature of the receipt in each case
was the decisive factor, or there was a combination
of these factors. Each is thus an authority in the
setting of its own facts.
Before we deal with the facts of this case and
attempt to answer the question on which there is so
much to guide but nothing to bind, we will refer to
two cases of the Judicial Committee, one of which is
Income-Tax Commissioner v. Shaw Wallace & Oo. ('),
to which we have referred in another connection. In
that case, all the authorities prior to 1935 to which
we have referred (and some more) were used in aid of
arguments; but the Judicial Committee, for reasons
which are now illustrated by this judgment, declined
to comment on them. Shaw Wallace and Co., did
many businesses, and included in them was the managing agency of two oil-producing Companies. This
agency was terminated, and compensation was paid
for it. The usual question arose about capital or
revenue. The Full Bench of the Calcutta High Court
related the payment to goodwill, but the Judicial
Commit;ee rejected that ground because no goodwill
seemed to have been transferred. The Judicial Committee also rejected the contention that it was compensation in lieu of notice under s. 206, Indian
{1) [1959] Supp. r S.C.R. rro.
(2) [1960] 39 I.T.R. 90.
(3) [1959] Supp. 2 S.C.R. 375.
(4) [1960] 1 S.C.R. 527.
(5) (1932) L.R. 59 I.A. 206.
r·
I S.C.R.
SUPREME COURT REPORTS
275
Contract Act, as there was no basis for it either. The
r96r
Judicial Committee held that income meant a periodiSenairam
cal moneta,ry return coming in with some sort of reguDoongarmall
larity or expected regularity from a definite source
v.
and in business was the produce of something "loosely Commissioner of
spoken of as ca,pital". In business, income is profit Income-ta., Assam
earned by a process of production, or, in other words, H"d --;-;1 h 1
by the continuous exercise of an activity. In this
' •ya" •
·
sense, the sum sought to be charged could not be
regarded as income.