COMMISSIONER OF INCOME-TAX, CENTRAL ZONE, LAHORE VS TRUSTEE OF THE ESTATE OF LATE C.E. BEVEN PETMAN, LAHORE
2001 P T D 2829
[Lahore High Court]
Before Nasim Sikandar and Jawwad S. Khawaja, JJ
COMMISSIONER OF INCOME‑TAX, CENTRAL ZONE, LAHORE
versus
TRUSTEE OF THE ESTATE OF LATE C.E. BEVEN PETMAN, LAHORE
C. T. R. No. 178 of 1991, decided on 09/05/2001.
(a) Income-tax---
‑‑‑‑Taxability‑‑‑Name given to a transaction by the parties concerned does not necessarily decide the nature of the transaction‑‑‑Transaction which on its true construction was of a kind that would escape tax, is not taxable on the ground that the same result could be brought about by a transaction in another form which would attract tax.
Inland Revenue Commissioner v. Wesleyan General Assurance Society (1948) 16 ITR 101 ref.
(b) Income‑tax‑‑‑
‑‑‑‑Capital or revenue receipts‑‑‑Determination‑‑‑Principles‑‑‑While determining if a particular receipt was capital or revenue in nature the substance of the transaction had to be seen.
(c) Income‑tax‑‑‑.
‑‑‑‑Revenue‑‑‑Concept‑‑‑Revenue means flow of funds, that is money or rights to money which have resulted from the trading activities of a business as distinct from funds (capital) invested by the owner or loans made by creditors and others.
MWE Glantier and Bunderdown in Accounting, Theory and Practice ref.
(d) Income‑tax‑‑‑
‑‑‑‑Capital or revenue receipt/expense‑‑‑Determination‑‑‑Test‑‑‑Capital receipt or revenue receipt/expense will bear the same significance both in fact as well as in law‑‑‑To judge the exact nature of receipt or an expense no definite tests of universal application could be 'evolved or have been attempted to be evolved nor any infallible criterion can be or has been laid down which can be helpful in indicating the considerations which may relevantly be borne in mind in approaching the problem.
MWE Glantier and Bunderdown in Accounting, Theory and Practice ref.
(e) Income‑tax Act (XI of 1922)‑‑‑
‑‑‑‑S.10‑‑‑Taxability of a receipt under S.10, Income‑tax Act, 1922 was related merely to the fact if the same arose as a direct incidence of business, profession or vocation‑‑‑Fact that a receipt was casual or non‑recurring was of less importance inasmuch as even a casual or non‑recurring receipt was liable to tax if the same arose out of the business, profession or vocation carried by an assessee.
(f) Income‑tax‑‑‑
‑‑‑‑Exemption, claim of‑‑‑Burden of proof to claim exemption of whole or a part of a receipt remains on the person claiming the same.
(g) Income‑tax Act (XI of 1922)‑‑ ,
‑‑‑‑S.10‑‑‑Business‑‑‑Revenue receipt ‑‑‑Assessee, a trust was a partner in the business of coal mines and under the judgment of the Court which was based on‑the settlement by the parties out of the Court, was directed to be paid its share of profits which would have accrued to it but for the taking over of the mines by the Government‑‑‑Award of interest was also meant to compensate the trust in terms of money for the intervening period during which the trust remained deprived of the profits‑‑‑Nothing was available, on the record to show that the amount was in any manner directly relatable to the surrendering of rights by the Trust in the mines‑‑‑Assessing Officer, in circumstances, had all the justification to take the judgment and decree of the Civil Court as the basis for out of Court settlement irrespective of the phraseology used in the receipt executed by one of the co‑trustees‑‑‑Assessee had failed to make out a case that the amount in question was received on liquidation of any capital asset ‑‑‑Assessee also failed to establish that its case was that of total deprival of its rights in the mines and that agreed sum received by the assessee was not directly relatable to the decretal amount‑‑?Amount having been received by the assessee was‑in consequence of and directly relatable to the decree of the Civil Court which comprised mostly of the profits of the business as also the interest thereupon‑‑‑Amount received by the assessee comprised both of capital as well as revenue receipts and Assessing Officer was justified in allowing deduction of the capital value of the investment of the transaction in the firm‑‑‑Claim of the assessee that whole amount received by the assessee was exempt from tax being not supported even by the receipt executed by one of the co‑trustees, Assessing Officer was justified to refuse the same‑‑‑Principles.
The assessee a partnership firm comprised of late Mr. B, a retired Judge of the Lahore High Court and one K, an evacuee. The firm owned some coal mining business and other leasehold property in Marri Indus. The two partners owned one‑half share in the business though an extra two annas share was given to the evacuee partner to compensate him for his management and supervision of business. The firm obtained a lease for mining coal in Mianwali District in undivided Punjab. The firm flourished. After expiry of the original lease granted in 1946, for a period of 30 years it was renewed for a further period of thirty years which was to expire in the year 1976.
Before his death, Mr. B created a trust in favour of his five nephews. That trust became a partner in the said firm after his death. On partition of the Sub‑continent, the Government of Pakistan took over the properties of the firm including the business of coal mining and allotted it to a private limited company. To the extent of share of Mr. B. an application was made before the Additional Custodian of Evacuee Property which succeeded and the share of the trust was declared to be a non‑evacuee property. Also some compensation was awarded for the period from?14‑9‑1947 to 31‑7‑1948. The revision application filed by the Government was dismissed by the Custodian. While the matter was pending before the Custodian the Government of Pakistan cancelled the lease in favour of the firm on 31‑7‑1948. The validity of cancellation was challenged by the firm through a civil suit filed on 23‑11‑1950 in the Court of Senior Civil Judge, Mianwali which was later transferred to Senior Civil Judge, Lahore. In the suit so filed the firm, inter alia, claimed the restoration of the property alongwith compensation and damages. The Senior Civil Judge, Lahore through a judgment and decree, dated 2‑1‑1966 declared the said trust to be the lawful owner of 1/2 of the suit property, the cancellation of lease was found to be ineffective and the trust was awarded a sum of Rs.92,26,447 on account of price of coal price of wheat, store' rifles, :records and books, share in profits, free hold premises, and interest Both Central and Provincial Governments challenged the judgment and decree through a regular first appeal which was heard by the Division Bench of High Court and on 9‑4?1967 the judgment of the trial Court on cancellation of lease was maintained. However, on account of difference of opinion amongst the learned Judges as to the grant of exact relief to be allowed, the matter was referred to‑the Chief Justice for reference to a third Judge. In the meantime, one of the trustees and beneficiary approached the then President of Pakistan for an amicable out of the Court settlement. At the end of prolonged proceedings and negotiations the trustees finally agreed to receive a sum of Rs.35,00,000 in lieu of the amount awarded to, the trust by the Civil Court and as final discharge of the liability of the Government. It was accordingly done and an amount of Rs.35,00,000 was paid to the trust on 30th June, 1968, a co‑trustee recorded the following words as a receipt for the cheque of the said amount of Rs.35,00,000:
"The sum of Rs.35 lacs is being received from the Government of West Pakistan (Mineral Development Department) in full and final settlement, towards the price of the movable and immovable property and for sterilization of our assets aid for surrendering our rights in the lease pertaining to the Makarwal Colliery and towards the adjustment of our claim arising out of the decree passed on 1‑2‑1966 by Senior Civil Judge, Lahore, in our suit against the Government of Pakistan and West Pakistan etc."
After about a year or so the parties filed a compromise deed in the High Court in their pending regular first appeal which was disposed of accordingly.
For rite assessment year 1969‑70 the trust filed a return declaring interest on fixed deposit and saving account. The Assessing Officer through a notice under section 23(3) of the late Act of 1922 required the assessee to explain the receipt of Rs.35 lacs and Rs.1,10,076 during the year under consideration. Also as to why the sum of Rs.35,00,000 received on 30‑6‑1968 on account of settlement and Rs.1,10,076 on account of its share in profit accrued to it till 15‑10‑1947 in terms of order, dated 27‑11‑1967 passed by Additional Custodian, Lahore Evacuee Property should not be treated as income of the trust for the year. The assessee claimed that whole of the aforesaid amount was exempt from tax being a receipt of casual nature and not arising from the conduct of a business or exercise of a profession or vocation. A specific reference was made to section 4(3)(vii) of the Income?-tax Act that the aforesaid amount constituted receipt of capital‑cum‑casual and non‑recurring nature.
Accordingly Income‑tax Officer through an assessment order, dated 6‑5‑1972 proceeded to take the sum of Rs.35,00,000 as revenue receipt though the capital value of the investment of the Trust in the firm as per balance‑sheet at Rs.8,50,000 was allowed as deduction to reach a total of sum of Rs.26,50,000 to be divided in the five beneficiaries equally at Rs.5;59,123. The sum of Rs.1,10,076 disclosed as share of profits earlier awarded by the Custodian as also income from interest earned and declared during the period at Rs.43,419 were lumped to compute total income for the year at Rs.27,95,615. To reach this total only a sum of Rs.7,880 was allowed as deduction as against claimed expenses at Rs.10,880.
Two propositions were well‑established in application of laws relating to income‑tax. First, that the name given to a transaction by the parties concerned does not necessarily decide the nature of the transaction and secondly, a transaction which on its true construction is of a kind that would escape tax, is not taxable on the ground that the same result could be brought about by a transaction in another form which would attract tax.
The Tribunal in appeal went through the details of the compromise filed on 18‑12‑1969 before High Court for disposal of the appeal on agreed basis. Also they made a specific reference to the contents of the receipt executed by one of the trustees at the time of receipt of cheque as reproduced earlier. It was finally concluded that the said amount received as compensation was not liable to tax when seen in the light of the litigation between the parties as also the compromise deed finally executed. As far the other amount of Rs.1,10,076 awarded by the Custodian as share of the profits relating to the period between the date of dispossession of the firm and the cancellation of the lease the assessee does not appear to have contested the same seriously. The order of the Income‑tax officer to that extent was, therefore, maintained.
Only a very small amount was decreed an account of price of movable or immovable property. Bulk of it was on account of share in profits and the interest thereupon. The Civil Court after declaring the take?over of mines to be illegal further held the Trust to be entitled to 1/2 share in profits (after the taking‑over) as also the interest accrued on these profits-?One effect of the judgment being that the Trust remained a partner in the mines and was directed to be paid its share of profits which would have accrued to it but for the taking over. The award of interest also meant to compensate the Trust in terms of money for the intervening period during which the Trust remained deprived of the profits. There is nothing on record to show that the aforesaid amount of Rs.35,00,000 was in any manner directly relatable ,to the alleged surrendering of rights by the Trust in the aforesaid mines. Therefore, the Assessing Officer had all the, justification in the world to take the judgment and decree of the Civil Court as the basis for out of Court settlement irrespective of the phraseology used in the receipt executed by one of the co‑trustees as reproduced above. It will also be noted that finally a compromise was filed before High Court in regular second appeal to dispose of the matter. It means that the judgment and decree of the Civil Court again remained the basis wherein, as noted above, bulk of the amount was awarded to the assessee ?Trust as its share in profits and the interest accrued thereupon. The assessee without an iota of doubt failed to make out a case that the amount to question was received on liquidation of any capital asset. In order to make out a case there had to be an irresistible evidence that the amount received was in liquidation or as compensation for a capital asset. Mere receipt executed by one of the co‑trustees was not enough to dispel the impression of the Assessing Officer that the amount being received was in consequence of and directly relatable to the decree of the Civil Court which, as noted earlier, comprised mostly of the profits of the business as also the interest thereupon.
The business of mines was continued another company and the Court after declaring its take‑over to be illegal held the Trust to be entitled to 1 /2 share of profits. Obviously the other 1 /2 earned by the company was not touched. No sum of money, it needs to be noted, was awarded by the Court to the Trust as compensation for wrongful termination of ;ease.
Both the Assessing Officer as well as the Tribunal agreed that in determining if a particular receipt was capital or revenue in nature the substance of transaction had to be seen.
By revenue we mean the flow of funds, that is money or rights to money which have resulted from the trading activities of a business as distinct from funds (capital) invested by the owner or loans made by creditors and others. Obviously the words "capital receipt" and "revenue receipt" will bear the same significance both in fact as well as in law.
To judge the exact nature of receipt or expense no definite tests of universal application could be evolved or have been attempted to be evolved nor any infallible criterion can be or has been laid down which can be helpful in indicating the considerations which may relevantly be borne in mind in approaching the problem.
The taxability of receipt under section 10 of the late Act is related merely to the fact that it arose as a direct incidence of business, profession or vocation. The fact that a receipt was casual or non‑recurring was of less importance inasmuch as even a casual or non‑recurring receipt is liable to tax if it arises out of the business, profession or vocation carried on by an assessee.
The assessee in the present case failed to establish that its case was that of total deprival of its rights in the mines and that the agreed sum received by him was not directly relatable to the decretal amount. The Assessing Officer in the facts of the case appears justified in allowing deduction of the capital value of the investment of the 1 rust‑in the firm.
The amount received by a partner on account of reduction of share in the firm was a capital receipt and not a revenue receipt. The exclusion of the firm's equity in business was, therefore, the only concession to which the assessee Trust was entitled.
The claim of the assessee that whole of the aforesaid amount received was exempt from tax is not supported even by the receipt executed by one of the co‑Trustees. That receipt clearly includes the "adjustment" of their claim arising out of the order of the decree of the Civil Court. The recital of the aforesaid receipt confirms the view of the Assessing Officer that amount received by the assessee Trust comprised both of capital as well as revenue receipts His agreement with the contention of the assessee and subsequent exclusion of equity of the firm, was, therefore, justified. The treatment of remaining amount as revenue receipt by connecting the same to the decretal amount could only be assailed by bringing home in absolute terms the claim that a specific amount over and above the equity of the firm in the 'business was given as value or compensation of a capital asset. It was never done. Instead the assessee kept on taking a chance to get the whole of the receipt to be treated exempt which was rightly refused by the Assessing Officer. The Tribunal, though noted the various heads under which the decretal amount was divided still overlooked the fact that most of it had been on account of profits and the interest having accrued thereupon. Their opinion that the element of sterilization of assets which came up for consideration during settlement and, therefore, did not form part of the claim in suit could be correct as a fact. However, the legal position remains that as per receipt executed by the co?-Trustee the amount received was also in "adjustment" of the decree of the Civil Court. The Tribunal was also not correct in observing that determination of quantum of compensation awarded on account of alleged sterilization was not possible. Even if it was so, then it was the assessee who was to be a loser. Burden of proof to claim exemption of whole or a part of a receipt remains on the person claiming it. Therefore, the Tribunal clearly fell in error by placing undue reliance on the earlier wording of the receipt executed by the co‑Trustee and at the same time ignoring the latter part of the same. The recital of receipt had to be read as a whole. The use of word "sterilization" in the earlier part did not nullify the latter part of the receipt which clearly showed that amount received was also on account of "adjustment" of the decree of the Civil Court.
Inland Revenue Commissioner v. Butterly Company Limited (1955) 1 All. ELR 891 and Senairam Doongarmall v. C.I.T., Assam (1961) 4 Tax 183 distinguished.
Senariram Dongramal v. C.I.T., Assam (1961) 42 ITR 392; Inland Revenue Commissioner v. Butterly Company Limited (1955) 1 All. ELR 891; I. R. Commissioner v. WesIeyati General Assurance Society (1948) 16 ITR 101; Mortgage Co. v. Worthington (Inspector Taxes) (1959) 37 ITR 56; Raj Kishen Prem Chandra Jain v. Commissioner of Income‑tax (1959) 35 ITR 590; Rai Bahadur H.P. Bannerji v. C.I.T., Bihar and Orissa (1951) 19 ITR 596; Gobardhandas Jagannath v. C.I.T., Bihar and Orissa (1955) 27 ITR 225; Helen Rubber Industries Ltd: v. C.I.T. (1959) 36 ITR 544; Pierce Leslie & Co. Ltd. v. Commissioner of Income‑tax, Madras (1960) 38 ITR 356; Bharani Pictures v. C.I.T., Madras (1961) 43 ITR 474; Commissioner of Income‑tax, Kerala v. Helen Rubber Industries Ltd. (1962) 44 ITR 714; Senairam Doongarmall v. C.I.T., Assam (1961) 4 Tax 183; Bush, Beach and Gent Ltd. v. Road (1940) 8 ITR 36; Visalakshi Achi v. C.I.T., Madras (1958) 34 ITR 363; C.I.T., Madras v. V.P. Rao (1950) 18 ITR 825; C.I.T. v. Shamsher Printing Press 1960 PTD 808; P.H. Divecha and another v. C.I.T., Bombay 1960 PTD 556; Advance Accounting, 7th Edn.; MWE Glantier and Bunderdown in Accounting, Theory and Practice; Naseer A. Sheikh v. C.I.T. (Investigation) (1992) 66 Tax 55 and C.I.T. v. Rajendra Babubhai Modi 1993 PTD 1345 ref.
Muhammad Ilyas Khan for Appellant.
Nemo for Respondent.
Date of hearing: 8th March, 2001.
JUDGMENT
NASIM SIKANDAR. J. ‑‑‑This reference under section 66(I) of the late Income‑tax Act, 1922 has been made at the instance of Commissioner of Income‑tax, Tax Central Lone, Lahore. Following question of law is stated to have arisen out of the order of the Tribunal, dated 18‑4‑1977:‑‑‑
"Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in annulling the assessment in respect of additions of Rs.26,50,000 made by the Income‑tax Officer treating it to be revenue receipts out of payments received by the assessee? '
2. According to the statement of the case, the assessee a partnership firm comprised of late Mr. C.E. Beven Petman a retired Judge of the Lahore High Court and one Mr. Ishar Das Kapur. The firm owned some coal mining business and other lease hold property in Marri Indus. The two partners owned one‑half share in the business though an extra two annas share was given to the Hindu partner to compensate him for his management and supervision of business. The firm obtained a lease for mining coal in Mianwali District in undivided Punjab. The firm flourised and was subsequently known by the name of Meharwal Collieries. After expiry of the original lease granted in 1946, for a period of 30 years it was renewed for a further period of thirty years which would have expired in the year 1976.
3. Before his death, Mr. Beven Petman created a Trust in favour of his five nephews. That Trust became a partner in the said firm after his death. On partition of the Sub‑continent, the Government of Pakistan took over the properties of the firm including the business of coal mining and allotted it to a private limited company known as Western Punjab Collieries Limited. To the extent of share of Mr. Beven Petman an application was made before the Additional Custodian of Evacuee Property which succeeded on 27‑11‑1959 and the share of the Trust was declared to be a non‑evacuee property. Also some compensation was awarded for the period from 14‑9‑1947 to 31‑7‑1948. The revision application filed by the Government was dismissed by the Custodian. While the matter was pending before the Custodian the Government of Pakistan cancelled the lease in favour of the firm on 31‑7‑1948. The validity of cancellation was challenged by the firm through a civil suit filed on 23‑11‑1950 in the Court of Senior Civil Judge, Mianwali which was later transferred to Senior Civil Judge, Lahore. In the suit so filed the firm, inter alia, claimed the restoration of the property alongwith compensation and damages. The Senior Civil Judge, Lahore through a judgment and decree, dated 2‑1‑1966 declared the said Trust to be the lawful owner of 1/2 of the suit property, the cancellation of lease was found to be ineffective and the Trust was awarded a sum of Rs.92,26,447 on account of price of coal, price of wheat, stores, rifles, records and books, share in? profits, free hold premises, and interest. Both Central and Provincial Governments challenged the judgment and decree through a regular first appeal which was heard by the Division Bench of this Court and on 9‑4‑1967 the judgment of the trial Court on cancellation of lease was maintained. However, on account of difference of opinion amongst the. learned Judges as I to the grant. of exact relief to be allowed, the matter was referred to the Hon'ble Chief Justice for reference to a third Judge. In the meantime, one of the Trustees and beneficiary, Mr. H. C. Beven Petman, approached the then President of Pakistan for an amicable out of the Court settlement. At the en .l of prolonged proceedings and negotiations the Trustees finally agreed to receive a sum of Rs.35,00,000 in lieu of the amount awarded to the Trust by the Civil Court and as final discharge of the liability of the Government. It was accordingly done and an amount of Rs.35,00,000 was paid to the Trust on 30th June, 1968. M.A. Rehman, a co‑Trustee recorded the following words as a receipt for the cheque of the said amount of Rs.35,00,000:
"The sum of Rs.35 lacs is being received from the Government of West Pakistan (Mineral Development Department) in full and final settlement, towards the price of the movable and immovable property and for sterilization of our assets and for surrendering our rights in the lease pertaining to the Makarwal Colliery and ‑towards the adjustment of our claim arising out of the decree passed on 1‑2‑1966 by the Senior Civil Judge, Lahore, in our suit against the Government of Pakistan and West Pakistan etc. "
4. After about a year or so the parties filed a compromise deed in this Court in their pending regular first appeal which was disposed of accordingly.
For the assessment year 1969‑70 the Trust filed a return declaring interest on fixed deposit and saving account. The Assessing Officer through a notice under section 23(3) of the late Act of 1922, dated 22‑4‑1972 required the assessee to explain the receipt of Rs.35 lacs and Rs.1,10,076 during the year under consideration. Also as to why the sum of Rs.35,00,000 received on 30‑6‑1968 on account of settlement and Rs.1,10,076 on account of its share in profit accrued to it till 15‑10‑1947 in terms of order, dated 27‑11‑1967 passed by Additional Custodian, Lahore Evacuee Property should not be treated as income of the Trust for the year. The assessee claimed that whole of the aforesaid amount was exempt from tax as being a receipt of casual nature and not arising from the conduct of a business or exercise of a profession or vocation. A specific reference was made to section 4(3)(vii) of the Income Tax Ordinance that the aforesaid amount constituted receipt of capital‑cum‑casual and non‑recurring nature. In support of the submissions made, the assessee relied upon the ratio settled in re: Senariram Dongramal v. C.I.T., Assam (1961) 42 ITR 392 and re: Inland Revenue Commissioner. v. Butterly Company Limited 1955 (1) All. England Law Reports 891.??????
6. The Assessing Officer however, refused to accept the contention by' distinguishing the facts prevailing in these cases. He borrowed the words of Viscount Simon in Inland Revenue Commissioner v. Wesleyan General Assurance Society (1948) 16 ITR 101 (Supplement) to say that the name l given to a transaction by the party concerned did not determine its nature. i Also he was of the view that the amount in question having been received partly on capital and partly on revenue account could very well be bifurcated to bring the later to tax. The Assessing Officer was of the further view that bulk of the aforesaid amount having been awarded on account of claim of share of profits was to be treated as taxable income. In his view the claim put forth by the assessee before the Civil Court at Mianwali and subsequently transferred to Lahore was not for compensation, sterilization or loss of any capital assets as described in the above receipt. Instead, it was for damages, profits and interest. That amount according to him could at the best be taken as compensation for injurious affliction to a trading asset. Also, that such kind of receipt was revenue income in view of the law settled in re: Mortgage Co. v. Worthington (Inspector Taxes) (1959) 37 ITR 56 and Raj Kishen Prem Chandra Jain v. Commissioner of Income‑tax (1959) 35 ITR 590. To support his view that compensation for loss of profit caused by a Government or its functionaries which directly or indirectly interfered with the carrying on of a business were revenue receipts, the Assessing Officer placed reliance on re: Rai Bahadur H.P. Bannerji v. C.I.T:, Bihar and Orissa (1951) 19 ITR 596, re: Gobardhandas Jagannath v. C. I. T., Bihar and Orissa (1955) 27 ITR 225, A reference was also made to re: Helen Rubber Industries Ltd. v. C.I.T. (1959) 36 ITR 544, re: Peirce Leslie & Co. Ltd. v. Commissioner of Income‑tax, Madras (1960) 38 ITR 356 and re: Bharani Pictures v. C.I.T., Madras (1961) 43 ITR 474 to support his view that compensation or damages for an injury inflicted on a persons' trading assets or compensation for wrongful termination of an agreement would be a revenue receipt. To repel the claim that receipts in question were of casual nature, the Assessing Officer further placed reliance upon re: Helen Rubber Industries Ltd. v. C.I.T. (1959) 36 ITR 544 and re: Commissioner of Income‑tax, Kerala v. Helen Rubber Industries Ltd. (1962) 44 ITR 714.
7. Accordingly Mr. Fakhir-ul-Islam, Income‑tax Officer through an assessment order. dated 6‑5‑1972 proceeded to take the sum of Rs.35,00,000 as revenue receipt though the capital value of the investment of the Trust in the firm as per balance‑sheet at Rs.8,50,000 was allowed as deduction to reach a total of sum of Rs.26.50,000 to be' divided in the five beneficiaries a equally at Rs.5,59,123. The sum of Rs.1,10,076 disclosed as share of profits earlier awarded by the Custodian as also income from interest earned and declared during the period at Rs.43,419 were lumped to compute total income for the year at Rs.27,95,615. To reach this total only a sum of Rs.7,880 was allowed as deduction as against claimed expenses at Rs.10,880.
8. On appeal the learned Tribunal agreed that the law settled in re: Inland Revenue Commissioner v. Wesleyan General Assurance Society (1948) 16 ITR 101 per Viscount Simon two propositions were well established in application of laws relating to income‑tax. First, that the name given to a transaction by the parties concerned does not necessarily decide the nature of the transaction and secondly, a transaction which on its true construction is of a kind that would escape tax, is not taxable on the ground that the same result could be brought about by a transaction in another form which would attract talc. The Tribunal went through the details of the compromise filed on 18‑12‑1969 before this Court for disposal of the appeal p on agreed basis. Also they made a specific reference to the contents of the receipt executed by one of the Trustees at the time of receipt of cheque as reproduced earlier. It was finally concluded that the said amount received as compensation was not liable to tax when seen in the light of the litigation between the parties as also the compromise deed finally executed. As far the other amount of Rs.1,10,076 awarded by the Custodian as share of the profits relating to the period between the date of dispossession of the firm and the cancellation of the lease the assessee does not appear to have contested the same seriously. The order of the Income-tax Officer to that extent was, therefore, maintained. '
9. Mr. Muhammad Ilyas Khan, Advocate/Standing counsel for the revenue supports the order of the Assessing Officer which, in his view, is a laminating example of the labour which the tax collectors at that time used to take before accepting or rejecting the plea of a tax‑payer. The case‑law cited by the Assessing Officer and referred to above is reiterated to make his point.
10. We share the admiration of the learned counsel of the labour put in by the said Assessing Officer. It will be seen that the aforesaid judgment and decree of the Civil Court was the basis on which the negotiation for out of Court settlement went on and finally matured. The decretal amount of Rs.92,26,447 comprised of the following payments indicated in' judgment and decree of the Civil Court:‑‑‑
???????????
| (i) Price of coal. | Rs. 3,500 |
| (ii) Price of wheat. | Rs. 24,996 |
| (iii) Stores | Rs. 96,000 |
| (iv) Rifles | Rs. 19,000 |
| (v) Records & Books. | Rs. 25,000 |
| (vi) Share in profits. | Rs. 57,87,624 |
| (vii) Freehold premises. | Rs. 1,04,100 |
| (viii) Interest. | Rs. 32,92,826 |
| Total??? | Rs. 92,26,447 |
11. The above break‑up clearly demonstrates that only a very small amount was decreed on account of price of movable or immovable property. Bulk of it was on account of share in profits and the interest thereupon. The Civil Court after declaring the take‑over of mines to be illegal further held the Trust to be entitled to 1 /2 share in profits (after the taking over) as also the interest accrued on these profits. One effect of the judgment being that the Trust remained a partner in the mines and was directed to be paid its share of profits which would have accrued to it but for the taking over: The award of interest also meant to compensate the Trust in terms of money for the intervening period during which the Trust remained deprived of the profits. There is nothing on record to show that the aforesaid amount of Rs.35,00,000 was in any manner directly relatable to the alleged surrendering of rights by the Trust in the aforesaid mines. Therefore, the Assessing Officer had all the justification in the world to take the judgment and decree of the Civil Court as the basis for out of Court settlement E irrespective of the phraseology used in the receipt executed by the co‑trustee as reproduced above. It will also be noted that finally a compromise .was filed before this Court in regular second appeal to dispose of the matter. It means that the judgment and decree of the Civil Court again remained the basis wherein, as noted above, bulk of the amount was awarded to the assessee‑trust as its share in profits and the interest accrued thereupon. The assessee without an iota of doubt failed to make out a case that the amount in question was received on liquidation of any capital asset. In order to make out a case there had to be an irresistible evidence that the amount received was in liquidation or as ‑compensation for a capital asset. Mere receipt executed by one of the co‑trustees was not enough to dispel the impression of the Assessing Officer that the amount being received was in consequence of and directly relatable to the decree of the Civil Court which as noted earlier, comprised mostly of the profits of the business as also the interest thereupon.
12. We will also agree with the learned counsel for the Revenue that the cases relied upon by the assessee in re: Inland Revenue Commissioner v. Butterly (supra) and re: Senairam Doongarmall v. C.I.T., Assam (1961) 4 Taxation 183 were clearly distinguishable. In the first case the Colliery concern owned by the assessee‑company was nationalized and it was paid compensation in accordance with the Coal Industry‑ Nationalisation Act, 1946. It was taxed by the Revenue. On a case stated by Special Commissioners of Income‑tax it was conceded by the company that the payments received by it were income and by the Crown that income received from property was not chargeable to tax unless it formed pert of the profits of a business. In the case in hand, after taking over of the Colliery the business of the firm came to an end temporarily. Subsequently the Trust was held to have remained a partner in the mine business which in the meanwhile, had continued. It was not only held entitled to profits for the intervening period but also to the interest accrued thereupon. Both amounts therefore, were profits and gains of business by fiction of law though the assessee actually did not carry on the same after take‑over.
13. In the second case, the Hon'ble Supreme Court of India inter alia found that first consideration for holding a receipt to be profits or gains of business within section 10 of the Income‑tax Act was to see "if there was a business at all of which it could be said to be the income." In that case the assessee was a tea grower and a tea manufacturer. He owned a tea estate consisting of tea gardens, factories, labour quarters, staff quarters, etc. The military authorities requisitioned the factory buildings etc. for defence purposes. The land under tea cultivation was, however, not requisitioned and the assessee continued to be in possession of tea gardens to preserve the plants though the manufacture of tea was totally stopped. The compensation for the use of the property paid by the Government was calculated on the basis of the out‑turn of tea that would have been manufactured by the assessee during that period. The High Court of Assam held that the amount of compensation was not agricultural income but it was income derived from property and as such a Revenue receipt in the hands of the assessee. The Supreme Court of India while reversing the judgment of the High Court was of the view that "to say that a business was being carried on, meant not more than that profit was to be earned by a process of production." According to Hon'ble Court, the business of a tea grower and manufacturer was not merely to grow tea plants but to collect tea leaves and render them fit for sale. Therefore, the tending of tea gardens to preserve the plants was not a continuation of the business of the assessee. In the view of their Lordships the compensation paid to the assessee did not partake the character of profits of because; no business having been done by the assessee no question of profits taxable under section 10 of the Act arose.
14. As said earlier, in the case in hand the business of mines was continued by another company and the Court after declaring its take‑over to be illegal held the Trust to be entitled to 1/2 share of profits. Obviously the other I/2 earned by the company was not touched. No sum of money, it needs to be noted, was awarded by the Court to the Trust as compensation for wrongful termination of lease.
15. Both the Assessing Officer as well as the Tribunal agreed that in determining if a particular receipt was capital or revenue in nature the substance of transaction had to be seen. The Kerala High Court in re: Helon? Rubber Industries (Supra) went a step ahead. It was of the view that in determining if a particular receipt was a capital or a revenue receipt the substance of the transaction had to be seen from the point of view of a businessman. In that case the assessee‑company leased a Rubber Factory for a period of 15 years. Clause 14 of the lease deed provided that during the continuance of the lease arid for a further period of three years after its expiration, the lessees should not either directly or indirectly work for any other rubber goods manufacturing concern or themselves carry on any such concern except continuing their business at a particular place. Also that in the event of breach of the provision they were to pay to the assessee‑company a lump sum of Rs.10,000 as compensation as per clause 14. Per clause 16 if the lessee discontinued the lease before the termination of the period fixed, they were to pay the lessors a sum of Rs.10,000 by way' of liquidated damages for discontinuation. On a dispute arising between the parties, the matter was taken to the Court where it was finally settled by a compromise under which the lease was terminated, The lessee paid the assessee‑company a sum of Rs.23,311 on account of damages provided in clauses 14 and 16 of the lease deed. Out of this the assessee credited to his account the sum of Rs.7,075 towards the damages for breach of clause 14 and the sum of Rs.8,050 towards damages for breach of clause 16 of the lease deed. The company had no other factory and the lease was the only source of its income until its termination through the Court as said above. The assessee lumped the total amount of damages of Rs.15,125 and claimed the same to be a casual and non‑recurring income not liable. to tax. The Assessing Officer, however, found the same to be in nature of income as it had been received for breach of the terms of the agreement. The assessee failed in the first appeal. On further appeal the Tribunal found that whole of the aforesaid amount represented only compensation for breach of clause 16 which was taxable. The appeal was consequently dismissed. On a reference as directed by the Court under section 66(2) of the late Income‑tax Act, 1922, the Hon'ble Judges of the Karala High Court concluded that as the purpose of clause 14 of the lease deed was only to ensure the assessee‑company's profit during and after termination of the lease, damages received under that clauses were in the nature of a revenue receipt and were, therefore, taxable. However, the damages under clause 16 were found of capital nature and not assessable to income‑tax.
16. The facts in the other cases referred to by the Assessing Officer are also relevant. Inre: Bharani Picture v. C.I.T., Madras (1961) 43 ITR 474 a firm engaged in production of cinematograph films entered into a partnership with another firm for production of a film. The amount received towards the release of rights in the film so produced were found taxable, as according to the Court, that release of rights in picture was neither an injury nor an abandonment of any capital asset of the assessee so as to make the payment received under the agreement as of capital nature. The assessee in the present case was allowed profits for the period during which it was not in possession of the mines alongwith interest. The subsequent settlement having been apportioned in capital and revenue receipts, the one co‑related to profits and interest was certainly a revenue receipt.
17. In the next case re: Gobardhandas Jagannath v. C.I.T., Bihar and Orissa (1955) 27 ITR 225 the assessee an individual received a certain sum from the Government Department as compensation for the use and occupation of his land which was requisitioned. No damage was done to the land which was returned to him after the period of requisition in the same condition as it was before. While turning down the claim of landowner that amount received by him was a capital receipt and, therefore, not liable to tax, the Patna High Court observed that the assessee was only prevented during the period in question from enjoying the usufruct of the land and was not permanently deprived of the use of the land. The amount of Rs.8,272 therefore, represented merely. the loss of income suffered by the assessee for the period it remained in occupation of the Government. The amount received was, therefore, found liable to be taxed as income from other source.
18. The facts before King's Bench Division in re: Bush, Beach and Gent, Ltd. v. Road (1940) 8 ITR 36 are that the assessee‑company was trading in Industrial Chemicals. As buyers, they entered into a contract with another company; the sellers, for the supply by the latter of certain chemical salt from Spain to be sold for use as an agricultural chemical. The contract contained provisions that the buyers should sell the salts only in specified territories and that the sellers would allow no one else to sell the salts in those territories. The contract involved the setting up by the buyers of a new and separate selling organization as the sale of agricultural chemicals was a new business to them. While the contract had three years to run, the vendor company wished to terminate it and it was accordingly agreed that they should be entitled to do so on paying a certain sum to the buyer company. That amount was treated as profit and assessed by the Department. The Court came to the conclusion that the sum in question necessarily represented profits which the appellant would or might have made under the contract had it not been terminated. Therefore, it was found a revenue and not a capital receipt in the hands of the assessee. ,
19. In the next three cases re: Visalakshi Achi v. C.I.T. Madras (1958) 34 ITR 363, re: Rai Bahadur H.P. Bannerji v. C.I.T., Bihar and Orissa (1951) 19 ITR 596 and re: Raj Kishen Prem Chandra Jain v. Commissioner of Income‑tax (1959) 35 ITR 590 the facts similar to those earlier considered by the Patna High Court in re: Gobardhandas Jagannath (supra). In all these cases the assessees received compensation for use and occupation of their State functionaries and compensation so received was claimed either or of capital nature. However, the Courts found these compensations to be necessarily the sums paid for use and occupation of lands without changing their nature and utility or the rights of the assessees therein. Therefore, these sums were found to be of revenue nature as the Courts expressed the view that these were in fact profits received from the land and therefore, taxable.
20. In the next case re: Peirce Leslie & Co. Ltd. v. Commissioner of Income‑tax, Madras (supra), the amounts received as per agreement as compensation for termination of agreement were held to have been brought about in the‑ordinary course of business and, therefore, a trading receipt 'in the usual course‑ of business activities of the company. In‑ the last case referred on the subject re: C.I.T., Madras v. V.P. Rao (1950) 18 ITR 825, the Madras High Court interpreted the provisions of section 4(3)(vii) and section 6 of the late. Act providing for non‑taxability of casual and non?recurring receipts. The assessee in that case was a Member of the Indian Civil Service who subsequently became a Judge of the Madras High Court. He retired in June, 1941. Although a Barrister‑at‑Law he never practised as an Advocate and after having retired as a Judge of the High Court he agreed to serve as an Arbitrator under section 234 of the Madras Local Board Act, 1920. The proceedings related to a dispute between two District Councils. The Government of the Province agreed to pay him for his work a lump sum of Rs.3,000 and travelling allowance on the scale admissible to a Judge of the High Court. The assessee claimed the sum of Rs.3,000 received by him as exempt under section 4(3)(vii) of the late Income‑tax Act, 1922. Their Lordships, however, did not agree. In their opinion the amount arose from the exercise of the occupation of an arbitrator by the assessee. Further that it was not a receipt of casual nature and, therefore, was not exempt from assessment under the said provisions of the Act. In the process their Lordships observed: "the word casual in section 4(3)(vii) can only be applied to accidental or fortuitous receipts occurring without stipulation, contract, calculation or design".
21. The Assessing Officer in the present case relied heavily upon the interpretation of the word "casual" as made by their Lordships. According to him the receipt in the case was clearly anticipated as it was based upon decree and subsequently on a negotiated settlement culminating in a compromise. To.hold that it was not a non‑recurring receipt the Assessing Officer referred to another judgment re: C.I.T. v. Shamsher Printing Press 1960 PTD 808 in which compensation on compulsory vacation of business premises was held to be taxable and not a casual or non‑recurring receipt. A judgment of the Bombay High Court reported in the same issue in re: P.H. Divecha and another v. C.I.T., Bombay; 1960 PTD 556 was also referred. In that case on termination of monopoly agreement Messrs Philips Electrical Co. as a gesture of good‑will agreed to pay Rs.40,000 per annum for a period of three years to each of the partners in instalments. The Court upheld the view of the revenue that the benefit conferred by the agreement did not constitute a trading asset and its termination did not extinguish the whole or any part of any trading asset. The amount being a receipt arising "from" business the provisions of section 4(3)(vii) were held to be inapplicable.
22. According to Douglas Grabutt, in Advance Accounting 7th Ed. Capital in a business comprises capital paid in by partners, or in case of joint stock company, sums received from shareholders, or debenture‑holders loans, the proceeds of sale of any asset etc. According to the MWE Glantier and Bunderdown in Accounting, Theory and Practice, by revenue we mean the flow of funds, that is money or rights to money which have resulted from the trading activities of a business as distinct from funds (Capital) invested by the owner or loans made by creditors and others. Obviously the words capital receipt and revenue receipt will bear the same significance both in fact as well as in law. To Judge the exact nature of receipt or expense as observed by their Lordships of the Bombay High Court in re: P.H. Divecha v. C.I.T. (supra) no definite tests of universal application could be evolved or have been attempted to be evolved nor any infalliable criterion can be or has been laid down which can be helpful in indicating the considerations which may relevantly be borne in mind in approaching the problem. Their Lordships were called upon to ascertain whether a certain payment was in truth a capital receipt or a revenue receipt.
23. The taxability of receipt under section 10 of the late Act is related merely to the fact that it arose as a direct incidence of business, profession or vocation. The fact that a receipt was casual or non‑recurring was of less importance inasmuch as even a casual or non‑recurring receipt is liable to tax if it arises out of the business, profession or vocation carried on by an assessee. This view is amply supported by the principle settled by the' Hon'ble Supreme Court of Pakistan in re: Naseer A. Sheikh v. C.I.T. (Investigation) (1992) 66 Tax 55. The Assessing Officer also referred to a judgment in re: C.I.T., Bombay v. Shamsher Printing Press 1960 PTD 808 which though not directly relevant still gave an interesting study as to the nature of a receipt. The assessee in that case besides purchasing and selling papers, stationary, books etc. had installed a printing press. The premises in which the press was housed was requisitioned by the Government and assessee had to shift his business to another place. Amongst other payments made by the Government as compensation a‑sum of Rs.57,435 was paid on account of compulsory vacation of the premises, disturbance and loss of business. The Court round that in the given facts the aforesaid sum was not received by the assessee for any injury to its capital assets including good?will. It was received as compensation for loss of profits and was a revenue receipt and accordingly was not exempt from tax under section 4(3)(vii) as casual acid non‑recurring receipt.
24. It needs to be repeated that the assessee in the present case failed to establish that its case was that of total deprival of its rights in the mines and that the agreed sum received by him was not directly relatable to the decretal amount. The Assessing Officer in the facts of the case appears justified in allowing deduction of the capital value of the investment of the Trust in the firm. In re: C.I.T. v. Rajendra Babubhai Modi 1993 PTD 1345 = 200 ITR 98, the amount received by a partner on account of reduction of share in the firm was held to be a capital receipt and not a revenue receipt. The exclusion of the firm's equity in business was, therefore, the only concession to which the assessee Trust was entitled to.
25. The claim of the assessee that whole of the aforesaid amount received was exempt from tax is not supported even by the receipt executed by one of the co‑trustees as reproduced above. That receipt clearly includes the "adjustment" of their claim arising out of the order of the decree of the Civil Court dated 1‑2‑1996. The recital of the aforesaid receipt confirms the view of the Assessing Officer that amount received by the assessee Trust comprised both of capital as well as revenue receipts. His agreement with the contention of the assessee and subsequent exclusion of equity of the firm, as noted earlier, was therefore, justified. The treatment of remaining amount as revenue receipt by connecting the same to the decretal amount could only be assailed by bringing home in absolute terms the claim that a specific amount over and above the equity of the firm in the business was given as value or, compensation of a capital asset. It was never done. Instead the assessee kept on taking a chance to get the whole of the receipt to be treated exempt which was rightly refused by the Assessing Officer. The learned Tribunal, it will be seen, though noted the various heads under which the decretal amount was divided still overlooked the fact that most of it had been on account of profits and the interest having accrued thereupon. Their opinion that the element of sterilization of assets which came up for consideration during settlement and therefore, did not form part of the claim in suit could be correct as a fact. However, the legal position remains that as per receipt executed by the co?-trustee the amount received was also in "adjustment" of the decree of the Civil Court. The learned Tribunal was also not correct in observing that determination of quantum of compensation awarded on account of alleged sterilization was not possible. Even if it was so, then it was the assessee who was to be a loser. It is established beyond doubt that burden of proof to claim h exemption of whole or a part of a receipt remains on the person claiming it. Therefore, the learned Members of the Tribunal clearly fell in error by placing undue reliance on the earlier wording of the receipt executed by the CO‑trustee and at the same time ignoring the latter part of the same. The recitals of receipt had to be read as a whole. The use of word "sterilization" in the earlier part did not nullify the latter part of the receipt which clearly showed that the amount received was also on account of "adjustment" of the decree of the Civil Court.
That being so our answer to the question is in the negative.
M.B.A./C‑105/L ???????????????????????????????????????????????????????????????????????????????? Reference answered.