ORDER
1. This is a reference by the Commissioner, Income-tax, under Section 66(2). The assessce is a Hindu undivided family, which owns a certain house property which is its principal source of income. In previous years income-tax used to be assessed on the income of that property. In the year ending 31st March 1932, the family was assessed on an income which included a sum of Rs. 15,000 received in a trasaction to be presently referred to. The question which arose before the assessing authorities was whether this sum of Rs. 15,000 can be considered to be income, profit, or gain of business within the meaning of the Income-tax Act. The Income-tax Commissioner held that it was income accruing from business and therefore taxable. He however made a reference under Section 66(2) on the application of the assessee, and the questions which we are called upon to answer are as follows:
1. Did the sum of Rs. 14,560 assessed by the Income-tax Officer represent income, profits or gains? 2. If so, did that sum represent a receipt arising from business within the meaning of Clause (vii) of Sub-section (3) of Section 4, Income-tax Act, 1922, and consequently excluded from the exemption conferred by that clause?
2. It appears that one Kanhaiya Lal Jaju was a party to an appeal pending in the High Court. The assessee entered into an agreement with Kanhaiya Lal, under which the assessee undertook to supply funds needed for the prosecution of the appeal by Kanhaiya Lal who agreed to repay the sums to be advanced to him by the assessee together with an additional sum of Rs. 21,000 in case the appeal was decided in favour of Kanhaiya Lal. It seems to be implied that if Kanhaiya Lal was unsuccessful, he was not liable to repay any part of the advances made by the assessee, nor would he be liable to pay anything by way of compensation. The agreement was reduced to writing. The assessce, represented by one Chhote Lal, executed an ‘instrument stipulating to supply all funds needed by Kanhaiya Lal for the prosecution of his appeal and to take formal receipts from the latter. The agreement proceeded to lay down that, in case the appeal was successful, Kanhaiya Lal would pay back all the sums advanced by the assessee together with the sum of Rs. 21,000 and that in case Kanhaiya Lal failed to fulfil his undertaking, it would be open to the assessee to institute a suit for recovery of the sums due under the agreement with interest at the rate of 9 per cent per annum. The agreement further provided that in case any compromise was arrived at between Kanhaiya Lal and his adversary the assessee would be entitled to repayment of the sums advanced by him and also to the sum of Rs. 21,000 referred to above.
3. The assessee financed the litigation, and Kanhaiya Lal won his appeal. Apparently Kanhaiya Lal was not willing to pay the sum of Rs. 21,000 in addition to the sums actually advanced. Eventually a compromise was arrived at between the assessee and Kanhaiya Lal. under which the latter paid Rupees 15,000 in full satisfaction of the as sessec’s claim under the agreement referred to above. The Income-tax Department deducted a sum of Rs. 440 on account of interest paid by the assessee, and assessed Rs. 14,560 to income-tax. This is the sum which is referred to in question No. 1.
4. The learned advocate for the assessee has argued that the receipt of Rs. 15,000 by Kanhaiya Lal in the circumstances already stated cannot be considered to be income, profit or gain from business within the meaning of Section 4(3)(vii), Income-tax Act. He also contended that it is income of a casual nature and should be deemed to have been exempted by the aforesaid section. Reliance is placed on Commissoner of Income-Tax, Bengal v. Shaw Wallace & Co. 1932 P.C. 138, in which their Lordthips of the Privy Council made certain observations to the effect that the word “business” connotes continuity and regularity of trasactions. In that case Messrs. Shaw, Wallace & Co., agents of a certain petroleum company were paid a large sum of money as compensation for the termination of their agency. The Income-tax Authorities treated it as income, profit or gain, and assessed it to tax. The Calcutta High Court held that it could not be considered to be income, gain or profit so as to attract the application of the Income-tax Act. Their Lordships of the Privy Council took the same view and observed:
The object of the Indian Act is to tax ‘income,’ a term which it does not define. It is expanded, no doubt into income, profits and gains, but the expansion is more a matter of words than of substance. Income, their Lordships think, in this Act connotes a periodical monetary return ‘coming in’ with some sort of regularity, or expected regularity, from definite source. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Thus income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something, which is often loosely spoken of as ‘capital’. But capital, though possibly the source in the case of income from securities, is in most asses hardly more than an element in the process of production.
5. Their Lordships also referred to the phrase “business carried on by him” in Section 10. In the end they held the payment to Messrs. Shaw, Wallace & Co. as no more than a solatium. We are clearly of opinion that the observations of their Lordships of the Privy Council quoted above, which are strongly relied on by the assessee, should be taken in conjunction with the facts of that case and we are unable to hold that their Lordships intended to lay down that, unless the source of income is one which yields (income periodically and not only once the income derived from it cannot be assessed to tax. Circumstances are easily conceivable in which there can be no doubt that the receipt of a sum of money is the income, profit or gain from business, and yet it accrued only once. In the case before us there can be little doubt I that the assessee embarked upon a transaction of loan in which unusual conditions were stipulated. He agreed to advance such sums as were needed by Kanhaiya Lal for the prosecution of his appeal and stipulated for its return together with profit on the sums advanced. The profits were not calculated at a given rate of interest, but in a lump sum. It may be, as the learned advocate for the assessee argues, that there was an element of speculation in the transaction. At the same time, it cannot be gainsaid that the transaction was one of loan from which the lender expected to derive considerable pecuniary profit. The business which yielded profit to the lender commenced “from the date of the agreement and continued till the assessee realized the sum of Rs. 15,000 from Kanhaiya Lal. There was continuity and regularity in the sense that be advanced sums from time to time, as occasions arose for Kanhaiya Lal to borrow, took steps to enforce the agreement against Kanhaiya Lal and succeeded so far as to recover Rs. 15,000 out of the Rs. 21,000 agreed to be paid, over and above the sums actually advanced. We are clearly of of opinion that the transaction amounted to business within the meaning of the Income-tax Act. We are unable to hold that this income was of a purely casual nature. On the contrary we think that it represents a return on the money invested by the assessee. To hold otherwise would imply that the income, profit or gain, accruing from a single transaction or investment which is not akin to the assessee’s trade or avocation is not income, gain or profit from business which in our opinion, is contrary to the plain meaning of the words employed in the Act. That a isingle transaction or investment may be business cannot admit of doubt. Any receipts exceeding the capital must be treated as profit. It is true that, if Kanhaiya Lal had lost the case, the assessee would probably have lost all that he had advanced to him. That however is beside the point. The fact remains that he received Rs. 15,000 as a return on the sums which Kanhaiya Lal had borrowed.
6. For the reasons given above we answer both the questions in the affirmative. The assessee shall pay the costs of this reference. We assess the fee of the advocate far the department at Rs. 150 for which a certificate shall be filed within the time allowed by the rules.
