{"id":135759,"date":"1958-10-07T00:00:00","date_gmt":"1958-10-06T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-rai-bahadur-jairam-valji-and-on-7-october-1958"},"modified":"2017-03-13T08:53:17","modified_gmt":"2017-03-13T03:23:17","slug":"commissioner-of-income-tax-vs-rai-bahadur-jairam-valji-and-on-7-october-1958","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-rai-bahadur-jairam-valji-and-on-7-october-1958","title":{"rendered":"Commissioner Of Income-Tax, … vs Rai Bahadur Jairam Valji And … on 7 October, 1958"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Commissioner Of Income-Tax, … vs Rai Bahadur Jairam Valji And … on 7 October, 1958<\/div>\n
Equivalent citations: 1959 AIR 291, \t\t 1959 SCR Supl. (1) 110<\/div>\n
Author: T V Aiyyar<\/div>\n
Bench: Aiyyar, T.L. Venkatarama<\/div>\n
           PETITIONER:\nCOMMISSIONER OF INCOME-TAX, NAGPUR\n\n\tVs.\n\nRESPONDENT:\nRAI BAHADUR JAIRAM VALJI AND OTHERS\n\nDATE OF JUDGMENT:\n07\/10\/1958\n\nBENCH:\nAIYYAR, T.L. VENKATARAMA\nBENCH:\nAIYYAR, T.L. VENKATARAMA\nGAJENDRAGADKAR, P.B.\nSARKAR, A.K.\n\nCITATION:\n 1959 AIR  291\t\t  1959 SCR  Supl. (1) 110\n CITATOR INFO :\n E&D\t    1959 SC 814\t (24,52,54)\n R\t    1959 SC1352\t (8)\n RF\t    1961 SC1579\t (30,31,34)\n RF\t    1964 SC 758\t (12)\n RF\t    1965 SC  65\t (5,31,33)\n R\t    1971 SC1590\t (9)\n R\t    1972 SC 386\t (12)\n R\t    1973 SC 515\t (9)\n R\t    1973 SC1011\t (15,20)\n D\t    1987 SC 500\t (36)\n RF\t    1992 SC1495\t (31)\n\n\nACT:\n       Income  Tax-Capital  or\tRevenue\t receipt-Compensation\tfor\n       premature  termination of contract-Whether  trading  receipt\n       -Liability to tax-lndian Income-tax Act, 1922 (XI of 1922).\n\n\n\nHEADNOTE:\nThe respondent had been carrying on business in the  produc-\ntion  and  supply  of limestone since  1920,  and  under  an\nagreement  entered  into with the Bengal  Iron\tCompany\t was\nsupplying  all its requirements of limestone  and  dolomite.\nSometime  later the Indian Iron and Steel Company took\tover\nall  the  assets  and liabilities  of  the  former  company.\nSubsequently   differences   having   arisen   between\t the\nrespondent  and\t the  Indian Iron  and\tSteel  Company\tthey\nentered\t into an agreement on May 9, 1940, in settlement  of\nall  the  disputes  between them whereby,  inter  alia,\t the\nrespondent was to work a quarry of the company for a  period\nOf  25 years and to supply the limestone quarried  therefrom\nto the company according to its requirements and to get from\nthe  railway  authorities facilities  for  transporting\t the\nlimestone  more\t economically; and it was agreed  that\ttill\nsuch  facilities were given, the respondent was to  be\tpaid\nRs. 4000\/- every month.\t Under the agreement the  respondent\nhad  the right to work other quarries of his own and  supply\nlimestone  so  quarried to other  purchasers.\tThe  railway\nauthorities  having declined to grant facilities, it  became\nimpossible  to\tcarry  out  the\t agreement  in\tthe   manner\ncontemplated by the parties, who, thereupon, entered into  a\nfresh agreement on August 2, 1941, terminating\n111\nthe  agreement\tdated May 9, 1940, on  certain\tterms.\t The\nagreement  provided inter alia (1) that the  Company  should\npay \" Rs. 2,50,000\/- to the sellers as solatium besides\t the\nmonthly\t instalments of Rs. 4000\/-\", remaining unpaid  under\nthe contract dated May 9, 1940, (2) that the company  should\npurchase  limestone from the respondent for a period  of  12\nyears,\tand (3) that the respondent was to be appointed\t the\nloading contractors of the Company for loading iron ore.  On\na  question as to whether the the sum of Rs. 2,50,000\/-\t was\nliable\tto  tax,  the respondent claimed that  it  was\tnot,\n'being a capital receipt but the income-tax authorities held\nthat  it was a trading receipt and was income chargeable  to\ntax.   The High Court however held on a reference  under  s.\n66(1), that the income was not chargeable to tax, and  hence\nthe  present appeal.  In support of the appeal, the  respon-\ndent contended inter alia that (1) the contract dated May 9,\n1940,  was  for a period of 25 years of which more  than  23\nyears had still to run at the time of the settlement, and it\nwas therefore an asset of an enduring character, capital  in\ncharacter, and the compensation paid therefor was a  capital\nreceipt,  and (2) that the true character of  the  agreement\nwas  that  it brought into existence  an  arrangement  which\nwould  enable the respondent to carry on a business and\t was\nnot  itself  any  business, and any  payment  made  for\t the\ntermination of such an agreement was a capital receipt.\nHeld, that the contract of May 9, 1940, was entered into  by\nthe  respondent in the ordinary course of his  business\t and\nthat  the sum of Rs. 2,50,000\/- which was paid\tas  solatium\nfor the cancellation of that contract, was a revenue receipt\nand was chargeable to tax.\nThere  is a distinction between a contract entered  into  in\nthe usual course of business and an agency contract.   While\nit  may\t be  possible  to regard  the  latter  as  merely  a\nframework  for\tdoing business, the former  constitutes\t the\nbusiness  itself, and, therefore, compensation paid for\t the\ntermination  of the former kind of contract must be held  to\nbe revenue, whereas compensation paid for the termination of\nthe latter might be capital in character.\nIt would make no difference in the character of the receipt,\nwhen  it  is  compensation for\tcancellation  of  a  trading\ncontract, whether its performance is to consist of a  single\nact or a series of acts spread over a period.\nCase law reviewed.\nVan   Den   Berghs   Ltd.  v.  Clark,\t[1935]\t A.C.\t431,\ndistinguished.\n\n\n\nJUDGMENT:\n<\/pre>\n
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 109 of 1954.
\nAppeal\tby special leave from the judgment and\torder  dated
\nApril  21,  1950, of the former Nagpur High Court  in  Misc.
\nCivil Case No. 135 of 1949.\n<\/p>\n
112<\/span><\/p>\n
R.   Ganapathy Iyer and R. H. Dhebar, for the appellant.
\nRadhavinod  Pal,  J.  M. Thakar and I. N.  Shroff,  for\t the
\nrespondents.\n<\/p>\n
1958.  October 7. The Judgment of the Court was delivered by
\nVENKATARAMA AIYAR J.-This is an appeal against the  judgment
\nof the High Court of Nagpur in a reference under s. 66(1) of
\nthe Indian Income-tax Act (XI of 1922), hereinafter referred
\nto  as\tthe  Act,  and the point  that\tis  raised  for\t our
\ndetermination  is whether a sum of Rs. 2,50,000 received  by
\nthe  respondent on August 2, 1941, is chargeable to  income-
\ntax.   While,  according to the Department,  the  amount  in
\nquestion  is a revenue receipt liable to be included in\t the
\nchargeable income, according to the respondent it is capital
\nreceipt\t not  liable to tax.  The Appellate  Tribunal  held,
\naffirming  the decisions of the Income-tax Officer  and\t the
\nAppellate   Assistant  Commissioner,  that  the\t amount\t  in
\nquestion was a trading receipt, and was income liable to  be
\nassessed.  On the application of the respondent, it referred
\nthe following question for the decision of the High Court:
\n”  Whether in the circumstances of the case the sum  of\t Rs.
\n2,50,000 received by the assessee as damages or compensation
\nfor  the  premature termination of the contract of  9th\t May
\n1940  is income assessable within the meaning of the  Indian
\nIncome-tax Act.”\n<\/p>\n
The  reference\twas  heard by Sen and Deo,  JJ.,  who  held,
\ndisagreeing with the Tribunal, that the sum of Rs.  2,50,000
\nwas  a capital receipt in the hands of the  respondent,\t and
\nthat  it,  was not liable to be taxed.\tThe  appellant\tthen
\nfiled  an  application under s. 66(A)(2) of the\t Act  for  a
\ncertificate to appeal to this Court, but that was dismissed,
\nthe  learned judges holding that the law on the subject\t was
\nwell  settled.\t The appellant thereafter  applied  to\tthis
\nCourt  for  special leave under Art. 136, and the  same\t was
\ngranted, and hence this appeal.\n<\/p>\n
113<\/span><\/p>\n
The  question  whether a receipt is capital  or\t income\t has
\nfrequently  come  up for determination\tbefore\tthe  courts.
\nVarious\t rules have been enunciated as furnishing a  key  to
\nthe  solution of the question, but as often observed by\t the
\nhighest\t authorities,  it is not possible to  lay  down\t any
\nsingle\ttest  as  infallible  or  any  single  criterion  as
\ndecisive  in the determination of the question,\t which\tmust
\nultimately  depend on the facts of the particular case,\t and
\nthe authorities bearing on the question are valuable only as
\nindicating the matters that have to be taken into account in
\nreaching a decision.  Vide Van Den Berghs Ltd. v. Clark (1).
\nThat,  however,\t is not to say that the question is  one  of
\nfact, for, as observed in Davies (H.  M. Inspector of Taxes)
\nv.  The\t Shell Company of China Ltd. (2) ”  these  questions
\nbetween\t capital  and income, trading profit or\t no  trading
\nprofit, are questions which, though they may depend no doubt
\nto a very great extent on the particular facts of each case,
\ndo involve a conclusion of law to be drawn from those  facts
\n“.  Vide  also\tthe observations of Lord Greene,  M.  R.  in
\nRustproof Metal Window Co., Ltd. v. Commissioners of  Inland
\nRevenue (3).  That being so, we must first examine the facts
\nof  the\t present -case, and then consider whether  on  those
\nfacts and in the light of the applicable principles, the sum
\nof Rs. 2,50,000 received by the respondent is a capital or a
\nrevenue receipt.\n<\/p>\n
The respondent is a businessman whose trading activities run
\nin several channels.  He is a railway contractor; he runs  a
\nrice mill and a sugar factory; he is a supplier Of limestone
\nand dolomite.  It is with the last of these businesses\tthat
\nwe  are concerned in these proceedings.\t The respondent\t had
\nacquired  a quarry at Paraghat and had been himself  working
\nit  and\t selling  limestone quarried out  of  it  to,  among
\nothers,\t a Company called the Bengal Iron Company, Ltd.\t  On
\nJanuary 5, 1935, the said Company entered into an  agreement
\nwith the respondent for the purchase of all its requirements
\nof limestone and dolomite from
\n(1) [1935] A.C. 431.\t    (2) (1951) 32 Tax Cas. 133 151.
\n(3)  (1947) 29 Tax Cas. 243, 266.\n<\/p>\n
15<\/span>
\n114<\/span><\/p>\n
the latter at rates specified therein, and these rates\twere
\nsubsequently  modified\tby  another  agreement\tbetween\t the
\nparties\t dated December 21, 1935.  In 1936 the Company\twent
\ninto liquidation, and its assets and liabilities were  taken
\nover  by  another Company called the Indian Iron  and  Steel
\nCompany, Ltd. under a scheme of amalgamation dated September
\n8,  1936.  This Company continued to purchase limestone\t and
\ndolomite  from the respondent for some time, but  later\t on,
\nfinding that the rates were uneconomic owing to increase  in
\nthe railway freight, it decided to purchase its requirements
\nfrom  other  sources,  and by notice  dated  May  29,  1939,
\ninformed   the\trespondent  accordingly.    Thereupon,\t the
\nrespondent  filed Suit No. 211 of 1940 in the High Court  of
\nCalcutta  for  specific performance of\tthe  contract  dated
\nJanuary\t 5, 1935, as modified on December 21, 1935, and\t for
\nan injunction restraining the Indian Iron and Steel Company,
\nLtd.  from purchasing limestone or dolomite from any  person
\nother  than  the  plaintiff,  and  on  March  13,  1940,  an
\ninjunction  in those terms was actually issued\tagainst\t the
\nCompany.\n<\/p>\n
Thereafter,  the Company and the respondent entered into  an
\nagreement  in settlement of all the disputes  between  them,
\nand  the same was embodied in a document dated May 9,  1940.
\nAs it is this document that forms the source for the payment
\nof Rs. 2,50,000 to the respondent, it is necessary to  refer
\nto the terms thereof in some detail.  Under this  agreement,
\nthe  respondent\t was to work a quarry of the  Company  at  a
\nplace called Gangapur for a period of 25 years and to supply
\nthe limestone quarried therefrom to the Company according to
\nits  requirements.   This quarry, it should be\tstated,\t was
\nsituated  near\tKulti  where  the  Company  carried  on\t its
\nsmelting  operations,  and  obviously it  would\t reduce\t the
\nworking\t expenses, if limestone required therefor  could  be
\ngot  from Gangapur.  There were, however, no  facilities  in
\nGangapur railway station for transporting the goods from the
\nquarry,\t and so it was arranged that the authorities  should
\nbe  moved for permission to construct a siding at  Gangapur,
\nand that the cost thereof should be borne
\n115<\/span>
\nby  the\t Company.   It was expected that it  would  take  18
\nmonths\tbefore\tthe siding could be completed,\tand  it\t was
\nagreed that during that period the respondent was to be paid
\nRs. 4,000 every month.\tThereafter, the respondent was to be
\npaid  at  the rate of Rs. 2-9-0 per ton of  limestone  which
\nmight be loaded in the railway wagons to be arranged for  by
\nthe Company.  The working of the quarry was left entirely in
\nthe hands of the respondent.  It was he that was to purchase
\nthe  machinery and the appliances necessary  for  quarrying.
\nHe  was\t to  engage  his own workmen  and  put\tup  all\t the
\nrequisite  superstructures.  After the limestone was  raised
\nfrom  the  quarry,  he was to get it  cleaned  and  Tendered
\nmerchantable,  and  it was thereafter to be  loaded  in\t the
\nwagon.\t There\tare two clauses in the\tagreement  to  which
\nreference might be made.  Under cl. 6, the respondent agreed
\n”  to  supply  to  the\tCompany\t such  other  quantities  of
\nlimestone,  if any, as the Company may order  besides  Kulti
\nrequirements “. Clause 13 of the agreement enjoined that the
\nrespondent was not to engage, during the subsistence of\t the
\nagreement, in any other contract business for the working of
\nany  quarry  within an area of 20 miles from  the  Company’s
\nquarry,\t but  this  was\t subject to  the  proviso  that\t the
\nrespondent was free to work any quarry belonging to and held
\nby him.\n<\/p>\n
To  continue the narration, the railway authorities did\t not
\nagree  to  the construction at Gangapur of a  siding  and  a
\nloopline to the quarry, and so it became impossible to carry
\nout the agreement in the manner contemplated by the parties.
\nIt is in this situation that the parties came together,\t and
\non  August  2,1941, entered into a new agreement and  it  is
\nwith  this  that we are directly concerned in  this  appeal.
\nThe agreement recites that the Company feeling difficulty in
\nworking their mines referred to in the contract dated May 9,
\n1940,  made a proposal for termination of the said  contract
\non certain terms, and that was agreed to.  The terms of\t the
\nagreement are (1) that the Company should pay ” Rs. 2,50,000
\nto  the sellers as solatium besides the monthly\t instalments
\nof  Rs. 4,000 “, remaining unpaid under the  contract  dated
\nMay 9, 1940; (2)
\n116<\/span>
\nthat the Company should take all the limestone required\t for
\nits furnaces at Kulti from the respondent for a period of 12
\nyears  on terms and conditions set out in an agreement;\t (3)
\nthat  the  respondent  was  to\tbe  appointed  the   loading
\ncontractors  of\t the  Company for loading all  iron  ore  at
\nMonoharpore  for a period of 12 years from January 1,  1942,
\non  the\t terms\tand  conditions\t specified  in\ta   separate
\nagreement.   Pursuant to this agreement, the respondent\t was
\npaid  a sum of Rs. 2,50,000 and the two agreements  relating
\nto the purchase of limestone and the loading of iron ore  at
\nMonoharpore were also executed.\t The balance due on  account
\nof monthly payment of Rs. 4,000 provided in the agreement of
\nMay  9, 1940, was also duly paid.  Now, on these facts,\t the
\nquestion is whether the sum of Rs. 2,50,000 received by\t the
\nrespondent was capital or revenue.\n<\/p>\n
Before discussing the principles applicable to the facts  as
\nstated\tabove,\tit is necessary to deal\t with  a  contention
\nraised on the facts of the case on behalf of the respondent.
\nDr. Radha Binode Pal, who appeared for him, argued that\t for
\nthe  purpose of carrying out the agreement dated January  5,
\n1935, the respondent had executed works of a capital  nature
\nsuch  as construction of quarters, tenements and  the  like,
\nand  had  incurred expenses exceeding Rs. 4 lakhs  -on\tthat
\naccount,  that\tall this had to be thrown away when  the  if
\nquarry\tat Paraghat had to be abandoned, and the sum of\t Rs.
\n2,50,000  was really a reimbursement of the amount spent  by
\nhim as above and was therefore a respondent, the position in
\nlaw  would  no doubt be as contended for by him.   But\thave
\nthose  facts been established ? In his statement before\t the
\nIncome-tax  Officer, the respondent merely stated  that\t the
\namount\tin  question  was  paid\t as  consideration  for\t the
\ntermination of the contract of 1935 and not of 1940, and  it
\nis  pointed out by the Tribunal that the respondent did\t not
\nsubstantiate  even this assertion.  There was no  allegation
\nthat capital expenses had been incurred in the execution  of
\nthe  contract of 1935, and that the amount in  question\t was
\npaid as compensation therefor;\n<\/p>\n
117<\/span><\/p>\n
nor  is there any evidence on that question.  In deed,\twhen
\nit  is\tremembered  that the quarry  at\t Paraghat  had\tbeen
\nabandoned before the contract dated May 9, 1940, was entered
\ninto,  it  is difficult to imagine how any  amount  paid  as
\ncompensation for the cancellation of that contract can\thave
\nany connection with expenses incurred with reference to that
\nquarry.\t  We must hold that the sum of Rs. 2,50,000 was\t not
\npaid as compensation for expenses thrown away and cannot  be
\nheld to be a capital receipt on that account.
\nNow,  the contention on behalf of the appellant is that\t the
\ncontract  dated\t May 9, 1940, was one entered  into  by\t the
\nrespondent in the ordinary course of his business, that\t the
\nsum of Rs. 2,50,000 was paid admittedly as solatium for\t the
\ncancellation  of  that\tcontract, that\tthe  payment  really
\nrepresents the profits which the respondent could have made,
\nhad the contract been performed, and that it is therefore  a
\nrevenue receipt; and a number of authorities were quoted  in
\nsupport of this contention.  We shall now refer to the\tmore
\nimportant   of\t them.\t ID  Short  Bros.    Ltd.   v.\t The
\nCommissioners of Inland Revenue (1), the facts were that the
\nappellant   Company  which  was\t carrying  on  business\t  as
\nshipbuilders  had  entered  into a  contract  to  build\t two
\nsteamers and later on, agreed to its cancellation on receipt
\nof  a sum of pound 1,00,000.  The question was whether\tthis
\nwas a capital or revenue receipt.  Rowlatt, J., held that it
\nwas merely a receipt in a going concern and was revenue, and
\nthat  was  affirmed by the Court of Appeal,  Lord  Hanworth,
\nM.R.,  observing that such a contract as the one before\t him
\nwas liable in the ordinary course of business to be  altered
\nor terminated on terms and the payment of pound 1,00,000  in
\nsettlement   of\t the  rights  under  the  contract  was\t  an
\nadjustment made between the appellants and their clients  in
\nthe  ordinary course of business.  Similar observations\t are
\nto be found in the judgment of Sargant, L. J. and  Lawrence,
\nL. J. It may be noted on the facts of the present case\tthat
\nthe  agreement of January 5, 1935, was modified on  December
\n21,  1935,  and\t the disputes  which  arose  with  reference
\nthereto
\n(1)  (1927) 12 Tax Cas. 955.\n<\/p>\n
118<\/span><\/p>\n
were settled by the agreement of May 9, 1940, which was,  in
\nturn,  replaced\t by  agreement dated August  2,\t 1941.\t The
\nagreements  dated  May 9, 1940, and August  2,\t1941,  could
\ntherefore  be  properly said to be adjustments made  in\t the
\nordinary course of business.\n<\/p>\n
In  The Commissioners of Inland Revenue v. The\tNorth  fleet
\nCoal and Ballast Co., Ltd. (1), the respondent Company which
\nwas the owner of a chalk quarry had entered into a  contract
\nwith a purchaser for the supply of certain quantity of chalk
\nfor  a period of ten years.  After some time, the  purchaser
\nwanted to be relieved from the contract, and the  respondent
\nagreed\tto its termination on receipt, of pound 3,000.\t The
\npoint  for  decision  was whether that was a  capital  or  a
\nrevenue\t receipt.   In\tholding\t that  it  was\tthe  latter,
\nRowlatt, J., observed:\n<\/p>\n
”  If  the contract had gone forward those sums\t would\thave
\ncome  into  profits  every  year  and  now  that  they\t are
\nrepresented  by a commutation, so far as that is  concerned,
\nthe point seems to be concluded by Short’s case (2) “.
\nOne  of the contentions urged on behalf of the assessee\t was
\nthat the contract being for a term was a capital asset, that
\nthe  effect  of the subsequent agreement terminating  it  on
\npayment\t of  pound  3,000 was in  substance  to\t assign\t the
\nunexpired  portion of the contract for a consideration,\t and
\nthat  it  would be a capital receipt on the  principle\tlaid
\ndown  in  John Smith & Son v. Moore(1).\t In  repelling\tthis
\ncontention, Rowlatt, J., observed :\n<\/p>\n
“These\tcontracts  are not being sold.\tThey are  not  being
\neven   extinguished  really  for  this\tpurpose.   What\t  is
\nhappening  is that the profits under them are  being  taken;
\nsomething is being taken in respect of the profits of  them.
\nThat  is the position.\tThis sum represents the\t profits  of
\nthe  Company -on the contracts, treating them  as  contracts
\nwhich nationally have earned or are going to earn a profit.”
\nAnd  the  decision  in\tJohn  Smith  &\tSon  v.\t Moore\t was
\ndistinguished.\n<\/p>\n
(1) (1927) 12 Tax Cas. 1102.\n<\/p>\n
(2) (1927) 12 Tax Cas. 955.\n<\/p>\n
(3) (1921) 12 Tax Cas. 266,
\n119<\/span>
\nIn John Smith & Son v. Moore (1), it may be stated that\t the
\nexecutors sold some outstanding contracts for the supply  of
\ncoal to the son of the testator for a consideration, and  it
\nwas  held that the payment made by the son for the  purchase
\nof  the contracts was in his hands a capital  expense.\t The
\npayment\t was  not given by one party to a  contract  to\t the
\nother in cancellation of the agreement but by a stranger  to
\nthe contract to one of the parties thereto for an assignment
\nof his rights thereunder.  In Jessee Robinson & Sons v.\t The
\nCommissioners  of  Inland  Revenue (2),\t the  appellant\t had
\nentered\t into  two  contracts for the sale  of’\t yarn.\t The
\npurchaser  cancelled the contracts and paid pound 12,500  in
\nsettlement  of the claims.  The contention of the  appellant
\nwas  that this payment was not a trading receipt  or  profit
\narising\t from  his  trade.  In\trejecting  this\t contention,
\nRowlatt, J. observed:\n<\/p>\n
”  It  seems  to  me that there is no  reason  why  the\t sum
\nreceived in that respect for breach of contract is not a sum
\nwhich is part of the receipts of the business for which that
\ncontract was made.”\n<\/p>\n
Examining the facts of the present case in the light of\t the
\nabove  decisions, the question to be considered\t is  whether
\nthe  contract  dated May 9, 1940, was entered  into  by\t the
\nrespondent in the usual course of his business.\t If it\twas,
\nthen  the  amount paid for the termination of  the  contract
\nmust  be held to be a trading receipt.\tThat the  respondent
\nhas  been carrying on business in the production and  supply
\nof limestone is amply established.  The record shows that he
\nhad been supplying limestone and dolomite to the Bengal Iron
\nCompany,  Ltd.,\t from  about  the year\t1920  and  that\t the
\ncontracts of 1935 were entered into only in the carrying  on
\nof  that business.  Vide para. 4 in the plaint in  Suit\t No.
\n211  of\t 1940 already referred to.  The contract of  May  9,
\n1940,  was  made  in settlement of the\trights\tunder  those
\ncontracts.  It is to be noted that under the agreement dated
\nAugust\t2,  1941,  under  which he received  a\tsum  of\t Rs.
\n2,50,000,  he  also  secured a contract for  the  supply  of
\nlimestone  for a period of 12 years.  On these facts, it  is
\nimpossible to
\n(1) (1921) 12 Tax Cas. 266.\n<\/p>\n
(2) (1929) 12 Tax Cas. 1241.\n<\/p>\n
120<\/span><\/p>\n
come  to  any  conclusion other than that  the\tcontract  in
\nquestion was entered into by the respondent in the  ordinary
\ncourse\tof  his business.  The learned Judges  in  the-Court
\nbelow observe that the assessee was not a dealer in,  though
\nhe was a supplier of, limestone.  This appears to us to be a
\ndistinction  without  a difference.  Moreover, it  would  be
\nwholly\timmaterial  for\t the  present  purpose\twhether\t the
\nrespondent was a dealer in or supplier of limestone, as,  in
\neither\tview,  he  would be carrying  on  business  and\t the
\ncontract  in  question\twould be one  entered  into  in\t the
\ncarrying  on of that business.\tWe should also observe\tthat
\nthe  statement that the respondent was only a  supplier\t but
\nnot  a\tdealer\tin limestone does riot appear  to  be  quite
\naccurate on the facts.\tUnder cl. 13 of the agreement  dated
\nMay  9,\t 1940, the respondent had the right  to\t work  other
\nquarries  of  his own, and the evidence shows  that  he\t did
\nsupply limestone so quarried to other purchasers.
\nIn  support  of\t the judgment of the  Court  below,  learned
\ncounsel for the respondent urged the following contentions :
\n(1)  The contract dated May 9, 1940, was for a period of  25
\nyears  of which more than 23 years had still to run  at\t the
\ntime of the settlement, and it was therefore an asset of  an
\nenduring   character,\tcapital\t in   character,   and\t the
\ncompensation paid therefor was a capital receipt.
\n(2)  The true character of the agreement was that it brought
\ninto  existence\t an  arrangement  which\t would\tenable\t the
\nrespondent  to\tcarry on a business and was not\t itself\t any
\nbusiness and any payment made for the termination of such an
\nagreement is a capital receipt.\n<\/p>\n
(3)  The business which was to be carried on pursuant to the
\ncontract  was of a specialised character, that there was  no
\ngeneral market for limestone and dolomite, that the contract
\nin  question formed practically the entire business  of\t the
\nrespondent and the compensation paid for the closure of that
\nbusiness  would\t not  be a revenue  receipt  but  a  capital
\nreceipt on account of sterilisation of a capital asset.\t  It
\nis argued by Dr. Radha Binode Pal that the features
\n121<\/span>
\nstated above were not present in the contracts which came up
\nfor consideration in the decisions cited for the  appellant,
\nand  that they are therefore distinguishable, and he  relied
\non  other authorities as applicable to the fact,,;  of\tthis
\ncase.\tThese  contentions  and\t the  authorities  cited  in
\nsupport thereof must now be considered.\n<\/p>\n
(1)  Is\t the receipt of Rs. 2,50,000 a capital\treceipt\t for
\nthe reason that it was compensation for the settlement of  a
\ncontract  which had a long life before it ? The argument  of
\nthe  respondent\t is that there is in the  Income-tax  law  a
\nwell-defined   distinction   between   fixed   capital\t and
\ncirculating  capital  (Vide John Smith & Son  v.  Moore)(1),
\nthat  where there is a contract the performance of which  is
\nto  be\tnot  once and for all but spread over  a  period  of
\nyears, it is in the nature of a fixed capital and a  payment
\non  account  of\t it  must be held  to  be  capital  receipt.
\nReliance  is  placed in support of this\t contention  on\t the
\ndecisions  in Commissioner of Income-tax v. Shaw  Wallace  &
\nCo.  (2)  and Barr, Crombie & Co. Ltd. v.  Commissioners  of
\nInland\tRevenue\t (3)  and certain  observations\t in  Kelsall
\nParsons & Co. v. Commissioners of Inland Revenue (4) and The
\nCommissioner of Income-tax and Excess Profits Tax, Madras v.
\nThe South India Pictures Ltd., Karaikudi<\/a> (5).
\nIn  Income-tax Commissioner v. Shaw Wallace. & Co. (2),\t the
\nrespondent Company had been acting for several years as\t the
\ndistributing agents of two oil Companies.  In 1927-28, these
\nCompanies   decided   to   make\t  their\t  own\tdistribution
\narrangements  and accordingly terminated the agency  of\t the
\nrespondent and paid compensation therefor.  The question was
\nwhether\t this amount was a revenue receipt in the  hands  of
\nthe  respondent.  It was held by the Privy Council  that  it
\nwas  a capital receipt, because it represented\tcompensation
\npaid  for cessation of business, not profits earned  in\t the
\ncarrying  on  of  it.\tIn  Barr,  Crombie  &  Co.  Ltd.  v.
\nCommissioners of Inland Revenue (3), the facts were that
\n(1)  (1921) 12 Tax Cas. 266.\n<\/p>\n
(3)  (1945) 26 Tax Cas. 4o6.\n<\/p>\n
(5)  [1956] S.C.R. 223.\n<\/p>\n
(2)  (1932) L.R. 59 I.A. 2o6.\n<\/p>\n
(4)  (1938) 21 Tax Cas. 608.\n<\/p>\n
16<\/span>
\n122<\/span><\/p>\n
under  an  agreement dated May 25, 1937, the  appel]ant\t had
\nbeen appointed manager of a shipping company for a period of
\n15 years, and one of the terms of the agreement was that  if
\nthe  company went into liquidation, the entire\tremuneration
\nfor the remaining period -was payable forthwith.  On  Novem-
\nber 5, 1942, the company went into liquidation, and a sum of
\npound  16,306  16s. 11d. was paid to the  appellant  as\t its
\nremuneration for the period of about 8 years which was still
\nto  run.  On a question as to whether this was taxable as  a
\nrevenue receipt, it was held that as virtually the whole  of
\nthe asets of the appellant company consisted of the managing
\nagency agreement, a payment for its extinction was a capital
\nreceipt\t and was therefore not taxable.\t Distinguishing\t the
\ndecision  in Kelsall’s case (1) where compensation paid\t for
\nthe  termination  of an agency agreement was held  to  be  a
\nrevenue\t receipt, the Lord President Normand  observed:\t (at
\npage 411).\n<\/p>\n
”  Here we are not dealing with a single payment  in  return
\nfor  the surrender of the prospect of making profits in\t the
\nfinal  year  of the agreement, but with a  payment  for\t the
\nsurrender   of\tan  agreement  while  there  was   still   a
\nsubstantial  period-indeed, more than half of the period  of
\nthe agreement-to run “.\n<\/p>\n
Lord Moncrieff agreeing with this conclusion observed that ”
\nso  far from this being a prepayment of future\tremuneration
\nfor  services, this was, if regard be had to ‘the  substance
\nof the matter a price paid upon the purchase and sale of the
\nmain asset of a business.”\n<\/p>\n
In  Kelsall’s case (1), the assessee carried on business  as
\ncommission  agents and acquired a number of agencies in\t the
\ncourse\tof that business.  One of these agencies  which\t was
\nfor a period of three years was cancelled at the end of\t the
\nsecond year on payment of pound 1,500 as compensation.\t The
\nquestion  was  whether\tthis  was a  capital  or  a  revenue
\nreceipt.   In  holding\tthat it was  the  latter,  the\tLord
\nPresident,  Normand  observed  that  the  business  of\t the
\nappellant was to acquire as many agencies as it could,\tthat
\nit was incidental to that agency that it should be modified,
\naltered or discharged
\n(1)  (1938) 21 Tax Cas. 6o8.\n<\/p>\n
123<\/span><\/p>\n
and  that as the period outstanding was one year,  it  could
\nnot be said that the appellant was parting with an  enduring
\nasset  of the business.\t Lord Fleming in agreeing with\tthis
\nconclusion  stated that he attached importance to  the\tfact
\nthat  the  agreement  had  Only one year  to  run  and\tthat
\ndifferent  considerations  might &rise\tif  the\t outstanding
\nperiod was considerable.\n<\/p>\n
”  A  different\t case  would have  arisen  for\tdecision  he
\nobserved, (at p. 622) ” if the agreement had been terminated
\nwhen  it  had still, say, a period of 10 years\tto  run.   A
\npayment\t made  in respect of a loss to be sustained  over  a
\nperiod\tof years may well have a different character from  a
\npayment\t made  in respect of a loss to be sustained  in\t the
\nyear in which the payment is received.”\n<\/p>\n
All  these  cases  were\t considered by\tthis  Court  in\t The
\nCommissioner of Income-tax and Excess Profits Tax, Madras v.
\nThe  South India Pictures Ltd., Karaikudi<\/a> (1).\t There,\t the
\nassessee  was  carrying on business in the  distribution  of
\nfilms, and in the course of such business entered into three
\ncontracts  dated September 17, 1941, July 16, 1942, and\t May
\n5,  1945, with a company called the Jupiter Pictures,  Ltd.,
\nfor  the  production and distribution of three films  for  a
\nperiod\tof 5 years.  On October 31, 1945, the  assessee\t and
\nthe  Jupiter  Pictures,\t Ltd.,\tentered\t into  an  agreement
\nterminating  the contracts in consideration of a payment  of
\nRs.  26,000 as compensation to the assessee.   The  question
\nhaving\tbeen  raised whether this was a capital\t or  revenue
\nreceipt,  this\tCourt held that it was the  latter  and\t was
\nliable to be taxed, and the decision in Barr, Crombie &\t Co.
\nLtd.   v.   Commissioners   of\tInland\t Revenue   (2)\t was
\ndistinguished  on the ground that there the whole  trade  of
\nthe assessee was built on the agreement dated May 25,  1937,
\nthat it was a fundamental asset of the assessee’s  business,
\nand that the payment on account of it was a capital receipt.
\nNow, it is the contention of the respondent that the present
\ncase  is governed by the principles laid down in  the  above
\ndecisions and not those enunciated in the authorities  cited
\nfor the appellant, and that the
\n(1) [1956] S.C.R. 223.\n<\/p>\n
(2) (1945) 26 Tax Cas. 406.\n<\/p>\n
124<\/span><\/p>\n
payment\t of Rs. 2,50,000 as compensation on account  of\t the
\nagreement  dated  May  9,  1940,  falls\t within\t  Income-tax
\nCommissioner  v. Shaw Wallace & Co. (1) and Barr, Crombie  &
\nCo.  Ltd.  V.  Commissioners of Inland Revenue (2  )  rather
\nthan  Kelsall’s case (3) and The Commissioner of  Income-tax
\nand  Excess Profits Tax, Madras v. The South India  Pictures
\nLtd., Karaikudi<\/a> (4) because the contract dated May 9,  1940,
\nformed\tpractically the only business of the respondent\t and
\nthe  contract  had  at the time of the\tsettlement  still  a
\nperiod\tof  23\tyears  to run.\tIt will\t be  seen  that\t the
\nreceipts, the chargeability of which was in question in\t the
\ndecisions  cited for the respondent, were all payments\tmade
\nas  compensation  for the termination of  agency  contracts,
\nwhereas we are concerned with an amount paid as solatium for
\nthe cancellation of a contract entered into by a businessman
\nin  the\t ordinary course of his business, and that,  in\t our
\njudgment,  makes all the difference in the character of\t the
\nreceipt.   In  an  agency  contract,  the  actual   business
\nconsists  in  the  dealings between the\t principal  and\t his
\ncustomers, and the work of the agent is only to bring  about
\nthat  business.\t  In other words, what he does\tis  not\t the
\nbusiness  itself  but  something  which\t is  intimately\t and
\ndirectly  linked  up with it.  It is therefore\tpossible  to
\nview  the  agency as the apparatus which leads\tto  business
\nrather\tthan  as the business itself on the analogy  of\t the
\nagreements in Van Den Berghs Ltd. v. Clark (5).\t  Considered
\nin  this  light, the agency right can be held to be  of\t the
\nnature\tof a capital asset invested in business.   But\tthis
\ncannot\tbe said of a contract entered into in  the  ordinary
\ncourse of business.  Such a contract is part of the business
\nitself,\t not anything outside it as is the agency,  and\t any
\nreceipt on account of such a contract can only be a  trading
\nreceipt.\n<\/p>\n
That there is a distinction between an agency agreement\t and
\na contract made in the usual course of business will further
\nbe clear, if we have regard to one
\n(1) (1932) L.R. 59 I.A. 206.  (2) (1945) 26 Tax Cas. 406.
\n(3) (1938) 21 Tax Cas. 608.   (4) [1956] S.C.R. 223.
\n(5)  [1935] A. C. 431.\n<\/p>\n
125<\/span><\/p>\n
of  the\t reasons on which the conclusion  that\tcompensation
\npaid for cancellation of agency rights is a capital  receipt
\nis  sometimes rested.  It is that, in substance,  the  agent
\nassigns the agreement to the principal and the\tcompensation
\nis  price  paid\t therefor.  Vide the  observations  of\tLord
\nMoncrieff  in Barr, Crombie & Co. Ltd. v.  Commissioners  of
\nInland Revenue (1) at page 413 already quoted.\tIt no  doubt
\nsounds somewhat strange that an arrangement between  parties
\nto a contract settling claims thereunder should be  regarded
\nas an assignment of the rights of one of them to the  other,
\nbut  it\t at  least emphasises that the agreement  is  to  be
\nregarded as a capital asset of the agent, which is saleable.
\nSuch  a\t concept will be out of place with  reference  to  a
\ncontract  entered  into\t in the\t course\t of  business.\t Any
\npayment made for the non-performance or cancellation of such
\na  contract can only be damages or compensation and  cannot,
\nin  law or fact, be regarded as an assignment of the  rights
\nunder  the  contract.\tA  claim for  damages  is,  in\tlaw,
\nincapable  of  being transferred, though the  benefit  of  a
\ncontract could be assigned while it is subsisting, and\tsuch
\nassignment  can only be in favour of third persons,  not  in
\nfavour of the other party to the contract, in which case  it
\nwill be a new contract.\t Reference may in this connection be
\nmade   to   the\t observations  of  Rowlatt,   J.,   in\t The
\nCommissioners  of Inland Revenue v. The Northfleet Coal\t and
\nBallast\t Co., Ltd. (2) already quoted, that  such  contracts
\nwere not sold.\n<\/p>\n
If,  then, contracts entered into in the course of  business
\ncannot,\t unlike\t agency contracts, be regarded\tas  ,capital
\nassets\tof  the business, would it make\t any  difference  in
\ntheir  character  that\tthey are to be in  operation  for  a
\nperiod ? On principle, it is difficult to see why it should.
\nIf  under  the\tterms of a contract a businessman  A  is  to
\nsupply goods, let us say, 100 bales of yarn, on a particular
\nday  and  he does that, the price received by  him  therefor
\nwill  be  a revenue receipt.  And in the above case  if\t the
\npurchaser  cancels  the\t contract and pays  damages  to\t the
\nseller, that would also be a revenue receipt.  If under\t the
\nsame
\n(1) (1945) 26 Tax Cas. 406
\n(2) (1927) 12 Tax Cas. 1102.\n<\/p>\n
126<\/span><\/p>\n
contract  A  is\t to  deliver the  bales\t in  four  quarterly
\ninstalments,  and he does so and receives the price in\tfour
\ninstalments,  all  the receipts would be  revenue  receipts.
\nAnd  if\t after one instalment is  delivered,  the  purchaser
\ncancels the contract as regards future instalments and\tpays
\ncompensation  therefor\tto  the seller,\t such  payment\twill
\nundoubtedly be a revenue receipt.  If the contract is that A
\nis  to\tsupply whatever goods are ordered by  the  purchaser
\nduring\ta  certain period, let us say, 10 years,  the  price
\nreceived for the goods ordered and delivered will be revenue
\nreceipt.  Now, if the purchaser under this contract puts  an
\nend to the contract after some time, say, at the end of\t two
\nyears  and pays compensation for the breach of the  contract
\nas  regards the remaining period, does the  receipt  thereof
\nbecome\ta capital receipt ? It sounds illogical so to  hold.
\nHow   does  it\taffect\tthe  true  position,   whether\t the
\ncontracting  parties agree to carry on business in the\tsale
\nand  purchase of goods for a stated period on terms  settled
\nbetween\t them,\tor whether they enter into a  succession  of
\ncontracts for that purpose ?\n<\/p>\n
Two  decisions\thave been quoted before us as  showing\tthat
\npayments  under\t a  contract entered into  in  the  ordinary
\ncourse\tof business would be revenue receipts,\teven  though
\nthe  agreement may be for a period.  In The Commissioner  of
\nInland\tRevenue v. The Northfleet Coal and Ballst Co.,\tLtd.
\n(1)  cited above, the contract was for the supply  of  chalk
\nfor a period of ten years, and the compensation paid was for
\nthe cancellation of the contract for the unexpired period of
\nfour  years,  and it was held to be a trading  receipt.\t  In
\nShove (H.  M. Inspector of Taxes) v. Dura Manufacturing\t Co.
\nLtd.  (2), the respondent company had introdticed company  A
\nto  company B, as the result of which the former obtained  a
\nremunerative  business with the latter.\t In return for\tthis
\nservice, A agreed to pay the respondent a commission on\t the
\nbusiness   so  obtained.   Later  on,  this  agreement\t was
\nterminated  on payment of a sum of pound 1,500 by A to\tthe,
\nrespondent.  The question was whether this was a revenue
\n(1)  (1927) 12 Tax Cas. 1102.  (2) (1941) 23 Tax  Cas.\t779,\n<\/p>\n
783.
\n127<\/span>
\nreceipt.  In answering it in the affirmative, Lawrence,\t J.,
\nobserved:\n<\/p>\n
” Reliance was also placed on certain dicta in the Court  of
\nSession in Kelsall Parsons & Co. v. Commissioners of  Inland
\nRevenue,  at pages 620, 622 and 624, which suggest  that  if
\nthe  contract cancelled has more than one year to  run,\t the
\nsum  received  for  its cancellation way  be  capital.\t The
\nlearned Judges who expressed this view did not say that such
\nsum  must  be capital.\tThey were dealing  with\t a  contract
\ndifferent  from\t the present, namely,  an  agency  contract,
\nwhich  constituted  a  very large  part\t of  the  taxpayer’s
\nbusiness “.\n<\/p>\n
”  In  view  of\t the  decision\tin  Short  Bros.,  Ltd.\t  v.
\nCommissioners  of  Inland Revenue and  in  Commissioners  of
\nInland Revenue v. Northfleet Coal and Ballast Co.  Ltd.\t and
\nthe  differences  of facts, I do not feel that\tthose  dicta
\nought to be applied to the present case.”\n<\/p>\n
In  our\t opinion, therefore, when once it is  found  that  a
\ncontract  was  entered\tinto  in  the  ordinary\t course\t  of
\nbusiness,  any\tcompensation received  for  its\t termination
\nwould  be  a revenue receipt, irrespective  of\twhether\t its
\nperformance  was to consist of a single act or a  series  of
\nacts  spread over a period, and in this respect, it  differs
\nfrom an agency agreement.\n<\/p>\n
In  holding that compensation paid on the cancellation of  a
\ntrading contract differs in character from compensation paid
\nfor  cancellation  of an agency contract, we should  not  be
\nunderstood as deciding that the latter must always, and as a
\nmatter\tof  law\t be held to be a  capital  receipt’  Such  a
\nconclusion  will  be directly opposed to  the  decisions  in
\nKelsall’s  case (1) and The Commissioner of  Income-tax\t and
\nExcess Profits Tax, Madras v. The South India Pictures Ltd.,
\nKaratkudi<\/a>  (2).\t The fact is that an agency  contract  which
\nhas  the  character of a capital asset in the hands  of\t one
\nperson may assume the character of a trading receipt in\t the
\nhands  of another, as, for example, when the agent is  found
\nto make a trade of acquiring agencies and dealing with them.
\nThe principle was
\n(1) (1938) 21 Tax Cas. 608.\n<\/p>\n
(2) [1956] S.C.R. 223.\n<\/p>\n
128<\/span><\/p>\n
thus  stated  by Romer, L. J., in Golden Horse\tShoe,  (New)
\nLtd. v. Thurgood (1):\n<\/p>\n
” The determining factor must be the nature of the trade  in
\nwhich  the  asset  is  employed.   The\tland  upon  which  a
\nmanufacturer  carries on his business is part of  his  fixed
\ncapital..  The\tland  with which a  dealer  in\treal  estate
\ncarries OD. his business is part of his circulating capital.
\nThe  machinery with which a manufacturer makes the  articles
\nthat  he sells is part of his fixed capital.  The  machinery
\nthat  a\t dealer in machinery buys and sells is part  of\t his
\ncirculating  capital,  as is the coal that a  coal  merchant
\nbuys and sells in the course of his trade.  So, too, is\t the
\ncoal  that  a  manufacturer of gas buys and  from  which  he
\nextracts his gas.”\n<\/p>\n
Therefore,  when  a  question arises whether  a\t payment  of
\ncompensation for termination of an agency is a capital or  a
\nrevenue receipt, it would have to be considered whether\t the
\nagency\twas in the nature of capital asset in the  hands  of
\nthe  assessee, or whether it was only part of his  stock-in-
\ntrade.\t Thus, in Barr, Crombie & Son Ltd. v.  Commissioners
\nof   Inland  Revenue  (2),  the\t agency\t was  found  to\t  be
\npractically  the  sole\tbusiness of the\t assessee,  and\t the
\nreceipt\t of  compensation on account of it  was\t accordingly
\nheld  to be a capital receipt, while in Kelsall’s  case\t (3)
\nthe agency which was terminated was one of several  agencies
\nheld  by the assessee and the compensation  amount  received
\ntherefor was hold to be a revenue receipt, and that was also
\nthe  case  in  The Commissioner\t of  Income-tax\t and  Excess
\nProfits\t Tax,  Madras  v. The  South  India  Pictures  Ltd.,
\nKaraikudi<\/a>  (4).\t  It  is, however,  unnecessary\t to  further
\nelaborate  this point, as we are concerned in  this  appeal,
\nnot  with  an agency agreement but with a  contract  entered
\ninto  in  the  ordinary\t course of  business,  and,  in\t our
\njudgment,  compensation\t received  on  account\tof  such   a
\ncontract must be held to be a revenue receipt.
\n(2)  The  above\t discussion answers to a  large\t extent\t the
\ncontention of the respondent that the contract
\n(1)  (1933) 18 Tax Cas.\t 280, 300.\n<\/p>\n
(3)  (1938) 21 Tax Cas. 6o8.\n<\/p>\n
(2)  (1945) 26 Tax Cas. 4o6.\n<\/p>\n
(4)  [1956] S.C.R. 223.\n<\/p>\n
129<\/span><\/p>\n
dated  ‘May 9, 1940’ was merely a framework of his  business
\nand  not the business itself, and that a receipt on  account
\nof  it\tmust be treated as a capital receipt.  The  decision
\nrelied\ton in support of this contention is Van\t Den  Berghs
\nLtd.  v. Clark (1).  There, two companies, one\tEnglish\t and
\nthe  other Dutch, which were engaged in the manufacture\t and
\nsale  of  margarine  entered into  certain  agreements,\t the
\nobject\tof  which was to avoid competition  and\t to  augment
\ntheir profits.\tAn elaborate scheme was devised under  which
\nthe  two companies were to carry on their business  indepen-
\ndently but “in friendly alliance” and in accordance with the
\nscheme;\t and the profits were to be shared between  the\t two
\ncompanies in certain proportions.  The agreements were to be
\nin  operation till 1940, but differences arose\tbetween\t the
\nparties in the working of the scheme and the “alliance ” was
\nterminated in 1927, the Dutch company paying to the  English
\ncompany\t a  sum\t of pound  4,50,000  as\t compensation.\t The
\nquestion was as to the character of this receipt, whether it
\nwas  a capital or a revenue receipt, and it was held by\t the
\nHouse  of  Lords  that\tit was a  capital  receipt  and\t not
\ntaxable.\n<\/p>\n
Now,  it  will\tbe seen that the contracts  which  were\t the
\nsource\tof  the receipt in question did\t not  in  themselves
\nconstitute the business which yielded the profits to the two
\ncompanies.   Those  profits were derived by  them  from\t the
\nmanufacture and sale of margarine, and there was nothing  in
\nthe agreements providing that the companies were to join  in
\nthe  manufacture  and sale of the margarine.   The  position
\nunder  the agreement is thus stated by Lord  Macmillan,\t who
\ndelivered the leading judgment:\n<\/p>\n
”  The\tthree agreements which the appellants  consented  to
\ncancel\twere not ordinary commercial contracts made  in\t the
\ncourse\tof carrying on their trade; they were not  contracts
\nfor the disposal of their products, or for the engagement of
\nagents or other employees necessary for the conduct of their
\nbusiness; nor were they merely agreements as to how their
\n(1)  (1935) A.C. 431.\n<\/p>\n
17<\/span>
\n130<\/span><\/p>\n
trading profits when earned should be distributed as between
\nthe  contracting  parties.  On the  contrary  the  cancelled
\nagreements related to the whole structure of the appellants’
\nprofit-making  apparatus.   They regulated  the\t appellants’
\nactivities, defined what they might and what they might\t not
\ndo, and affected the whole conduct of their business.”
\nThus,  the  agreements in question were intended  to  ensure
\nthat  the business in margarine was carried on to  the\tbest
\nadvantage,  but\t did not, in themselves, form  part  of\t the
\nbusiness.   They  were\tmerely collateral  to  it.  For\t the
\nreasons given in discussing the nature of agency agreements,
\nthe agreements between the two companies must be regarded as
\nnot  pertaining\t to the trading\t activities,  which  yielded
\nprofits, and the payment on account of those agreements must
\nbe  held to be a capital receipt.  But these  considerations
\nwould  be inapplicable to the agreement, with which  we\t are
\nconcerned.   The business which the respondent was to  carry
\non  and\t which\twas to yield profits to\t him  was  the\tvery
\nbusiness  to which the agreement relates.  It is under\tthis
\nvery  agreement that he was to be paid Rs. 2-9-0 per ton  of
\nlimestone loaded by him, and the business which he had to do
\nto  earn  the amount was to raise and  supply  limestone  as
\nprovided  in the agreement.  There is here no  profit-making
\napparatus  set up by the agreement &part from  the  business
\nwhich  is  to be carried on under it.\tWe  are\t accordingly
\nunable\tto agree that the present case is governed’ ‘by\t the
\ndecision in Van Den Berghs Ltd. v. Clark
\n(3)  It\t  remains  to  deal  with  the\tcontention  of\t the
\nrespondent that the business which he was to have carried on
\nunder  the contract dated May 9, 1950, was  practically\t the
\nentirety of his trading activities, and that the termination
\nof  such  a  contract is tantamount to\tstopping  his  doing
\nbusiness  and  the compensation paid therefor is  a  capital
\nreceipt.  Reliance is placed in support of this argument  on
\nthe decision in The Glenboig Union Fireclay Co. Ltd. v.\t The
\nCommissioners of Inland Revenue (2).  Now, to appreciate the
\n(1) (1935) A.C. 431.\n<\/p>\n
(2) (1922) 12 Tax Cas. 427.\n<\/p>\n
131<\/span><\/p>\n
truer position, it is necessary to bear in mind the distinc-
\ntion between compensation on account of business carried  on
\nunder  an  agreement  with  a  third  party  when  that\t  is
\nterminated, and compensation which is received on account of
\na business which the assessee is prevented from carrying  on
\nby  a third person in exercise of an overriding\t power.\t  In
\nthe  former case, the payment would in general be a  trading
\nreceipt\t referable to the business activities carried on  or
\nto be carried on under the agreement and would be taxable as
\na  revenue  receipt.  There may be exceptions  to  this.   A
\nfamiliar instance is when the parties agree, as part of\t the
\ncontract to do business, that one of them shall not carry on
\nsimilar\t business for a stated period after the\t termination
\nof the contract, and a compensation is paid therefor.\tThat
\nhas been held to be a capital receipt.\tVide Beak v.  Robson
\n(1).  The reason is that it is a payment made not on account
\nof  profits which might have been earned in the carrying  on
\nof  the\t business but as solatium for not  carrying  on\t the
\nbusiness.   A payment made in a similar covenant to  operate
\nduring the period of the contract, however, has been held to
\nbe a revenue receipt, because it arises out of the  carrying
\non  of the business.  Vide Thompson v.\tMagnesium  Elektron,
\nLtd.  (2).  It might also happen that one of the parties  to
\nthe  contract  might  have, in the  carrying  out  -thereof,
\nincurred expenses of a capital character and as a result  of
\nthe cancellation of the contract, those expenses would\thave
\nbeen  thrown  away.   A payment made  on  account  of  those
\nexpenses would bear the character of a capital receipt.\t But
\napart  from  these  and similar\t in-stances,  it  might,  in
\ngeneral,  be  stated  that payments made  in  settlement  of
\nrights under a trading contract are trading receipts and are
\nassessable  to revenue.\t But where a person who is  carrying
\non  business  is  prevented from doing\tso  by\tan  external
\nauthority  in exercise of a paramount power and\t is  awarded
\ncompensation  therefor,\t whether that receipt is  a  capital
\nreceipt or a revenue receipt will depend upon whether it  is
\ncompensation for injury inflicted on a capital asset or on a
\n(1) (1942) 25 Tax Cas. 33.\n<\/p>\n
(2) (1943) 26 Tax Cas. 1.\n<\/p>\n
132<\/span><\/p>\n
stock-in-trade.\t The decision in The Glenboig Union Fireclay
\nCo. Ltd. v. The Commissioners Of Inland Revenue (1)  applies
\nto this category of cases.  There, ,he assessee was carrying
\non  business in the manufacture of fire clay goods and\thad,
\nfor  the performance of that business, acquired a fire\tclay
\nfield  on lease.  The Caledonian Railway which\tpassed\tover
\nthe field prohibited the assessee from excavating the  field
\nwithin\t a,  certain  distance\tof  the\t rails,\t  and\tpaid
\ncompensation therefor in accordance with the provisions of a
\nstatute.  It was held by the House of Lords that this was  a
\ncapital\t receipt and was not taxable on the ground that\t the
\ncompensation was really the price paid ” for sterilising the
\nasset  from which otherwise profit might have been  obtained
\n“.  That  is say, the fire clay field was  a  capital  asset
\nwhich was to be utilised for the carrying on of the business
\nof  manufacturing fire clay goods and when the assessee\t was
\nprohibited  from  exploiting  the field, it  was  an  injury
\ninflicted  on  his  capital  asset.   Where,  however,\t the
\ncompensation is referable to injury inflicted on the  stock-
\nin-trade,   it\twould  be  a  revenue  receipt.\t  Vide\t The
\nCommissioners of Inland Revenue v. Newcastle Breweries\tLtd.
\n(2).   The principle of these decisions has  no\t application
\nwhere the compensation paid is in respect of rights  arising
\nunder  a trading contract.  A payment made in settlement  of
\nthat  contract\tis an adjustment of the\t rights\t under\tthat
\ncontract, and must be referred to the profits which could be
\nmade in the carrying out of that contract.\n<\/p>\n
In  the\t present case, the contract dated May 9,  1940,\t was
\nsimply an agreement to carry on business.  In settlement  of
\nthat  contract,\t Rs. 2,50,000 was paid\tto  the\t respondent.
\nThat was not a payment on account of any capital expenditure
\nincurred  by  him in the execution of  the  contract.\tThat
\nindeed was the point sought to be raised by the\t respondent,
\nbut  therein he has failed.  It is also to be noted that  at
\nno time was he prevented from carrying on business.   Clause
\n6 of the agreement dated May 9, 1940, contemplates that\t the
\nrespondent was to carry on generally the business
\n(1) (1922) 12 Tax Cas. 427.\n<\/p>\n
(2) (1927) 12 Tax Cas. 927.\n<\/p>\n
133<\/span><\/p>\n
of  supply  of\tlimestone even apart from his  work  in\t the
\nGangapur  quarry,  and the agreement dated August  2,  1941,
\nprovides  for  his supplying limestone for the\tfurnaces  at
\nKulti  for  a  period of 12 years and for  loading  iron  at
\nMonoharpore  for a like period.\t There was therefore  at  no
\ntime  any agreement which operated as a bar to the  carrying
\non of business by the respondent.\n<\/p>\n
On  a consideration of all the facts established, we are  of
\nopinion\t that the receipt of Rs. 2,50,000 by the  respondent
\nis a revenue receipt. and is chargeable to tax.
\nIn  the result, the appeal is allowed, the judgment  of\t the
\nHigh Court set aside and the order of the Tribunal restored.
\nThe   respondent  will\tpay  the  costs\t of  the   appellant
\nthroughout.\n<\/p>\n
\t\t\t\t\tAppeal allowed.<\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Commissioner Of Income-Tax, … vs Rai Bahadur Jairam Valji And … on 7 October, 1958 Equivalent citations: 1959 AIR 291, 1959 SCR Supl. (1) 110 Author: T V Aiyyar Bench: Aiyyar, T.L. Venkatarama PETITIONER: COMMISSIONER OF INCOME-TAX, NAGPUR Vs. RESPONDENT: RAI BAHADUR JAIRAM VALJI AND OTHERS DATE OF JUDGMENT: 07\/10\/1958 BENCH: […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-135759","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nCommissioner Of Income-Tax, ... vs Rai Bahadur Jairam Valji And ... on 7 October, 1958 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-rai-bahadur-jairam-valji-and-on-7-october-1958\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Commissioner Of Income-Tax, ... vs Rai Bahadur Jairam Valji And ... on 7 October, 1958 - 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