Patna High Court
Additional Commissioner Of Income-Tax vs Poddar Auto Dealers on 19 August, 1974
Equivalent citations: [1975]101ITR14(PATNA)
Author: N.L. Untwalia
Bench: N.L. Untwalia
JUDGMENT Untwalia, C.J.
1. The Income-tax Appellate Tribunal, Patna Bench, has made this reference under Section 256(1) of the Income-tax Act, 1961, on the following question of law :
"Whether, on the facts and in this circumstances of the case, the receipt of Rs. 50,000 by the assessee was a capital receipt ?"
2. M/s. Poddar Auto Dealers, the assessee in the case, was a registered firm carrying on business as an agent of M/s. Hindustan Motors Ltd. besides the business of running a motor garage and undertaking repair works. The assessee was appointed an agent of M/s. Hindustan Motors Ltd. in the year 1955. By an agreement dated the 22nd November, 1960, which was effective from the 1st November, 1960, entered into between the assessee and M/s. Poddar Auto Dealers Pvt. Ltd., the latter took over the business of the assessee and agreed to pay 31% of its profits subject to a minimum of Rs. 25,000 per annum. Subsequently, by another agreement dated the 16th March, 1962, the assessae transferred its rights under the agreement dated November 22, 1960, with effect from the 1st January, 1962, for a consideration of Rs. 50,000 to the Orient Industries Pvt. Ltd., Calcutta. Out of the sum of Rs. 50,000, Orient Industries had paid Rs. 25,000 on March 12, 1962, Rs. 10,000 on March 23, 1962, Rs. 5,000 on May 9, 1962, and Rs. 10,000 on June 21, 1962. The assessment year in question is 1963-64, corresponding to the accounting year ending on March 31, 1963. The Income-tax Officer held the sum of Rs. 50,000 to be a revenue receipt of the assessee and taxed it as its income. The Appellate Assistant Commissioner maintained the addition in appeal. The assessee took up the matter further in appeal before the Tribunal, and it allowed the appeal and deleted the sum of Rs. 50,000 from the income of the assessee, holding that it was a capital receipt and not a revenue receipt. On being asked to state a case, the Tribunal has done so on the question of law afore-mentioned.
3. The Tribunal in its appellate order followed the principles of law laid down by the Supreme Court in Commissioner of Income-tax v. Vazir Sultan & Sons, [1959] 36 ITR 175 (SC) and distinguished the decision of that court in M. R. Goyal v. Commissioner of Income-tax, [1969] 73 ITR 698 (SC). This case seems to be squarely covered by the principle of law laid down by the Supreme Court in the earlier case as also in many others. It is clearly outside the ambit of the type of cases dealt with by the Supreme Court in M. R. Goyal's case and similar other cases. Strictly speaking, therefore, one could say that no question of law was to be referred to this court for its opinion as the opinion on the point seemed to be well settled and it was a question of only application of the principles to the particular facts of a case. But, as is customary, in such cases of expenditure, whether a particular item of expenditure is a capital expenditure or a revenue expenditure, disputes, and sometimes on the parties' taking adversely opposite stand, do crop up between the revenue and the taxpayers, and reference has got to be made to find out on what side of the line a particular case falls. In the case of Vazir Sultan & Sons Bhagwati J. has quoted an interesting passage at page 179 from the speech of Lord Macmillan in Van den Berghs Ltd. v. Clark, [1935] 3 ITR (Eng. Cas.) 17 (HL) to show that the question whether a particular receipt is a revenue receipt or a, capital receipt or a particular expenditure is a capital expenditure or a revenue expenditure is beset with considerable difficulty and one finds the revenue and the assessee ranged on different sides taking up alternate contentions as it suits their purposes. I am also tempted to quote that passage in this judgment, and it reads as follows:
" 'The reported cases fall into two categories, those in which the subject is found claiming that an item of receipt ought not to be included in computing his profits and those in which the subject is found claiming that an item of disbursement ought to be included among the admissible deductions in computing his profits. In the former case the Crown is found maintaining that the item is an item of income ; in the latter, that it is a capital asset. Consequently, the argumentative position alternates according as it is an item of receipt or an item of disbursement that is in question, and the taxpayer and the Crown are found alternately arguing for the restriction or the expansion of the conception of income'."
4. It would be noticed from the order of the Income-tax Officer that the assessee parted with its agency business as such of directly dealing with the cars and other vehicles of Hindustan Motors Ltd, when it entered into an agreement on November 22, 1960, with Poddar Auto Dealers Pvt. Ltd. As I shall presently show with reference to some passages from the judgment of the Supreme Court in the case of Vazir Sultan & Sons, wherein reference has been made to the decision of the Privy Council in Commissioner of Income-tax v. Shaw Wallace and Company, [1932] 2 Comp Cas 276 (PC) and to the decisions of the Supreme Court in Commissioner of Income-tax v. South India Pictures Ltd., [1956] 29 ITR 910 (SC) and Commissioner of Income-tax v. Rai Bahadur Jairam Valji, [1959] 35 ITR 148 (SC), that undoubtedly the agency business of the assessee obtained in the year 1955 was a capital asset and a fixed capital and not a trading asset in the shape of circulating capital or stock-in-trade. When the assessee exploited the agency agreement and the agency business by parting with some of its bundles of rights in favour of Poddar Auto Dealers Pvt. Ltd., then in a sense it was letting out commercial assets, and the receipts which it got from the said private company, either in the shape of 31% of its profits or a minimum guarantee of Rs, 25,000, was undoubtedly its income--vide the decision of the Supreme Court in Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd., [1951] 20 ITR 451 (SC) There are numerous other cases on the point; it is not necessary to refer to any other. But then when it completely parted with its right under the agency agreement, as modified and substituted by its right under the agreement dated November 22, 1960, in favour of Orient Industries Pvt. Ltd., in substance and in effect, it completely parted with its profit-making apparatus and got the sum of Rs. 50,000 by way of capital receipt and not by way of compensation in lieu of the profit which it was making under the agreement of 1960. The Income-tax Officer thought that since capital accounts of the partners had been credited in proportion to their shares on account of the receipt of Rs. 50,000 from Orient Industries, it must be taken to be the profit of the assessee. It was not so. Ordinarily and generally, the share of the partners in the capital assets of the partnership firm on its disposal would be in proportion to their shares in the profits or losses of the firm. That fact by itself was too weak to lead to the conclusion at which the Income-tax Officer arrived. The Appellate Assistant Commissioner mainly dealt with the question as to whether the whole of the amount of Rs. 50,000 could be treated as income of the assessee during the accounting year in question, as quite a big chunk totalling Rs. 25,000 had been received by the assessee before the starting of the accounting year, namely, before April 1, 1962. He held that on the facts of this case the whole of the amount of Rs. 50,000 was rightly taxed in the assessment year 1963-64. In view of the answers of the Tribunal in favour of the assessee on the main question in the case, it did not think it necessary, and rightly so, to embark upon a discussion of the other question as to whether the whole of the amount could be treated as income in relation to the assessment year in question.
5. In the case of Shaw Wallace and Company, the Judicial Committee of the Privy Council had attempted to give a definition of "income" which does not seem to have been accepted to the fullest extent by the Board in later cases as also by the Supreme Court, as noticed by the latter in the case of Vazir Sultan & Sons, but on the particular point with which we are concerned in this case, that case was followed. And so were followed, as I have already stated, the other two decisions of the Supreme Court in the cases of South India Pictures Ltd. and Rai Bahadur Jairam Valji. I cannot do better than taking the gist of those cases, as mentioned by Bhagwati J., who delivered the majority view of the court in the case of Vazir Sultan & Sons. I am doing so for the purpose of pointing out that the facts of the instant case, on application of the said principles, will unmistakably lead to the conclusion that the sum of Rs. 50,000 is a capital receipt and not taxable as a revenue receipt. In the case of South India Pictures Ltd., it was held by the majority, as noted at pages 181-182 of Vazir Sultan & Sons' case:
"(1) The sum paid to the assessee was not truly compensation for not carrying on its business but was a sum paid in the ordinary course of business to adjust the relation between the assessee and the producers of the films;
(2) The agreements which were cancelled were by no means agreements on which the whole trade of the assessee had for all practical purposes been built and the payment received by the assessee was not for the loss of such a fundamental asset as was the ship managership of the assessee in Barr Crombie & Co. Ltd. v. Commissioners of Inland Revenue, [1947] 15 ITR (Supp) 56; and (3) One could not say that the cancelled agreements constituted the framework or whole structure of the assessee's profit-making apparatus in the same sense as the agreement between the two margarine dealers in Van den Berghs Ltd. v. Clark was."
6. Thereafter, the criteria laid down by the majority judgment in Commissioner of Income-tax v. South India Pictures Ltd. for determining whether the particular payment received by the assessee was income or was to be regarded as a capital receipt were summed up thus at page 182:
"(i) whether the agreements in question were entered into by the assessee in the course of carrying on its business of distribution of films, and
(ii) whether the termination of the agreements in question could be said to have been brought arbout in the ordinary course of business....."
7. A similar view which was taken in the case of Rai Bahadur Jairam Valji was also noticed, in which the Supreme Court, on the facts and circumstances of that case, had come to the conclusion that the contract in question was entered into by the assessee in the ordinary course of business and was one entered into in the carrying on of that business. The arrangement ultimately arrived at between the parties in regard to the payment of a sum of Rs. 2,50,000 was accordingly treated as an adjustment made in the ordinary course of business and the receipt was, therefore, held to be an amount paid as solatium for the cancellation of a contract entered into by a person in the ordinary course of business. The facts of the case of Vazir Sultan & Sons, with reference to the variation of the agreement between the same parties, were clearly different. They brought about exclusion of the extended area of operation from the busi- ness of the agent by a subsequent agreement entered into in 1950. The payment of a certain amount was held to be a payment for truncating the capital asset of the assessee. The facts of the case of M. R. Goyal are very much near to that of the case of Rai Bahadur Jairam Valji. Even in the earlier case of Rai Bahadur Jairam Valji, the Supreme Court had emphasised the distinction between the agency agreement and the contract made, in the usual course of business. A passage in that regard is quoted at page 183, which reads as follows :
" 'In an agency contract, the actual business consists in the dealings between the principal and his customers, and the work of the agent is only to bring about that business. In other words, what he does is not the business itself but something which is intimately and directly linked up with it. It is, therefore, possible to view the agency as the apparatus which leads to business rather than as the business itself on the analogy of the agreements in Van den Berghs Ltd. v. Clark. Considered in this light, the agency right can be held to be of the nature of a capital asset invested in business. But this cannot be said of a contract entered into in the ordinary course of business. Such a contract is part of the business itself, not anything outside it as is the agency, and any receipt on account of such a contract can only be a trading receipt'."
8. The Supreme Court considered whether the agency in the case of Vazir Sultan & Sons was a capital asset of the assessee's business and, after relying upon the decision of Viscount Haldane in John Smith & Sons v. Moore, [1921] 12 TC 266 (HL), it was held at page 187 that the agency agreement was a capital asset. I have no difficulty in holding in this case that the agency agreement entered into by the assessee with Hindustan Motors Ltd. in the year 1955 was a capital asset; the whole of it was not destroyed, lost or parted when the assessee entered into an agreement with Poddar Auto Dealers Pvt. Ltd. in the year 1960. As stated already, it was merely an exploitation of the commercial assets in a different form. Till then, the recurring amount which the assessee was getting from Poddar Auto Dealers Pvt. Ltd. was income. But by the arrangement arrived at on the basis of the second agreement dated March 16, 1962, the whole of the profit-making apparatus of the assessee was parted with and lost. The question has presented some difficulty when the assessee gets some amount of compensation on termination of agency agreement from the principal itself. Sometimes, in a given case, such compensation, and especially with regard to the managing agency business, has been treated as revenue receipts. But, here, in this case, I venture to think that the type of agreement which the assessee entered into with Orient Industries Pvt. Ltd., even if it would have entered into with Poddar Auto Dealers Pvt. Ltd. on payment of Rs. 50,000, would not have clothed the receipt with the character of a revenue receipt; still it would have been a capital receipt. This is clearly so, without presenting any difficulty, when the agreement was with another company. After having parted with all its rights of profit-making apparatus, namely, the agreement of the year 1960, by a subsequent agreement executed in the year 1962, the assessee was left with no business activity in connection with the agency agreement with Hindustan Motors Ltd. The amount, therefore, received by it was not in lieu of compounded profit but surely in lieu of loss of profit-making apparatus.
9. I may with advantage here refer to two more cases, one of the English court and the other of the Supreme Court of India, before I distinguish the decision of the Supreme Court in the case of M. R. Goyal. It is always to be remembered and stress on the distinction has been laid in several decisions that what is received by way of price or compensation on disposing of circulating capital or stock-in-trade, namely, the trading asset, is ordinarily and generally revenue receipt. What, however, comes in the hands of the assessee on disposal of the capital assets referable to fixed capital is generally a capital receipt. What is a capital asset in the hands of one may be a trading asset in the hands of another. An assessee doing business in merchandise owning a piece of land on which stands his business premises will be holding it as a capital asset, while a dealer in real estate in England or immovable properties in India will be holding such a piece of land as a trading asset or as a stock-in-trade. In London Investment & Mortgage Co. Ltd. v. Worthington (H. M. Inspector of Taxes), [1958] 38 TC 86; [1959] 37 ITR 56 (HL), a company carried on the trade of property dealing. During the war some of the properties of the company were damaged or destroyed by enemy action ; the company received value payments in respect of those properties under the provisions of the War Damage Act, 1943. The company was assessed to income-tax, under Schedule D, for the relevant periods. The stand taken on its behalf that it was not taxable as a revenue receipt was rejected. The Court of Appeal reversed the judgment of Upjohn J. and the House of Lords took the same view. Lord Evershed M. R. said at page 104;
"It seems to me that the effect of the two cases I have mentioned supports the view which has been fundamental to the Crown's argument, namely, that where a trader is dealing in any kind of commodity and where for any reason part of that stock-in-trade, part of the commodity, disappears or is compulsorily taken or is lost, and is replaced by a sum of cash by way of price or compensation, then, prima facie, that sum of cash will be, and should be, taken into the account of profits or gains arising or accruing to the trader from his trade."
10. Romer L. J., also a member of the Court of Appeal, said at page 111 :
"Where a trader sells or disposes of part of his circulating capital it is a well-settled principle that the proceeds, for tax purposes, are treated as a trading receipt, and it is not confined to cases where the circulating capital, be it timber or other property, is actually sold,....."
11. I may just refer to the speech of Viscount Simonds delivered in the House of Lords at page 114 :
"My Lords, I have no doubt that the Commissioners were right in saying that the payments were prima facie trading receipts. It was the business of the company to dispose of its stock-in-trade and to receive a cash equivalent or other compensation in return and for the purpose of income-tax law such cases as Green v. J. Gliksten & Son Ltd., [1929] 14 TC 364 (HL) and Commissioners of Inland Revenue v. Newcastle Breweries Ltd., [1927] 12 TC 927 (HL) show that it is irrelevant whether the disposition is by sale, voluntary or compulsory, or by an involuntary loss attended by subsequent compensation. The company had one asset, lost it, and acquired another. I think it is incontrovertible that the asset it acquired was acquired in the course of its business, and not the less so because the war damage scheme was universal and compulsory and applied equally to all property owners whether or not they carried on the business of dealers in property. I do not deal at greater length with this part of the case because I am in complete agreement with the judgment of the Court of Appeal."
12. One of the cases, viz., Commissioners of Inland Revenue v. Newcastle Breweries Ltd. is also referred to in the judgment of the Supreme Court in the case of Vazir Sultan & Sons. Similar was the decision of the Supreme Court in Vr. Kr. S. Firm v. Commissioner of Income-tax, [1966] 60 ITR 425 (SC). War damage compensation received by the assessee in replacement of his trading assets was treated in its entirety as profits liable to tax.
13. In the case of M. R. Goyal, [1969] 73 ITR 698, 701 (SC), it would be noticed that the assessee had secured a contract for purchase of parachutes from the Tata Aircraft Ltd. An advance of Rs. 10,00,000 had to be deposited. He entered into an arrangement with three financiers, but subsequently, he walked out on receipt of a sum of Rs, 1,87,000 from one of the three financiers. A question arose whether the said sum was a capital receipt or a revenue receipt. Of course, one of the questions before the Tribunal was that, even if the said sum could be treated as a revenue receipt, was it on account of any business carried on by the assessee ? The answer by the Tribunal was that it was an adventure in the nature of trade. The Tribunal had found that it was the assessee, namely, the appellant before the Supreme Court, who had entered into a contract with the Tata Aircraft Ltd. for the purchase of parachutes for a fixed sum. He intended to do and did a venture in the nature of trade. He did, as many influential parties in the country do, that instead of doing the business himself, he managed to secure contracts and pass on the actual execution of the business to others in return for a fixed sum of money. In such a situation, when the so-called partnership arrangement entered into by the assessee with the three financiers was given a go-by later on by the assessee, the Supreme Court said:
"When he agreed to accept a sum of Rs, 1,87,000 from the aforesaid persons as consideration for transferring the benefits of the contract the appellant can well be said to have concluded a deal which represented the profit which he anticipated by acquiring the parachutes."
14. Applying, therefore, the test laid down by the Supreme Court in various decisions, it would be clearly discernible that here in this case the assessee was not parting with the benefits of a trading contract, rather it parted with its profit-making apparatus, namely, the agreement of the year 1960; by utilising that apparatus it was earning profit from the agency business, and the whole of it was lost when he decided to retire (sic) the receipt of Rs. 50,000. It was a sum paid to the assessee, truly a compensation for parting with its business, and the agreement dated March 16, 1962, entered into with Orient Industries Pvt. Ltd. deprived the assessee of the benefit of its agreement entered into on November 22, 1960, with Poddar Auto Dealers Pvt. Ltd. which constituted the framework or whole structure of the assessee's profit-making apparatus.
15. For the reasons stated above, I answer the question of law referred in the affirmative, in favour of the assessee and against the revenue. I, accordingly, hold that on the facts and in the circumstances of the case the receipt of Rs. 50,000 by the assessee was a capital receipt. The assessee must get the cost of this reference. Hearing fee is assessed at Rs. 100 only.
S.K. Jha, J.
16. I agree.