Case: The Commissioner of Income-tax, Punjab, Haryana, J. &amp; K. &amp; H.P Vs. Prabhu Dayal (dead) by his legal representatives

of carrying on their trade; they were not contracts for the disposal of their products or for the engagement of agents or other employees necessary for the conduct of their business; nor were they merely agreements as to how their trading profits when earned should be distributed as between the contracting parties. On the contrary, the cancelled agreements related to the whole structure of the appellants profit making apparatus. They regulated the appellants activities, defined what they might and what they might not do, and affected the whole conduct of their business. I have difficulty in seeing how money laid out to secure, or money received for the cancellation of, so fundamental an organisation of a traders activities can be regarded as an income disbursement or an income receipt. . . . In my opinion that asset, the congeries of rights which the appellants enjoyed under the agreements and which for a price they surrendered was a capital asset." 16. It is now well settled that a distinction has to be drawn between a payment made for past services or discharge of past liabilities and that made for compensation for termination of an income producing asset. The former does not lose its revenue nature but the latter being a payment for destruction of a capital asset, must be considered as capital receipt. 17. The distinction between a capital receipt and a revenue receipt came up for consideration before this Court in Senairam Dongarmal v. Commissioner of Income-tax Assam, 42 ITR 392 = (AIR 1961 SC 1579 ). The assessee therein owned tea estate consisting of tea gardens, factories and other buildings carried on a business of growing and manufacturing tea. The factory and other buildings on the estate were requisitioned for defence purpose by the military authorities. The assessee continued to be in possession of the tea gardens and tended them to preserve the plants but the manufacture of tea was completely stopped. The assessee was paid compensation for the year 1944-45 under the Defence of India rules calculated on the basis of the out-turn of tea that would have been manufactured by the assessee during that period. The question was whether the amounts of compensation were revenue receipts taxable in the hands of the assessee. This court held that the first consideration before holding a receipt to be profits or gains of business within S. 10 of the Income-tax Act was to see if there was a business at all of which it could be said to be income. The primary condition of the application of section 10 was that tax was payable by an assessee under the head "Profits and gains of a business" in respect of a business carried on by him Where an assessee did not carry on business at all the section could not be made applicable and any compensation for requisition of assets that he received could not bear the character of profits of a business. The Court further held that the amounts of compensation received by the assessee were not revenue receipts and did not comprise any element of income. It is true that in that case the Court did not consider whether the income in question could have been considered as income from other sources but the ratio of that decision is that the compensation paid being in respect of sterilisation of an income producing asset, the same should be considered as a capital receipt. 18. The only other decision we need make reference is the decision of this Court in Kettlewell Bullen and Co. Ltd. v. Commissioner of Income-tax, Calcutta 53 ITR 261 = (AIR 1965 SC 65 ). Therein this Court observed that it cannot be said as general rule that what is determinative of the nature of a receipt on the cancellation of a contract of agency or office is extinction or compulsory cessation of the agency or office. Where payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business or deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade though freed from the contract terminated, the receipt is revenue; where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessees income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt. These decisions lay down the tests to be applied in distinguishing a capital receipt from a revenue receipt. With the guidance thus afforded, let us now take a second look at the facts found for answering the question referred. The assessee, possibly, by some fortuitous circumstances discovered Kankar in some place in Jind State. This circumstances gave him an opportunity to bring about an agreement between the State of Jind and Shanti Prasad Jain and when Shanti Prasad Jain transferred his right to a new company, in the formation of which the assessee had a hand, he was promised certain yearly commission on the net profits earned by the company. None of these activities of the assessee can be considered as a business activity but yet he had acquire an income yielding asset as a result of his activities. But the compromise decree destroyed that asset and in its place he was given Rs. 70,000 as compensation. This payment was neither in respect of the services rendered by him in the past nor towards the accumulated commission due to him. It was paid as compensation to him because he gave up his right to get commission in future to which he was entitled under the agreement. It was a price paid for surrendering a valuable right which in our opinion was a capital asset. Therefore that receipt must be considered as a capital receipt.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]10. It was not the case of the Revenue that the assessee was engaged in the business of discovering Kankar or any other mineral. He appears to have found Kankar by mere chance. It is also not the case of the Revenue that the assessee was engaged in the business of bringing about agreements between parties. In fact, it is not the case of the Revenue that the assessee was engaged in any business. There is no evidence to show that he was a business man. His discovery of Kankar as well as his part in bringing about the agreement mentioned earlier were stray acts, possibly occasioned by fortuitous circumstances11. Business as understood in the income-tax law connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose - see the decision of this Court in Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax, 26 ITR 765   = (AIR 1955 SC 176  ). By this statement we do not mean to say that under no circumstance a single transaction cannot amount to a business transaction. But this is not one such. Herein we are dealing with the stray activity of a non-businessman. Hence it is difficult to agree with the Revenue in its contention that the agreement entered into by the assessee with the Dalmia Dadri Cement company should be considered as a business activity12. In the determination of the question whether a particular receipt is capital or an income, it is not possible to lay down any single test as infallible or any single criterion as decisive. The question must ultimately depend on the facts of the particular case and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. That, however, is not to say that the question is one of fact, for these question between capital and income, trading profit or no trading profit, are questions which, though they may depend to a very great extent on the particular facts of each case, do involve conclusions of law to be drawn from those facts16. It is now well settled that a distinction has to be drawn between a payment made for past services or discharge of past liabilities and that made for compensation for termination of an income producing asset. The former does not lose its revenue nature but the latter being a payment for destruction of a capital asset, must be considered as capital receiptIt is true that in that case the Court did not consider whether the income in question could have been considered as income from other sources but the ratio of that decision is that the compensation paid being in respect of sterilisation of an income producing asset, the same should be considered as a capital receiptWhere payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business or deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade though freed from the contract terminated, the receipt is revenue; where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessees income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt. These decisions lay down the tests to be applied in distinguishing a capital receipt from a revenue receipt. With the guidance thus afforded, let us now take a second look at the facts found for answering the question referred. The assessee, possibly, by some fortuitous circumstances discovered Kankar in some place in Jind State. This circumstances gave him an opportunity to bring about an agreement between the State of Jind and Shanti Prasad Jain and when Shanti Prasad Jain transferred his right to a new company, in the formation of which the assessee had a hand, he was promised certain yearly commission on the net profits earned by the company. None of these activities of the assessee can be considered as a business activity but yet he had acquire an income yielding asset as a result of his activities. But the compromise decree destroyed that asset and in its place he was given Rs. 70,000 as compensation. This payment was neither in respect of the services rendered by him in the past nor towards the accumulated commission due to him. It was paid as compensation to him because he gave up his right to get commission in future to which he was entitled under the agreement. It was a price paid for surrendering a valuable right which in our opinion was a capital asset. Therefore that receipt must be considered as a capital receipt.