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

3. We shall now refer to the material facts found by they Income-tax Appellate Tribunal as can be gathered from the case stated. The assessee was assessed as an individual. The relevant assessment year is 1955-56, the accounting period for the same ended on Asad Sudi 1, S. Y. 2011.        4. The assessee was instrumental in discovering the existence of Kankar deposits in Jind State. He also brought about an agreement between one Shanti Prasad Jain and the erstwhile state of Jind, now a part of Punjab State for the acquisition of sole and exclusive monopoly rights of manufacturing cement in the said Jind state. That agreement was entered into on April 2, 1938. The same was to remain operative for a period of 25 years, which term was liable to be extended to 100 years all the option of the said Shanti Prasad Jain or his nominee. Shanti P)arsad Jain transferred his rights under that agreement to a public limited company by name M/s. Dalmia Dadri Cement Ltd. on May 4, 1938. The assessee was one of the promoters of the said company.        5. For the services rendered by the assessee, the Dalmia Dadri Cement Co. by an agreement dated May 27, 1938 agreed, to pay him a commission of 1% on the yearly net profits earned by the company from the said cement factory. That agreement was to subsist so long as the original agreement dated April 2, 1938 subsisted.        6. The agreement dated May 27, 1938 between the assessee and the Dalmia Dadri Cement Co. was acted upon till 1950 and thereafter the company did not pay the commission agreed to be paid. Consequently the assessee filed a suit against the company claiming the commission due to him. The said suit ended in a compromise and the compromise was made a decree of Court. Under that decree the assessee was to be paid Rs. 15,000/- as commission for the years 1951 and 1952  Rs. 15,000/- as commission for the year 1953. Further he was to be paid Rs. 70,000/- by way of compensation for the termination of the agreement between him and the company as from January. 1,1954. That compensation was received by the assessee on June 11, 1954.        7. The assessees claim that the sum of Rs. 70,000/- was capital receipt and hence not taxable in his hands was rejected by the Income-tax Officer. That officer held that the said sum of Rs. 70,000/- was a remuneration paid once and for all for the services rendered by the assessee and as such taxable in his hands. This decision was affirmed by the Appellate Assistant Commissioner, who held that the amount of Rs. 70,000/- was a lump sum compensation received for the services rendered, hence the same was a receipt in the ordinary course of assessees business and consequently it was taxable as a revenue receipt.        8. Aggrieved by that order the assessee took up the matter in appeal to the Tribunal. The Tribunal held that the company by paying the said compensation of Rs. 70,000/- terminated the contract which enabled the assessee to receive from the said company a commission of one per cent of the net profits and as scuh the said receipt by the assessee was capital not revenue.        9. Thereafter at the instance of the Commissioner the question set out earlier was referred to the High Court for its opinion which, as mentioned earlier, was answered in favour of the assessee.

Court's reasoning:
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.