Vildirect: IncomeTax-caselaws-1977-VIL-294-CAL-DT

1977-VIL-294-CAL-DT

Equivalent Citation: [1978] 113 ITR 37

CALCUTTA HIGH COURT

Date: 03.08.1977

COMMISSIONER OF INCOME-TAX, WEST BENGAL

NATIONAL INSURANCE CO. LIMITED

BENCH

Judge(s) : S. C. DEB., C. K. BANERJEE

JUDGMENT

DEB J.--This reference under section 66(1) of the Indian Income-tax Act, 1922, relates to the assessment year 1957-58 for which the relevant previous year ended on the 31st December, 1956.

The assessee is an insurance company. On January 19, 1956, the management of its life insurance business vested in the Central Government under the provisions of the Life Insurance (Emergency Provisions) Ordinance, 1956 (hereinafter referred to as the "Ordinance"). From the 19th January, 1956, to 31st August, 1956, a Custodian was in the management of the said life insurance business under the provisions of the Ordinance and the corresponding section of the Life Insurance (Emergency Provisions) Act, 1956 (hereinafter stated as "the Act"). The assessee was paid under section 7 of the Act a compensation of Rs. 81,069 for the deprivation of the management of the said life insurance business for the aforesaid period when the Custodian was in the management of the said business. Thereafter, the life insurance business in India was nationalised by the Life Insurance Corporation Act, 1956, and under section 7 of that Act the assets and liabilities of the insurers appertaining to the life insurance business stood transferred to and vested in the Life Insurance Corporation of India with effect from September 1, 1956.

The Income-tax Officer brought the aforesaid amount to tax as a revenue receipt by rejecting the assessee's contention that it was a capital receipt. In view of the decision of the Supreme Court in the case of Dwarkadas Shrinivas v. Sholapur Spinning & Weaving Co. Ltd. [1954] 24 Comp Cas 103; 1954 SCR 674; AIR 1954 SC 119, the Appellate Assistant Commissioner held that the right of the assessee to manage its life insurance business was a property and that the compensation paid for the deprivation of the said property was in the nature of a capital receipt in the hands of the assessee. Accordingly, he allowed the appeal filed by the assessee.

The Tribunal dismissed the appeal filed by the department and at the instance of the Commissioner referred the following question of law for the opinion of this court:

In view of the real controversy between the parties and to pinpoint the issue, we reframe the question as suggested by the learned counsel for both the parties, as follows:

"Whether, on the facts and in the circumstances of the case and on a proper construction of the relevant provisions of the Life Insurance (Emergency Provisions) Act, 1956, the Tribunal was right in holding that Rs. 81,069 was in the nature of a capital receipt in the hands of the assessee and was, therefore, not assessable as a revenue receipt under section 10(1) of the Indian Income-tax Act, 1922 ?"

Save for slight changes, the provisions of the aforesaid Ordinance and the Act are substantially the same. They were passed for taking over, in the public interest, of the management of the life insurance business pending nationalisation thereof. Since the management of the life insurance business of the assessee vested in the Central Government and it was taken over by the Custodian as aforesaid, the provisions of sub-sections (3), (5) and (6) of section 3 of the Act, as rightly admitted by the learned counsel for both the parties, had no application respecting the said life insurance business in view of sub-section (3) of section 4 of the Act.

In the state of the law as aforesaid and on the facts and circumstances of the case as stated by the Tribunal as aforesaid, Mr. B. L. Pal, learned counsel for the revenue, argues before us as follows:

The right of the assessee to manage its life insurance business cannot be said to be an integral part of its profit-making apparatus and it was not even its asset and, therefore, it cannot be held that the compensation paid to the assessee under section 7 of the Act was in respect of acquisition of any asset belonging to the assessee; foregoing submissions are borne out by the law, namely, that the assets pertaining to the life insurance business have vested in the Life Insurance Corporation under the provisions of the Life Insurance Corporation Act, 1956, which provides for payment of compensation for deprivation of assets; there is a distinction between the deprivation of a property and its user and the compensation payable for deprivation of a capital asset is a capital receipt, whereas the compensation payable for deprivation of its user is a revenue receipt; the assessee remained the owner of its life insurance business which was carried on by the Custodian in terms of the Act under certain restrictions; and for all these reasons it should be held that this receipt was not a capital receipt but a revenue receipt and as such it was taxable in the hands of the assessee.

Though the case of Lakshmi Insurance Co. (P.) Ltd. v. Commissioner of Income-tax [1971] 80 ITR 575 (Delhi) is directly on the point, Mr. Pal does not accept the correctness of this decision. Before expressing any opinion on this and his other contentions noted earlier, we would like to deal with the cases cited at the Bar.

The agreements in the case of Van den Berghs Ltd. v. Clark [1935] 19 TC 390; 3 ITR (Eng Cas) 17 (HL) constituted the framework of the whole structure of the profit-making apparatus of the assessee and the compensation paid to the assessee for cancellation of those agreements was held to be a capital receipt in the hands of the assessee. On the other hand, the compensation received for breach of a contract was held to be a revenue receipt in the hands of the assessee in the case of Burma Steamship Co. Ltd. v. Inland Revenue Commissioners [1930] 16 TC 67 (C Sess).

In the case of London & Thames Haven Oil Wharves Ltd v. Attwooll (H. M. Inspector of Taxes) [1966] 43 TC 49; [1968] 70 ITR 460 (CA), the compensation received by the assessee for loss of earning from a jetty which was damaged by a ship was held to be a revenue receipt. It has been held in the case of Raja's Commercial College v. Gian Singh & Co. Ltd. [1976] 3 WLR 58; [1976] 2 All ER 801 (PC) that the damages payable by a trespasser to the owner of a building were taxable in the hands of the owner as revenue receipts.

In the case of Glenboig Union Fireclay Co. Ltd. v. Commissioners of Inland Revenue [1922] 12 TC 427 (HL), the compensation paid to the assessee for preventing the assessee from exploiting a fireclay field was held to be a capital receipt in the hands of the assessee inasmuch as the fireclay field was a capital asset of the assessee and the compensation was paid for sterilization of the said asset.

The relevant facts in the case of Commissioner of Income-tax v. Jairam Valji [1959] 35 ITR 148 (SC) may now be briefly stated. In the ordinary course of business the assessee and a company entered into an agreement in 1941 as and by way of mere adjustment of the rights of the assessee under an earlier agreement of 1940. No profit-making apparatus was set up by the agreement of 1941 which contained a term to the effect that the company should pay Rs. 2.5 lakhs to the assessee "as solatium besides the monthly instalment of Rs. 4,000", remaining unpaid under the contract of 1940. It may be noted here that there was no agreement between the assessee and the company at any time preventing the assessee from carrying on with its business. Now, in those circumstances, it was held by the Supreme Court that Rs. 2.5 lakhs received by the assessee under the agreement of 1941 was a revenue and not a capital receipt and was chargeable to tax.

The compensation received by the assessee in respect of a cancelled agency agreement in the case of Commissioner of Income-tax v. Vazir Sultan & Sons [1959] 36 ITR 175 (SC) was held to be a capital receipt because the cancelled agreement formed part of the fixed and capital asset of the assessee's business.

In the foregoing case the Supreme Court says that to determine whether the compensation paid to an assessee for cancellation of an agreement is a capital receipt or revenue receipt, the first question to be considered is whether the agreement in question was a capital asset of the assessee's business and constituted his profit-making apparatus and was in the nature of a fixed capital or it was a trading asset or circulating capital or stock-in-trade of his business. If it was the former, compensation received would be a capital receipt, whereas, if the agreement was entered into by the assessee in the ordinary course of his business and for the purpose of carrying out that business, it would fall into the latter category and the compensation received would be a revenue receipt.

The managing agency agreement in the case of Kettlewell Bullen & Co. Ltd. v. Commissioner of Income-tax [1964] 53 ITR 261 (SC) formed part of the capital asset of the assessee and, therefore, it was held that the compensation received by the assessee for its cancellation was a capital receipt and was not chargeable to tax as a revenue receipt.

It was held in the case of Karam Chand Thapar & Bros. (P.) Ltd. v. Commissioner of Income-tax [1971] 80 ITR 167 (SC), that the compensation received by the assessee for cancellation of one of its managing agency agreements was a capital receipt, by the Supreme Court, by following its earlier decision in the case of Kettlewell Bullen & Co. Ltd. [1964] 53 ITR 261 (SC). The Supreme Court further held that the compensation received for loss of office or agency should ordinarily be regarded as a capital receipt but this rule is subject to an exception, namely, that the payment received even for termination of an agency agreement would be a revenue receipt and not a capital receipt in the case where the agency was one of many which the assessee held and its termination did not impair the profit-making structure of the assessee but was within the framework of the business, it being a necessary incident of the business that the existing agencies may be determined and fresh agencies may be taken.

The compensation received in the case of Commissioner of Income-tax v. Manna Ramji & Co. [1972] 86 ITR 29 (SC) was for a loss of earning of the business and, therefore, it was held by the Supreme Court that it was a revenue receipt and not a capital receipt in the hands of the assessee.

The aforesaid cases cited at the Bar were decided on different facts and they do not in terms apply to the instant case before us as rightly admitted by the learned counsel for both the parties. But, at the same time, we must not overlook the principles laid down in the aforesaid cases by the high authorities.

It may now be noted here that the question as to whether the compensation paid under section 7 of the instant Act before us was a capital or a revenue receipt was not in issue in the case of Commissioner of Income-tax v. United India Life Assurance Co. Ltd. [1966] 62 ITR 610 (Mad) and no opinion has been expressed in it in this behalf.

On the other hand, the case of Lakshmi Insurance Co. (P.) Ltd. [1971] 80 ITR 575 (Delhi), as already stated, is directly on the point. In this case, the assessee was paid compensation under section 7 of this Act for the deprivation of the management of its life insurance business and the question was whether the said compensation received by the assessee was a capital or a revenue receipt and assessable to tax.

And in view of the decision of the Supreme Court in the case of Dwarkadas Shrinivas [1954] 24 Comp Cas 103; [1954] SCR 674; AIR 1954 SC 119, it was held by the Delhi High Court that the right to manage its life insurance business was a property of the assessee and it formed part of its capital assets as it constituted a part of its profit-making apparatus. Accordingly, it was held that the compensation received by the assessee under section 7 of the Act was for the deprivation of a part of its capital asset and as such it was a capital receipt and was not taxable as a revenue receipt or income in the hands of the assessee.

Their Lordships of the Delhi High Court also opined that the mere fact that the compensation paid to the assessee was measured by the past profits did not make the compensation paid income of the assessee as a result of business done by it. To us it appears that no exception can be taken to the aforesaid opinion of their Lordships of the Delhi High Court, for their Lordships of the Supreme Court in the case of Kettlewell Bullen & Co. Ltd. [1964] 53 ITR 261 (SC), at page 274 of the report, quoted with approval the observation of Lord Macmillan, in the case of Van den Berghs Ltd. [1935] 19 TC 390; 3 ITR (Eng Cas) 17 (HL) to the effect that "even if a payment is measured by annual receipts, it is not necessarily itself an item of income".

Now, at this stage, we would like to dispose of a subsidiary argument of Mr. Pal which has not been noted earlier. It is based on section 4 of the Finance Act, 1973, by which sub-clause (d) in clause (ii) has been inserted in section 28 of the Income-tax Act, 1961, in the following terms:

"In section 28 of the Income-tax Act, in clause (ii), after sub-clause (c) the following sub-clause shall be inserted, and shall be deemed to have been inserted, with effect from the 1st day of April, 1972, namely:--

' (d) any person, for or in connection with the vesting in the Government, or in any corporation owned or controlled by the Government, under any law for the time being in force, of the management of any property or business ' ".

Mr. Pal argues that the aforesaid provision of law supports his contention, namely, that the compensation received by the assessee under section 7 of the Act was a revenue receipt and was taxable in the hands of the assessee as a revenue receipt. In this behalf, he also places before us the notes on the relevant clauses of the Bill introduced in Parliament. It may now be noted here that this provision of law was inserted after the judgment in the case of Lakshmi Insurance Co. [1971] 80 1TR 575 (Delhi) was delivered by the Delhi High Court.

It is beyond dispute that Parliament can make and unmake any fiscal law provided it falls within its legislative competency. It can also convert a capital receipt into a revenue receipt and vice versa by an appropriate legislation for the purpose of income-tax with prospective or retrospective operation. The aforesaid amendment of section 28 of the Income-tax Act, 1961, does not apply to the assessment year with which we are concerned in this reference, nor does it affect the aforesaid decision of the Delhi High Court. We must not also deduce any principle from the aforesaid amendment and apply it to the instant case before us which must be determined on the principles which stood prior to the aforesaid amendment of section 28 of the Income-tax Act, 1961. Therefore, merely because the law has been amended, it cannot be said that it supports the aforesaid argument of Mr. Pal.

Now, as to his other contentions, in view of the decision of the Supreme Court in the case of Dwarkadas Shrinivas [1954] 24 Comp Cas 103; 1954 SCR 674; AIR 1954 SC 119, it must be held that the right of the assessee to manage its life insurance business was its personal property and that the assessee was deprived of this particular property by the paramount act of the legislature. It is also a settled law that a property is a bundle of rights which the owner can lawfully exercise to the exclusion of all others. He is entitled to use and enjoy it as he pleases provided he does not infringe any law of the State.

The property is either corporeal or incorporeal. The right to manage one's own business, in our opinion, is an incorporeal property. The argument that in view of the provisions of the Life Insurance Corporation Act, 1956, this property is not an asset is not acceptable to us.

Briefly speaking, under section 2(4A) of the Indian Income-tax Act, 1922, capital asset means property of any kind held by an assessee except any stock-in-trade, consumable stores or raw materials held for the purpose of his business.

The right to manage a business is not a consumable store or a raw material. The assessee did not carry on any business of managing companies and, that apart, it cannot be said that the right to manage its own life insurance business was the stock-in-trade of the assessee. It was also not in the nature of a circulating capital of the business of the assessee.

The assessee is a company and it carried on the business of life insurance. It is settled law that the management of every company is vested in its board of directors. The companies held their properties and assets through the board of directors and through the board of directors the companies are in possession of their properties and assets. The business and the trading activities of the companies are regulated by the board of directors and they are carried on by the companies through their board. The management or the administration of the business is directly and inextricably linked up with the business itself and it is also an essential and basic part of the whole profit making apparatus or structure of the companies.

In our opinion, the right of the assessee to manage its life insurance business was not only a property but was also an asset which was in the nature of a fixed asset, because fixed assets are those assets which are ordinarily held for the purposes of earning revenue and not with a view to re-sell them at a profit in the ordinary course of business. Further, it was not in the nature of a trading asset, circulating capital, stock-in-trade, consumable store or raw material held by the assessee for the purposes of its business.

This compensation paid under section 7 of the Act to the assessee was not paid for any business or trading transaction in the commercial or any sense between the assessee and the Central Government. The assessee was permanently deprived of its right to manage its life insurance business by the Central Government in exercise of its paramount power for which compensation was paid to the assessee under section 7 of the Act. Moreover, the compensation was paid not for inflicting any injury on any stock-in-trade or circulating capital of the assessee but for the total and outright deprivation of its right of management of its life insurance business.

This right of the assessee, as already stated, was in the nature of a fixed asset. In view of the aforesaid definition of the expression "capital asset", it must also be held that this asset was in the nature of a capital asset. It may also be noted here that this asset has not been specifically excluded in the aforesaid definition of "capital asset".

This particular capital asset of the assessee having been vested in the Central Government under section 3(1) of the Act and the corresponding provisions of the Ordinance, the assessee became entitled to the compensation and it was paid to the assessee in terms of section 7 of the Act. Thereafter its other assets pertaining to the life insurance business vested in the Life Insurance Corporation of India under the provisions of the Life Insurance Corporation Act, 1956, and, under its provisions, separate compensation became payable to the assessee for deprivation of those separate assets only. Therefore, reliance on the provisions of the Life Insurance Corporation Act, 1956, was misplaced by Mr. Pal.

Moreover, no trading activity was involved in the matter of deprivasion of the right of management of the life insurance business of the assessee. This deprivation had radically affected the whole mechanism and the entire profit making apparatus or structure of the assessee. It had also seriously affected the whole trading structure and the framework in which the assessee used to carry on its life insurance business. It may also be noted here that section 3(1) and section 4 of the Act laid a complete embargo on the right of the assessee to manage its life insurance business. It may also be noted in the Central Government on and from the 19th January, 1956, and which was forthwith taken over by the Custodian as aforesaid.

In any event, this compensation received by the assessee cannot be in the nature of revenue receipt, for this receipt did not arise in the ordinary course of carrying on or carrying out of any business. It was paid not for a mere deprivation of the user of an asset but for a total deprivation of the management and possession of the life insurance business of the assessee and for an outright sterilization of its entire profit-making apparatus for all time to come.

In the premises, it must be held that the aforesaid compensation received by the assessee was not in the nature of a revenue receipt but was in the nature of a capital receipt and was accordingly not taxable as a revenue receipt in the hands of the assessee.

For all these reasons, the arguments of Mr. Pal noted earlier must fail and for the same reason we are also in agreement with the decision in the case of Lakshmi Insurance Co. (P.) Ltd. [1971] 80 ITR 575 (Delhi), including the reasons given by their Lordships of the Delhi High Court in their aforesaid judgment.

We accordingly answer the question in the affirmative and in favour of the assessee. We do not, however, propose to make any order as to costs.

C. K. BANERJI J.--I agree.

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