Hardayal Hardy, J.
(1) At the instance of the Commissioner of Income-tax, the Income-tax Appellate Tribunal Delhi Bench A has referred to this Court the following questions of law :-
(I) Whether in the facts 'and circumstances of the case the sum of Rs. 14,517.00 was a capital receipt in the hands of the assessed (ii) Whether in the facts and circumstances of the case the assessed is entitled to the deduction of Rs. 19.000.00 being the sum embezzled by Mani Ram?
(2) According to the stated case, the 'assessed company which is a limited liability company had been running an exchange at Delhi for forward dealings in oil and oil seeds, At the relevant time it was dealing only in groundnut oil and mustard seeds. There was another Exchange known as Om Exchange Limited which was also doing similar business. Under the Forward Markets (Regulations) Act, 1952, the Forward Markets Commission had declared a policy that they would recognise only one Exchange for doing forward business in a particular commodity at any place. In order to get recognition and permission to carry on business in these commodities the assessed submitted two applications to the Forward Market Commission. On October 18, 1955 the assessed entered into an agreement with Om Exchange Limited. By virtue of this agreement the assessed agreed to transfer to Om Exchange Limited the possession of the premises in which the offices and the ring in which its trading members and brokers used to assemble and conduct their business including, furniture and fixtures. The agreement showed that the transfer of possession was for a consideration of Rs. 25,000.00. The agreement further provided that the Board of Directors of Om Exchange Limited shall be enlarged by representation being allowed to at least six members of the assessed company who shall be nominated by it. The trading members and brokers of the assessed company whose names were to be approved by its then Chairman were also to be taken over as such by Om Exchange Limited. Fifty per cent of the staff of the assessed company was also agreed to be taken over by Om Exchange Limited. In consideration of the settleent arrived at between two the companies the assessed company nto only withdrew its two applications to the Forward Markets Commission for recognition in ground-nut oil and mustard seeds, but it also agreed to close down its. business in oil and oil seeds with effect from 31st October, 1955 and all outstanding contracts in its books of account were agreed to be transferred free of commission charges to Om Exchange Limited on the existing terms and conditions. In connection with the assessed company's assessment to Income-tax for the year 1956-57 (the accounting year being 1955-56) the Income-tax Officer computed the written down value of furniture and fixtures at Rs. 10,483.00 while the difference between that amount and the sum of Rs. 25,000.00 which had been received from Om Exchange Limited i.e. Rs. 14,517.00 was treated as revenue receipt by the assessed. The order made by the Income-tax Officer was confirmed in appeal by the Appellate Assistant Commissioner of Income-tax, but on second appeal to the Income-tax Appellate Tribunal it was held that the amount received was a capital receipt.
(3) The assessed had also made a claim for a sum of Rs. 19,000.00 as a business loss on the ground that the amount had been embezzled by its then Manager Mani Ram. The latter was prosecuted before a magistrate and was found guilty of defalcation in respect of the said amount. It was brought out in evidence that Mani Ram used to handle the cash and keep accounts of the assessed company. There was a safe in the office for keeping the cash and its key used to remain with Mani Ram. His duty as Manager-cum-Cashier was one of general supervision over the cash and bank account of the assessed. He used to receive and pay cash, disburse salary to the members of the staff, pay brokerage, margin money and profits on settlement of transactions to the trading members as well as brokers. He was authorised to receive amounts deposited towards margin money, brokerage and loss etc. from trading members and brokers and was as such handling considerable amount of cash in the course of carrying on the business of the assessed company.
(4) The Tribunal accepted the contention of the assessed that the embezzlement by Mani Ram took place in the course of carrying on the business of the company and was incidental to it and thereforee upheld the assessed's claim that the amount embezzled by Mani Ram should be allowed as a permissible deduction.
(5) At the hearing of the reference, learned counsel for the Revenue endeavored to make am attempt to persuade us to draw the line as had been done by Rowlatt J. in Curtis v. J. & G. Oilfield Ltd. where it was held that if the money of the assessed had reached the till and the embezzlement took place after that then the loss caused by the embezzlement could nto be claimed as a trading loss, but if the money was intercepted before it reached the till then the loss could be properly claimed. The test laid down by Rowlatt J. was however nto approved by a Division Bench of the Bombay High Court in Lord's Dairy Farm Ltd. v. Commissioner of income-tax Bombay North, Kutch and Saurashtra, Baroda. It was there said that if in any case it was found that it was necessary to deputise certain duties to an employee and it was also found that the loss sprang out from the necessity of doing so then the loss would be a trading loss and the assessed would be entitled to claim that amount as a proper deduction. The view taken by Chagala C.J. who delivered the judgment of the Division Bench had the support of a Division Bench of Madras High Court in M. P. Venkatachalapathy lyer and another v. Commissioner of Income-tax, Madras) where Satyanarayana Rao and Raghava Rao Jj after reviewing the English authorities with regard to losses, by embezzlement, specifically referred to the practice in England as stated by W.E. Snelling in the Dictionary of Income-tax and Super-tax Practice, 5th edn. 1923 page 231. As would appear from page 372 of the report in Venkatachalapathy lyer's case the learned Judges of the Madras High Court also referred to passages from certain other books viz. Guide to Income-tax Practice and Excess Profits Duty, by Murry and Roger N. Carter 8th edn. and to a passage in the Income-tax Law and Practice by New Port at page 73 which are all to the same effect and observed that it seems, to be a well established practice in England that loss by embezzlement is a permissible deduction but the loss is allowed as a deduction only if the embezzlement can be said to be necessarily incurred in carrying on the trade and springs directly from the necessity of deputing duties to the various employees.
(6) The decisions in Lord's Dairy Farm Ltd. v. Commissioner of Income-tax Bombay North, Kutch and Saurashtra, Baroda and M. P. Venkatachalapathy lyer and another v. Commissioner of Income-tax, Madras) were approved by the Supreme Court in Badri Dagadas v. Commissioner of Income-tax where their Lordships also approved of the decision of Patna High Court in Motipur Sugar Factory Ltd. v. Commissioner of Income-tax, Bihar and Orissa and held that loss resulting from embezzlement by an employee or agent in a business is admissible as a deduction under section 10(1) of the Indian Income-tax Act, 1922, if it arises out of the carrying on of the business and is incidental to it.
(7) Considering the nature of the duties entrusted to Mani Ram to which a detailed reference has already been made there can be no doubt that the defalcation took place in the course of carrying on the business of the assessed company and was incidental to it.
(8) Besides the cases mentioned above the learned counsel for the assessed cited two other cases also, one of which is a decision of the Supreme Court in Commissioner of Income-tax, U.P. v. Nainital Bank Ltd. while the other is a decision of Allahabad High Court in U.P. Vanaspati Agency v. Commissioner of Income-tax, U.P. The case of Nainital Bank Limited is a case of loss suffered by the bank as a result of dacoity while the case of U.P. Vanaspati Agency is one of theft. The ratio of both these cases supports the assessed's contention. But in view of the Supreme Court's decision in Badridas Daga's case which is directly in point, it is nto necessary to deal with these cases. The second question referred by the Tribunal is, thereforee, answered in favor of the assessed.
(9) We now turn to the first question which indeed presents some difficulty. The contention urged on behalf of the Revenue is that the mere fact that it is mentioned in the agreement that the sum of Rs. 25,000.00 was being paid by Om Exchange Limited to the assessed company as consideration for taking over the possession of the premises in which the offices and the ring of the company are located and for furniture and fixture, and the assessed had agreed to close down its business in oil and oil seeds with effect from 31st October, 1955 and had also withdrawn its applications to the Forward Markets Commission for recognition in groundnut oil and mustard seeds, is nto decisive of the matter. For the purpose of determining the real nature of the transaction it is nto necessary to look merely at the form of the agreement but one has also to consider the substance of the transaction. According to the learned counsel for the Revenue the true nature of the transaction was that the assessed was joining hands with Om Exchange Limited with a view to avoid competition. Six of the directors were pursuant to the agreement to be appointed as directors of Om Exchange Limited and were to be allotted shares. Fifty per cent of its employees were also to be taken over by Om Exchange Limited. All outstanding contracts were also to be transferred from the assessed's books to the books of Om Exchange Limited. The arrangement was thereforee more or less in the nature of pooling arrangement whereby the assessed company agreed to receive Rs. 25,000.00 in consideration for its withdrawal from competition in dealing in the same commodities as Om Exchange Limited. The receipt of such an amount could nto be considered as capital receipt but it was one in the nature of revenue and thereforee taxable except to the extent of the written down value of furniture and fittings which had been computed at Rs. 10,843.00.
(10) The contention urged on behalf of the assessed on the other hand is that by the transfer of possession of the premises in which the offices and the ring of the assessed company were located and by its undertaking to close down its business in oil and oil seeds with effect from 31st October 1955 and by the withdrawal of its applications for recognition to do forward business in ground-nut oil and mustard seeds what the assessed company had done was to put an end to the whole structure of its profits-making apparatus. The receipt of any money as consideration for doing so can hardly be described as income or trading receipt.
(11) There is a great deal of force in the argument advanced on behalf of the assessed. The problem of discriminating between income receipt and capital receipt is nto new and has engaged the attention nto only of the highest authorities in England but also of the courts in our own country. It is true that no two cases can be wholly alike and each case has to be decided on its own facts; but nevertheless sufficient guidance can always be had from decided cases. Some of those cases we shall now consider.
(12) On behalf of the Revenue, Mr. Kirpal referred us to the judgment of the Supreme Court in Commissioner of Income-tax Excess Profits Tax, Bombay City v. Shamsher Printing Press . In that case the respondent firm had for the purpose of its business a printing press. The premises in which the press was housed was requisitioned by the government and the respondent had to shift its business to another place. Of the various sums paid as compensation for the requisition, government paid Rs. 57,435.00 towards the claim of the respondent 'on account of the compulsory vacation of the premises, disturbance and loss of business.' The question was whether the sum of Rs. 57,435.00 was a revenue receipt and liable to tax. Sarkar J. who spoke for the Court observed that it was clear that the requisition did nto cause any injury to any of the tangible capital assets of the respondent's business. What was said on behalf of the respondent was that there was injury to its profit making apparatus but it was nto suggested that the respondent's business had a profit giving apparatus apart from its tangible capital assets. The payment itself indicated that it was received as compensation for loss of profits and was as such a revenue receipt.
(13) The next case cited by Mr. Kirpal is Raghuvanshi Mills Ltd., Bombay v. Commissioner of Income-tax, Bombay City. In that case the assessed company had insured its mills with certain insurance companies and had also taken out certain policies of the type known as 'consequential loss policies' which insured against loss of profits, standing charges and agency commission. The mills were completely destroyed as a result of fire and a certain amount was paid to the assessed by the insurance company under 'consequential loss policies.' The question was whether this amount which was treated as paid on account of loss of profits was assessable to Income-tax. The Supreme Court answered the question in favor of the Revenue holding that the amount received by the assessed was income and as such taxable. Discussing the question Bose J. observed :-
'THEassessed is a business company. Its aim is to make profits and to insure against loss. In the ordinary way it does this by buying raw material, manufacturing goods out of them and selling them so that on balance there is a profit or gain to itself. But it also has other ways of acquiring gain, as do all prudent businesses, namely by insuring against loss of profits. It is indubitable that the money paid in such circumstances is a receipt and in so far as it represents loss of profits, as opposed to loss of capital and so forth, it is an item of income in any normal sense of the term,'
(14) It is apparent that nto much help can be derived by the learned counsel for the Revenue from both these cases as the receipt of money in such circumstances could hardly be attributed to any other account except on account of revenue.
(15) Mr. Kirpal then cited the case of Commissioner of Income-tax. Bombay City I v. Bhaidas Cursondas and Co.. In our opinion, the case has hardly any relevance as the sum of Rs. 1,40,000.00 which the non-resident company had received from the assessed company pursuant to a fresh agreement between them to the effect that the difference between the previously agreed price and the revised price: should be borne by the parties in equal shares, was obviously a business receipt of the non-resident company arising out of its business and tax should have been paid on the amount by the assessed before the amount was paid to the non-resident company.
(16) Learned counsel for the assessed on the other hand referred us to the case of Commissioner of Income-tax, Hyderabad-Deccan v. Vaur Sultan & Sons. The question which the Supreme Court was called upon to consider in that case no doubt related to compensation received by the assessed for cancellation of sale agency agreement, but the principle which the majority (N. H. Bhagwati'and B. P. Sinha JJ.) accepted is one of wider application. The learned Judges observed :-
'THEposition as it emerges on a consideration of these authorities may now be summarised. The first question to consider would be whether the agency agreement in question for cancellation of which the payment was received by the assessed was a capital asset of the assessed's business, constituted its profit-making apparatus and was in the nature of its fixed capital or was a trading asset or circulating capital or stock-in-trade of his business. If it was the former the payment received would be undoubtedly a capital receipt; if, however, the same was entered into by the assessed in the ordinary course of businefess and for the purpose of carrying on that business, it would fall into the latter category and compensation or payment receipt for its cancellation would merely be an adjustment made in the ordinary course of business of the relation between the parties and would constitute a trading or a revenue receipt and nto a capital receipt.'
(17) The case which appears to me to be the nearest to the one with which we are concerned in this case is Ven Den Berghs v. Clark (Inspector of Taxes). The appellants, an English company with an issued share capital of over a million pounds carried on a very extensive business as manufacturers of margarine and other substitutes for butter. Their articles of associatioin empowered them to act in many subsidiary capacities such as those of importers, dealer, cattle breeders, crushers, shipowners and merchants etc. Their principal trade rivals in the manufacture of margarine were a Dutch company. In the year 1927, the appellants received payment of 450,000 from their Dutch rivals as damages for recission of their previous agreements that had been entered into between the parties during the years 1908 to 1920. The question was whether the amount received as compensation ought to be taken into account in computing the balance of the profits or gains of the appellants' trade for the year 1927 on which they were chargeable to tax for the year 1928-29 under Sch. D of the Income-tax Act, 1918. The appellants contented that the amount was a capital receipt and ought nto to be reckoned as forming part of the profits arising from the carrying on of their trade. The Crown said that the 'amount was a trade receipt which ought to be included in the computation of the appellants' profits or gains for income-tax purposes.
(18) In the course of his speech Lord Macmillan while examining and classifying the earlier decision of the House of Lords referred to the principle of discrimination enunciated by Viscount Cave in the case of British Insulated and Helsby Cables Ltd. v. Atherton and. observed that all those decisions would be found to exhibit a satisfactory measure of consistency with what was said by Lord Cave. Refferring to some of those decisions. Lord Macmillan said :-
'Asum provided to establish a pension fund for employees, as has already been seen, is a capital disbursement; British Insulated and Helsby Cables Ltd. v. Atherton so is a sum paid by a coal merchant for the acquistion of the right to a number of curremt contracts to supply coal; Jhon Smith & Son v. Moore, so is a payment by a colliery company as the price of being allowed to surrender unprofitable seams included in its leasehold; Mallet v. Staveley Coal & iron Co. Similarly a sum received by a fireclay company as compensation for leaving unworked the fireclay under a railway was held to be a capital receipt; Glenboig Union Fireclay Co. v. Commissioners of inland Revenue. On the other hand, a sum awarded by the War Compensation Court to a company carrying on the business of brewers and wine and spirit merchants in respect of the compulsory taking over of its stock of rum by the Admirality was held to be a trade or income receipt; Commissioner of Inland Revenue v. Newcastle Breweries Ltd.; so was a sum paid to a ship building company for the cancellation of a contract to build a ship; Short Brothers Ltd. v. Commissioners of Inland Revenue so was a lump sum payment received, by a quarry company in lieu of four annual payments in consideration of which the company had relieved a customer of his contract to purchase a quantity of chalk yearly for ten years and build a wharf at which it could be loaded; Commissioners of Inland Revenue v. Northfleet Coal and Ballast Co. so was a sum recovered from insurers by a timber company in respect of the destruction by fire of their stock of timber ; J00Gliksten & Son O. Green . Conversly, where a company paid 'a sum as the price of getting rid of a life director, whose presence on the board was regarded as deterimejntal to the profitable conduct of the company's business, the payment was held to be an income disbursement ; Mitchell v. R. W. Noble Ltd., so was the payment made in the case of the Anglo-Persian Oil Co. v. Dalein order to disembarrass the company of an onerous agency agreement. There are further instances in the reports, but I have quoted enough for the purpose of illustration.'
(19) After citing those numerous decisions His Lordship finally summed up the position as under ;-
'THEthree agreements which the appellants consented to cancel were nto ordinary commercial contracts made in the course of carrying on their trade; they were nto 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 nto 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 organization of a trader's activities can be regarded as an income disbursement or an income receipt. Mr. Mills very properly warned your Lordships against being misled as to the legal character of the payment by its magn itude, for magnitude is a relative term and we are dealing with companies which think in millions. But the magnitude of a transaction is nto an entirely irrelevant consideration. The legal distinction between a repair 'and a renewal may be influenced by the expense involved. In the present case, however, it is nto the largeness of the sum that is important but the nature of the asset that was surrendered. 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.'
(20) In Barr, Crombie & Ltd. v. Commissioners Inland Revenue Lord Moncrieff referring to the cases of British Insulated and Helsby Cables Ltd. and Van Den Berghs Ltd. observed:-
'INcases such as this, which are so dependent each upon its own complicated circumstances, it is nto possible to get much guidance by way of comparison from the decisions in other related cases. I think, however, that a general guide for application in all such cases is to be found in the passage from Lord Cave's speech in the case of British Insulated and Helsby Cables Ltd. v. Atherton (1926 A.C. 213; 10 T. C. 192 as approved in the subsequent case of Vanden Berghs Ltd. v. Ctark 1935 A.C. 439; 19 T.C. 429 by Lord Macmillan), in which he indicated that, when the transaction takes the form of a transfer from one party to another of something that has formed part of the enduring trading assets of one of them, any such transfer for a price points rather to a transaction on capital than on revenue account.'
(21) In Commissioners of Inland Revenue v. Fleming & Co. (Machinery) Ltd. Lord Russel stated the position in these words:-
'ITmay be difficult to formulate a general principle by reference to which in all cases the correct decision will be arrived 'at since in each case the question comes to be one of circumstance and degree. When the rights and advantages surrendered on cancellation are such as to destroy or materially to cripple the whole structure of the recipient's profit-making apparatus, involving the serious dislocation of the normal commercial organisation and resulting perhaps in the cutting down of the staff previously required, the recipient of the compensatioin may properly affirm that the com enhs'ation represents the price paid for the loss or sterilisation of a capital asset and is thereforee a capital and nto a revenue receipt. Illustrations of such cases are to be found in Van den Berghs Ltd. and Barr Crombie &Co.; Lfd. On the other hand when the benefit surrendered on cancellation does nto represent the loss of an enduring asset in circumstances such as those above mentioned-where for example the structure of the recipient's business is so fashioned as to absorb the shock as one of the normal incidents to be looked for and where it appears that the compensation received is no more than a surrogatum for the future profits surrendered the compensation received is in use to be treated as a revenue receipt and nto a capital receipt. See e.g. Short Brothers Ltd. : Kelsall Parsons & Co.
(22) Applying the guide-lines laid down in the abovementioned decisions there can be no doubt that when the assessed company transferred to Om Exchange Limited nto only the possession of the premises in which its offices and the ring were located but also its furniture 'and fixtures and the arrangement did nto rest merely with that but went further whereunder the assessed undertook to close down its business in oil and oil seeds, transferred all outstanding contracts in its books of account to Om Exchange Limited, withdrew its applications for recognition for the purpose of carrying on forward business in oil and oil seeds and also turned over 50% of its staff to the transferee company, the transfer destroyed or materially crippled the whole structure of its profit-making apparatus, involving serious dislocation of its normal commercial organisation and resulting in the cutting down of the staff previously required by it, the test laid down by Lord Russel in the case of Flemming and Co. (Machinery) Ltd. must be held to have been fully satisfied. The consideration received by the recipient company must in the circumstances be held to represent the price paid for the loss or sterilization of a capital asset and is thereforee a capital and nto revenue receipt.
(23) In our opinion thereforee the first qusetion has also to be answered in the affirmative. The assessed will also have its costs. Counsel's fee Rs. 200.00