Judgment:
D.K. Sen, J.
1. Stewarts & Lloyds of India Ltd., the assessee, was a wholly owned subsidiary of Stewarts & Lloyds Ltd. of London (the U.K. company). In December, 1963, the assessee entered into a contract with the Indian Oil Corporation under which the work of erection of a pipeline at the Baroda Refinery of the Corporation was entrusted to the assessee. The contract was valued at Rs. 127.11 lakhs.
2. The assessee commenced the work under the said contract in 1964. Initially, the work was expected to be completed within 15 months from commencement but in fact it took more than three and a half years to complete the same. In the meantime, on June 8, 1965, the assessee was converted into a public limited company under the Companies Act, 1956, but remained a subsidiary of the U.K. company which continued to hold 60 per cent. of the shares of the assessee.
3. In executing the contract with the Indian Oil Corporation, the assessee incurred expenditure aggregating to Rs. 173.94 lakhs and according to the assessee, it sustained a loss of Rs. 57.85 lakhs in the venture.
4. Correspondence was had between the U.K. company and the assessee in 1966 and on January 20, 1967, the U.K. company passed a resolution as follows :
'It was resolved that although the company had no legal obligation to do so, in all the circumstances, it was proper for the company, without admission of liability, to indemnify S & L of I (Stewarts & Lloyds of India) against such loss up to a maximum of Rs. 25 lakhs for a period of two years. In the event that the total loss on this contract has not been established by the end of two years from the date of this resolution, the company will, on the request of S & L of I, transfer the said sum of Rs. 25 lakhs to S & L of I in consideration of S & L of I agreeing, in the event of the total loss subsequently being established to be less than the said sum, to repay to the company the difference between the said sum and the total loss established.'
5. After further discussions between the assessee and the U.K. company on the quantum of loss suffered by the assessee in the said venture, it was recorded in a letter dated September 20, 1968, from the U.K. company to the assessee as follows :
'Further to recent discussions regarding our Board Minute No. 7038 of January 20, 1967, it has been agreed between us that subject to the condition stipulated in this minute, S & L's obligation is Rs. 22.5 lakhs. Will you please confirm your agreement whereupon agreements for settlement will be made.'
6. In the assessment year 1969-70, the relevant accounting period ending on September 30, 1968, the assessee credited a sum of Rs. 22.5 lakhs as receivable from the U.K. company. In its income-tax return filed for the said assessment year, the assessee did not, however, include the said amount of Rs. 22.5 lakhs as a receipt under any head of income and claimed that the said amount was not taxable. The Income-tax Officer held that the said amount of Rs. 22.5 lakhs was taxable as a revenue receipt as the said amount had been agreed to be paid to the assessee by the U.K. company to compensate the assessee for the loss sustained by it in the Baroda Refinery contract. He added back the said Rs. 22.5 lakhs in the total income of the assessee.
7. From the said assessment, the assessee preferred an appeal to the Appellate Assistant Commissioner, The Appellate Assistant Commissioner found that actual payment had been received by the assessee during the years 1969 to 1972. He also found that after its conversion into a public limited company, there had been no business between the assessee and the U.K. company. He also noted that in its resolution dated January 20, 1967, the U.K. company did not admit any legal obligation or liability to make the said payment and in the income-tax return filed by the U.K. company in the U.K., the payments made to the assessee were not claimed as business expenses.
8. On the basis of the aforesaid, the Appellate Assistant Commissioner held that the fact that the said amount had been shown in the profit and loss account of the assessee for the relevant assessment year under the head 'Income from other sources' was not decisive.
9. He noted further that the receipt of the said amount by the assessee was not continuous but that a lump sum was paid for a period of two years and such payment was made without any claim from the assessee. He also found from the evidence that the payment by the U.K. company to the assessee was not attributable to any custom or past practice of any traditional or contractual or legal obligation and that the payment was merely a casual and windfall gift. He held that the said amount could not be treated as income subject to assessment in India. He allowed the appeal and directed the Income-tax Officer to exclude the said amount from the total income of the assessee.
10. The Revenue preferred an appeal against the order of the Appellate Assistant Commissioner to the Tribunal. It was contended before the Tribunal on behalf of the Revenue that the said receipt was connected with and referable to the business carried on by the assessee and further that the said amount was paid to compensate the assessee for loss sustained by it in a particular business venture. It was contended that the assessee had in fact invited the receipt by sending reports of its loss to the U.K. company. It was contended further that the receipt could not be treated as a windfall as negotiations and discussions had preceded the receipt and the receipt was the result of a concluded agreement.
11. It was further contended that a right to receive the amount had accrued to the assessee during the relevant assessment year under the resolution of the U.K. company dated January 20, 1967. The receipt was of a trading nature though the U.K. company had made the payment out of a non-commercial motive. In the hands of the recipient, the receipt acquired the character of a trading receipt as it was connected with the assessee's business.
12. The Tribunal held that as there was no dispute as to the assessee's version of the factum and source of the receipt, it was for the Revenue to establish that the receipt had the character of income. The Tribunal held further that neither the object or motive of the U.K. company nor the steps taken for determination of the amount to be paid to the assessee as compensation would determine the character of the receipt. There could be consultation and discussion between a donor and a donee. The Tribunal held that in the facts and circumstances, the said amount did not have the character of income.
13. The Tribunal next considered whether the right to receive the amount from the U.K. company had accrued during the relevant assessment year. The Tribunal noted that during the relevant period, the U.K. company had merely passed a resolution expressing its intention to pay an amount at the end of two years, i.e., within two years from January 20, 1967. The Tribunal held that till January 20, 1969, there was not even a moral obligation on the part of the U.K. company to pay the promised amount to the assessee. The Tribunal held that the right to receive the amount did not, in any event, accrue to the assessee during the relevant accounting year. The mere fact that the assessee had credited the amount to its profit and loss account at the end of the year would not alter the position. The Tribunal accepted the conclusion of the Appellate Assistant Commissioner that no income had accrued to the assessee during the relevant period and rejected the appeal.
14. On an application of the Revenue under Section 256(1) of the Income-tax Act, 1961 ('the Act'), the following question has been referred by the Tribunal as a question of law arising out of its order for the opinion of this court :
'Whether, on the facts and in the circumstances of the case and on a proper interpretation of the resolution dated January 20, 1967, passed by Stewarts and Lloyds, U.K., the Tribunal was right in holding that the sum of Rs. 22.5 lakhs receivable by the assessee from the said U.K. company with reference to the Baroda Refinery project was not of the character of income ?'
15. The said question has come up in Income-tax Reference No. 218 of 1977.
16. On an application of the Revenue under Section 256(2) of the Income-tax Act, 1961, this court directed the Tribunal to refer the following question of law arising out of the order of the latter for the opinion of this court :
' Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that Rs. 22'5 lakhs credited to the profit and loss account of the assessee for the previous year ended September 28, 1968, did not accrue as income of the assessee during the previous year ?'
17. This question has come up in Income-tax Reference No. 155 of 1982.
18. The learned advocate for the Revenue contended at the hearing that in the instant case, the assessee had suffered a loss and injury in its business. Any amount recovered to fill the gap or whole should properly be entered in the profit and loss account. In the instant case, the loss was suffered by the assessee in actually carrying on its business by executing the contract with the Indian Oil Corporation.
19. The learned advocate submitted that from the correspondence disclosed in the instant case and in particular the letters of the U.K. company dated January 20, 1967, and September 20, 1968, read together would indicate that a legal obligation had been imposed on the U.K. company.
20. The learned advocate next submitted that at the relevant time, viz., when the assessee entered into the contract with the Indian Oil Corporation, the assessee was a 100 per cent. subsidiary of the U.K. company. Even after the conversion of the assessee into a public limited company, 60 per cent. of its shares continued to be held by the U.K. company. This relationship between the assessee and the U.K. company indicated that there was a legal obligation on the U.K. company to pay the said amount to the assessee. The U.K. company, a major shareholder of the assessee, stood to be benefited by making good the assessee's business loss.
21. The learned advocate submitted further that even if payments were voluntarily made by a third party who was under no obligation to pay anything, the receipts of the payments in the hands of the recipient in the course of business or in the exercise of a profession or vocation by the recipient would be income.
22. The learned advocate also submitted that on the facts and in the circumstances, the payments made by the U.K. company, received by the assessee, were not a gift or a donation. No personal element was involved in the payment. Such resolution passed by the U.K. company on January 20, 1967, was, inter alia, that if the total loss suffered by the assessee in executing the contract with the Indian Oil Corporation has not been established or if it is established that the loss suffered was less than the amount paid by the U.K. company, the assessee would repay the said sum or the difference between the said sum and the actual loss, if the actual loss was less, to the U.K. company. This covenant, it was submitted, established that the payment was not by way of a gift or donation. The payment was for the purpose of indemnifying the assessee against a particular loss.
23. The learned advocate for the Revenue also submitted that the assessee has included the amount received from the U.K. company in its profit and loss account which would also go to show that the amount received was treated as a business receipt.
24. In support of his contention, the learned advocate for the Revenue cited the following decisions :
(a) Susil C. Sen, In re : [1941]9ITR261(Cal) .
In this case, the assessee, an attorney and advocate, in the course of acting for a shareholder of a company rendered certain services which resulted in substantial issue of new shares of the company to the public. A firm of stock brokers who were benefited by the issue of new shares paid Rs. 10,000 to the assessee though the latter had not acted for them and they were not legally bound for anything. On a reference by the Commissioner, it was held by a Division Bench of this court that the assessee had received the amount in the exercise of his profession as a lawyer and advocate and though the receipt was casual and non-recurring, it was not exempt from income-tax.
(b) P. Krishna Menon v. CIT : [1959]35ITR48(SC) .
In this case, the assessee, who used to study and teach the philosophy of Vedanta, received from one of his foreign disciples sums of money from time to time. The question was whether the said amounts were assessable to income-tax in the hands of the assessee. It was held by the Supreme Court in the facts that the teaching imparted by the assessee was a vocation and by reason of imparting of teaching, the assessee had received amounts from his disciples, the teaching being the consideration and as such, the payments were income arising from the vocation of the assessee and assessable to income-tax. The fact that the teaching had been imparted without any motive of producing income did not affect the position.
(c) Bengal Textiles Association v. CIT : [1960]39ITR723(SC) .
The assessee in this case was a statutory corporation incorporated under a Central Ordinance. The object of the assessee was to improve the procurement and distribution of cotton piece-goods in Bengal. Under an agreement between the Government of Bengal and the assessee, the Government, inter alia, agreed to pay every month to the association the administrative expenses incurred by the assessee including establishment charges, advertising, salaries and wages. In 1947, the Business Profits Tax Act was promulgated and brought into effect. The assessee claimed exemption from this tax on the ground that the amounts received by it from the Government were subsidies within the meaning of the said tax and was exempt. On these facts, it was held by the Supreme Court, affirming the judgment of this court, that the payments made by the Government to the assessee was for the purpose of assisting the assessee to carry on his trade and business and in consideration of the service it was rendering to the Government. The payments were not benevolent and, as such, were not subsidy within the meaning of the Business Profits Tax Act. The amounts were held to be assessable under the said Act.
(d) A. Gajapathi Naidu v. CIT : [1960]40ITR282(Mad) .
In this case, the assessee had supplied bread to a Government hospital at stipulated rates. The assessee found the rates to be uneconomical and after the close of the year made representations to the Government. The Government passed an order directing payment of compensation for the loss sustained by the assessee in the supply of bread in the year concerned. The assessee submitted a bill and received the amount awarded in the subsequent accounting year. On these facts, it was held by the Madras High Court that though the payment was in fact an act of grace on the part of the Government, it was directly related to the business of the assessee and the receipt arose out of the business of the assessee. It was held that the receipt was not casual but was a trade receipt liable to tax. It was, however, held that the amount could not be included in the subsequent assessment year.
(e) Senairam Doongarmall v. C/r : [1961]42ITR392(SC) .
The facts in this case were that the assessee owned a tea estate and carried on the business of growing and manufacturing tea. The factory and other buildings of the assessee were requisitioned by the military authorities for defence purposes. The assessee continued to be in possession of the tea gardens which were preserved but manufacture of tea was stopped. The assessee was paid compensation under the Defence of India Rules for the years 1944 and 1945 calculated on the basis of the out-turn of tea which could have been manufactured by the assessee during the period. The question was whether the compensation paid was a revenue receipt taxable in the hands of the assessee. On these facts, it was held by the Supreme Court that the assessee did not continue his business of growing and manufacturing tea at the relevant time and, therefore, the compensation received by it could not be taxed as profits and gains of his business. The measure and method of payment could not determine the character of such payment. The Supreme Court held that the amount of compensation received did not have any element of income.
(f) Nabadwip Chandra Roy v. C/r .
In this case, the assessee carried on business in textiles and in that capacity had been appointed chairman of a co-operative society and had received certain amount as bonus in consideration of services rendered by him. On these facts, it was held by the Assam High Court that the amount received was income in his hands arising from his textile business and was taxable as income.
(g) H. H. Maharani Shri Vijaykuverba Saheb of Morvi v. CIT : [1963]49ITR594(Bom) .
In this case, the assessee, a Ruler of an Indian Native State, had abdicated in favour of his son in January, 1948. From April, 1949, the son paid to his father a monthly allowance. It was found that this allowance was not paid under any custom or usage, nor for maintenance as the assessee had sufficient independent means. On these facts, it was held by the Bombay High Court that the payments having commenced long after the abdication, they were voluntary and not made under any legal or. contractual obligation. The allowances also not being customary or under any usage or for maintenance were not assessable as income.
(h) V. S. S. V. Meenakshi Achi v. CIT : [1966]60ITR253(SC) .
In this case, the assessees owned and ran a rubber plantation in Malay, Under the Rubber Industry (Replanting) Fund Ordinance, 1952, of the Federated Malay States, cess was collected on rubber produced and a fund was created in which proportionate parts of the cess collected were deposited to the credit of the producers on the basis of production and payments were made to the producers from such credit against expenditure incurred for maintenance of the plantations. On such facts, it was held by the Supreme Court that as the amounts from the fund were paid against expenditure for maintenance, the same were revenue receipts includible in the assessable income of the assessee.
(i) London and Thames Haven Oil Wharves Ltd. v. Attwooll (Inspector of Taxes) : [1968]70ITR460(Cal) .
In this case, a jetty belonging to the taxpayer was seriously damaged by an oil tanker which was navigated negligently. Apart from compensation for physical damages, the taxpayer received a sum as consequential damages suffered for the loss of use of the jetty during repairs. On these facts, it was held by the English Court of Appeal that the sum received as consequential damages was a revenue receipt assessable to income-tax. The amount was received under a legal right and as compensation for the trader's inability to use the jetty. The sum which it received from the owner of the tanker would have been credited to the profits.
(j) H. R. Sugar Factory (P.) Ltd. v. CIT : [1970]77ITR614(All) .
In this case, the Government, in order to encourage early crushing of sugarcane, decided to allow factories which started such crushing by a specified date a concession of 4 annas per maund of cane crushed up to a particular date. The assessee received a sum from the Government for early start of crushing of sugarcane under the scheme. On these facts, it was held by the Allahabad High Court that the amount received by the assessee was by way of a subsidy to encourage early crushing. The payment was closely connected with the business of the assessee. The amount was held to be a trading receipt and taxable as income.
(k) CIT v. Dr. K. George Thomas : [1974]97ITR111(Ker) .
In this case, the assessee was engaged in a religious movement. The assessee received in his personal account amounts from various persons from America, who were supporters of the assessee in his religious cause. On these facts, the Tribunal held that the amounts received by the assessee did not represent remuneration or payment for services rendered, that the donors were supporting a movement and that there was no obligation cast on them to make the payments which were not made under any legal or contractual obligation. It was held that the receipts were casual and non-recurring and did not arise in the course of the exercise of any vocation and could not be held to be income. On a reference, the Kerala High Court reversed the decision of the Tribunal and held that the receipts arose from the exercise of a vocation by the assessee and, therefore, though the said receipts were casual and non-recurring, they should be held to be income. The religion and teaching of religion were occupations of the assessee and there was a link between the activity of the assessee and the amounts received. It was found that the assessee had informed the donors that he had incurred huge losses in running his newspaper and had called upon the donors to take over the newspaper.
(1) CIT v. P. N. Nagaraj : [1976]102ITR83(Mad) .
In this case, the assessee who was an architect conveyed information about movable properties available for sale which ultimately resulted in the sale of some of the properties. On the conclusion of the sale, the vendors paid to the assessee an amount which was shared by the assessee with the purchasers. On these facts, it was held by the Madras High Court that the assessee had utilised his professional ability and knowledge which resulted in the sale and the payment made to the assessee was in the nature of professional services rendered. It was held that the assessee having shared the receipt with the purchaser, it was established that the assessee and the purchaser had acted jointly to bring about the sale.
(m) CIT v. Keshri Singh .
In the facts of this case, it was held by the Rajasthan High Court that an amount paid for specific service rendered by an assessee and received by way of commission or remuneration would be income in the hands of the assessee though the transaction was not solicited and the income arose from an incidental occupation of the assessee.
(n) Dhrewgadhra Chemical Works Ltd. v. CIT : [1977]106ITR473(Bom) .
In this case, on the recommendation of the Tariff Board, the Government directed that the manufacturers of soda ash should be allowed a subsidy of Re. 1 per cwt. of soda ash produced and sold from the date of the decision provided the soda ash was sold at a fair selling price recommended by the Tariff Board. The assessee who manufactured soda ash during the relevant period claimed the subsidy. The amount of subsidy was recovered on a compromise after a suit was filed. On these facts, it was held by the Bombay High Court that the subsidy received by the assessee was a receipt of revenue nature as they were supplementary trade receipts. The whole object of payment of subsidy was to enable the manufacturers to carry on their business profitably. The subsidy was, therefore, to be included in the taxable profit of the assessee. The position was the same even if the subsidy was payable for a limited period and could not be regarded as casual or non-recurring.
(o) CIT v. Sirpur Paper Mills Ltd. : [1978]112ITR776(SC) .
In this case, the building, plant and machinery of the assessee were covered by insurance against loss by fire. The said assets were partly damaged by fire and the assessee received an amount as compensation in respect of the loss. A part of the amount received as compensation was spent for restoration of the assets. The question arose whether the balance of compensation was assessable to tax as a revenue receipt. On these facts, it was not disputed before the Supreme Court by the Revenue that the balance compensation received by the assessee represented capital receipt in its hands.
(p) Agra Chain Mfg. Co. v. CIT : [1978]114ITR840(All) .
The assessee in this case was an exporter of aluminium products and had received certain import entitlements on the basis of exports effected by him. The entitlements were sold by the assessee. The assessee claimed that the receipts from the sale of the entitlements were capital receipts and not liable to be taxed as trading receipts. A Division Bench of the Allahabad High Court found that the assessee as an exporter was entitled to get the import entitlements under the scheme and the benefits of such entitlements would be an advantage or profits arising out of the assessee's business. The entitlements were not a gift or a bounty. The proceeds of the sale of the said entitlements were held to be taxable as profits in the hands of the assessee.
(q) Jeewanlal (1929) Ltd. v. CIT : [1983]139ITR865(Cal) .
The assessee in this case was an exporter of aluminium goods and had obtained import entitlements from the Government of India under a Special Export Promotion Scheme. The assessee sold the entitlements. The question arose whether the amounts received from sale of the entitlements were assessable as revenue profits. It was held by a Division Bench of this court that as the entitlements had been acquired in the course of its dealings as an exporter and as the export conferred a right to the entitlements, the dealing in the entitlements by the assessee had resulted in profits which were assessable as revenue profits. The fact that the assessee was not a dealer in import entitlements and its object in reselling the entitlements were not relevant to the question.
(r) Jeewanlal (1929) Ltd. v. CIT : [1983]142ITR448(Cal)
In this case, the assessee as an exporter of aluminium products received cash assistance from the Government on the exports. The assessee claimed that such cash assistance was a casual and non-recurring receipt or a capital receipt and that it was a bounty and of a benevolent nature given by the Government for the purpose of earning foreign exchange and not with the object of enabling the assessee to carry on its export business or to cover losses arising out of such business. On these facts, it was held by a Division Bench of this court on a reference that the nature of the business, the nature of the income and the nature of the rights to receive and the relations between the payer and the payee cannot be decisive to determine the controversy. It was found that by making exports, the assessee had received the subsidy which had the nature of assistance and the subsidy was inextricably connected with the exports. It was held that the cash assistance was incidental to and supplemental to the trading receipts and was a taxable revenue receipt.
25. The learned advocate for the Revenue cited the following English decisions :
(a) Reed v. Seymour [1927] 11 TC 625.
In this case, the assessee, a professional cricketer, received an amount of money being the proceeds of a benefit match held in bis favour which had remained invested by the trustees of the club. It was held that the assessee was not assessable in respect of the amount inasmuch as it was a personal gift and not a profit or perquisite arising from his employment.
(b) Glenboig Union Fireclay Co. Lid, v. IRC [1922] 12 TC 427.
The assessee in this case was the lessee of certain land over which a line of a railway company had been laid. The land contained fireclay. There were proceedings between the assessee and the railway company in respect of the right of the assessee to mine fireclay from such land. The railway company exercised its statutory powers and required the fireclay to be left unworked on payment of compensation. The amount of compensation was settled and paid to the assessee. The assessee charged in its trading account the expenditure incurred in keeping the fireclay field open and received from the railway company damages in respect of such expenditure. On these facts, it was held by the House of Lords that the compensation received by the assessee was not profit but a capital receipt and the amount received as damages was also not a trading profit. An agreement was arrived at between the assessee and the Revenue under which the sum paid as damages was treated as a trading receipt.
(c) Ensign Shipping Co. Ltd. v. IRC [1928] 12 TC 1169.
In this case, two ships belonging to the assessee ready to proceed with cargoes of coal were detained in port by an order of the Government for a certain period. On a claim made by the assessee against the Government for compensation for loss of use of the ships and for the expenditure incurred, the assessee received an amount from the Government in settlement. It was held by the Court of Appeal that the sum received from the Government by the assessee was a trading receipt of the assessee during the relevant period and was liable to excess profits duty and income-tax.
(d) Green v. J. Gliksten & Son Ltd. [1928] 14 TC 364.
In this case, it was held by the English Court of Appeal that money received from an insurance company in respect of goods destroyed by fire should be brought into the profit and loss account of the taxpayer as a trading receipt for a computation of his profit for income-tax.
(e) Burmah Steam Ship Co. Ltd. v. IRC [1930] 16 TC 67.
In this case, the owners of a ship made over the same for repairs to shipbuilders. The shipbuilders failed to complete the repairs within the stipulated time and committed five months' delay. The shipowners claimed damages from the shipbuilders, assessed on the estimated profits which the ship would have earned during the period of. delay. The claim was compromised by payment of an amount by the shipbuilders. It was held that the amount received was compensation for loss of trading profit and the same constituted income on which the shipowners were liable to pay income-tax.
(f) Higgs v. Wrightson [1944] 26 TC 73.
The assessee in this case was the owner of an agricultural land where he had carried on the business of dairy farming. During the war, the assessee had ploughed up a portion of his land which previously had been used for pasture. In respect for such land, the assessee received from the Government a 'ploughing grant' under the Agricultural Development Act, 1939. It was held that this grant was a trading receipt and liable to be taxed as income.
(g) Federal Farms Ltd. v. Minister of National Revenue [1959] Ex, C.R. 91.
In this case, the assessee carried on business as a grower, packer and shipper of vegetables. In a particular year, there was a hurricane in the area which destroyed large quantities of vegetables ready for marketing and damaged the farms and fields extensively. A company was incorporated for the purpose of receiving voluntary contributions and distributing the same to the sufferers of the hurricane in order to alleviate the losses sustained by them. The assessee received from this company an amount for the loss of his crop and also a certain percentage for the value of his supplies and equipment. It was held that the money received by the assessee was in the nature of a voluntary gift and did not arise in the taxpayers' business. It was held further that the fact that the amount of payment was related to and was to some extent measured by the amount of loss would not have any bearing on the nature or the quality of the payment. It was held that the amount received was not an income or a revenue receipt which could be brought into account in computing the taxpayers' income.
26. The learned advocate for the assessee contended on the other hand that the decisions cited on behalf of the Revenue had no application on the facts and in the circumstances of the instant case. The payment received by the assessee in the instant case was not under a legally enforceable contract. This amount was also not received under any statute or a statutory scheme which entitled the assessee to claim and receive the said amount. The payment was not received by the assessee for any services rendered to the U. K. company.
27. It was submitted that the Tribunal came to the correct conclusion that the amount received by the assessee was not taxable income. There was no demand or claim by the assessee on the U. K. company and the fact that negotiations and discussions took place between the assessee and the U. K. company before the amount of payment was fixed and the actual payment was made did not alter the character of the payment. The fact that the assessee had included the amount received initially in its profit and loss account would also make no difference in the determination of the actual nature of the said amount.
28. In support of his contentions, the learned advocate for the assessee cited the following decisions :
(a) The Seaham Harbour Dock Co. v. Crook [1931] 16 TC 333.
In this case, money was received by a dock-owning company from a grant made by the Unemployment Grants Committee under the authority of the Parliament to assist the dock-owning company in carrying out the work of extension of its docks. Payments were received from time to time over several years. Assessments of income were made upon the company on the footing that the payments were part of its annual profits or gains. It was held by the House of Lords that such payments were not profits and gains of the trade carried on by the company and were not liable to income-tax.
(b) Federal Farms Ltd.'s case [1959] Ex. C. R. 91.
This case has been noted earlier.
(c) Simpson v. John Reynolds & Co. (Insurances] Ltd. [1975] Simon's Tax Cases 271.
In this case, the taxpayer company carried on business as insurance brokers. For many years, the taxpayer had acted as adviser to a company in all its insurance matters and pension schemes. In 1965, the other company came under the control of ICI Ltd. and was required by the latter as the controlling company to place all its insurance matters with another insurance company. The company informed the taxpayer that its services would no longer be required and volunteered to pay to the taxpayer company 1,000 per annum for a period of five years commencing from March, 1966. It was recorded that the payment was being made in recognition of the past services of the taxpayer as insurance brokers and was being calculated on the basis of the earnings of the taxpayer by way of commission from this particular business.
In respect of such payments, the taxpayer was assessed to corporation tax on the basis that the instalment of 1,000 received by the taxpayer was a trading receipt liable to tax under the Act. On appeal, it was held by the Commissioners that the said amount of 1,000 was not chargeable to tax and the assessment was set aside. On a reference, the High Court upheld the decision of the Commissioners and ultimately the Court of Appeal also upheld the decision. It was held by the Court of Appeal that the payment of the said amount of 1,000 received by the taxpayer was a wholly unexpected and unsolicited gift which had been made after the business connection had ceased, in recognition of past services rendered over a long period. There was no suggestion that the business connection would be renewed later. Therefore, the amount received by the taxpayer could not be described as annual profits or gains arising or accruing to the taxpayer from its trade within the meaning of the Act.
(d) CIT v. India Discount Co. Ltd. : [1970]75ITR191(SC) .
In this case, the assessee, a dealer in shares, purchased certain shares in the company with arrear dividends. The assessee received an amount against the said shares on account of dividends declared earlier. The amount was first credited to the profit and loss account of the assessee and thereafter transferred to a reserve fund. The question arose whether the amount received on account of arrear dividends was assessable to income-tax in the hands of the assessee. On the above facts, the Supreme Court held that the assessee having purchased the shares along with arrear dividends, the sum received on account of dividend was not income which could be assessed in the hands of the assessee. The Supreme Court held further that a receipt which in law could not be regarded as income would not be so treated merely because the assessee had erroneously credited the same to its profit and loss account.
(e) Mehboob Productions Private Ltd. v. CIT : [1977]106ITR758(Bom) .
The assessee in this case had produced a film which was awarded a certificate of merit. On the strength of such certificate, the assessee preferred a claim before the State Government that the film should be declared as exempt from entertainment duty and that as the producer, the assessee would be entitled to that part of the proceeds of the exhibition of the film which represented entertainment duty. The claim of the assessee was accepted by the State Government and the assessee recovered from various exhibitors the amount which had been collected by way of entertainment duty. The assessee claimed that the amount so recovered was not liable to be included in its total income as it was not a trading receipt but was an amount received by way of a testimonial and in any event it was a casual and non-recurring receipt and, therefore, exempt under Section 4(3)(vii) of the Indian Income-tax Act, 1922.
On these facts, it was held by the Bombay High Court that the receipt in dispute was not an income in the ordinary or normal sense of the term. The assessee had produced the film without any expectation that the same would be exempt from entertainment duty or that the amounts of entertainment duty collected would be directed to be returned to the assessee. It was held that the amount received was in the nature of a windfall not in the contemplation of the assessee and that the same was not directly attributable to or had arrived as business profits and the same could not form part of the total income of the assessee.
(f) Siddhartha Publications (P.) Ltd. v. CIT : [1981]129ITR603(Delhi) .
In this case, the assessee was the publisher of an English magazine. In order to improve the magazine, the assessee approached a foreign organisation for assistance. The organisation contributed a sum of Rs. 28,342 to the assessee. The Income-tax Officer held that the contribution received by the assessee was a taxable revenue receipt. The Appellate Assistant Commissioner took a different view and held that the contribution was a casual and non-recurring receipt not in the nature of income. The Tribunal held that the donation though made only once was received as a result of the business activity of the assessee against some consideration and was, therefore, a business liability to tax. On a reference, a Division Bench of the Delhi High Court found and held that no services had been rendered by the assessee to the foreign organisation and there was no mutual or commercial arrangement between the two. The donation was found to be non-recurring and casual and dependent entirely on the will of the donor. The assessee could not enforce the payment of the donation. It was found that though the assessee had requested the organisation for financial assistance by way of business, the terms of the donation made it clear that the same was given purely as a donation and not for business. It was held that the donation was not a revenue receipt liable to be taxed.
29. On the question referred under Section 256(2), the learned advocate for the Revenue submitted that on ascertained facts, whether any income accrued to the assessee in a particular year or not would be a question of law. The learned advocates submitted further that in view of the resolution dated January 28, 1967, passed by the U. K. company read with the letter dated September 20, 1968, from the U.K. company to the assessee, it would appear that a right to receive the amount offered by the U.K. company had accrued to the assessee during the relevant accounting year.
30. It was submitted further that from the entries made in the profit and loss account of the assessee drawn up for the relevant previous year ending on September 28, 1968, it would appear that a sum of Rs. 22.5 lakhs had been credited as receivable from the U.K. company with reference to the Baroda Refinery Project. It has been found by the Tribunal that the said amount of Rs. 22'5 lakhs had been received by the assessee from the U.K. company.
31. From the facts found as aforesaid, it was contended that the said income of Rs. 22.5 lakhs had accrued to the assessee during the relevant accounting year. In support of his contentions, the learned advocate for the Revenue cited the following decisions :
(a) E. D. Sassoon and Company Ltd. v. CIT : [1954]26ITR27(SC) .
This decision was cited for the following observations of the Supreme Court (at pages 51, 54 and 55) :
' It is clear, therefore, that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debi-tum in -braesenti, solvendum in future : see W. S. Try Ltd. v. Johnson (Inspector of Taxes) [1946] 1 All ER 532 and Webb v. Stenton andOrs., Garnishees 11 QBD 518 at 522, 527. Unless and until there iscreated in favour of the assessee a debt due by somebody, it cannot be saidthat he has acquired a right to receive the income or that income hasaccrued to him... :
It is no doubt true that the accrual of income does not depend upon its ascertainment or the accounts cast by assessee. The accounts may be made up at a much later date. That depends upon the convenience of the assessee and also upon the exigencies of the situation. The amount of the income, profits or gains may thus be ascertained later on the accounts being made up. But when the accounts are thus made up, the income, profits or gains ascertained as the result of the accounts are referred back to the chargeable accounting period during which they have accrued or arisen and the assessee is liable to tax in respect of the same during that chargeable accounting period... (at pages 54 and 55)'
(b) CIT v. fai Parkash Om Parkash Company Ltd. : [1964]52ITR23(SC) .
In this case, it was laid down by the Supreme Court that a question whether any income accrued or arose or could be deemed to have accrued or arisen in any previous year is a question of law.
(c) Motilal Padampat Sugar Mills Company Ltd. v. State of Uttar Pradesh : [1979]118ITR326(SC) .
In this case, the State of U.P. had decided to grant exemption from sales tax for a period of three years to all new industrial units in the State. The assessee received further information from the Director of Industries and was assured that there would be no sales tax on the finished products of the assessee's proposed industrial unit from the date it received a connection for electricity for commencing production. The assurance of exemption was reiterated by the Chief Secretary of the Government subsequently. On the basis of such assurance, the assessee set up a factory. Thereafter, the Government changed its policy and laid down that the new :unit of the type set up by the assessee would be given only a partial concession. Thereafter, the State Government revised this policy and rescinded even the partial exemption. The assessee challenged the decision of the Government under Article 226 of the Constitution claiming that it had set up a factory and invested a large amount of money relying on the unequivocal assurance that the assessee would be granted exemption from payment of sales tax for three years. The State Government was, therefore, bound to honour the assurance and grant the exemption. The assessee was unsuccessful in the High Court but on a final appeal before the Supreme Court, it was held that, on the facts, promissory estoppel had been established against the Government and the Government was bound to carry out its promise and allow such exemption to the assessee.
32. The learned advocate for the assessee contended on the other hand that it appeared from the said resolution dated January 28, 1967, that the U.K. company had only expressed its intention to pay the said amount. No legal right could or did accrue in favour of the assessee on the basis of the said resolution. The position remained the same after the U.K. company issued the said letter dated September 20, 1968. All that the said letter indicated was that on the basis of the said resolution, arrangements for settlement would be made with the assessee.
33. The learned advocate for the assessee contended further that the fact that the said amount had been entered in the books of account of the assessee was of no consequence inasmuch as no income had in fact accrued to the assessee by reason of the erroneous entry in the accounts and will not result in accrual of any income. In support of his contentions, the learned advocate for the assessee relied on the decision in India Discount Co, Ltd.'s case : [1970]75ITR191(SC) . The decision has been considered earlier.
34. On the question referred in Income-tax Reference No. 218 of 1977, we note the following facts as have been found by the Appellate Assistant Commissioner and the Tribunal. The said facts are, inter alia, that there had been no business transaction between the assessee and the U.K. company after the assessee was converted into a public limited company on June 8, 1965. In the income-tax return filed by the U.K. company in the U.K., the payments made to the assessee were not claimed to be the business expenses of the U.K. company. The said amount of Rs. 22'5 lakhs was paid without any claim from the assessee. There was no evidence that the said payment by the U.K. company to the assessee was attributable to any legal obligation or custom or past practice or tradition.
35. We also note that in the resolution dated January 28, 1967, it had been recorded by the U.K. company that it would indemnify the assessee against the loss suffered by the latter without any legal obligation to do so and without any admission of liability. It is also not the case of the Revenue that the assessee, on the basis of the said resolution, acted in any manner to its detriment and altered its position adversely. From the aforesaid, it is clear that there was no obligation, either contractual or statutory, on the U.K. company to make the said payment to the assessee. The case of promissory estoppel, in our view, had also not been established. From the aforesaid, the conclusion which necessarily follows is that the payment was made by the U.K. company to the assessee unsolicited and without any expectation. It is not the case of the Revenue that the assessee was induced to take up the contract with the Indian Oil Corporation on the expectation that the U.K. company would indemnify the assessee if the assessee suffered a loss in executing the work. No consideration passed from the assessee to the U.K. company for the said payment and no quid pro quo was involved.
36. The fact that at the relevant time the assessee was a subsidiary of the U.K. company would make no difference to the legal position. The U.K. company and the assessee at all material times were and remained different entities. Similarly, the fact that there were prior discussions between the assessee and the U.K. company regarding the method and manner of the payment and determination of the quantum to be paid would not affect the character of the receipt. As the Tribunal correctly noted, there can be nothing to bar consultation and discussion between a donor and a donee.
37. In the conspectus, as above, it appears that the principles laid down both in the English law and in Indian law in the decisions cited on behalf of the assessee noted hereinabove would apply to the facts of this case. It appears to us that the payment received by the assessee from the U.K. company was a casual receipt in the nature of a windfall. The payment was benevolent and constituted a gesture of goodwill on the part of the U.K. company. It cannot be said that the said payment had the character of a trading or a revenue receipt.
38. The fact that the amount received from the U.K. company had been shown in the profit and loss account of the assessee for the relevant assessment year under the head 'Income from other sources' would also not be decisive in the determination of the character of the receipt. The Supreme Court has clearly laid down in India Discount Co. Ltd.'s case : [1970]75ITR191(SC) , that a receipt which in law could not be regarded as income could not be so treated merely because the assessee had erroneously credited the same to its profit and loss account.
39. For the above reasons, we find no reason to interfere with the conclusion of the Tribunal. We answer the question referred in Income-tax Reference No. 218 of 1977 in the affirmative and in favour of the assessee.
40. On the question referred in Income-tax Reference No. 155 of 1982, the relevant facts found are, inter alia, that the actual payment had been received by the assessee from the U.K. company during the years 1969 to 1972. In the resolution dated January 28, 1967, it was recorded that the U.K. company intended to make the payment over a period of two years after the ascertainment of the loss suffered by the assessee by the end of the said two years. As we have already held, no obligation was imposed by the said resolution on the U.K. company, contractual or otherwise, to make the said payment to the assessee. We note that the assessee had credited the amount in its account in the relevant assessment year but the same would not affect the actual position. The Supreme Court heldin E. D. Sassoon & Company Ltd.'s case : [1954]26ITR27(SC) , that the accrualof an income would not depend on the accounts of the assessee. Whatever bethe position of the accounts, the profits and gains as ascertained would haveto be referred back to the chargeable accounting period during which suchprofits or gains actually accrued or arose and the assessee would be liableto tax in respect of the same during the correct and proper chargeableaccounting year.
41. On the facts and circumstances as aforesaid, we also accept the finding of the Tribunal that, in any event, no riant to receive the amount paid by the U.K. company accrued to the assessee during the relevant accounting year. We answer the question in Income-tax Reference No. 155 of 1982 also in the affirmative and in favour as the assessee. On the facts and in the circumstances of the case, there will be no order as to costs.
Ray, J.
42. I agree.