Commissioner of Income-tax Vs. Barium Chemicals Ltd. - Court Judgment

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direct taxation - assessment - sections 2 (47) and 45 of income tax act, 1961 - assessee entered into contract by which english company was required to erect barium chemical plant for assessee - during trial it was found that plant and machinery did not confirm agreed specification and design - issue regarding assessment of amount received by assessee from english company in lieu of settlement and amount paid by assessee for investigation into deficiencies of production units - on examination of terms of settlement deed it cannot be said that amount received represent loss of profits - agreement between assessee and english company were not trading contracts for generation of revenue profits - amount received amounts to capital receipt - there was no transfer of any capital asset as envisaged under section 45 - receipt cannot be termed as capital gains - held, amount paid by assessee should be deemed as capital expenditure whereas damages received by assessee were held as capital receipt. - motor vehicles act (59 of 1988)section 149 (2): [v. gopala gowda & jawad rahim, jj] insurers entitlement to defend the action joint appeal by insured and insurer - held, the language employed in enacting sub-section (2) of section 149 appears to be plain and simple and there is no ambiguity in it. it shows that when an insurer is impleaded and has been given notice of the case, it is entitled to defend the action only on grounds enumerated in sub-section (2) of section 149 of the act, and no other grounds are available to it. the insurer is not allowed to contest the claim of the injured or heirs of the deceased on other grounds, which are available to the insured. if insurer is permitted to contest the claim on other grounds it would mean adding more grounds of contest to the insurer and will be negation of the intention of the legislature and annihilate mandate of the provisions of sections 170 and 149 of the act. the insured can pursue appeal only after giving up the insurer as the appellant and not otherwise. in the instant case, the insurer has not withdrawn from party array but has remained prosecuting the appeal with the insured on the grounds which are available only to the insured. therefore, the joint appeal as filed by the insured and the insurer is not maintainable. section 166: [v. gopala gowda & jawad rahim, jj] claim for compensation accident due to mechanical defect in the vehicle held, it is not in dispute that the claimant suffered injuries in an accident, which occurred during the course of his employment, albeit due to his negligence but law does not render him remediless. statutory right is conferred on him, accruing by virtue of his employment under insured to claim compensation under workmens compensation act. the insurer is statutorily duty bound to discharge the liability of the owner of the vehicle, to pay such compensation to the employee, as mandated under the provisions of section 149 of the act. the right of an injured employee or his dependents as the case may be to be compensated, when injury is suffered or death occurs during his employment, is recognised not only under workmens compensation act, but also under benevolent provisions under section 166 and 167 of the m.v. act. the right of driver to seek compensation is not restricted only to the workmens compensation act, it has been enlarged to enable such person to seek just compensation (sections 166 and 168), conferring upon him the right of election engrafted under section 167 of the act to choose either of the two forum. the only defence which the insurer could take is limit of its liability as enumerated under section 147 of the act, leading to contest, inter alia, only between insured and insurer and does not impact claimants right to recover the compensation determined by the tribunal which crystallizes into enforceable right against both. in the instant case, the claimant/driver has exercised right of election under section 167 of the act to seek compensation under section 166 of the act resulting in award passed by the tribunal. therefore, the insured and the insurer have no escape but to discharge the said award as directed. undisputedly, in this case as deduced for proved facts, the vehicle in question was not properly maintained by the owner and despite faulty brake system, the claimant had undertaken the hazardous journey to his peril at the behest of and at the instruction of the owner. the owner is therefore, tortfeasor. section 168: [v. gopala gowda & jawad rahim, jj] insurers limit of liability - held, it is well settled that the liability of the insurance company for payment of compensation can be statutory or contractual. is for the insurance company to show that the insurance policy was a statutory policy and not a contractual policy to restrict its liability. that issue was neither raised before the tribunal nor is raised in this appeal requiring decision. thus, if at all the insurer has any valid ground to restrict its liability, it can proceed against the insured but firstly it has to discharge the award as required under section 149 (1) of the act. where the owner/insured has failed to maintain the vehicle as per prescribed safety standards and has caused the claimant to drive the vehicle with mechanical defects, the owner would be the tortfeasor and the claimant can maintain a petition seeking compensation under the provisions of the act, instead of seeking compensation under the workmens compensation act. on facts, held, the material evidence on record, particularly, with regard to the income of the claimant, his age, medical evidence and the evidence relating to pecuniary loss has not been considered by the tribunal in the correct perspective, which has resulted in passing of the impugned award, disproportionate to the pecuniary loss and the loss of future income of the victim. the settled principles governing determination of compensation has been given a go-bye. compensation of rs.4,15,150/- awarded by the tribunal was enhanced to rs.8,20,000/-. - the assessee took up the matter with the english company and called upon the latter to make good the deficiency and set right the plant and machinery. the english company was of the opinion that they did their best and incurred a loss of $ 3,50,000 and in order to make the plant workable, they had to spend $ 1,84,500. therefore, they wanted an indemnity from the assesee that they would not claim any more damages and agreed to complete the work by september, 1966. incorporating these details, a draft agreement was sent by the english company to the assessee. clark (inspector of taxes) [1935] 3 itr 17 that though in general the distinction between an income and a capital receipt was well recognised and easily applied, cases arose were to item lay on the border line and the problem had to be solved on the particular facts of each case. thus the amount received as consideration for the sale of a plot of land may ordinarily be a capital receipt but if the business of the recipient is to buy and sell lands, it may well be his income. 10. we think, sri ratnakar is well-founded in his submissions. best & co. both the income-tax officer as well as the appellate assistant commissioner rightly expressed the view that the assessee had not furnished any information as to the basis on which the compensation of $ 225,000 was agreed to be paid under the settlement deed dated february 22, 1967. but the tribunal without considering this aspect merely surmised that the details regarding the basis, if any, could be in possession of messrs mitchells and in that erroneous view recorded a finding that both the income-tax officer and the appellate assistant commissioner fell into error in expressing the view that the assessee had withheld the relevant details regarding the receipt of compensation. in the letter dated december 20, 1965, addressed by the english company to the assessee, which was already noticed by us hereinbefore,it was clearly mentioned how much loss the english company would suffer. the statement of lord poole, the recording of the aide-memoire and other documents clearly show that the settlement deed dated february 22, 1967, was mostly the result of oral discussions, the material portions of which were recorded in the form of an aide-memoire and the assessee furnished the same to the assessing authority. the collector of poona requisitioned the premises in 1944. although the requisition covered the office as well as the six sheds, at the request of the assessee, the collector agreed to allow the assessee to remain in possession of the office premises from where he carred on business. there has been a sterilisation of capital assets of the assessee in that the english company failed to erect the machinery and plant according to the original stipulations. that amount was paid by the english company as damages for their failure to fulfill their obligations under the agreements concluded with the assessee.m.n. rao, j. 1. this consolidated reference under section 256(1) of the income-tax act, 1961, arises out of a common order made by the income-tax appellate tribunal hyderabad, in ita nos. 1286 and 1296 of 1975-76. the relevant assessment year is 1968-69. the questions referred to this court are as follows : questions raised by the revenue : '1. whether, on the facts and in the circumstances of the case, the sum of rs. 47,20,539 received from m/s l. a. mitchells ltd., manchester, during the assessment year 1968-69 or any part thereof constitutes a revenue receipt or a capital receipt 2. whether the amount of rs. 47,20,539 is exigible to capital gains tax in the event of holding that the said amount constitutes capital receipt ?' questions raised by the assessee-company : '1. whether, on the facts and in the circumstances of the case, the sum of rs. 50,000 paid by the assessee to m/s. atkins pvt. ltd., calcutta, could be allowed as business expenditure partaking of the nature of revenue 2. whether, on the facts and in the circumstances of the case, the sum of rs. 42,212 paid by the assessee to m/s chemicals and technical services, london, could be allowed as business expenditure partaking of the nature of revenue ?' the facts leading to the two references in question in brief are as follows : the assessee-company is a registered company under the indian companies act. it entered into an agreement with messrs. l. a. mitchells ltd., manchester, united kingdom, on october 12, 1961, according to which the english company was required to erect a barium chemical plant for the assessee at kothagudem, andhra pradesh, for producing certain barium salts. the consideration fixed for the erection of the plant was $ 1,84,500. the work was to be commenced within four months and completed within 9 to 12 months from the issue of the letter of credit. the english company had agreed to ensure a certain quality of barium salts and also guaranteed certain quantity of production per annum. as differences arose between the assessee and the english company, a supplementary agreement was concluded on august 3, 1963, under which the english company agreed to take up complete responsibility for the plant and machinery supplied and they were prepared to give necessary guarantee. the erection of the plant continued till the middle of 1964. during the trial runs, it was noticed that the plant and machinery was completely defective and did not conform to the agreed specifications and designs. after the defects were pointed out by the assessee company and investigated into by the english company, the plant commenced production on may 4, 1965. then it was noticed that the production capacity was only 30% of the installed capacity. it was also found that the quality of the barium salts produced was not according to the agreed specifications. the assessee took up the matter with the english company and called upon the latter to make good the deficiency and set right the plant and machinery. the english company was of the opinion that they did their best and incurred a loss of $ 3,50,000 and in order to make the plant workable, they had to spend $ 1,84,500. therefore, they wanted an indemnity from the assesee that they would not claim any more damages and agreed to complete the work by september, 1966. incorporating these details, a draft agreement was sent by the english company to the assessee. in the meanwhile, the assessee informed the company law board government of india, that they intended to claim damages to the tune of $ 4,50,000 from the foreign company. there was some correspondence between the two companies. the proposal sent by the english company was not acceptable to the assessee and in turn they sent certain counter-proposals to the english company according to which the quantity and quality of the production were to be guaranteed. these proposals were not acceptable to the english company. in march, 1966, the english company left the erection site abruptly. subsequently, there were discussions and protracted negotiations as a result of which a settlement was reached between the two on february 22, 1967, under which the english company agreed for the following arrangement if the assessee would waive their claims against the english company. '(a) payment of 2,25,000 in sterling (rs. 47,20,939); (b) despatch of kiln from english company to the assessee valued at $ 27,000 (rs. 5,66,573); (c) surrendering all claims for spares and stores left at the site and abandoned by mitchells in february 1966, of the value of rs. 1,61,008; (d) surrendering claim for the credit balance of rs. 2,38,942 in the account of mitchells in the books of the assessee.' the total value of the above four items was rs. 56,87,402. 2. the income-tax officer (the assessing authority) considered the question whether the aforesaid amounts constituted capital receipt or revenue receipt. the contention raised by the assessee was that the entire amount received under the settlement dated february 22, 1967, represented compensation for liquidated damages and so the same should be treated as capital in nature. the income-tax officer, after considering the submissions made by the assessee, excluded the amount of rs. 1,61,008 on account of the value of spares and stores left at the erection site and treated the balance amount as revenue receipt liable to tax under the provisions of the income-tax act. on appeal, the appellate assistant commissioner came to the conclusion that the value of the kiln ($ 27,000 = rs. 5,66,513) supplied by the english company and the surrender of claim for the credit balance of rs. 2,38,942 standing to the account of the english company in the account books of the assessee should not be construed as revenue receipt. after excluding these two items, the appellate assistant commissioner held that the balance amount of rs. 47,20,939 should be treated as revenue receipt. aggrieved by this, the assessee preferred an appeal to the income-tax appellate tribunal. 3. as regards the two items held against, both the assessee and the revenue preferred appeals to the income-tax appellate tribunal which held that the amount of rs. 47,20,939 in its entirety should be treated as a capital receipt. it also rejected the alternative submission made on behalf of the department that in the event of the amount being treated as capital in nature, it should be assessable to capital gains tax. 4. during the accounting year, the assessee paid rs. 50,000 to messrs atkins (p) ltd. and claimed the same as revenue expenditure. the amount was paid towards consultation fee for services rendered by messrs atkins (p.) ltd. who were required to conduct an investigation into the deficiencies of the various production units and suggest alternative layout, additions and alterations to the existing plant and machinery. originally, the assessee had agreed to pay a sum of rs. 1,00,000 to messrs. atkins (p.) ltd. but when the work was half way through, the assessee felt that it was not possible to go through the programme. accordingly, it requested m/s atkins to receive rs. 50,000 towards services rendered by them. this amount was claimed by the assessee as business expenditure. but the income-tax officer considered that it was on capital account, since the advice of m/s. atkins was called for in connection with the plant and machinery installed. on appeal, the appellate assistant commissioner agreed with the assessee's claim and directed allowance of the same. on further appeal, at the instance of the revenue, the income-tax appellate tribunal reversed the finding of the appellate assistant commissioner and held that the expenditure in question was capital in nature. 5. the assessee also paid a sum of rs, 42,212 to messrs chemicals and technical services, london, and claimed the same as revenue expenditure in computing the profits for the assessment year 1968-69. this amount was paid pursuant to the contract entered into for purposes of advising the assessee to set right certain errors in the installation of plant and machinery by messrs. mitchells ltd. who had abandoned the work. messrs. chemicals and technical services went into the matter and submitted a report giving suggestions as to how the assessee could improve the existing working of the plant and machinery and suggested modifications for improving the efficiency. the income-tax officer considered the expenditure to the capital in nature and disallowed the same. on appeal, the appellate assistant commissioner agreed with the assessee and held that the payment was a revenue receipt. on further appeal, the income-tax appellate tribunal expressed the view that the same constitutes capital expenditure : when the damages received by the assessee from messrs. mitchells ltd. were capital in nature, the expenditure incurred on account of the payment made to messrs chemicals and technical services also must be considered as capital expenditure. 6. we shall first take up question no. 1 raised by the revenue which pertains to rs. 47,20,539. the question whether a payment is a revenue receipt assessable to tax or a capital receipt not so assessable defies easy solution. the dividing line is not clear cut, at any rate, in border line cases. 'income' was held to be a word of broadest connotation and difficult to define in any precise general formula (vide raja bahadur kamakshya narain singh of ramgarh v. cit [1943] 11 itr 513 , lord macmillan expressed the view in van den berghs ltd. v. clark (inspector of taxes) [1935] 3 itr 17 that though in general the distinction between an income and a capital receipt was well recognised and easily applied, cases arose were to item lay on the border line and the problem had to be solved on the particular facts of each case. 7. referring to these two views, the supreme court in cit/ept v. south india pictures ltd. : [1956]29itr910(sc) observed thus (p. 915) : 'no infallible criterion or test can be or has been laid down and the decided cases are only helpful in that they indicate the kind of consideration which may relevantly be borne in mind in approaching the problem. the character of the payment received may vary according to the circumstances. thus the amount received as consideration for the sale of a plot of land may ordinarily be a capital receipt but if the business of the recipient is to buy and sell lands, it may well be his income. the problem that confronts us has to be approached keeping in mind the different kinds of consideration taken into account in the different cases.' 8. it is the contention of sri suryanarayana murthy, learned counsel for the revenue, that the present question is a question of law and this court is therefore, entitled to embark upon an enquiry as to whether the amount received by the assessee company was towards loss of profits or towards loss of its source of income. an examination and analysis of the settlement dated february 22, 1967, according to learned counsel, would disclose that the view taken by the tribunal that the amount was received by the assessee from the english company towards damages directly relatable to the plant and machinery installed and that the same was not in the course of normal business carried on by the assessee company are unsustainable. there is no warrant for the conclusion reached by the tribunal that the assessee suffered substantial injury to its profit-making apparatus. in order to ascertain the nature or character or the source of the compensation received by the assessee, according to learned counsel, the terms of the basic document, viz., settlement deed dated february 22, 1967, must be examined and in the course of such examination, it would be necessary to consider the earlier two agreements of the years 1961 and 1963 also, since the 1967 settlement was the culmination of the earlier two agreements. the revenue need not seek a reference as to whether or not the findings of fact recorded by the tribunal were supported by evidence. the high court will have to look into the nature of the compensation in answering question no. 1. 9. sri ratnakar, learned counsel for the assessee, says that this court, in the absence of a reference sought by the department on the question whether or not the findings of fact recorded by the tribunal were supported by evidence, cannot independently embark upon an enquiry in order to ascertain the facts for the purpose of reaching its conclusions. the findings of fact recorded by the tribunal, according to sri ratnakar are binding on this court in the present reference as the department did not seek any reference disputing the findings of fact recorded by the tribunal. 10. we think, sri ratnakar is well-founded in his submissions. 11. in karam chand thapar & bros p. ltd. v. cit : [1971]80itr167(sc) , the question for reference before the high court was whether, on the facts and in the circumstances of the case, the sum of rs. 18,00,000 paid to messrs karamchand thapar & bros. ltd. was a revenue receipt and as such assessable to income-tax. this question is very similar to and in substance the same as the present question no. 1. the tribunal in that case held that the receipt was capital in nature. the high court re-examined the material on record and reversed the findings of fact and recorded a view that the amount was revenue receipt in the hand of the assessee, although no reference was sought by the department on the question whether the finding of fact recorded by the tribunal was not supported by evidence. adverting to this aspect, the supreme court stated the rule thus (p. 170) : 'the question as framed does not pose any challenge to the facts found by the tribunal. it was open to the commissioner to challenge the facts found by the tribunal, if the findings in question were not supported by any evidence or if in reaching those findings, the tribunal committed any error of law. but the commissioner did not challenge those findings on any of those grounds. the question as framed proceeds on the basis that the facts found by the tribunal are accepted by the commissioner, but he challenges the decision reached by the tribunal on the basis of those findings. in other words, the question framed should be read as to whether, on the facts and in the circumstances of the case, as found by the tribunal, the sum of rs. 18,00,000 paid to the company was a revenue receipt and as such assessable to income-tax.' 12. in sree meenakshi mills ltd. v. cit : [1957]31itr28(sc) , the supreme court, after reviewing the case law, summarised the position thus (p. 50) : '(1) when the point for determination is a pure question of law such as construction of a statute or document of title, the decision of the tribunal is open to reference to the court under section 66(1). (2) when the point for determination is a mixed question of law and fact, while the finding of the tribunal on the facts found is final, its decision as to the legal effect of those findings is a question of law which can be reviewed by the court. (3) a finding on a question of fact is open to attack under section 66(1) as erroneous in law when there is no evidence to support it or if it is perverse. (4) when the finding is one of fact, the fact that it is itself an inference from other basic facts will not alter its character as one of fact.' 13. the limitations imposed on the high court in this regard have been considered by the supreme court in karnani properties ltd v. cit : [1971]82itr547(sc) : 'the jurisdiction of the high court in dealing with a reference under section 66 is a very limited one. it must take the fact as stated in the statement of the case unless the question whether the findings of the tribunal are vitiated for one or the other of the reasons recognised by law is before it.' 14. the supreme court in cit v. s. p. jain : [1973]87itr370(sc) restated the aforesaid rule. 15. the contention of sri suryanarayana murthy is that the present question is a pure question of law since it relates to construction of documents, viz., settlement deed dated february 22, 1967, and the earlier two agreements of 1961 and 1963 and therefore, we can review the facts as found by the tribunal. it is difficult to agree with this contention. the settlement deed dated february 22, 1967, based on which the amount in question was received by the assessee cannot by any stretch of reasoning be construed as document of title. the reference sought to this court by the revenue was not with regard to the construction of the agreement dated february 22, 1967, or the earlier two agreements but the question referred was whether the sum of rs. 47,20,539 received by the assesee from the english company constitutes a revenue receipt or a capital receipt. in the determination of this question, it is not open for us to embark upon an enquiry into the aforesaid three agreements. 16. in the reference application made by the revenue to the tribunal which is at pages 120 and 122 of the paper book, the department stated in para 3, at page 121, thus : 'that the facts which are admitted and/or foundby the appellate tribunal and which are necessary for drawing up a statement of the case are stated in the enclosure for ready reference.' 17. the findings of the tribunal are to the effect that : in the case before us, mitchells did not properly comply with the task of installation of plant and machinery and on account of such nonfulfilment of the contract the profit-marking apparatus suffered very serious damage as the ultimate production was found to be far below the quality and quantity contracted for by the assessee. since the injury caused was substantial as to affect even the basic foundation of the assessee company, the damages received on this account will have to be considered as only capita in nature...... the damages received by the assessee company are directly relatable to the plant and machinery installed by mitchells and hence in our view, it cannot be held that such damages in dispute were received in the course of normal business carried on by the assessee company........... considering the fact that the assessee company suffered substantial injury to the profit making apparatus, the damages received on this account, in our view, will constitue capital receipt......... neither the initial agreement nor the final mutual agreement contained any specific clause to the effect that any part of the damages is relatable to the loss of profits.' 18. these findings have not been disputed by the revenue and, therefore, it is not open to the revenue to question these findings. 19. it is true that in cit v. best & co. (p.) ltd. : [1966]60itr11(sc) , the supreme court scrutinised the evidence. the assessee in that case was paid certain during three successive years after the termination of the agency and as a condition, the assessee undertook for a period of five years to refrain from selling or accepting any agency for explosives competitive with those covered by the agency agreements terminated. these amounts were claimed by the assessee as capital receipts and he did not place any material before the department to establish the relatives importance of the agency in the framework of the earning apparatus of its business or to prove that the agency was a pivot of its structure. the income-tax tribunal held that the amounts were received based on future sales and so they constitute normal commission receipts. the question referred to the high court was whether the amounts are assessable under section 10 for the assessment years 1951-52 and 1952-53 the high court, reversing the decision of the appellate tribunal, expressed the view that the amounts were capital receipts and so not liable to tax. in the appeal preferred by the commissioner to the supreme court, the evidence was scrutinised for the purpose of ascertaining the true nature of the receipts and it was held that the compensation received was not only in lieu of the loss of the agency but also for accepting a restrictive convenient for a specified period. the amount received by way of compensation which was attributable to the restrictive covenant was a capital receipt. if the compensation paid was in respect of two distinct matters, one taking the character of a capital receipt and the other of a revenue receipt, apportionment will have to be made between the two matters. what were the findings of fact recorded by the tribunal and whether the findings of the fact recorded by the tribunal were ignored by the high court and whether the high court, in the absence of reference sought by the department, can embark upon an independent enquiry in to the findings of fact recorded by the tribunal, did not fall for consideration before the supreme court and, therefore, this ruling is not an authority for the proposition advanced for the revenue by sri suryanarayana murthy. 20. even if the department had asked for a reference on the question whether the findings of the tribunal were supported by evidence, it would have been difficult for the department to establish that the facts found by the tribunal were unsupported by evidence. 21. in the original agreement dated october 12, 1961, by clause 8, it was stipulated that : '8. delivery of the plant and equipment included in the contract price shall commence in four months, and it is expected to complete delivery, erection and putting in to operation in nine to twelve months from the establishment of credits and issue of import licence and subject to site conditions and availability of site.' 22. clause 15 stipulated that the vendor (english company) shall not be liable to the purchaser for the following : '(a) any loss of profit or of contracts suffered by the purchaser, (b) any claim made against the purchaser, except as provided in these conditions, (c) any damage or injury caused by or arising from the acts or commissions of the purchaser or of other (not being the contractor's servants or sub-contractors), (d) any loss or damage or hindrance by circumstances over which the vendor has no control, and generally falling within the usual meaning of the expression 'force majeure' (except loss or damage caused by any such risks as by clause 14 (insurance) is required to be covered by insurance.' 23. in the conditions of sale attached to the agreement, the english company undertook 'that the machinery supplied by us shall be of first class materials and of sound workmanship and that we will make good or six months of delivery from the works and which are proved to be due solely to the use of defective materials or bad workmanship and defective parts replaced are to be our property.' clause no. 18 provides for arbitration. 24. in the supplemental agreement dated august 3, 1963, by clause 1, the english company undertook that 'they take complete responsibility for the plant and machinery supplied and to be supplied for producing the quality of salts are contracted, with the available raw materials and that they are prepared to give the necessary guarantees in this regard.' 25. on december 20, 1965, the english company wrote a letter to the assessee stating, inter alia, that they would incur on the job a loss approximately of $3,50,000. 'this is a considerably higher loss than we had hitherto contemplated.......... in short, we are faced with spending over $5,00,000 on a contract priced at $1,84,500'. by then the english company was aware that the assessee had made a claim before the company law board for $450,000. referring to this, the aforesaid letter states that 'although we have until now been prepared to complete the plant first and settle any claims afterwards, we have never thought that your claims, after allowing for our counter-claims, could possibly amount to any such figure.' 26. the aide-memoire incorporating the gist of the discussions that took place between the english company and the assessee explains the position in greater detail. para (c) of the aide-memoire(at page 21 of the paper book supplied by the assessee) states : 'if mitchells'loss, by some strategy can be restricted to $370,000, or slightly more, say $400,000 and they are absolved of their obligations under the contract and are able to walk off this contract and the site freely and amicably, then mitchells should welcome such proposals, if feasible.' para d-2 sets out the items of expenditure mitchells should incur. para d-2(iii) says that 'this amount should be deducted out of the $400,000 and the balance subject to a minimum of $150,000 should be paid to barium chemicals limited in sterling in cash, immediately'. para d-2 (iv) says that 'on completion of these obligations, barium and mitchells will mutually cancel the contract subsisting between them and both parties will be clear of all liabilities.' 27. this aide-memoire thus contemplated relieving mitchells from their obligation to the assessee-company on payment of certain amounts. the english company was anxious that their losses should be restricted to $ 400,000 and they were eager to extricate themselves from the obligations they had undertaken by virtue of the two agreements of 1961-1963. it was only after the english company walked out of the site abruptly in march, 1966, that the discussions further continued and culminated in the settlement dated february 22, 1967. para 2 of the settlement deed refers to the fact the disputes and differences had arisen between the two. para 3 which is relevant reads : '3. notwithstanding that the above-mentioned claims have been rejected by mitchells, s. pearson industries ltd., and lord poole, the parties hereto, namely, mitchells and barium, have agreed that the aforesaid disputes and differences shall be settled and determined on the terms and conditions hereinafter set out. 1. mitchells shall on the delivery to them of this agreement duly signed by barium authorised representative : (a) pay to barium's authorised representatives in england the sum of $ 225,000; (b) pay to messrs stocken & company, barium's solicitors, the sum of $10,000 on account of their costs and disbursements; and (c) release for collection within there calendar months at barium's own expense and cost the kiln (as described in the schedule hereto) which is now at 72, purely way, croydon, surrey, england, and which barium has agreed to accept in such condition as it may be on the date of collection. (d) barium hereby acknowledges that it accepts the above sums and the release of the said kiln in full and complete settlement and discharge of all claims of any kind, whether present or future, actual or contingent, against mitchells, l. a. mitchel (holdings) ltd., and s. pearson industries ltd. and against any other parent or associated or subsidiary company and against lord poole and any other individual arising out of or connected with the said contract......... 3. without prejudice to the generality of the foregoing, barium hereby waives all claims (if any) for damages in respect of loss of profits and releases mitchells and all others mentioned in clause 2 hereof from any obligation to complete and said contract and mitchells hereby release and discharge barium from all claims of any kind, whether present or future, actual or contingent, arising out of or connected with the said contract,' 28. the contention of sri suryanarayana murthy for the revenue, is that only the cost of the kiln constitutes capital receipt since that was by way of replacement of defective machinery and the other amounts are revenue receipts. we are unable to agree with this contention. the amounts mentioned in sub-clause (1) of clause 3 were accepted by the assessee in full and complete settlement and discharge of all claims, whether present or future actual or contingent, against mitchells and other companies associated with that and lord poole, the managing director, and this was specifically stated in sub-clause (2) of clause 3. there is no reference either in sub-clause (1) or (2) to any loss of profits. it is only in sub-clause (3) of clause 3, that there is reference to loss of profits. by this sub-clause the assessee waived 'all claims, if any, for damages in respect of loss of profits and releases mitchells....' this could be attributed to two things : (i) that the english company was apprehending that despite receiving the amounts under sub-clause (1) of clause 3, the assessee company might claim further damages by way of loss of profits and that contingency the english company wanted to pre-empt; (ii) that the assessee-company also perhaps had entertained an idea that it could claim further amounts by way of loss of profits. by sub-clause (3), that claim for further amounts was given up by the assessee. it is, therefore, not possible to draw the inference that what was received by the assessee-company under clause 3(1) was either fully or partly towards loss of profits. 29. it is next contended by sri suryanarayana murthy, learned counsel for the revenue, that the assessee's claim that the amount in question was a capital receipt should not be accepted for the reason that they had suppressed the materials in their possession. both the income-tax officer as well as the appellate assistant commissioner rightly expressed the view that the assessee had not furnished any information as to the basis on which the compensation of $ 225,000 was agreed to be paid under the settlement deed dated february 22, 1967. but the tribunal without considering this aspect merely surmised that the details regarding the basis, if any, could be in possession of messrs mitchells and in that erroneous view recorded a finding that both the income-tax officer and the appellate assistant commissioner fell into error in expressing the view that the assessee had withheld the relevant details regarding the receipt of compensation. 30. there is no basis for the revenue, in our view, to advance this contention. the finding of fact recorded by the tribunal that the assessee had not withheld any relevant details regarding the receipt of compensation from mitchells has not been questioned by the department by seeking a reference on that. when the department had accepted the fact as found by the tribunal, it is not open to learned counsel for the revenue now to contend that there was no basis for the finding recorded by the tribunal. 31. even if we were to go into the question whether the assessee had withheld any relevant details regarding the receipt of the amount in question, our answer would have been the same as the one record by the tribunal. in the letter dated december 20, 1965, addressed by the english company to the assessee, which was already noticed by us hereinbefore,it was clearly mentioned how much loss the english company would suffer. the aide-memoire which was also noticed by us, supra, gives further details. the gist of the discussions held by the assessee with lord poole, the managing director of messrs mitchells limited, was communicated by the assessee to the income-tax officer in their letter dated december 24, 1971, which is at page 28 of the paper book supplied by the assessee. mr dadachanjee (who represented the assessee in the discussions) put a specific question to lord poole : 'mr. dadachanjee : you have said that this operation cost you $250,000. does it refer to the extra costs for modifications or inclusive of everything.' this was the answer by lord poole : 'lord poole : this is in addition to the original estimate. everything was paid before the contract started. the original amount received is $ 165,000. in fact, you have the plant at a lesser price. la porte would have charged you $ 500,000.' 32. this gives a rough idea as to what was contemplated between both the parties. the english company was willing to spend an additional sum of $ 250,000 and if anybody else were to be entrusted with that work, it would have cost $ 500,000. ultimately, in the settlement deed dated february 22, 1967, the figure was reduced to $ 225,000. the statement made by lord poole on may 10, 1965 (which is at page 31 of the paper book supplied by the assessee) shows that by that date the loss sustained by them was already $ 250,000 and it would by substantially more by the time the other changes were effected. all these documents were furnished to the income-tax officer and the first appellate authority viz., the appellate assistant commissioner. it is true that the assessee stated before the company law board that it intended to claim damages of $ 450,000 from the english company. what was stated by the assessee-company was what it was contemplating doing. from that no inference follows that it had already concealed any material based on which it advanced the claim before the company law board. the statement of lord poole, the recording of the aide-memoire and other documents clearly show that the settlement deed dated february 22, 1967, was mostly the result of oral discussions, the material portions of which were recorded in the form of an aide-memoire and the assessee furnished the same to the assessing authority. we, therefore, do not find any justification for the criticism advanced that the assessee had suppressed any relevant information. 33. at the time of the trial run in 1964, it was noticed that the plant and machinery were defective. after completion, the plant went into production in may, 1965. there is no dispute that its optimum production was 30% of the installed capacity and that the quality of the barium salts was not what was stipulated in the agreement entered into by the assessee-company with the english company. the injury caused to the assessee-company was substantial as found by the tribunal. the non-fulfilment of the contract on the part of the english company, according to the tribunal, had resulted in serious damage to the profit-making apparatus of the assessee-company ultimately affecting the production. when the injury found was substantial so as to affect even the basic foundation of the assessee-company, the tribunal opined that 'the damages received on this account will have to be considered as only capital in nature'. in coming to this conclusion, the tribunal relied on the decisions of the supreme court in godrej and company v. cit : [1959]37itr381(sc) and cit v. vazir sultan & sons : [1959]36itr175(sc) . 34. the tribunal also found that the damages received by the assessee were directly relatable to the plant and machinery installed by mitchells and, therefore, the amounts could not be treated as having been received in the course of the normal business carried on by the assessee. 35. sri suryanarayana murthy relying upon the rulings in cit v. rai bahadur jairam valji : [1959]35itr148(sc) kettlewell bullen & co. ltd v. cit : [1964]53itr261(sc) , cit v. shamsher printing press : [1960]39itr90(sc) , cit v. rohtas industries ltd. : [1978]112itr798(cal) , cit v. rohtas industries ltd. : [1981]130itr292(cal) , vadilal soda ice factory v. cit : [1971]80itr711(guj) and cit v. manna ramji & co. : [1972]86itr29(sc) contends that on the findings recorded by the tribunal, no conclusion could by drawn that the receipt in question was a capital receipt. the amount was received by the assessee in the ordinary course of business and, therefore, even if it were to be treated as compensation for any damage suffered, it could not but be described as a revenue receipt. there was no destruction to the profit earning source of the assessee and even after receiving the compensation, the assessee carried on the business. any amount received as compensation for laying out of the machinery, according to mr. murthy, must be treated as a revenue receipt and not as a capital receipt. 36. it is difficult for us to agree with the contentions of sri suryanarayana murthy. 37. the facts in none of the aforesaid rulings are similar to those in the instant case. the ratio decidendi in the rulings cited by sri murthy turn on the particular facts and circumstances of each case. the conclusions sought to be drawn by sri murthy based on the aforesaid rulings with a view to supporting his contention that the amount in question is a revenue receipt, in our opinion, are untenable. 38. as already noticed above there, is no infallible test to draw a clear cut demarcation between a capital receipt and a revenue receipt, in cit and ept v. south india pictures ltd. : [1956]29itr910(sc) , the assessee had been given distribution rights in respect of three films and received towards commission a sum of rs. 26,000. the tribunal and the high court were of the view that the amount constituted a capital receipt. by a majority judgment, the supreme court ruled that the assessee received that amount in the ordinary course of business to adjust the relation between the assessee and the producers; the termination of the agreements did not radically or at all affect or alter the structure of the assessee's business. the amount received was only toward commission i.e. as compensation for loss of commission, which it would have earned had the agreements not been terminated and, therefore, the amount could not be construed as a capital asset. it was received only in the ordinary course of business and, therefore, it was liable to tax as a revenue receipt. 39. it is useful to notice in this context three other cases relating to compensation received for termination of managing agents. in godrej & co. v. cit : [1959]37itr381(sc) , the assessee received certain amount by way of compensation under an agreement for surrendering its claim for 20 per sent of commission as managing agent and agreeing to receive only 10 per cent. rejecting the cotention of the revenue that since the amount received was only compensation for carrying on the managing agency on a reduced remuneration, the supreme court, while holding the receipt a capital receipt, stated the rule thus (p. 386) : 'to regard such an agreement as a mere variation in the terms of remuneration is only to take a superficial view of the matter and to ignore the effect of such variation on what has been called the profit-making apparatus. a managing agency yielding a remuneration calculated at the rate of 20 per cent of the profit is not the same thing as a managing agency yielding a remuneration calculated at 10 per cent of the profits. there is a distinct deterioration in the character and quality of managing agency viewed as a profit making apparatus and this deterioration is of an enduring kind. the reduced remuneration having been separately provided, the sum of rs. 7,50,000 must be regarded as having been paid as compensation for this injury to or deterioration of the managing agency just as the amounts paid in glenboig's case [1922] 12 tc 427 or vazir sultan's case : [1959]36itr175(sc) were held to be.' 40. in cit v. vazir sultan & sons : [1959]36itr175(sc) , bhagwati j., speaking for the majority, on a review of various english decisions, laid down the following test (p. 185) : 'the first question to consider would be whether the agency agreement in question for cancellation of which the payment was received by the assessee was a capital asset of the assessee'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 assessee in the ordinary course of business and for the purpose of carrying on that business, it would fall into the latter category and the compensation or payment received for its cancellation would merely by 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 not a capital receipt.' 41. the ruling of the house of lords in glenboig union fireclay co. ltd. v. irc [1922] 12 tc 427 (hl), to the effect that if compensation received was really the price paid 'for sterilising the asset from which otherwise profit might have been obtained' was approvingly referred to. applying the test, the supreme court held that (p. 187 of 36 itr) : 'the agency agreements in fact formed a capital asset of the assessee's business worked or exploited by the assessee by entering into contracts for the sale of the charminar cigarettes manufactured by the company to the various customers and dealers in the respective territories. this asset really formed part of the fixed capital of the assessee business. it did not constitue the business of the assessee but was the means by which the assessee entered into the business transactions by way of distributing those cigarettes within the respective territories. it really formed the profit-making apparatus of the assessee's business of distribution of the cigarettes manufactured by the company. if it was thus neither circulating capital nor stock-in-trade of business carried on by the assessee, it could certainly not be anything but a capital asset of its business and any payment made by the company as and by way of compensation for terminating or cancelling the same would only be a capital receipt in the hands of the assessee.' 42. the assessee had two agency agreements - one relating to the hyderabad state and the other relating to the territories outside the hyderabad state. adverting to the aspect that even if the agency outside hyderabad was lost, the assessee retained the agency within the hyderabad state, the supreme court observed (p. 187) : 'even if one of these agency agreements was thus terminated, it would result in the destruction of the profit-making apparatus or sterilisation of the capital asset pro tanto and if in the former case the receipt in the hand of the assessee would only be a capital receipt, equally would it be a capital receipt if compensation was obtained by the assessee for the termination or cancellation of one of these agency agreements which formed a capital asset of the assessee's business.' 43. in karam chand thapar and bros p. ltd. v. cit : [1971]80itr167(sc) , the assessee received rs. 18,00,000 as compensation for termination of one of several managing agencies. after stating that it is not possible to lay down any single test as determinative of the question whether the receipt is capital or income, the supreme court followed its earlier ruling in kettlewell bullen and company's case : [1964]53itr261(sc) , wherein it was held (p. 172 of 80 itr) : 'where, on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated), the receipt is revenue : where, by the cancellation of an agency, the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt.' 44. applying the test, the supreme court held that the receipt on question was a capital receipt. in kettlewell bullen's case : [1964]53itr261(sc) , the assessee was the managing agent of six companies. it entered into an arrangement with mugneeram bangur and company whereby the latter agreed, (i) to purchase the entire holding of shares of the assessee in fort william jute company, the managed company, (ii) to procure repayment of all loans made by the assessee to fort william jute company, and (iii) to procure that the managed company will compensate the assessee for loss of office by payment of a sum of rs. 3,50,000 after the assessee resigned its managing agency and reimburse that amount to the managed company. the assessee company tendered resignation of the managing agency and received the sum of rs. 3,50,000 from the managed company. the question arose whether the amount of rs. 3,50,000 received by the assessee to relinquish the managing agency was a revenue receipt liable to tax. the agreement was made some time on may 21, 1952. in the normal circumstances, the managing agency was to continue up to january 14, 1957. observing the question is not capable of solution upon application of any single test and after referring to the observations of venkatarama aiyar j. in cit v. raj bahadur jairam valji : [1959]35itr148(sc) , the supreme court observed that the assessee company was formed with the object of acquiring managing agencies of companies and to carry on the business and to take part in the management, supervision or control of the business or operations of any other company, association, firm or person and to make profit out of it and (p. 268 of 53 itr) : 'that only authorised and appellant to acquire as a fixed asset, if a managing agency may be so described, and to exploit it for the purpose of profit. but here is no evidence that the company was formed for the purpose of acquiring and selling managing agencies and making profit by those transactions of sale and purchase. a managing agency is not an asset for which there is a market, for it depends upon the personal qualifications of the agent.' 45. the supreme court laid down the test in the following terms (p. 270 of 53 itr) : 'it may be broadly stated that what is received for loss of capital is a capital receipt what it received as profit in a trading transaction is taxable income. but the difficulty arises in ascertaining whether what is received in a given case is compensation for loss of a source of income, or profit in a trading transaction. cases on the borderline give rise to vexing problems. the act contains no real definition of income; indeed it is a term not capable of a definition in terms of a general formula....... it need hardly be said that the form in which the transaction which gives rise to income is clothed and the name which is given to it are irrelevant in assessing the exigibility of a receipt arising from a transaction to tax. it is again not predicated that the income must necessarily have a recurrent quality.' 46. after reviewing the case law - english cases and also its earlier rulings - south india pictures limited case : [1956]29itr910(sc) , rai bahadur jairam valji case : [1959]35itr148(sc) vazir sultan and sons case : [1959]36itr175(sc) and godrej and company's case : [1959]37itr381(sc) , the court stated the law thus (p. 282 of 53 itr) : 'on an analysis of these cases which fall on two sides of the dividing line, a satisfactory measure of consistency in principle is disclosed. where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated), the receipt is revenue : where, by the cancellation of an agency, the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt. 47. applying the said rule, the court ruled that the amount received by the assessee was a capital receipt since it was paid to compensate loss of a capital asset. in jairam valji case : [1959]35itr148(sc) , the assessee received a sum of rs. 2,50,000 as solatium for termination of a contract when the rates were found by the purchaser to be uneconomical. while considering the question whether the sum was a capital or revenue receipt, the supreme court considered several english rulings apart from certain indian decisions and held that the amount received by the assessee was liable to tax as a revenue receipt. the business which the assessee was carrying on was the very business to which the agreement by which the solatium received related, and as it was in the ordinary course of business, any compensation received for its termination must be held to be revenue receipt. while stating so, the supreme court cautioned that it cannot be treated as infallible and observed that (p. 280 of 53 itr) : 'an agency contract which has the character of a capital asset in the hands of one person may assume the character of a trading receipt in the hand of another, as, for example, when the agent is found to make a trade of acquiring agencies and dealing with them. therefore, when the question arises whether the payment of compensation for termination of an agency is a capital or a revenue receipt, it must be considered whether the agency was in the nature of a capital asset in the hands of the agent, or whether it was only part of his stock-in-trade.' 48. the case in cit v. prabhu dayal : [1971]82itr804(sc) concerns the question whether a sum of rs. 70,000 received by the assessee in a compromise decree in a suit filed by him for non-payment of commission on the yearly net profits earned by the company to which he transferred his exclusive monopoly rights for acquisition of kankar deposits in jind state for manufacturing cement, was revenue or capital in nature. that amount was held to be a capital asset since it was a price paid for surrendering a valuable right. 49. cit v. shamsher printing press : [1960]39itr90(sc) and cit v. manna ramji and co. : [1972]86itr29(sc) relate to a totally different set of facts. in shamsher printing press' case : [1960]39itr90(sc) , the assessee received rs. 57,435 as compensation from the government for requisitioning his printing press since the requisition necessitated the assessee to shift his business to another place. the question was whether the amount of rs, 57,435 constituted a capital receipt or a revenue receipt. the claim of the assessee was that his business had suffered for a period of two years because of requisitioning of the premises. as the requisition itself was temporary in nature and having regard to the fact that no claim was made by the assessee for loss of goodwill, in which case the assessee would have definitely succeeded, the supreme court held that the amount received was a revenue receipt. in cit v. manna ramji and co. : [1972]86itr29(sc) , the business premises of the assessee consisted of an office and six sheds used for storing wood and timber. the collector of poona requisitioned the premises in 1944. although the requisition covered the office as well as the six sheds, at the request of the assessee, the collector agreed to allow the assessee to remain in possession of the office premises from where he carred on business. a compensation of rs. 1,85,200 for requisitioning the premises was awarded and after some correspondence the matter was referred to an arbitrator - the civil judge, poona, who, inter alia, held that the assessee was entitled to a lump sum of rs. 1,25,500 for loss of earnings. the income-tax officer deducted a sum of rs. 20,426 from out of the aforesaid amount as that amount was spent by the assessee in the claim proceedings against the government over and above the amount of rs. 2,000 which was awarded towards costs. on the balance amount of rs. 1,05,074 he levied tax treating the same as a revenue receipt. on appeal, the appellate assistant commissioner allowed the appeal and set aside the income-tax officer's order. the income-tax appellate tribunal on further appeal, held that the sum of rs. 1,25,000 was a revenue receipt. the high court, on a reference, held that the amount was a capital receipt not liable to tax. the supreme court reversed the finding of the high court, agreeing with the view expressed by the tribunal. the assessee was not deprived permanently of his sources of income; requisitioning was for temporary period and so it lacked the element of permanence. the amount paid to the assessee was on account of loss of earnings and he had also carried on business though on a reduced scale. having regard to all those circumstances the supreme court held that it was a revenue receipt. vadilal soda ice factory v. cit : [1971]80itr711(guj) relates, inter alia to the question whether two sums of rs. 7,000 and 50,000 received by the assessee as compensation for loss of contracts and loss of profits were assessable to tax. the contention of the assessee that the amounts represent capital receipts was negatived by the gujarat high court following the decision of the supreme court in shamsher printing press' case : [1960]39itr90(sc) . the two amounts were received by the assessee as compensation for loss of contracts and loss of profits and therefore, they were held to be revenue receipts. the two case relating to m/s rohtas industries : [1978]112itr798(cal) and : [1981]130itr292(cal) were decided by the calcutta high court. in both cases, the assessee was m/s. rohtas industries limited. it had purchased machinery from a german firm. after the machinery was installed, it was discovered that the same was defective and the output was below the guaranteed figure. after some correspondence, the german firm agreed that there was low output in spite of replacement of the parts. therefore, the german firm paid certain amounts to a german bank to be utilised by the assessee in future for purchase of other machinery. the assessee itself treated the amounts as income and disclosed the same in its profit and loss account. subsequently it claimed depreciation in respect of the capital expenditure on the machinery. the tribunal held that the amount received by the assessee from the german firm as compensation for low output and offered for taxation in the previous assessment years was a revenue receipt. the commissioner of income tax thereafter initiated proceedings for reference to the high court on the question whether the amount received was not a rebate on the actual price of machinery originally supplied. the question was answered in favour of the assessee by the calcutta high court. 50. from the foregoing decisional law, it is reasonably clear that in order to decide whether or not a payment is a revenue receipt, its true nature and substance must be looked into. the form in which it is expressed it not decisive. how the assessee treated the payment is not conclusive of its nature. if the assess himself has treated the payment in his account books as compensation or consideration received for loss of earnings or profits, it is a revenue receipt. if the payment is received in the ordinary course of the business of the assessee for loss of stock-in-trade, it is a revenue receipt. if, on the other hand, the payment received is towards compensation for extinction or sterilisation partly or fully of a profit earning source (capital asset), such receipt not being in the ordinary course of the assessee's business, it must be construed as a capital receipt. neither on the findings of the tribunal, nor on an examination of the terms of the settlement dated february 22, 1967, can it be said that the amount in question represented loss of profits. the business the assessee carried on was in barium chemicals. the settlement dated february 22, 1967, concluded between the assesee and the english company cannot be treated as one in the ordinary course of the business carried on by the assessee. installation of machinery and parts was not the business of the assesee. it was the business of the english company. there has been a sterilisation of capital assets of the assessee in that the english company failed to erect the machinery and plant according to the original stipulations. it had abandoned the work in the middle. the optimum capacity of the machinery installed was not even 30 per cent of the installed capacity. the amount paid was towards damages in order to compensate the assessee for not fulfilling the terms of the contract. the sterilisation of assets need not be in to in order to make a payment a capital receipt (vide vazir sultan and sons : [1959]36itr175(sc) ; godrej & company [1957] 37 itr 381 and karam chand thapar : [1971]80itr167(sc) ). the plant and machinery could not by any stretch of reasoning be construed as stock-in-trade of the assessee. they are only capital assets. the agreements between the assessee and the english company were not trading contracts for generation of revenue profits, but they were only designed to bring into being an apparatus for an income yielding source. 51. having regard to all these circumstances, the only conclusion we reach on this aspect is that the sum of rs. 47,20,939 received by the assessee during the assessment year 1968-69 from m/s mitchell limited constitutes in its entirety a capital receipt and so not liable to tax. agreeing with the view of the tribunal, we answer question no. 1 raised by the revenue in favour of the assessee and against the department. 52. the second question raised by the revenue is whether the amount of rs. 47,20,939 is exigible to capital gains tax in the event of holding that the said amount constitutes a capital receipt. the expression 'transfer' defined in section 2(47) of the act is as follows : 'transfer', in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law.' 53. none of the ingredients mentioned in section 2(47) is present in the transaction in question. there was neither sale nor exchange nor relinquishment of any asset or extinguishment nof any rights in respect of the amount of rs. 47,20,939 received by the assessee from the english company. that amount was paid by the english company as damages for their failure to fulfill their obligations under the agreements concluded with the assessee. unless the transaction falls within any of the categories specified in the aforesaid definition clause, the amount cannot be brought to tax under section 45 of the income-tax act as capital gains. as there was no transfer of any capital asset as envisaged under section 45, agreeing with the view taken by the tribunal, we answer the question in favour of the assessee and against the department. 54. question no. 1, raised by the assessee related to the sum of rs, 50,000 paid by the assessee to m/s atkins private limited, calcuttaand whether the sum could be allowed as business expenditure partaking of the nature of revenue. this amount was not the subject matter of the settlement dated february 22, 1967. m/s atkins private limited were engaged by the assessee to conduct investigation into the deficiencies of the various production units and to suggest improvements. m/s atkins private limited did not complete there investigation and half was through there assignment was cancelled. the assessee company paid m/s atkins a sum of rs. 50,000 as against the originally contracted amount of rs. 1,00,000. the damages received by the assesee-company from the english company were held by us to be a capital receipt. the amount of rs. 50,000 paid by the assessee to m/s atkins will have to be considered as capital expenditure. sri ratnakar, learned counsel for the assessee could not dispute this seriously. we therefore agreeing with the tribunal answer this question against the assessee and in favour of the revenue. 55. the second question raised by the assessee company is concerned with the amount of rs. 42,212 paid by the assessee to m/s chemicals and technical services london and whether it could be allowed as business expenditure partaking of the nature of revenue. this amount was not the subject matter of the settlement dated february 22, 1967. as in the case of the first question raised by the assessee the answer to this question must also be in favour of the revenue and against the assesse. when the damages 'received by the assessee were held to be in the nature of capital receipt it necessarily follows that the amount paid by the assessee to m/s chemicals and technical service was for the purpose of advising the assess to set right certain errors in the installation of the plant and machinery. m/s chemicals and technical services investigated into the mattter and subimtted a report suggesting improvement of existing plant and machinery in order to increase production. since the object of investigation conducted by the company relate to the plant and machinery the same in our view constitutes capital expenditure. this position could not be seriously contested by sri ratnakar learned counsel for the assessee. we, therefore, agreeing with the tribunal answer the question in favour of the revenue and against the assessee. 56. in the result we answer questions nos. 1 and 2 raised by the revenue in favour of the assessee and against the revenue. our answers to questions nos. 1 and 2 raised by the assessee company are in favour of the revenue and against the assessee company. 57. there shall be no order as to costs.

Judgment:

M.N. Rao, J.

1. This consolidated reference under section 256(1) of the Income-tax Act, 1961, arises out of a common order made by the Income-tax Appellate Tribunal Hyderabad, in ITA Nos. 1286 and 1296 of 1975-76. The relevant assessment year is 1968-69. The questions referred to this court are as follows :

Questions raised by the Revenue :

'1. Whether, on the facts and in the circumstances of the case, the sum of Rs. 47,20,539 received from M/s L. A. Mitchells Ltd., Manchester, during the assessment year 1968-69 or any part thereof constitutes a revenue receipt or a capital receipt

2. Whether the amount of Rs. 47,20,539 is exigible to capital gains tax in the event of holding that the said amount constitutes capital receipt ?' Questions raised by the assessee-company :

'1. Whether, on the facts and in the circumstances of the case, the sum of Rs. 50,000 paid by the assessee to M/s. Atkins Pvt. Ltd., Calcutta, could be allowed as business expenditure partaking of the nature of revenue 2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 42,212 paid by the assessee to M/s Chemicals and Technical Services, London, could be allowed as business expenditure partaking of the nature of revenue ?' The facts leading to the two references in question in brief are as follows :

The assessee-company is a registered company under the Indian Companies Act. It entered into an agreement with Messrs. L. A. Mitchells Ltd., Manchester, United Kingdom, on October 12, 1961, according to which the English company was required to erect a barium chemical plant for the assessee at Kothagudem, Andhra Pradesh, for producing certain barium salts. The consideration fixed for the erection of the plant was $ 1,84,500. The work was to be commenced within four months and completed within 9 to 12 months from the issue of the letter of credit. The English company had agreed to ensure a certain quality of barium salts and also guaranteed certain quantity of production per annum. As differences arose between the assessee and the English company, a supplementary agreement was concluded on August 3, 1963, under which the English company agreed to take up complete responsibility for the plant and machinery supplied and they were prepared to give necessary guarantee. The erection of the plant continued till the middle of 1964. During the trial runs, it was noticed that the plant and machinery was completely defective and did not conform to the agreed specifications and designs. After the defects were pointed out by the assessee company and investigated into by the English company, the plant commenced production on May 4, 1965. Then it was noticed that the production capacity was only 30% of the installed capacity. It was also found that the quality of the barium salts produced was not according to the agreed specifications. The assessee took up the matter with the English company and called upon the latter to make good the deficiency and set right the plant and machinery. The English company was of the opinion that they did their best and incurred a loss of $ 3,50,000 and in order to make the plant workable, they had to spend $ 1,84,500. Therefore, they wanted an indemnity from the assesee that they would not claim any more damages and agreed to complete the work by September, 1966. Incorporating these details, a draft agreement was sent by the English company to the assessee. In the meanwhile, the assessee informed the Company Law Board Government of India, that they intended to claim damages to the tune of $ 4,50,000 from the foreign company. There was some correspondence between the two companies. The proposal sent by the English company was not acceptable to the assessee and in turn they sent certain counter-proposals to the English company according to which the quantity and quality of the production were to be guaranteed. These proposals were not acceptable to the English company. In March, 1966, the English company left the erection site abruptly. Subsequently, there were discussions and protracted negotiations as a result of which a settlement was reached between the two on February 22, 1967, under which the English company agreed for the following arrangement if the assessee would waive their claims against the English company.

'(a) payment of 2,25,000 in sterling (Rs. 47,20,939);

(b) despatch of kiln from English company to the assessee valued at $ 27,000 (Rs. 5,66,573);

(c) surrendering all claims for spares and stores left at the site and abandoned by Mitchells in February 1966, of the value of Rs. 1,61,008;

(d) surrendering claim for the credit balance of Rs. 2,38,942 in the account of Mitchells in the books of the assessee.'

The total value of the above four items was Rs. 56,87,402.

2. The Income-tax officer (the assessing authority) considered the question whether the aforesaid amounts constituted capital receipt or revenue receipt. The contention raised by the assessee was that the entire amount received under the settlement dated February 22, 1967, represented compensation for liquidated damages and so the same should be treated as capital in nature. The Income-tax officer, after considering the submissions made by the assessee, excluded the amount of Rs. 1,61,008 on account of the value of spares and stores left at the erection site and treated the balance amount as revenue receipt liable to tax under the provisions of the Income-tax Act. On appeal, the Appellate Assistant Commissioner came to the conclusion that the value of the kiln ($ 27,000 = Rs. 5,66,513) supplied by the English company and the surrender of claim for the credit balance of Rs. 2,38,942 standing to the account of the English company in the account books of the assessee should not be construed as revenue receipt. After excluding these two items, the Appellate Assistant Commissioner held that the balance amount of Rs. 47,20,939 should be treated as revenue receipt. Aggrieved by this, the assessee preferred an appeal to the Income-tax Appellate Tribunal.

3. As regards the two items held against, both the assessee and the Revenue preferred appeals to the Income-tax Appellate Tribunal which held that the amount of Rs. 47,20,939 in its entirety should be treated as a capital receipt. It also rejected the alternative submission made on behalf of the Department that in the event of the amount being treated as capital in nature, it should be assessable to capital gains tax.

4. During the accounting year, the assessee paid Rs. 50,000 to Messrs Atkins (p) Ltd. and claimed the same as revenue expenditure. The amount was paid towards consultation fee for services rendered by Messrs Atkins (p.) Ltd. who were required to conduct an investigation into the deficiencies of the various production units and suggest alternative layout, additions and alterations to the existing plant and machinery. Originally, the assessee had agreed to pay a sum of Rs. 1,00,000 to Messrs. Atkins (p.) Ltd. But when the work was half way through, the assessee felt that it was not possible to go through the programme. Accordingly, it requested M/s Atkins to receive Rs. 50,000 towards services rendered by them. This amount was claimed by the assessee as business expenditure. But the Income-tax officer considered that it was on capital account, since the advice of M/s. Atkins was called for in connection with the plant and machinery installed. On appeal, the Appellate Assistant Commissioner agreed with the assessee's claim and directed allowance of the same. On further appeal, at the instance of the Revenue, the Income-tax Appellate Tribunal reversed the finding of the Appellate Assistant Commissioner and held that the expenditure in question was capital in nature.

5. The assessee also paid a sum of Rs, 42,212 to Messrs Chemicals and Technical Services, London, and claimed the same as revenue expenditure in computing the profits for the assessment year 1968-69. This amount was paid pursuant to the contract entered into for purposes of advising the assessee to set right certain errors in the installation of plant and machinery by Messrs. Mitchells Ltd. who had abandoned the work. Messrs. Chemicals and Technical Services went into the matter and submitted a report giving suggestions as to how the assessee could improve the existing working of the plant and machinery and suggested modifications for improving the efficiency. The Income-tax officer considered the expenditure to the capital in nature and disallowed the same. On appeal, the Appellate Assistant Commissioner agreed with the assessee and held that the payment was a revenue receipt. On further appeal, the Income-tax Appellate Tribunal expressed the view that the same constitutes capital expenditure : when the damages received by the assessee from Messrs. Mitchells Ltd. were capital in nature, the expenditure incurred on account of the payment made to Messrs Chemicals and Technical Services also must be considered as capital expenditure.

6. We shall first take up question No. 1 raised by the Revenue which pertains to Rs. 47,20,539. The question whether a payment is a revenue receipt assessable to tax or a capital receipt not so assessable defies easy solution. The dividing line is not clear cut, at any rate, in border line cases.

'Income' was held to be a word of broadest connotation and difficult to define in any precise general formula (vide Raja Bahadur Kamakshya Narain Singh of Ramgarh v. CIT [1943] 11 ITR 513 , Lord Macmillan expressed the view in Van Den Berghs Ltd. v. Clark (Inspector of Taxes) [1935] 3 ITR 17 that though in general the distinction between an income and a capital receipt was well recognised and easily applied, cases arose were to item lay on the border line and the problem had to be solved on the particular facts of each case.

7. Referring to these two views, the Supreme Court in CIT/EPT v. South India Pictures Ltd. : [1956]29ITR910(SC) observed thus (p. 915) :

'No infallible criterion or test can be or has been laid down and the decided cases are only helpful in that they indicate the kind of consideration which may relevantly be borne in mind in approaching the problem. The character of the payment received may vary according to the circumstances. Thus the amount received as consideration for the sale of a plot of land may ordinarily be a capital receipt but if the business of the recipient is to buy and sell lands, it may well be his income. The problem that confronts us has to be approached keeping in mind the different kinds of consideration taken into account in the different cases.'

8. It is the contention of Sri Suryanarayana Murthy, learned counsel for the Revenue, that the present question is a question of law and this court is therefore, entitled to embark upon an enquiry as to whether the amount received by the assessee company was towards loss of profits or towards loss of its source of income. An examination and analysis of the settlement dated February 22, 1967, according to learned counsel, would disclose that the view taken by the Tribunal that the amount was received by the assessee from the English company towards damages directly relatable to the plant and machinery installed and that the same was not in the course of normal business carried on by the assessee company are unsustainable. There is no warrant for the conclusion reached by the Tribunal that the assessee suffered substantial injury to its profit-making apparatus. In order to ascertain the nature or character or the source of the compensation received by the assessee, according to learned counsel, the terms of the basic document, viz., settlement deed dated February 22, 1967, must be examined and in the course of such examination, it would be necessary to consider the earlier two agreements of the years 1961 and 1963 also, since the 1967 settlement was the culmination of the earlier two agreements. The Revenue need not seek a reference as to whether or not the findings of fact recorded by the Tribunal were supported by evidence. The High Court will have to look into the nature of the compensation in answering question No. 1.

9. Sri Ratnakar, learned counsel for the assessee, says that this court, in the absence of a reference sought by the Department on the question whether or not the findings of fact recorded by the Tribunal were supported by evidence, cannot independently embark upon an enquiry in order to ascertain the facts for the purpose of reaching its conclusions. The findings of fact recorded by the Tribunal, according to Sri Ratnakar are binding on this court in the present reference as the Department did not seek any reference disputing the findings of fact recorded by the Tribunal.

10. We think, Sri Ratnakar is well-founded in his submissions.

11. In Karam Chand Thapar & Bros P. Ltd. v. CIT : [1971]80ITR167(SC) , the question for reference before the High Court was whether, on the facts and in the circumstances of the case, the sum of Rs. 18,00,000 paid to Messrs Karamchand Thapar & Bros. Ltd. was a revenue receipt and as such assessable to income-tax. This question is very similar to and in substance the same as the present question No. 1. The Tribunal in that case held that the receipt was capital in nature. The High Court re-examined the material on record and reversed the findings of fact and recorded a view that the amount was revenue receipt in the hand of the assessee, although no reference was sought by the Department on the question whether the finding of fact recorded by the Tribunal was not supported by evidence. Adverting to this aspect, the Supreme Court stated the rule thus (p. 170) :

'The question as framed does not pose any challenge to the facts found by the Tribunal. It was open to the Commissioner to challenge the facts found by the Tribunal, if the findings in question were not supported by any evidence or if in reaching those findings, the Tribunal committed any error of law. But the Commissioner did not challenge those findings on any of those grounds. The question as framed proceeds on the basis that the facts found by the Tribunal are accepted by the Commissioner, but he challenges the decision reached by the Tribunal on the basis of those findings. In other words, the question framed should be read as to whether, on the facts and in the circumstances of the case, as found by the Tribunal, the sum of Rs. 18,00,000 paid to the company was a revenue receipt and as such assessable to income-tax.'

12. In Sree Meenakshi Mills Ltd. v. CIT : [1957]31ITR28(SC) , the Supreme Court, after reviewing the case law, summarised the position thus (p. 50) :

'(1) When the point for determination is a pure question of law such as construction of a statute or document of title, the decision of the Tribunal is open to reference to the court under section 66(1).

(2) When the point for determination is a mixed question of law and fact, while the finding of the Tribunal on the facts found is final, its decision as to the legal effect of those findings is a question of law which can be reviewed by the court.

(3) A finding on a question of fact is open to attack under section 66(1) as erroneous in law when there is no evidence to support it or if it is perverse.

(4) When the finding is one of fact, the fact that it is itself an inference from other basic facts will not alter its character as one of fact.'

13. The limitations imposed on the High Court in this regard have been considered by the Supreme Court in Karnani Properties Ltd v. CIT : [1971]82ITR547(SC) :

'The jurisdiction of the High Court in dealing with a reference under section 66 is a very limited one. It must take the fact as stated in the statement of the case unless the question whether the findings of the Tribunal are vitiated for one or the other of the reasons recognised by law is before it.'

14. The Supreme Court in CIT v. S. P. Jain : [1973]87ITR370(SC) restated the aforesaid rule.

15. The contention of Sri Suryanarayana Murthy is that the present question is a pure question of law since it relates to construction of documents, viz., settlement deed dated February 22, 1967, and the earlier two agreements of 1961 and 1963 and therefore, we can review the facts as found by the Tribunal. It is difficult to agree with this contention. The settlement deed dated February 22, 1967, based on which the amount in question was received by the assessee cannot by any stretch of reasoning be construed as document of title. The reference sought to this court by the Revenue was not with regard to the construction of the agreement dated February 22, 1967, or the earlier two agreements but the question referred was whether the sum of Rs. 47,20,539 received by the assesee from the English company constitutes a revenue receipt or a capital receipt. In the determination of this question, it is not open for us to embark upon an enquiry into the aforesaid three agreements.

16. In the reference application made by the Revenue to the Tribunal which is at pages 120 and 122 of the paper book, the Department stated in para 3, at page 121, thus :

'that the facts which are admitted and/or foundby the Appellate Tribunal and which are necessary for drawing up a statement of the case are stated in the enclosure for ready reference.'

17. The findings of the Tribunal are to the effect that :

In the case before us, Mitchells did not properly comply with the task of installation of plant and machinery and on account of such nonfulfilment of the contract the profit-marking apparatus suffered very serious damage as the ultimate production was found to be far below the quality and quantity contracted for by the assessee. Since the injury caused was substantial as to affect even the basic foundation of the assessee company, the damages received on this account will have to be considered as only capita in nature...... The damages received by the assessee company are directly relatable to the plant and machinery installed by Mitchells and hence in our view, it cannot be held that such damages in dispute were received in the course of normal business carried on by the assessee company........... Considering the fact that the assessee company suffered substantial injury to the profit making apparatus, the damages received on this account, in our view, will constitue capital receipt......... Neither the initial agreement nor the final mutual agreement contained any specific clause to the effect that any part of the damages is relatable to the loss of profits.'

18. These findings have not been disputed by the Revenue and, therefore, it is not open to the Revenue to question these findings.

19. It is true that in CIT v. BEST & CO. (P.) Ltd. : [1966]60ITR11(SC) , the Supreme Court scrutinised the evidence. The assessee in that case was paid certain during three successive years after the termination of the agency and as a condition, the assessee undertook for a period of five years to refrain from selling or accepting any agency for explosives competitive with those covered by the agency agreements terminated. These amounts were claimed by the assessee as capital receipts and he did not place any material before the Department to establish the relatives importance of the agency in the framework of the earning apparatus of its business or to prove that the agency was a pivot of its structure. The Income-tax Tribunal held that the amounts were received based on future sales and so they constitute normal commission receipts. The question referred to the High Court was whether the amounts are assessable under section 10 for the assessment years 1951-52 and 1952-53 The High Court, reversing the decision of the Appellate Tribunal, expressed the view that the amounts were capital receipts and so not liable to tax. In the appeal preferred by the Commissioner to the Supreme Court, the evidence was scrutinised for the purpose of ascertaining the true nature of the receipts and it was held that the compensation received was not only in lieu of the loss of the agency but also for accepting a restrictive convenient for a specified period. The amount received by way of compensation which was attributable to the restrictive covenant was a capital receipt. If the compensation paid was in respect of two distinct matters, one taking the character of a capital receipt and the other of a revenue receipt, apportionment will have to be made between the two matters. What were the findings of fact recorded by the Tribunal and whether the findings of the fact recorded by the Tribunal were ignored by the High Court and Whether the High Court, in the absence of reference sought by the Department, can embark upon an independent enquiry in to the findings of fact recorded by the Tribunal, did not fall for consideration before the Supreme Court and, therefore, this ruling is not an authority for the proposition advanced for the Revenue by Sri Suryanarayana Murthy.

20. Even if the Department had asked for a reference on the question whether the findings of the Tribunal were supported by evidence, it would have been difficult for the Department to establish that the facts found by the Tribunal were unsupported by evidence.

21. In the original agreement dated October 12, 1961, by clause 8, it was stipulated that :

'8. Delivery of the plant and equipment included in the contract price shall commence in four months, and it is expected to complete delivery, erection and putting in to operation in nine to twelve months from the establishment of credits and issue of import licence and subject to site conditions and availability of site.'

22. Clause 15 stipulated that the vendor (English company) shall not be liable to the purchaser for the following :

'(a) Any loss of profit or of contracts suffered by the purchaser,

(b) any claim made against the purchaser, except as provided in these conditions,

(c) any damage or injury caused by or arising from the acts or commissions of the purchaser or of other (not being the contractor's servants or sub-contractors),

(d) any loss or damage or hindrance by circumstances over which the vendor has no control, and generally falling within the usual meaning of the expression 'force majeure' (except loss or damage caused by any such risks as by clause 14 (insurance) is required to be covered by insurance.'

23. In the conditions of sale attached to the agreement, the English company undertook 'that the machinery supplied by us shall be of first class materials and of sound workmanship and that we will make good or six months of delivery from the works and which are proved to be due solely to the use of defective materials or bad workmanship and defective parts replaced are to be our property.'

Clause No. 18 provides for arbitration.

24. In the supplemental agreement dated August 3, 1963, by clause 1, the English Company undertook that 'they take complete responsibility for the plant and machinery supplied and to be supplied for producing the quality of salts are contracted, with the available raw materials and that they are prepared to give the necessary guarantees in this regard.'

25. On December 20, 1965, the English company wrote a letter to the assessee stating, inter alia, that they would incur on the job a loss approximately of $3,50,000. 'This is a considerably higher loss than we had hitherto contemplated.......... In short, we are faced with spending over $5,00,000 on a contract priced at $1,84,500'. By then the English company was aware that the assessee had made a claim before the Company Law Board for $450,000. Referring to this, the aforesaid letter states that 'Although we have until now been prepared to complete the plant first and settle any claims afterwards, we have never thought that your claims, after allowing for our counter-claims, could possibly amount to any such figure.'

26. The aide-memoire incorporating the gist of the discussions that took place between the English company and the assessee explains the position in greater detail. Para (C) of the aide-memoire(at page 21 of the paper book supplied by the assessee) states :

'If Mitchells'loss, by some strategy can be restricted to $370,000, or slightly more, say $400,000 and they are absolved of their obligations under the contract and are able to walk off this contract and the site freely and amicably, then Mitchells should welcome such proposals, if feasible.'

Para D-2 sets out the items of expenditure Mitchells should incur. Para D-2(iii) says that 'This amount should be deducted out of the $400,000 and the balance subject to a minimum of $150,000 should be paid to Barium Chemicals Limited in sterling in cash, immediately'.

Para D-2 (iv) says that 'on completion of these obligations, Barium and Mitchells will mutually cancel the contract subsisting between them and both parties will be clear of all liabilities.'

27. This aide-memoire thus contemplated relieving Mitchells from their obligation to the assessee-company on payment of certain amounts. The English company was anxious that their losses should be restricted to $ 400,000 and they were eager to extricate themselves from the obligations they had undertaken by virtue of the two agreements of 1961-1963. It was only after the English company walked out of the site abruptly in March, 1966, that the discussions further continued and culminated in the settlement dated February 22, 1967. Para 2 of the settlement deed refers to the fact the disputes and differences had arisen between the two. Para 3 which is relevant reads :

'3. Notwithstanding that the above-mentioned claims have been rejected by Mitchells, S. Pearson Industries Ltd., and Lord Poole, the parties hereto, namely, Mitchells and Barium, have agreed that the aforesaid disputes and differences shall be settled and determined on the terms and conditions hereinafter set out.

1. Mitchells shall on the delivery to them of this agreement duly signed by Barium authorised representative :

(a) pay to Barium's authorised representatives in England the sum of $ 225,000;

(b) pay to Messrs Stocken & Company, Barium's solicitors, the sum of $10,000 on account of their costs and disbursements; and

(c) release for collection within there calendar months at Barium's own expense and cost the kiln (as described in the schedule hereto) which is now at 72, Purely Way, Croydon, Surrey, England, and which Barium has agreed to accept in such condition as it may be on the date of collection.

(d) Barium hereby acknowledges that it accepts the above sums and the release of the said kiln in full and complete settlement and discharge of all claims of any kind, whether present or future, actual or contingent, against Mitchells, L. A. Mitchel (Holdings) Ltd., and S. Pearson Industries Ltd. and against any other parent or associated or subsidiary company and against Lord Poole and any other individual arising out of or connected with the said contract.........

3. Without prejudice to the generality of the foregoing, Barium hereby waives all claims (if any) for damages in respect of loss of profits and releases Mitchells and all others mentioned in clause 2 hereof from any obligation to complete and said contract and Mitchells hereby release and discharge Barium from all claims of any kind, whether present or future, actual or contingent, arising out of or connected with the said contract,'

28. The contention of Sri Suryanarayana Murthy for the Revenue, is that only the cost of the kiln constitutes capital receipt since that was by way of replacement of defective machinery and the other amounts are revenue receipts. We are unable to agree with this contention. The amounts mentioned in sub-clause (1) of clause 3 were accepted by the assessee in full and complete settlement and discharge of all claims, whether present or future actual or contingent, against Mitchells and other companies associated with that and Lord Poole, the managing director, and this was specifically stated in sub-clause (2) of clause 3. There is no reference either in sub-clause (1) or (2) to any loss of profits. It is only in sub-clause (3) of clause 3, that there is reference to loss of profits. By this sub-clause the assessee waived 'all claims, if any, for damages in respect of loss of profits and releases Mitchells....' This could be attributed to two things : (i) that the English company was apprehending that despite receiving the amounts under sub-clause (1) of clause 3, the assessee company might claim further damages by way of loss of profits and that contingency the English company wanted to pre-empt; (ii) that the assessee-company also perhaps had entertained an idea that it could claim further amounts by way of loss of profits. By sub-clause (3), that claim for further amounts was given up by the assessee. It is, therefore, not possible to draw the inference that what was received by the assessee-company under clause 3(1) was either fully or partly towards loss of profits.

29. It is next contended by Sri Suryanarayana Murthy, learned counsel for the Revenue, that the assessee's claim that the amount in question was a capital receipt should not be accepted for the reason that they had suppressed the materials in their possession. Both the Income-tax officer as well as the Appellate Assistant Commissioner rightly expressed the view that the assessee had not furnished any information as to the basis on which the compensation of $ 225,000 was agreed to be paid under the settlement deed dated February 22, 1967. But the Tribunal without considering this aspect merely surmised that the details regarding the basis, if any, could be in possession of Messrs Mitchells and in that erroneous view recorded a finding that both the Income-tax officer and the Appellate Assistant Commissioner fell into error in expressing the view that the assessee had withheld the relevant details regarding the receipt of compensation.

30. There is no basis for the Revenue, in our view, to advance this contention. The finding of fact recorded by the Tribunal that the assessee had not withheld any relevant details regarding the receipt of compensation from Mitchells has not been questioned by the Department by seeking a reference on that. When the Department had accepted the fact as found by the Tribunal, it is not open to learned counsel for the Revenue now to contend that there was no basis for the finding recorded by the Tribunal.

31. Even if we were to go into the question whether the assessee had withheld any relevant details regarding the receipt of the amount in question, our answer would have been the same as the one record by the Tribunal. In the letter dated December 20, 1965, addressed by the English company to the assessee, which was already noticed by us hereinbefore,it was clearly mentioned how much loss the English company would suffer. The aide-memoire which was also noticed by us, supra, gives further details. The gist of the discussions held by the assessee with Lord Poole, the managing director of Messrs Mitchells Limited, was communicated by the assessee to the Income-tax officer in their letter dated December 24, 1971, which is at page 28 of the paper book supplied by the assessee. Mr Dadachanjee (who represented the assessee in the discussions) put a specific question to Lord Poole :

'Mr. Dadachanjee : You have said that this operation cost you $250,000. Does it refer to the extra costs for modifications or inclusive of everything.'

This was the answer by lord Poole :

'Lord Poole : This is in addition to the original estimate. Everything was paid before the contract started. The original amount received is $ 165,000. In fact, you have the plant at a lesser price. La Porte would have charged you $ 500,000.'

32. This gives a rough idea as to what was contemplated between both the parties. The English company was willing to spend an additional sum of $ 250,000 and if anybody else were to be entrusted with that work, it would have cost $ 500,000. Ultimately, in the settlement deed dated February 22, 1967, the figure was reduced to $ 225,000. The statement made by Lord Poole on May 10, 1965 (which is at page 31 of the paper book supplied by the assessee) shows that by that date the loss sustained by them was already $ 250,000 and it would by substantially more by the time the other changes were effected. All these documents were furnished to the Income-tax officer and the first appellate authority viz., the Appellate Assistant Commissioner. It is true that the assessee stated before the company Law Board that it intended to claim damages of $ 450,000 from the English company. What was stated by the assessee-company was what it was contemplating doing. From that no inference follows that it had already concealed any material based on which it advanced the claim before the company Law Board. The statement of Lord Poole, the recording of the aide-memoire and other documents clearly show that the settlement deed dated February 22, 1967, was mostly the result of oral discussions, the material portions of which were recorded in the form of an aide-memoire and the assessee furnished the same to the assessing authority. We, therefore, do not find any justification for the criticism advanced that the assessee had suppressed any relevant information.

33. At the time of the trial run in 1964, it was noticed that the plant and machinery were defective. After completion, the plant went into production in May, 1965. There is no dispute that its optimum production was 30% of the installed capacity and that the quality of the barium salts was not what was stipulated in the agreement entered into by the assessee-company with the English company. The injury caused to the assessee-company was substantial as found by the Tribunal. The non-fulfilment of the contract on the part of the English company, according to the Tribunal, had resulted in serious damage to the profit-making apparatus of the assessee-company ultimately affecting the production. When the injury found was substantial so as to affect even the basic foundation of the assessee-company, the Tribunal opined that 'the damages received on this account will have to be considered as only capital in nature'. In coming to this conclusion, the Tribunal relied on the decisions of the Supreme Court in Godrej and Company v. CIT : [1959]37ITR381(SC) and CIT v. Vazir Sultan & Sons : [1959]36ITR175(SC) .

34. The Tribunal also found that the damages received by the assessee were directly relatable to the plant and machinery installed by Mitchells and, therefore, the amounts could not be treated as having been received in the course of the normal business carried on by the assessee.

35. Sri Suryanarayana Murthy relying upon the rulings in CIT v. Rai Bahadur Jairam Valji : [1959]35ITR148(SC) Kettlewell Bullen & Co. Ltd v. CIT : [1964]53ITR261(SC) , CIT v. Shamsher Printing Press : [1960]39ITR90(SC) , CIT v. Rohtas Industries Ltd. : [1978]112ITR798(Cal) , CIT v. Rohtas Industries Ltd. : [1981]130ITR292(Cal) , Vadilal Soda Ice Factory v. CIT : [1971]80ITR711(Guj) and CIT v. Manna Ramji & Co. : [1972]86ITR29(SC) contends that on the findings recorded by the Tribunal, no conclusion could by drawn that the receipt in question was a capital receipt. The amount was received by the assessee in the ordinary course of business and, therefore, even if it were to be treated as compensation for any damage suffered, it could not but be described as a revenue receipt. There was no destruction to the profit earning source of the assessee and even after receiving the compensation, the assessee carried on the business. Any amount received as compensation for laying out of the machinery, according to Mr. Murthy, must be treated as a revenue receipt and not as a capital receipt.

36. It is difficult for us to agree with the contentions of Sri Suryanarayana Murthy.

37. The facts in none of the aforesaid rulings are similar to those in the instant case. The ratio decidendi in the rulings cited by Sri Murthy turn on the particular facts and circumstances of each case. The conclusions sought to be drawn by Sri Murthy based on the aforesaid rulings with a view to supporting his contention that the amount in question is a revenue receipt, in our opinion, are untenable.

38. As already noticed above there, is no infallible test to draw a clear cut demarcation between a capital receipt and a revenue receipt, In CIT and EPT v. South India Pictures Ltd. : [1956]29ITR910(SC) , the assessee had been given distribution rights in respect of three films and received towards commission a sum of Rs. 26,000. The Tribunal and the High Court were of the view that the amount constituted a capital receipt. By a majority judgment, the Supreme Court ruled that the assessee received that amount in the ordinary course of business to adjust the relation between the assessee and the producers; the termination of the agreements did not radically or at all affect or alter the structure of the assessee's business. The amount received was only toward commission i.e. as compensation for loss of commission, which it would have earned had the agreements not been terminated and, therefore, the amount could not be construed as a capital asset. It was received only in the ordinary course of business and, therefore, it was liable to tax as a revenue receipt.

39. It is useful to notice in this context three other cases relating to compensation received for termination of managing agents. In Godrej & Co. v. CIT : [1959]37ITR381(SC) , the assessee received certain amount by way of compensation under an agreement for surrendering its claim for 20 per sent of commission as managing agent and agreeing to receive only 10 per cent. Rejecting the cotention of the Revenue that since the amount received was only compensation for carrying on the managing agency on a reduced remuneration, the Supreme Court, while holding the receipt a capital receipt, stated the rule thus (p. 386) :

'To regard such an agreement as a mere variation in the terms of remuneration is only to take a superficial view of the matter and to ignore the effect of such variation on what has been called the profit-making apparatus. A managing agency yielding a remuneration calculated at the rate of 20 per cent of the profit is not the same thing as a managing agency yielding a remuneration calculated at 10 per cent of the profits. There is a distinct deterioration in the character and quality of managing agency viewed as a profit making apparatus and this deterioration is of an enduring kind. The reduced remuneration having been separately provided, the sum of Rs. 7,50,000 must be regarded as having been paid as compensation for this injury to or deterioration of the managing agency just as the amounts paid in Glenboig's case [1922] 12 TC 427 or Vazir Sultan's case : [1959]36ITR175(SC) were held to be.'

40. In CIT v. Vazir Sultan & Sons : [1959]36ITR175(SC) , Bhagwati J., speaking for the majority, on a review of various English decisions, laid down the following test (p. 185) :

'The first question to consider would be whether the agency agreement in question for cancellation of which the payment was received by the assessee was a capital asset of the assessee'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 assessee in the ordinary course of business and for the purpose of carrying on that business, it would fall into the latter category and the compensation or payment received for its cancellation would merely by 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 not a capital receipt.'

41. The ruling of the House of Lords in Glenboig Union Fireclay Co. Ltd. v. IRC [1922] 12 TC 427 (HL), to the effect that if compensation received was really the price paid 'for sterilising the asset from which otherwise profit might have been obtained' was approvingly referred to. Applying the test, the Supreme Court held that (p. 187 of 36 ITR) :

'The agency agreements in fact formed a capital asset of the assessee's business worked or exploited by the assessee by entering into contracts for the sale of the Charminar cigarettes manufactured by the company to the various customers and dealers in the respective territories. This asset really formed part of the fixed capital of the assessee business. It did not constitue the business of the assessee but was the means by which the assessee entered into the business transactions by way of distributing those cigarettes within the respective territories. It really formed the profit-making apparatus of the assessee's business of distribution of the cigarettes manufactured by the company. If it was thus neither circulating capital nor stock-in-trade of business carried on by the assessee, it could certainly not be anything but a capital asset of its business and any payment made by the company as and by way of compensation for terminating or cancelling the same would only be a capital receipt in the hands of the assessee.'

42. The assessee had two agency agreements - one relating to the Hyderabad State and the other relating to the territories outside the Hyderabad State. Adverting to the aspect that even if the agency outside Hyderabad was lost, the assessee retained the agency within the Hyderabad State, the Supreme Court observed (p. 187) :

'Even if one of these agency agreements was thus terminated, it would result in the destruction of the profit-making apparatus or sterilisation of the capital asset pro tanto and if in the former case the receipt in the hand of the assessee would only be a capital receipt, equally would it be a capital receipt if compensation was obtained by the assessee for the termination or cancellation of one of these agency agreements which formed a capital asset of the assessee's business.'

43. In Karam Chand Thapar and Bros P. Ltd. v. CIT : [1971]80ITR167(SC) , the assessee received Rs. 18,00,000 as compensation for termination of one of several managing agencies. After stating that it is not possible to lay down any single test as determinative of the question whether the receipt is capital or income, the Supreme Court followed its earlier ruling in Kettlewell Bullen and Company's case : [1964]53ITR261(SC) , wherein it was held (p. 172 of 80 ITR) :

'Where, on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated), the receipt is revenue : where, by the cancellation of an agency, the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt.'

44. Applying the test, the Supreme Court held that the receipt on question was a capital receipt. In kettlewell Bullen's case : [1964]53ITR261(SC) , the assessee was the managing agent of six companies. It entered into an arrangement with Mugneeram Bangur and Company whereby the latter agreed, (i) to purchase the entire holding of shares of the assessee in Fort William Jute Company, the managed company, (ii) to procure repayment of all loans made by the assessee to Fort William Jute Company, and (iii) to procure that the managed company will compensate the assessee for loss of office by payment of a sum of Rs. 3,50,000 after the assessee resigned its managing agency and reimburse that amount to the managed company. The assessee company tendered resignation of the managing agency and received the sum of Rs. 3,50,000 from the managed company. The question arose whether the amount of Rs. 3,50,000 received by the assessee to relinquish the managing agency was a revenue receipt liable to tax. The agreement was made some time on May 21, 1952. In the normal circumstances, the managing agency was to continue up to January 14, 1957. Observing the question is not capable of solution upon application of any single test and after referring to the observations of Venkatarama Aiyar J. in CIT v. Raj Bahadur Jairam Valji : [1959]35ITR148(SC) , the Supreme Court observed that the assessee company was formed with the object of acquiring managing agencies of companies and to carry on the business and to take part in the management, supervision or control of the business or operations of any other company, association, firm or person and to make profit out of it and (p. 268 of 53 ITR) :

'That only authorised and appellant to acquire as a fixed asset, if a managing agency may be so described, and to exploit it for the purpose of profit. But here is no evidence that the company was formed for the purpose of acquiring and selling managing agencies and making profit by those transactions of sale and purchase. A managing agency is not an asset for which there is a market, for it depends upon the personal qualifications of the agent.'

45. The Supreme Court laid down the test in the following terms (p. 270 of 53 ITR) :

'It may be broadly stated that what is received for loss of capital is a capital receipt what it received as profit in a trading transaction is taxable income. But the difficulty arises in ascertaining whether what is received in a given case is compensation for loss of a source of income, or profit in a trading transaction. Cases on the borderline give rise to vexing problems. The Act contains no real definition of income; indeed it is a term not capable of a definition in terms of a general formula.......

It need hardly be said that the form in which the transaction which gives rise to income is clothed and the name which is given to it are irrelevant in assessing the exigibility of a receipt arising from a transaction to tax. It is again not predicated that the income must necessarily have a recurrent quality.'

46. After reviewing the case law - English cases and also its earlier rulings - South India Pictures limited case : [1956]29ITR910(SC) , Rai Bahadur Jairam Valji case : [1959]35ITR148(SC) Vazir Sultan and Sons case : [1959]36ITR175(SC) and Godrej and Company's case : [1959]37ITR381(SC) , the court stated the law thus (p. 282 of 53 ITR) :

'On an analysis of these cases which fall on two sides of the dividing line, a satisfactory measure of consistency in principle is disclosed. Where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated), the receipt is revenue : Where, by the cancellation of an agency, the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt.

47. Applying the said rule, the court ruled that the amount received by the assessee was a capital receipt since it was paid to compensate loss of a capital asset. In Jairam Valji case : [1959]35ITR148(SC) , the assessee received a sum of Rs. 2,50,000 as solatium for termination of a contract when the rates were found by the purchaser to be uneconomical. While considering the question whether the sum was a capital or revenue receipt, the Supreme Court considered several English rulings apart from certain Indian decisions and held that the amount received by the assessee was liable to tax as a revenue receipt. The business which the assessee was carrying on was the very business to which the agreement by which the solatium received related, and as it was in the ordinary course of business, any compensation received for its termination must be held to be revenue receipt. While stating so, the Supreme Court cautioned that it cannot be treated as infallible and observed that (p. 280 of 53 ITR) :

'An agency contract which has the character of a capital asset in the hands of one person may assume the character of a trading receipt in the hand of another, as, for example, when the agent is found to make a trade of acquiring agencies and dealing with them. Therefore, when the question arises whether the payment of compensation for termination of an agency is a capital or a revenue receipt, it must be considered whether the agency was in the nature of a capital asset in the hands of the agent, or whether it was only part of his stock-in-trade.'

48. The case in CIT v. Prabhu Dayal : [1971]82ITR804(SC) concerns the question whether a sum of Rs. 70,000 received by the assessee in a compromise decree in a suit filed by him for non-payment of commission on the yearly net profits earned by the company to which he transferred his exclusive monopoly rights for acquisition of kankar deposits in Jind State for manufacturing cement, was revenue or capital in nature. That amount was held to be a capital asset since it was a price paid for surrendering a valuable right.

49. CIT v. Shamsher Printing Press : [1960]39ITR90(SC) and CIT v. Manna Ramji and Co. : [1972]86ITR29(SC) relate to a totally different set of facts. In Shamsher Printing Press' case : [1960]39ITR90(SC) , the assessee received Rs. 57,435 as compensation from the Government for requisitioning his printing press since the requisition necessitated the assessee to shift his business to another place. The question was whether the amount of Rs, 57,435 constituted a capital receipt or a revenue receipt. The claim of the assessee was that his business had suffered for a period of two years because of requisitioning of the premises. As the requisition itself was temporary in nature and having regard to the fact that no claim was made by the assessee for loss of goodwill, in which case the assessee would have definitely succeeded, the Supreme Court held that the amount received was a revenue receipt. In CIT v. Manna Ramji and co. : [1972]86ITR29(SC) , the business premises of the assessee consisted of an office and six sheds used for storing wood and timber. The Collector of Poona requisitioned the premises in 1944. Although the requisition covered the office as well as the six sheds, at the request of the assessee, the collector agreed to allow the assessee to remain in possession of the office premises from where he carred on business. A compensation of Rs. 1,85,200 for requisitioning the premises was awarded and after some correspondence the matter was referred to an arbitrator - the civil Judge, Poona, who, inter alia, held that the assessee was entitled to a lump sum of Rs. 1,25,500 for loss of earnings. The Income-tax officer deducted a sum of Rs. 20,426 from out of the aforesaid amount as that amount was spent by the assessee in the claim proceedings against the Government over and above the amount of Rs. 2,000 which was awarded towards costs. On the balance amount of Rs. 1,05,074 he levied tax treating the same as a revenue receipt. On appeal, the Appellate Assistant Commissioner allowed the appeal and set aside the Income-tax officer's order. The income-tax Appellate Tribunal on further appeal, held that the sum of Rs. 1,25,000 was a revenue receipt. The High Court, on a reference, held that the amount was a capital receipt not liable to tax. The Supreme Court reversed the finding of the High Court, agreeing with the view expressed by the Tribunal. The assessee was not deprived permanently of his sources of income; requisitioning was for temporary period and so it lacked the element of permanence. The amount paid to the assessee was on account of loss of earnings and he had also carried on business though on a reduced scale. Having regard to all those circumstances the Supreme Court held that it was a revenue receipt. Vadilal Soda Ice Factory v. CIT : [1971]80ITR711(Guj) relates, inter alia to the question whether two sums of Rs. 7,000 and 50,000 received by the assessee as compensation for loss of contracts and loss of profits were assessable to tax. The contention of the assessee that the amounts represent capital receipts was negatived by the Gujarat High Court following the decision of the Supreme Court in Shamsher Printing Press' case : [1960]39ITR90(SC) . The two amounts were received by the assessee as compensation for loss of contracts and loss of profits and therefore, they were held to be revenue receipts. The two case relating to M/s Rohtas Industries : [1978]112ITR798(Cal) and : [1981]130ITR292(Cal) were decided by the Calcutta High Court. In both cases, the assessee was M/s. Rohtas Industries Limited. It had purchased machinery from a German firm. After the machinery was installed, it was discovered that the same was defective and the output was below the guaranteed figure. After some correspondence, the German firm agreed that there was low output in spite of replacement of the parts. Therefore, the German firm paid certain amounts to a German bank to be utilised by the assessee in future for purchase of other machinery. The assessee itself treated the amounts as income and disclosed the same in its profit and loss account. Subsequently it claimed depreciation in respect of the capital expenditure on the machinery. The Tribunal held that the amount received by the assessee from the German firm as compensation for low output and offered for taxation in the previous assessment years was a revenue receipt. The commissioner of Income tax thereafter initiated proceedings for reference to the High Court on the question whether the amount received was not a rebate on the actual price of machinery originally supplied. The question was answered in favour of the assessee by the Calcutta High Court.

50. From the foregoing decisional law, it is reasonably clear that in order to decide whether or not a payment is a revenue receipt, its true nature and substance must be looked into. The form in which it is expressed it not decisive. How the assessee treated the payment is not conclusive of its nature. If the assess himself has treated the payment in his account books as compensation or consideration received for loss of earnings or profits, it is a revenue receipt. If the payment is received in the ordinary course of the business of the assessee for loss of stock-in-trade, it is a revenue receipt. If, on the other hand, the payment received is towards compensation for extinction or sterilisation partly or fully of a profit earning source (capital asset), such receipt not being in the ordinary course of the assessee's business, it must be construed as a capital receipt. Neither on the findings of the Tribunal, nor on an examination of the terms of the settlement dated February 22, 1967, can it be said that the amount in question represented loss of profits. The business the assessee carried on was in barium chemicals. The settlement dated February 22, 1967, concluded between the assesee and the English company cannot be treated as one in the ordinary course of the business carried on by the assessee. Installation of machinery and parts was not the business of the assesee. It was the business of the English company. There has been a sterilisation of capital assets of the assessee in that the English company failed to erect the machinery and plant according to the original stipulations. It had abandoned the work in the middle. The optimum capacity of the machinery installed was not even 30 per cent of the installed capacity. The amount paid was towards damages in order to compensate the assessee for not fulfilling the terms of the contract. The sterilisation of assets need not be in to in order to make a payment a capital receipt (vide Vazir Sultan and Sons : [1959]36ITR175(SC) ; Godrej & Company [1957] 37 ITR 381 and Karam Chand Thapar : [1971]80ITR167(SC) ). The plant and machinery could not by any stretch of reasoning be construed as stock-in-trade of the assessee. They are only capital assets. The agreements between the assessee and the English company were not trading contracts for generation of revenue profits, but they were only designed to bring into being an apparatus for an income yielding source.

51. Having regard to all these circumstances, the only conclusion we reach on this aspect is that the sum of Rs. 47,20,939 received by the assessee during the assessment year 1968-69 from M/s Mitchell Limited constitutes in its entirety a capital receipt and so not liable to tax. Agreeing with the view of the Tribunal, we answer question No. 1 raised by the Revenue in favour of the assessee and against the Department.

52. The second question raised by the Revenue is whether the amount of Rs. 47,20,939 is exigible to capital gains tax in the event of holding that the said amount constitutes a capital receipt. The expression 'transfer' defined in section 2(47) of the Act is as follows :

'transfer', in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law.'

53. None of the ingredients mentioned in section 2(47) is present in the transaction in question. There was neither sale nor exchange nor relinquishment of any asset or extinguishment nof any rights in respect of the amount of Rs. 47,20,939 received by the assessee from the English company. That amount was paid by the English company as damages for their failure to fulfill their obligations under the agreements concluded with the assessee. Unless the transaction falls within any of the categories specified in the aforesaid definition clause, the amount cannot be brought to tax under section 45 of the income-tax Act as capital gains. As there was no transfer of any capital asset as envisaged under section 45, agreeing with the view taken by the Tribunal, we answer the question in favour of the assessee and against the Department.

54. Question No. 1, raised by the assessee related to the sum of Rs, 50,000 paid by the assessee to M/s Atkins Private Limited, Calcuttaand whether the sum could be allowed as business expenditure partaking of the nature of revenue. This amount was not the subject matter of the settlement dated February 22, 1967. M/s Atkins Private Limited were engaged by the assessee to conduct investigation into the deficiencies of the various production units and to suggest improvements. M/s Atkins Private Limited did not complete there investigation and half was through there assignment was cancelled. The assessee company paid M/s Atkins a sum of Rs. 50,000 as against the originally contracted amount of Rs. 1,00,000. The damages received by the assesee-company from the English company were held by us to be a capital receipt. The amount of Rs. 50,000 paid by the assessee to M/s Atkins will have to be considered as capital expenditure. Sri Ratnakar, learned counsel for the assessee could not dispute this seriously. We therefore agreeing with the Tribunal answer this question against the assessee and in favour of the Revenue.

55. The second question raised by the assessee company is concerned with the amount of Rs. 42,212 paid by the assessee to M/s Chemicals and Technical Services London and whether it could be allowed as business expenditure partaking of the nature of revenue. This amount was not the subject matter of the settlement dated February 22, 1967. As in the case of the first question raised by the assessee the answer to this question must also be in favour of the Revenue and against the assesse. When the damages 'received by the assessee were held to be in the nature of capital receipt it necessarily follows that the amount paid by the assessee to M/s Chemicals and Technical Service was for the purpose of advising the assess to set right certain errors in the installation of the plant and machinery. M/s Chemicals and Technical Services investigated into the mattter and subimtted a report suggesting improvement of existing plant and machinery in order to increase production. Since the object of investigation conducted by the company relate to the plant and machinery the same in our view constitutes capital expenditure. This position could not be seriously contested by Sri Ratnakar learned counsel for the assessee. We, therefore, agreeing with the Tribunal answer the question in favour of the Revenue and against the assessee.

56. In the result we answer questions Nos. 1 and 2 raised by the Revenue in favour of the assessee and against the Revenue. Our answers to questions Nos. 1 and 2 raised by the assessee company are in favour of the Revenue and against the assessee company.

57. There shall be no order as to costs.