Allahabad H.C : The commission of Rs. 25,000 received by the assessee on sale of shares of Universal Tyres Co. was exempt from tax under s. 10(3) of the IT Act, 1961 ?

Counsel Appeared

M. Katju, for the Revenue : V. Gulati & V.B. Upadhya, for the Petitioner

A.N. VARMA, J.:

At the instance of the Revenue, the following question of law has been referred for our opinion:

” Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the commission of Rs. 25,000 received by the assessee on sale of shares of Universal Tyres Co. was exempt from tax under s. 10(3) of the IT Act, 1961 ? “

The assessee is an individual and the proceedings relate to the asst. yr. 1970-71. The assessee enjoys income from commission on the sale of products like cycle, linoleum, jute-matting, etc., manufactured by various Birla concerns. During the relevant previous year, he was paid a sum of Rs. 25,000 by Universal Tyres Ltd. Under a revised return, he asserted that this amount was exempt from tax under s. 10(3) of the IT Act, 1961, claiming the same as a receipt which was of a casual and non-recurring nature not falling under any of the provisos to s. 10(3). In the alternative, it was claimed that in case the said receipt was treated as assessable income, he was entitled to a deduction of 25 per cent therefrom as expenses incurred by him in helping Universal Tyres Ltd. also a Birla concern-in the sale of its shares and in the setting up of a factory owned by that company at Naini.

The ITO negatived the assessee’s claim for exemption of the said receipt of Rs. 25,000 from tax holding that the amount paid to the assessee by m/s. Universal Tyres Ltd., for helping it in the sale of its shares formed part and parcel of the assessee’s normal and regular business and hence liable to be taxed. The ITO, however, allowed a deduction of ten per cent instead of 25 per cent claimed by the assessee from that receipt as expenses. In this way, the ITO made an addition of Rs. 22,500 to the assessee’s income.

The assessee appealed before the AAC but without any success. The AAC held that the aforesaid amount had been paid to the assessee for having rendered specific services, namely, the sale of shares and for the setting up of a factory in Naini, and, consequently, the transaction constituted an adventure in the nature of trade and, therefore, liable to be assessed. He observed that the very fact that the assessee agreed to help Universal Tyres Ltd. in the sale of its shares indicated that the amount received was not a casual income or a windfall. Under the circumstances, the amount of Rs. 25,000 earned by the assessee was liable to be treated as an assessable income not exempt from tax under s. 10(3).

The Tribunal, on further appeal by the assessee, reversed the decision of the ITO and the AAC and held that the receipt of Rs. 25,000 by the assessee was clearly casual and non-recurring in nature and inasmuch as the same did not arise from any business or by the exercise of any profession or occupation, it was exempt from tax. The Tribunal found that the assessee’s principal source of income was commission received from various Birla concerns for the sale of the products mentioned above. He was not a share- broker, nor is he in the business of helping industries in the setting up of their factories. There was no stipulation or understanding between him and Universal Tyres Ltd. regarding the payment of this amount. The amount was paid to him by Universal Tyres Ltd. ex gratia in recognition of his services rendered by their assisting the former in the disposal of their shares as well as setting up their factory at Naini. In the result, the assessee’s appeal was allowed. Thereupon, at the instance of the CIT, the Tribunal has referred the question quoted above for our opinion.

6. The short question which arises for our consideration is whether the receipt of Rs. 25,000 by the assessee was his ” income ” or a ” receipt” of a casual and non-recurring nature and whether this payment to the assessee could be regarded as a receipt arising from any business of the assessee or from exercise by him of any profession or occupation. In order to appreciate the question, it will be convenient to have s. 10(3) extracted here : ” 10. Income not included in total income.—In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included …… (3) any receipts which are of a casual and non- recurring nature not being winnings from lotteries, to the extent such receipts do not exceed one thousand rupees in the aggregate : Provided that this clause shall not apply to— (i) capital gains chargeable under the provisions of s. 45; or (ii) receipts arising from business or the exercise of a profession or occupation; or (iii) receipts by way of addition to the remuneration of an employee. “

It may be mentioned that the Department did not seek to rely on cls. (i) and (iii) of sub-s. (3) of section 10. Consequently, if we come to the conclusion that the payment of Rs. 25,000 was a receipt which was of a casual and non-recurring nature, the question remaining for consideration would be whether the receipt comes under cl. (ii) of sub-s. (3) of s. 10, i.e., whether it arose from any business of the assessee or from exercise by him of any profession or occupation.

7. The words ” casual ” and ” non-recurring ” have not been defined in the Act and they must, therefore, receive their plain and ordinary meaning. In the Oxford Universal Dictionary, the word ” casual ” has been defined as meaning: ” (i) subject to or produced by chance ; accidental, fortuitous; (ii) coming at uncertain times ; not to, be calculated on, unsettled…”

8. In the context of the statute, ” unsettled ” seems to be the aptest meaning to be applied in such cases. Starting from the plain dictionary meaning, judicial decisions have attempted to delineate the true significance and scope of these terms. Each case has, however, ultimately turned on its own facts. But the aspect which has been most stressed as providing an important guiding factor is the absence of any contract, stipulation or understanding obliging the giver to make the payment. We do not, however, propose to encumber this judgment with the plethora of decisions pronounced on the subject. We will content ourseleves with two decisions which are directly in point. These are In re Mahammad Faruq (1938) 6 ITR 1 (All) and Rani Amrit Kunwar vs. CIT (1946) 14 ITR 561 (All). The facts of In re Mohammed Faruq (1938) 6 ITR 1 are indistinguishable from those of the case in hand. We will, therefore, deal with that decision first. In this case, the assessee was employed as a manager by one Syed Jawad Ali Shah to look after his estate on a salary of Rs. 400 per month. Syed Jawad Ali Shah established a sugar factory in his estate and afterwards sold the same to a limited company called the Pipraich Sugar Factory Ltd. While acting as a manager of Syed Jawad Ali Shah, the assessee assisted this company in disposing of its shares. After the company had been successfully floated, its directors, in recognition of the assessee’s services, allotted to him shares of the value of Rs. 15,000. The ITO treated the value of these shares as income assessable under law. The assessee appealed. But the same was dismissed by the Asstt. CIT. Thereupon, at the instance of the assessee, the following question was referred for the opinion of the High Court :

“Whether the fully paid up shares of Rs. 15,000 allotted to the applicant in service of one of the shareholders only by the directors of the Pipraich Sugar Factory Ltd., under the circumstances mentioned above, i.e., voluntarily and without any previous agreement or understanding, amount to an income assessable under law or are mere receipts of a casual and non- recurring nature within the meaning of s. 4(3)(vii) and exempt from assessment. “

10. The High Court answered the question in the negative holding that the receipt of the shares by the assessee was in the nature of a windfall. It was casual and non-recurring in nature and hence clearly exempt from tax under s. 4(3)(vii) corresponding to s. 10(3) of the 1961 Act. This is how their Lordships stated the law In re Mohammed Faruaq (1938) 6 ITR 1 : ” We have to see whether the allotment of shares is income within the meaning which has been assigned to that term by their Lordships of the Privy Council or whether it can be described as a mere windfall. We do not think there can really be any doubt upon this question. The applicant was not an employee of the Pipraich Sugar Factory Limited., although it appears from the reference that his employer, Syed Jawad Ali Shah, was one of the shareholders in the company. This payment was not made by the company to one of its employees for services rendered. The applicant was not in any way carrying on the vocation of a Promoter of companies or a share-broker of anything of that kind. He did not enter into any contract with the company by which the company Promised him remuneration for assisting in the disposal of shares. It may be that the applicant was actuated by a hope that his services if successful would not go unrequited but it is obvious that he had no legal claim against the company and that any hope that he had was based upon the grace and goodwill of the directors. It cannot be said that the applicant’s object was the production of any definite return. If he hoped for a return, that return was certainly not definite in its nature. He may have been actuated by a desire merely to assist his employer in disposing of the factory hoping thereby to secure his employer’s goodwill and gratitude. We do not think that the applicant’s activities can be described as business which is stated in the Act to include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture We think that business must be some activity which has for its object the acquirement of some profit which can be claimed as of legal right. The receipt of the shires in this case was certainly in the nature of a windfall. The receipt was certainly casual in its nature. There was no expectation of returns which would come in with any sort of regularity. ” (Emphasis supplied)

11. We are in respectful agreement with the above decision. In the present case also, the payment to the assessee was not based on any stipulation or understanding. The assessee had no legal claim against Universal Tyres Ltd. in regard to this payment which was made entirely ex gratia based on no more than the grace of Universal Tyres Ltd. extended to the assessee in recognition and appreciation of the services rendered by him in helping the company to dispose of its shares. The assessee was not a share-broker nor a speculator nor a promoter of the company as found by the Tribunal. It was not his business to sell shares of companies or to negotiate the sale of the same or to help new undertakings in setting up their factories. The Tribunal has observed: ” It is admittedly not the business of the assessee to render services in the setting up of new factories or arranging sales of the shares of new companies. This is so far the first occasion when the assessee did that for the aforesaid company. These facts, according to us, clearly lead to the conclusion that rendering assistance to Universal Tyres Ltd., in the matter of sale of their shares and setting up of its factory at Naini, was not the assessee’s business. It could not also be held to be an adventure in the nature of trade as the material on record does not suggest that any machinery was set up by the assessee for the purpose. He was singlehandedly helping the said company under a moral obligation as he was in a way connected with a number of Birla concerns in the capacity of a trader.”

12. The above finding clearly establishes that the payment in question was in the nature of a bounty or a windfall founded solely on the sweet will of Universal Tyres Ltd. The Tribunal was hence clearly right in holding that the amount was in the nature of a casual and nonrecurring receipt not assessable to tax. The decision in Rani Amrit Kunwar’s case (supra) is also to the same effect. In this case, the assessee was the sister of the Ruler of an Indian State. Over a long course of years, annual payments were being made to her out of the State exchequer at a fixed rate called ” wardrobe allowance ” and as presents on certain specified days of festival each year. The question was whether this allowance was a receipt of a casual and non-recurring nature exempt from assessment. The Full Bench answered the question in the negative and held that the income was clearly a receipt which was casual and non-recurring in nature and hence exempt from tax. Two separate but concurring opinions were expressed by Braund J. and Malik J. (as he then was). Both the learned Judges stressed that in order to constitute an assessable income, the receipt should be founded on something more than the mere whim or sweet will of the person making the payment; and that the income in order to attract liability to tax must be founded on some legal obligation on the person making the payment to pay.

13. Malik J. (as he then was) placed strong reliance on a decision of the House of Lords in the case of Stedeford vs. Beloe reported in (1932) AC 388 (1932) 16 TC 505. In that case, the question was whether certain allowances and pension given to the headmaster of a school on his retirement when his service was not a pensionable service and the pension depended entirely upon the goodwill of the governing, body, who might, at any time if they desired, rescind the minutes under which they granted the pension, constituted taxable income. Malik J. referred to an extract from the speech of Viscount Dunedin which read as follows [Rani Amrit Kunwar’scase (supra)] : “.. …… it has been held again and again that a mere voluntary gift is not such a profit because it is not, in the true sense of the word, income. It is merely a casual payment which depends upon somebody else’s goodwill. ” Malik J. also relied on the speeches of Lord Warrington and Lord Thankerton, who summed up the law, respectively thus [Rani Amrit Kunwar’scase (supra)] : ” Here each payment is wholly voluntary. The case is only an instance of a succession of voluntary payments, each of which is voluntary and none of which need necessarily be continued. “

” It was a mere donation, given each year with no certioration that it would be repeated the year following. “

14. Relying on these opinions, Mr. Justice Malik held that the payments made to the assessee as ” wardrobe allowance ” were clearly casual in nature depending as they did on the grace and goodwill of the donor. We are quoting below the extracts from the judgment of Malik J, appearing at page 591 of the report which, in our opinion, provide a complete answer to the problem at hand [Rani Amrit Kunwar’scase (supra)] “: “To my mind, the word ‘non-recurring’ does not mean that it has, as a matter of accident or as a matter of fact, recurred, but that there Was a claim or a right in the assessee to expect its recurrence. I think a mere voluntary payment, not being receipt arising from business or the exercise of a profession, vocation or occupation and not being by way of addition to the remuneration of an employee or not having been made expressly liable, is not liable to be taxed ; and as I understand the exception, a voluntary payment must be deemed to be of a casual and non-recurring nature unless there is a liability on the donor to pay, which liability, may arise out of a contract, a custom or some order which is binding on him. (Emphasis supplied)

On the grounds given by me above, I would hold that the allowances made to the assessee from Nabha do not constitute her personal income assessable under the Indian IT Act and that they are of a casual and non-recurring nature and are, as such, exempt under s. 4(3)(vii) of the Act. “

Applying the tests laid down in Rani Amrit Kunwae’s case (supra) to the facts of the present case, there can be no manner of doubt that the payment of Rs. 25,000 made to the assessee was a receipt of a casual and non-recurring nature. The payment was completely voluntary and ex gratia depending on the mere sweet will of Universal Tyres Ltd. It was not founded on any stipulation or understanding or calculation such as may amount to an enforceable obligation on them. It was, as mentioned above, a windfall or a bounty. To sum up, the Tribunal was clearly right in holding that the receipt was casual and nonrecurring in nature entitled to be exempt from assessment. This brings us to the next question, namely, whether the receipt is covered by cl. (ii) of the proviso to s. 10(3), i. e., whether the receipt arose from any business of the assessee or the exercise by him of any profession or occupation. This question presents no difficulty. We have already quoted the finding of the Tribunal on this aspect of the case. The Tribunal has further observed that the assessee’s main source of income was commission from various Birla concerns in respect of sales of their products and that he was not engaged in the business either of sale of shares of new companies or of assisting them in setting up their factories. In short, the finding is that the assessee was not a sharebroker or a promoter of a company or one engaged in the business of setting up a factory. On these findings, the conclusion is inescapable that the case is not covered by cl. (ii) of the proviso to sub-s. (3) of s. 10.

On behalf of the Department, Sri M. Katju cited a decision in CIT vs. P. N. Nagaraj (1976) 102 ITR 83 (Mad). We have examined that decision but find the same to be of no assistance. There the finding was that the income was earned by the assessee by reason of the nature of the profession in which he was engaged and because of his professional contacts. Such an income would be clearly traceable to cl. (ii) of the proviso to s. 10(3). Consequently, it was rightly treated to be an income assessable under the Act.

In the result, the question is answered in the affirmative, in favour of the assessee and against the Revenue. The Department shall pay the costs of the reference which we assess at Rs. 200 to the assessee.

[Citation : 170 ITR 635]