Bombay H.C : The assessee’s right to the compensation arose only on May 18, 1951, on which date the award was given ?

Counsel Appeared

I.M. Munim with S.P. Mehta & S.J. Mehta, for the Assessee : G.S. Jetly with Mrs. Manjula Singh & S.V. Naik, for the Revenue.

S.P.BHARUCHA, J.:

This reference under s. 256(1) of the IT Act, 1961, made at the instance of the assessee, goes back to the Second World War. The assessee is a public limited company which, prior to the Second World War, was carrying on business in tea and timber in India, Burma and Siam. Consequent upon the Japanese invasion of Siam in or about December, 1941, the assessee’s business and property in Siam were abandoned. The business in Siam could not be restarted until December 1, 1945. After Japan surrendered to the Allies, an agreement was entered into, on January 1, 1946, between the Governments of Great Britain, India and Siam providing for restitution of injuries done in consequence of Siam’s association with Japan in the war. Under the said agreement, the Siamese Government declared as null and void all acquisitions of British territory made by Siam after December 7, 1941, as well as all titles, rights, properties and interests acquired in such territory since that date by the Siamese State and subjects. The Siamese Government agreed thereunder to take necessary legislative and administrative measures, inter alia, to compensate the loss of or damage to property, rights and interests in these territories arising out of the occupation thereof by the Siamese. The Siamese Government also agreed to assume responsibility for safeguarding, maintaining and restoring unimpaired British property, rights and interests of all kinds in Siam and for the payment of compensation for losses or damages sustained. Pursuant to the said agreement, claims were invited against the Siamese Government. The date of the notice inviting claims was July 7, 1948, and the claims in respect of property were required to reach the Siamese Government on or before March 31, 1949. A note in regard to the procedure to be followed by the claimants was issued. Clause 15 read thus :

” The appropriate British Commonwealth governmental authority, after receipt and screening of a claim, will present it to the Siamese Government for consideration. Where the Siamese Government admits a claim in full, or in such lesser amount as may be agreed by the claimant, the settlement of the claim will be effected without reference to the Claims Committee. Claims in respect of property will be referred to the committee for adjudication in the following cases : (a) where the claim is rejected in whole or in part by the Siamese Government (unless the claimant requests that it should not be referred to theCommittee); (b) where the Siamese Government itself desires to refer the claim to the Committee; (c) where the claim remains unsettled after a period of six months after presentation to the Siamese Government (unless the claimant requests that the matter should not be referred to the committee). “

1. Pursuant to the notice inviting claims, the assessee made a claim on March 18, 1949, in the prescribed form. It set out particulars of the property lost and the amount claimed in respect thereof. An award was made by the Claims Committee on March 18, 1951. It awarded to the assessee 4,80,771 pounds as compensation in lieu of restoration of property, 35,990 pounds as compensation in respect of damage to property and 2,409 pounds as compensation for loss sustained through deprivation of property. The aggregate amount of 5,19,1.70 pounds was decreased on account of a proportion of assessment and administrative expenses and pro rata scaling down to 5,04,743.9.0 pounds.

2. For the asst. yr. 1942-43, the assessee had made a loss in Burma in the amount of Rs. 64,64,731 and a profit in Siam in the amount of Rs. 22,89,343. Its net loss was, therefore, admitted to be Rs. 41,75,388. This loss was set off in the aggregate amount of Rs, 20,16,521 during the asst. yrs. 1942-43, 1943-44, 1944-45 and 1945-46.

3. For the asst. yr. 1951-52, with which we are concerned in this reference, the treatment of the receipt of compensation by the assessee was in issue and ultimately came up before the Tribunal. The Tribunal held that the assessee’s right to the compensation arose on March 18, 1951, upon which date the award was made. It rejected the assessee’s contention that the date of the receipt should be taken to be the date of the said agreement or, alternatively, the date upon which it made its claim against the Siamese Government. This finding gives rise to the first question posed to us. The Tribunal held that the compensation under the award received by the assessee in respect of mill and machinery stores (23,756 pounds), sawn timber (1,10,125 pounds) and logs (5,11,582 pounds) represented a revenue receipt and was taxable as such. This finding gives rise to the second question posed to us. Arising out of the finding that the aforesaid was a revenue receipt, it was contended by the assessee before the Tribunal that, in any event, the amount of Rs.21,58,867, which was the unabsorbed portion of the loss of Rs. 41,75,388

admitted for the asst. yr. 1942-43, could not be taxed. This contention of the assessee was turned down and it gives rise to the third question posed to us.

4. The three questions read thus:

” (1) Whether the Tribunal was right in holding that the assessee’s right to the compensation arose only on May 18, 1951, on which date the award was given ?

(2) Whether the Tribunal was right in holding that the compensation of £23,756 pounds (in respect of mill and machinery stores), 1,10,125 pounds (in respect of sawn timber) and 5,11,582 pounds (in respect of logs) received in terms of the above award represented revenue receipts ?

(3) Whether the earlier years’ losses of Rs. 21,58,867, which had already ‘lapsed’, could be deducted from the Revenue receipts referred to in question No. (2) ? “

1. Mr. Munim, learned counsel for the assessee, submitted that the assessee became entitled to compensation by reason of the said agreement ; the date of the said agreement was, therefore, the date to be taken as the date of receipt of the compensation. Alternatively, Mr. Munim submitted that the date on which the assessee made the claim for compensation should be treated as the date of receipt thereof.

2. The assessee’s business and property were abandoned and lost in or around December, 1941. There was no means by which the assessee could have recovered compensation for the loss of the business and property until the said agreement was arrived at on January 1, 1946. Thereunder, the Siamese Government agreed to compensate the loss or damage to property, rights and interests in British territory arising out of the occupation thereof by the Siamese. Pursuant to the said agreement, a Claims Committee was set up. That Claims Committee was required to adjudicate upon claims which had been rejected in whole or in part by the Siamese Government, where the Siamese Government itself desired that claims be referred to it, and where claims had remained unsettled for six months after presentation to the Siamese Government. What the assessee claimed and became entitled to receive was, therefore, compensation or damages for the loss sustained in regard to its property in Siam. Damages are compensation given to a party for the injury it has sustained. A claim for damages does not give rise to a debt until the liability is adjudicated upon and damages are assessed by a decree or order of a Court or other adjudicatory authority. The party does not get damages by reason of an existing obligation on the part of the person causing the injury. He gets damages as a result of the adjudication. No pecuniary liability arises until it is determined that the party complaining of injury is entitled to damages. When damages are assessed, the Court or the adjudicatory body is not ascertaining a pecuniary liability that has already existed. It has to decide first that the party complained against is liable and then only can it proceed to assess what the liability is (See Union of India vs. Raman Iron Foundry, AIR 1974 SC 1265).’

3. Having regard to this legal position, the assessee’s right to compensation arose only on the date upon which the award was made. The Tribunal was, therefore, right in so holding. This brings us to the second question. It will be recalled that the Claims Committee awarded to the assessee an aggregate sum of 5,04,743,9,0 pounds in this

manner: ” The abovementioned claim has now been duly examined and compensation has been awarded as follows:

Heading . Amount awarded

Heading

2property

)

(com pens ation in

r

l o e of i f st

e o

u r . a

ti o n

r c o to e t f

£4,80,771.

0.0

£35,990.0.

0

Heading 3 s d (compensation in p a property) e m

a

g e

s t u h s r o

l u o g s h s t a

Heading 4 i (compensation n for deprivation of e property) d

. £2,409.0.0

Less : . £5,19,170.0.0 1. Proportion of assessment and administration £1,624.18.8 . expenses

2. Pro rata scaling down

£12

,80

1.1

2.4

.

£14,

. . 426.

11.0

£5.0

Net . award

4,74

3.9.

The assessee appears to have asked for particulars of the amounts awarded which were supplied on September 17, 1951. From these particulars, it was seen that the compensation awarded included 23,756 pounds in respect of mill and machinery stores

1,10,125 pounds in respect of upcountry stores, that is, sawn timber, and 5,11,582 pounds in respect of missing logs. The taxing authorities and the Tribunal found that the compensation in regard to these items constituted a revenue receipt inasmuch as they were stock-in-trade. This finding is in question.

1. Mr. Munim submitted that the assessee had claimed compensation for the entirety of the business and property which it had lost in Siam. The claim was required to be made in the form prescribed. The form required particulars and they were supplied. The claim was not in respect of the separate items covered in that form. The items of mill and machinery stores; sawn timber and logs lost the character of stock-in-trade once the business in Siam was abandoned and came to form a part of the capital assets. The compensation paid on account of these items, even if considered separately, was, therefore, a capital receipt.

2. Mr. Munim relied upon the judgment of the Supreme Court in CIT vs. Canara Bank Ltd. (1967) 63 ITR 328(SC). The Canara Bank had opened a branch in Karachi prior to partition. After partition, the currencies of India and Pakistan continued to remain at par until the Indian rupee was devalued on September 18, 1949. On that date, the bank had a sum of Rs. 3,97,221 in its Karachi branch which belonged to its head office. The Pakistani rupee not being devalued at the same time, the parity between the Indian and Pakistani rupee ceased to exist. The exchange ratio was not determined until later. The bank was not permitted to carry on business in Pakistani currency until April 3, 1951, and thereafter it carried on no foreign exchange business. On July 1, 1953, permission to remit the said sum was granted by the State Bank of Pakistan and two days later acting upon that permission, the bank remitted it to India. In view of the difference in the value of the currencies, the bank made a profit of Rs. 1,73,817. The question that arose was whether this was a revenue receipt. It was urged on behalf of the Revenue that the said sum was the stock-intrade of the bank and the increment due to the fluctuation in the exchange rate had to be treated as incidental to the bank’s business. The Supreme Court assumed that the said sum was the bank’s stock-in-trade, but it observed that it did not necessarily follow that the increment due to the fluctuation in the exchange rate was due to trading operations in, the carrying on of banking business. It had been found by the Tribunal that the said sum was a ” blocked and sterilised balance ” and the bank was unable to deal with it or use it between September, 1949, and July, 1953, when it was finally remitted to India. In the Supreme Court’s opinion, the said sum changed the character of stock-in-trade when it was blocked and sterilised and the increment in its value due to the exchange fluctuation had to be treated as a capital receipt.

3. Mr. Munim also drew our attention to the Supreme Court judgment in Senairam Doongarmall vs. CIT (1961) 42 ITR 392(SC). This was a case in which the assessee owned a tea estate consisting of tea gardens, factories and other buildings, and it carried on the business of growing and manufacturing tea. The factory and other buildings on the

estate were requisitioned for defence purposes. The assessee remained in possession of the tea gardens and tended them to preserve the plants. The manufacture of tea, however, was completely stopped. The assessee was paid compensation under the Defence of India Rules calculated on the basis of the out-turn of tea that would have been manufactured. The question was whether the amounts of compensation were revenue receipts taxable in the assessee’s hands. The Supreme Court noted the observations of the House of Lords that ” there is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the application of that test ” [See Glenboig Union Fireclay Co. Ltd. vs. IRC (1922) 12 TC 427 (HL)]. The Supreme Court observed that it was the quality of the payment that was decisive of its character, not the method of the payment or its measure; and it was the quality that made it fall within capital or revenue. Analysing the facts of the case, the Supreme Court found that the growing of the plants only furnished the raw material for the business. Without the factory and the premises, the tea leaves could not be dried, smoked and cured to become tea, as known commercially, and it could not be packed or sold. The direct and immediate result of the requisition of the factory was, therefore, to stop the business. When payments were made to compensate the assessee, the measure was the out turn of tea that would have been manufactured, but that had little relevance. The injury was to the business as a whole. It was not a case in which the business continued and what was paid was to bring the profits up to normal level. Where the assessee did not carry on business at all, the compensation that he received could not bear the character of profits of a business. Accordingly, the Supreme Court held that the whole of the amount received by the assessee was not assessable.

1. Mr. Jetly, learned counsel for the Revenue, submitted, first, that whether or not the compensation awarded was a revenue or a capital receipt had to be considered by the Tribunal and the Tribunal having concluded that it was, in regard to the particular items, a revenue receipt, it was not for this Court to intervene. Mr. Jetly drew our attention in this regard to the judgment of the Supreme Court in Sutlej Cotton Mills Ltd. vs. CIT 1978

CTR (SC) 155:(1979) 116 ITR 1. The Supreme Court there observed that the law may be taken to be well-settled that where a profit or loss arose to an assessee on account of appreciation or depreciation in the value of foreign currency held by him on conversion into another currency, such profit or loss would, ordinarily, be trading profit or loss if the foreign currency had been held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in business. If, on the other hand, the foreign currency had been held as a capital asset or as fixed capital, such profit or loss would be of a capital nature. In the case before the Supreme Court, there was no finding by the Tribunal as to whether the foreign currency had been held by the assessee on capital account or revenue account and whether it was part of the fixed capital or of the circulating capital embarked and adventured in the assessee’s business in West Pakistan. If it had been employed by the assessee in its business in West Pakistan and had formed part of the circulating capital of that business, the loss resulting to the assessee on remission to India on account of alteration in the rate of exchange would be a trading loss

; but if it had been held on capital account and had been part of fixed capital, the loss would be a capital loss. The question, the Supreme Court observed, whether the loss suffered by the assessee was a trading loss or a capital loss could not be answered, unless

it was first determined whether the foreign currency was held by the assessee on capital account or on revenue account or, to put it differently, as part of fixed capital or of circulating capital. The matter was sent back to the Tribunal to take additional evidence in this regard.

2. Mr. Jetly laid emphasis on the fact that the assessee had received compensation in the sum of 23,756 pounds in respect of mill and machinery stores, 1,10,125 pounds in respect of sawn timber and 5,11,582 pounds in respect of logs. He submitted that these were items of stock-in-trade and, therefore, the compensation received in respect thereof was also of a revenue nature.

3. In support of this submission, Mr. Jetly drew our attention to the judgment of the Madras High Court in A.L.A. Firm vs. CIT (1976) 102 ITR 622. The problem that arose there was how the stock-in-trade of a firm which was dissolved had to be valued. On behalf of the assessee, it was submitted that when the firm was dissolved, its assets shed their character as stock-in-trade and became the properties of the firm. On behalf of the Revenue, it was submitted that the stage of dissolution commenced only after the termination of the business of the firm and that it was at the stage of the termination of the firm that the profits of the firm had to be ascertained. In the case of stock- in-trade, it had to be valued at the market rate at the time of dissolution. The Madras High Court noted that it was concerned in the case before it with the rights of the partners during the subsistence of the partnership. On the day fixed for dissolution, the profits of the firm had to be ascertained by valuing the stock-in-trade, and dissolution followed thereafter. The Court rejected the contention that the stock-in-trade had then got transformed into capital assets.

15. A Claims committee was set up under the said agreement. The note for the guidance of claimants before it shows that claims were to be made on a prescribed form. The note shows that the form required particulars of the property that was the subject-matter of the claim. The award specifies that the compensation was awarded to the assessee under three broad heads: in lieu of restoration of property, in respect of damage to property and for the loss sustained through deprivation of property. In these circumstances, the Supreme Court’s observations in Senairam Doongarmall’s case (1961) 42 ITR 392(SC), are relevant; it is the quality of the payment that is decisive of the character and makes it fall within capital or revenue and not the measure of its payment. The particulars were required to be given and compensation noted there against was only as a measure of the ascertainment of the total compensation payable to the assessee. The fact that, in such circumstances, compensation was noted against the items of mills and machinery stores, sawn timber and logs does not make the compensation quantified in respect of these items a revenue receipt. It is necessary to remember the peculiar facts. Upon the invasion of Siam by the Japanese forces late in the year 1941, the assessee’s business and property in Siam had to be abandoned. No one could then forecast what the result of the war would be and whether the assessee could ever be able to restart its business in Siam or even recover compensation for the loss. Such uncertainty continued throughout the duration of the war. The prospect of recovering compensation arose only when the said agreement was signed, a claims committee was formed and claims were invited. There

was, therefore, no question of the assessee holding the items of mills and machinery stores, sawn timber and logs as items of stock-in-trade or on revenue account after the invasion of Siam. This was a situation to which the observations of the Supreme Court in the case of CIT vs. Canara Bank Ltd. (1967) 63 ITR 328(SC), apply. The compensation that the assessee received did not arise due to trading operations. The trading operations had long since ceased. The items of mills and machinery stores, sawn timber and logs had long since been sterilised and had changed their character of stock-in-trade. The assessee’s business in Siam having ceased long before the award of the compensation, the compensation was not assessable. The compensation realised, even if it be treated as being for the individual items, cannot be treated as a revenue receipt.

16. The judgment of the Supreme Court in the case of Sutlej Cotton Mills Ltd. vs. CIT (supra), cited by Mr. Jetly has no application to the facts before us. In that case, the assessee continued to run a business in West Pakistan and it was required to be found, as a matter of fact, whether the foreign currency had been held by the assessee in West Pakistan on capital account or on revenue account. In the present case, the assessee’s business in Siam had long since ceased.

17. The judgment of the Madras High Court cited by Mr. Jetly is also of no assistance here. That was a case of a dissolved firm. The Court noted that on the date of dissolution the profit had to be ascertained by valuing the stock-in-trade first and dissolution would follow thereafter. Clearly, while there is a running business, stock-in-trade retains its character and is held on revenue account and must be treated as such.

18. In the result, we find that the Tribunal was in error in holding that the compensation in respect of mills and machinery stores, sawn timber and logs represented a revenue receipt. The third question would have needed an answer had we answered the second question in favour of the Revenue. Not having done so, it is unnecessary to answer the third question.

19. To sum up, the first question is answered in the affirmative and in favour of the Revenue. The second question is answered in the negative and in favour of the assessee. Having regard to the answer to the second question, it is not necessary to answer the third question.

20. There shall be no order as to costs.

[Citation : 169 ITR 148]