COMMISSIONER OF INCOME-TAX, NAGPUR versus RAI BAHADUR JAIRAM VALJI AND OTHERS

Citation: [1959] SUPP. 1 S.C.R. 110 · Decided: 07-10-1958 · Supreme Court of India · Bench: T.L. VENKATARAMA AIYYAR, P.B. GAJENDRAGADKAR, A.K. SARKAR · Disposal: Appeal(s) allowed

Judgment (excerpt)

llO 
SUPREME COURT REPORTS [1959) Supp. 
'958 
question did not arise for consideration at that stage, 
M. c. v. s. 
did ~ot also consi~er any material to support their 
Ah .. achal• .vadar findmg. In the circumstances, the only reasonable 
Etc. 
course is to leave that question open so that it may 
v. 
be decided in appropriate proceedings. 
1-he Slate of 
Mad.as .s. Othm 
In the result, subject to the aforesaid observations, 
the appeals are dismissed but without costs. 
Subba Rao ]. 
Ootober 7. 
Appeals dismissed. 
COMMISSIONER OF INCOME-TAX, NAGPUR 
v. 
RAI BAHADUR JAIRAM VALJI AND OTHERS 
(VENKATABAMA AIYAB, P. B. GAJENDBAGADKAB 
. and A. K. SABKAB JJ.) 
Income Tax-Capital or Revenue receipt-Compensation for 
premature termination of contract_..:.Whether trading reccipt-Liabi· 
lity to tax-Indian Income-tax Act, r922 (XI of r922). 
The respondent had been carrying on business in the produc-
tion and supply of limestone since 1920, and under an agreement 
entered into with the Bengal Iron Company was supplying all 
its requirements of limestone and dolomite. 
Sometime later 
the Indian Iron and Steel Company took over all the assets 
and liabilities of the former company. Subsequently differences 
having arisen between the respondent and the Indian Iron and 
Steel Company they entered into an agreement on May 9, 1940, 
in settlement of all the disputes .between them whereby, inter 
alia, the respondent was to work a quarry of the company for a 
period of 25 years and to supply the limestone quarried there-
from to the company according to its requirements and to get 
from the railway authorities facilities for transporting the lime-
stone more economically; and it was agreed that till such facili-
ties were given, the respondent was to be paid Rs. 4000/- every 
month. Under the agreement the respondent had the right to 
work other quarries of his own and supply limestone so quarried 
to other purchasers. The railway authorities having declined to 
grant facilities, it became impossible to carry out the agreement 
in the manner contemplated by the parties, who, thereupon, 
entered into a fresh agreement on August 2, 1941, terminating 
(1) S.C.R. SUPREME COUHT REPORTS 
111 
the agreement dated May 9, 1940, on certain terms. 
The agree-
1958 
ment provided inter alia (1) that the Company should pay "I~s. 
2,50,000/- to the sellers as solatium besides the monthly instal- Commissio11er of 
merits of Rs. 4000/-", remaining unpaid under the contract dated 
Incotne-Ta" 
May 9. 1940, (2) that the company should purchase limestone 
v. 
from the respondent for a period of 12 years, and .(3) that the 
Jairam Valji 
respondent was to be appointed the loading contractors of the 
Company for loading iron ore. 
On a question as to whether the 
the sum of Rs. 2,50,000/- was liable to tax, the respondent claim-
ed that it was not, being a capital receipt but the income-tax 
authorities held that it was a trading receipt and was income 
chargeable to tax. The High Court however held on a reference 
under s. 66(1), that the income was not chargeable to tax. and 
hence the present appeal. In support of the appeal, the respon-
dent contended inter alia that (1) the contract dated May 9, 1940, 
was for a period of 25 years of which more than 23 years had 
still to run at the time of the settlement, and it was therefore 
an asset of an enduring character, capital in character, and the 
compensation paid therefor was a capital receipt. and (2) that 
the true character of the agreement was that it broug.ht into 
existence an arrangement which would enable the respondent to 
carry on a business and was not itself any business, and any pay-
ment made for the termination of such an agreement was a 
capital receipt. 
Held, that the contract of May 9, 1940, was entered into by 
the respondent in the ordinary course of his business and that 
the sum of Rs. 2,50,000/- which was paid as solatium for the 
cancellation of that contract, was a revenue receipt and was 
chargeable to tax. 
There is a distinction between a contract entered into in the 
usual course of business and an agency contract. 
While it may 
be possible to regard the latter as merely a framework for doing 
business, the former constitutes the business itself. and, therefore, 
compensation paid for the termination of the former kind of 
contract must be held to be revenue, whereas compensation paid 
for the termination of the latter might be capital in character. 
It would make n

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