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Income‑tax Reference No. 24 of 1963, decided on 26th April 1967.
‑Sale of trade marks in consideration of fixed monthly payment for lifetime of vendor‑Monthly payments whether income or capital in hands' of vendor‑Indian Income‑tax Act, 1922, S. 12.
The assessee carried on in partnership the business of manufacturing and selling bidis under two trade marks of which he was the exclusive owner. After the dissolution of the firm by a deed dated March 12, 1951, the assessee sold to one of the other partners of the dissolved firm all his interest and share in the business hitherto carried on by the firm, and in its goodwill and also his ownership rights in the trade marks. The considera tion for the sale was a sum of Rs. 18,500 to be paid within two years from the registration of the sale deed and a further monthly payment to the assessee of Rs. 1,500 during his lifetime. The monthly payment was stated to be in consideration of the transfer of the trade marks ; and the liability to pay tax in respect of these payments was to be that of the assessee. Under the sale deed the assessee agreed that he would not at any time after the sale "either by himself or in partnership with any other person or persons carry on the trade and business of manufacturing or sale of bidis within the Union of India or Pakistan in any name whatsoever". Nor was he entitled to receive or claim the amount standing to his credit in the books of the dissolved firm or to participate in refunds of taxes or in amounts that may be realised from the railways. The assessee was entitled to enforce payment of the amounts specified in the deed in case of default and to realise them from the person and property of the purchaser. In case of failure of the assessee to observe any of the covenants in the deed he was not entitled to enforce the remaining payments due at the time of the breach. The question was whether payments of Rs. 1,500 per month under the sale deed were capital receipts in the hands of the assessee
Held, that the monthly payment was neither payment of a fixed consideration in instalments, nor compensation for the restrictive covenants imposed on the assessee. The payments were in the nature of an annuity and, therefore, revenue receipts in the hands of the assessee falling under section 12 of the Indian Income‑tax Act, 1922.
Maharajkumar Gopal Saran Narain Singh v. Commissioner of Income‑tax (1935) 3 I T R 237 (P C) applied.
Commissioner of Income‑tax v. Best & Co. (Private) Ltd. (1966) 60 I T R 11 (S C) ; Commissioner of Income‑tax v. Kunwar Trivikram Narain Singh (1965) 57 I T R 29 (S C) ; Commissioner of Income‑tax v. Patel Bros. (1966) 61 I T R 685 ; Commissioner of Income‑tax v. Shaw Wallace & Co. (1932) 2 Comp. Cas. 276 ; A I R 1932 P C 138 and Senairam Doongarmall v. Commissioner of Income‑tax (1961) 42 I T R 392 ; (1962) 1 S C R 257 ref.
A. N. Kirpal and D. K. Kapur for the Commissioner.
B. N. Goswamy for the Assessee.
.-In this reference under section 66(1) of the Income‑tax Act), 1922 (to be hereinafter referred to as "the Act"), the Income‑tax Appellate Tribunal, (Delhi Bench) "C", has submitted to this Court, for its opinion, the following question of law;
"Whether, on the facts and in the circumstances of the case, the payment of Rs. 18,000 received by the assessee at the rate of Rs. 1,500 per month, under the terms of the agreement, dated March 12, 1951, is a capital receipt in the hands of the assessee."
Shri Lal Chand Jain is the assessee in this case. Till March 12, 1951, he carried on the business of manufacture arid sale of bidis under the trade marks and trade names of "Pan Ka Ekka, Seth Biri No. 311" and "Divi". Those trade marks were hid exclusive properties On March 12, 1951, by means of a registered deed of agreement, he transferred his interest in the business in question along with the goodwill as well as the stock in‑trade to one Seth Ctjhuna Mal.
As the question of law, arising for decision in this case, depends upon the true interpretation of the sale deed dated March 12, 195 1, it is necessary to set out the same in full. It reads;
"This deed of sale made this 12th day of March 1951, between Seth Lal Chand Jain son of Seth Ramji Das, caste Jain, resident of Deputy Ganj, Delhi, hereinafter called the vendor, and Seth Sundar Lal adopted son of Seth Chhuna Mil, resident of Deputy Ganj, Delhi, hereinafter called the purchaser.
Whereas the vendor and the purchaser under partnership with Mst. Nathia Devi widow of L. Chhuna Mal carried on trade and business for the manufacture and sale of Biris under trade marks Pan Ka Ekka, Seth Biri No. 311 and Divi in the name and style of Seth Lai Chand Jain & Co., vide deed of partnership dated the 2nd February 1948, and
Whereas all the existing trade marks including the trade marks, above stated, were the property of the vendor and the purchaser and Shrimati Nathia Devi the third partner had nothing to do with them, and
Whereas the three partners of Seth Lal Chand Jain & Co. have dissolved the partnership with their mutual consent with effect from the 3rd of January 1951, and accounts between them have been gone into rendered and settled, and
Whereas in pursuance of this dissolution, the entire stock and goodwill in trade, etc., had fallen to the share of the vendor and the purchaser and Shrimati Nathia Devi had been allotted a sum of Rs. 20,000 as a result of the accounting, vide in deed of dissolution already executed, and
Whereas the vendor has now agreed with the purchaser for the sale to him of all his interests and share in the trade and business and goodwill and other dues and stock‑in‑trade effects goodwill and the right to carry on and continue the business and also the ownership rights of the property in all the trade marks belonging to the firm and hitherto used by the firm Seth Lal Chand & Co. the right of ownership in trade marks Pan Ka Ekka, Seth Biri No. 311 and D. 1 at the price and according to the conditions contained in this indenture of the sale, and
Whereas all the account books and other records of the partnership have been delivered to the purchaser exclusively by the partners of Sath Lal Chand Jain & Co., including the vendor named hereinabove and all the debts payable by Seth Lal Chand Jain & Co., are correctly and truly set forth in the said account books and the particulars of the debt due and owing to the firm are entered therein and also the particulars of the contracts and engagements entered into by the firm or to which the firm is entitled or liable to are entered therein, and nothing remains to be mentioned separately."
Now this deed of sale witnesseth;
That in pursuance of the said agreement the purchaser agrees to pay a sum of Rs. 19,500 to the vendor within 2 years next after the registration of this deed and further agrees to pay to the vendor Rs. 1,500 per month during the lifetime of the vendor only, i.e. till such time as Seth Lal Chand is alive, subject to the condition stated hereunder, the vendor does hereby convey, assign and make over to the purchaser all his rights, interests and share and beneficial interests in the goodwill of the firm Seth Lal Chand Jain & Co., and in the trade and business hitherto carried on by the firm and also in all the books and other debts now due and owing to the firm on account of the said trade and business including the right to receive and appropriate to himself the return from the income tax and excess profits tax etc., and all securities for the same and all in all contracts and engagements benefits and advantage, which have been entered into or can be enforced by the vendor in the firm Seth Lal Chand Jain & Co., and also in the stock in‑trade good articles of the firm and in the manufactured or manufactured ( ) biris, tobacco and others in stock of Seth Lal Chand Jain & Co., and in respect to the amounted moneys standing to the credit of the vendor in the books of the firm Seth Lal Chand Jain & Co. to have and to hold the property hereby conveyed to the purchaser exclusively and absolutely as full and complete owner of the same with all rights and privileges to enforce any contract hitherto standing in the name of the firm and to receive all amounts and outstanding hitherto due to the firm or that may hereafter be due to the firm or on account of the firm and to enter into all future contracts and carry on business as sole and absolute owner of Seth Lal Chand Jain & Co., and to represent and be the owner of all the rights and interest of the vendor in all the effects of the firm Seth Lal Chand Jain & Co.
The vendor does herewith agree with the purchaser that the vendor will not at any time hereafter either by himself or in partnership with any other person or persons carry on the trade and business of manufacturing or sale of biris within the Union of India or Pakistan in any name whatsoever and shall not be entitled to receive or claim the amount standing to his credit in the account books of Seth Lal Chand Jain & Co. under the name of the vendor Lal Chand Jain, and will have no right left of whatever nature in any of the trade marks hereto be longing to the firm Seth Lal Chand Jain & Co. and in the refunds that may now be received by the purchaser from income‑tax or excess profits tax or in the claim that may be realised from the railways, with respect to which all the purchaser alone henceforth shall be the sole exclusive and absolute owner. The purchaser will be responsible to make all payments with respect to income‑tax, sales tax or excess profits tax or any other tax payable for the firm Seth Lal Chand Jain & Co., whether levied so far or which may be levied hereafter and the vendor shall be under no liability for the same. The other liabilities of the firm Seth Lal Chand Jain & Co., will also be the exclusive liability of the purchaser who alone will be responsible to make all the payments due from the firm. The vendor, after the sale, has no right left in any way to interfere or meddle with the user and the ownership of the trade marks owned by the firm Seth Lal Chand Jain & Co., which have become absolute property of the purchaser. The purchaser henceforth will have the right at his discretion to continue the pending suits in the name of Seth Lal Chand Jain & Co., or to have himself substituted as its sole owner provided further that it is also open to the purchaser to change the name of the business and to adopt any other name and to take in Mst. Nathia Devi as a partner with him provided that the purchaser will not be entitled to take any other third person other than Mst. Nathia Devi as a partner. In all events, the purchaser shall open separate account books and in no event the vendor has any right left after this complete sale and conveyance to claim any right, interest or title in the property hereby conveyed. The payment of the monthly instalment of Rs. 1,500 each above‑referred, is in consideration of the vendor now selling all his rights of ownership in the property trade marks Pan Ka Ekka, Seth Biri No. 311 and Divi to the purchaser provided that this payment shall not in any case exceed beyond the lifetime of the vendor and all taxes, etc., levied by the income‑tax on this amount will be payable by the vendor himself. It is further made plain that in case the purchaser fails to make the payment of the sum of Rs. 18,500 within the time laid down hereabove, i.e. 2 years next after the date of registration of this document or if the purchaser fails to make the payments of monthly instalments of Rs. 1,500 due from the date of registration of these presents except in the event mentioned above, it shall be open to the vendor to enforce the payment of instalments due at that time through Court and to realise the same from the person and the property of the purchaser and the purchaser or his heirs, executors shall have no objection to the same, provided also that in case of failure of the vendor to observe any of the covenants herein contained, he will not be entitled to enforce the remaining payments due at the time of breach.
In witness whereof the parties have set and subscribed their hands in token of the correctness of these presents witnesses
"1. Lal Chand Vendor. (Sd.) Sundar Lal Jain,
2. Asa Bhai Lalu Bhai, in Gujrati. Purchaser.
3. (Sd.) H. C. Jain, 6, Pusa Road, Delhi."
As per the deed, the vendor agreed to sell to the purchaser all his interests and shares in his trade and business and good will and stock‑in‑trade, and the right to carry on and continue the business and also the ownership rights of the property in all the trade marks belonging to him. As a consideration thereof, the purchaser agreed to pay a sum of Rs. 18,500 to the vendor within two years next after the registration of the sale‑deed and he further agreed to pay to the vendor Rs. 1,500 per month during his lifetime. The deed specifically mentions : "The payment of the monthly instalment of Rs. 1,500 each, above referred, is in consideration of the vendor now selling all his rights of ownership in the property trade marks Pan Ka Ekka, Seth Biri No. 311 and Divi to the purchaser provided that this payment shall not in any case exceed beyond the lifetime of the vendor and all taxes, etc., levied by the income‑tax on this amount will be payable by the vendor himself". From this clause, it is clear that a sum of Rs. 1,500 per month was agreed to be paid as consideration for the transfer of the trade marks, mentioned above. Under the sale‑deed the vendor agreed that he will not, at any time, after the sale "either by himself or in partnership with any other person or persons carry on the trade and business of manufacturing or sale of biris within the Union of India or Pakistan in any name whatsoever and shall .not be entitled to receive or claim the amount standing to his credit in the account books of Seth Lal Chand Jain & Co. under the name of the vendor Lal Chand of the trade marks hereto belonging to the firm Seth Lal Chand Jain & Co. and in the refunds that may now be received by the purchaser from income‑tax or excess profits tax or in the claim that may be realised from the railways, with respect to which all the purchaser alone henceforth shall be the sole, exclusive and absolute owner". In the concluding portion of that document it is recited;
"It is further made plain that in case the purchaser fails to make the payment of the sum of Rs. 18,500 within the time laid down hereabove, i.e. 2 years next after the date of the registration of this document or if the purchaser fails to make the payment of monthly Instalments of Rs. 1,500 due from the date of registration of these presents except in the event mentioned above, it shall be open to the vendor to enforce the payments of instalment due at that time through Court and to realise the same from the person and the property of the purchaser and .the purchaser or his heirs, executors shall have no objection to the same, provided also that in case of failure of the vendor to observe any of the covenants herein contained, he will not be entitled to enforce the remaining payments due at the time of the breach." .
From the foregoing clauses it is clear that the purchaser agreed to pay to the vendor every month a sum of Rs. 1,500 during his lifetime, in consideration of the sale of his trade marks. The sale‑deed, either expressly or by necessary implication, does not say that the monthly payments in question were to be made, as compensation for the restrictions imposed on the vendor. It is true that under the sale deed the purchaser was given the right to stop the payments due from him to the vendor, if the vendor committed breach of the agreement in any manner ; but it must be noted that the agreement permitted him not only to stop the payments, to be made every month but also that the sum of Rs. 18,500 or any part thereof, which remained unpaid, which sum' was admittedly, agreed to be paid as consideration for the sale. As seen from the document the said sum of Rs. 18,500 could be paid within two years from the date of registration of the sale deed. Therefore, if the vendor committed breach of any of the covenants in the deed, it was open to the purchaser, as per the terms of the sale deed, not to pay the said sum. Bearing in mind these clauses, now, we have to determine the true nature of the agreement to pay to the vendor a sum of Rs. 1,500 every month.
The Income‑tax Officer came to the conclusion that those monthly payments are annuities and, as such, are liable to be taxed as "income". In appeal, the Income‑tax Appellate Assistant Commissioner agreed with the view taken by the Income‑tax Officer. He came to the conclusion that the income in question is neither a profit nor a gain falling within section 10 of the Act ; but it is an income from other sources, as contemplated by section 12 of the Act.
When the matter was taken up in appeal to the Income‑tax Appellate Tribunal, it differed from the view taken by the Income‑tax Officer and the Income‑tax Appellate Assistant Commissioner. It came to the conclusion that the purchaser had agreed to pay to the vendor a sum of Rs. 1,503 every month as compensation for his agreeing not to manufacture or trade in biris either in India or Pakistan. The question for our decision is whether the relevant clauses in the sale deed admit of such a construction.
The sale deed plainly says that the said sums were made payable in consideration for the transfer of his trade marks by the vendor. The sale deed further says that the liability to pay tax in respect of those payments is that of the vendor. This shows that the parties to the sale deed did contemplate payment of income‑tax in respect of those amounts. It is true that that circumstance, by itself, is not conclusive. But that circumstance negatives the contention of the assessee that the intention of the parties to the sale deed was that those payments were to be made as compensation for the restrictions placed on the assessee vendor.
Much emphasis was placed by Mr.‑Goswamy, learned counsel for the assessee, on the clause in the sale deed providing for the stoppage of payments provided in the sale deed in the event of the vendor engaging himself in the business of manufacture and/or sale of biris within the Union of India or Pakistan. In our opinion, the term empowering the purchaser to stop the payments in question is merely a term in terrorum. It is not necessary for us to decide in this case whether that term is valid in law.
It may also be noted that the purchaser can stop those monthly payments not only in the event of the vendor engaging himself in the business of manufacture or sale of bins, but also if he commits breach of any of the other covenants in the sale deed. This circumstance runs counter to the contention of Mr. Goswamy that those monthly payments were intended as compensation for the restrictive covenants imposed on the vendor.
We are in agreement with Mr. A. N. Kirpal, learned counsel for the department, that the facts of the present case fall within the rule laid down by the Judicial Committee in Maharajkumar Gopal Saran Narain Singh v. Commissioner of Income‑tax ((1935) 3 I T R 237 (P C)). In that case the assessee who owned nine annas, share in an estate, with the object of discharging his debts and of obtaining for himself an adequate income for his life, conveyed the greater portion of his estate to his son‑in‑law's mother who owned the remaining seven annas in the estate. The consideration for the transfer was the payment of the assessee's debts amounting to Rs. 10,26,937 and a cash payment of Rs. 4,73,063 ; and an annual payment of Rs. 2,40,000 to the assessee for his life. The Court held that "this was clearly a case where the owner of an estate (the assessee) bad exchanged a capital asset for (inter alia) a life annuity which was income in his hands and not a case in which he had exchanged his estate for a capital sum payable in instalments. . ." Similar is the position in the present case.
In Commissioner of Income‑tax v. Kunwar Trivikram Narain Singh ((1965) 57 I T R 29 (S C)), the Supreme Court laid down that "where an owner of an estate exchanges a capital asset for a perpetual annuity, it is ordinarily taxable income in his hands. The position will be different if he exchanges his estate for a capital sum payable in instalments." In that event, "the instalments, when received, would not be taxable income". In the present case, we are dealing with a case of an annuity and not payment of considera tion in instalments. If the monthly payments are considered as instalments of the consideration fixed, then we have to hold that the sale was for an indefinite consideration because those payments are required to be made during the lifetime of the vendor.
In support of his contention that the sum in question is not assessable to tax, Mr. Goswamy took us through several decisions. We shall now refer to those decisions. The first decision to which our attention was invited, is Commissioner of Income‑tax v. Best and Co. (Private) Ltd. ((1966) 60 I T R 11 (S C)). In that case the assessee‑company had the agency for the distribution in certain centres of the explosives manufactured by Imperial Chemical Industries (Exports) Ltd., Glasgow. This agency came into existence in 1900 and, although terminable at will, continued up to 1947, in which year Imperial Chemical Industries (Exports) Ltd. decided that all its agencies in India and Ceylon should be taken over by the Imperial Chemical Industries (India) Ltd. Consequently, it gave notice to the assessee terminating the agency from April 1, 1948. Towards compensation for the termination of the agency, the assessee was paid during the three successive years after the termination of the agency, certain amounts calculated on the basis of commission on sales made by the Imperial Chemical Industries (India) Ltd. As a condition of paying the compensation, 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. The assessee claimed that the amounts received by it were capital receipts as they represented compensation for termination of the agency and consideration for the restrictive covenant. The Court held that "the compensation agreed to be paid was not only in lieu of the loss of the agency but also for the respondent accepting a restrictive covenant for a specified period"; and that "the restrictive covenant was an independent obligation, which came into operation only when the agency was terminated and that part of the compensation which was attributable to the restrictive cove nant was a capital receipt and hence not taxable". The rule laid down in that case does not govern the facts of the present case. We have earlier considered the effect of the relevant clauses in the sale deed.
Next, reference was made to the decision of the Bombay High Court in Commissioner of Income‑tax v. Patel Bros. ((1966) 61 I T R 685). Therein, the assessee, who was the promoter and managing director of a private film company, entitled, under one of the articles of association of the company, to receive, in addition to a monthly remuneration of Rs. 750 as managing director, one‑tenth of the net surplus profits of the company after payment of a dividend of six per cent. on the paid‑up capital, in consideration of the services rendered and to be rendered by him to the company in connection with the promotion of the company's business. The assessee and the other shareholders of the company agreed to sell all the shares of the company to a third party. One of the conditions of the sale of the shares was that on the transfer of the shares, the assessee will cease to render services to the company and execute a release of his rights under the said article on receiving a sum of Rs. 1 lakh in consideration of foregoing his right to one‑tenth share of the surplus profits under the said article. The sale was effected and the assessee received Rs. 1 lakh from the purchaser under the above agreement. The income‑tax department included this sum of Rs. 1 lakh in his business income treating it as a revenue receipt. On a reference the court held that "the effect of the article was not merely to create an obligation on the part of the assessee to serve and to receive remuneration for the service rendered but the article created a right of a lasting and enduring nature in favour of the assessee and the consideration of Rs. 1 lakh received by the assessee for releasing such right as a condition of the sale was a capital receipt and not a revenue receipt". We fail to see how this decision has any bearing on the facts before us.
Next, reference was made to the well‑known decision of the Judicial Committee in Commissioner of Income‑tax v. Shaw Wallace and Company (1932)2 Comp. 276, 280). Therein the amount in question was received from a principal by an agent "as full compensation for cessation of the agency", or as "compensation for the loss of office". The Judicial Committee held that those sums "are not sums received for carrying on business, but are as some sort of solatium for the compulsory winding up of an agency, and, therefore, are not assessable as income, profits and gains within the meaning of Income‑tax Act". This decision, again, is of no assistance to the assessee. In that decision, their Lordships, observed;
"The object of the Indian Act is to tax income', a term, which it does not define. It is expanded, no doubt, into income, profits and gains', but the expansion is more a matter of words than of substance. Income, their Lordships think, in this Act connotes a periodical monetary return, coming in' with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Thus income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something, which is often loosely spoken of as capital'. But capital, though possibly the source in the case of income from securities, is in most cases hardly more than an element in the process of production."
From these observations it follows that the income, with which we are concerned in this case, is an income falling under section 12 of the Act.
Lastly, reliance was placed on the decision of the Supreme Court in Senairam Doongarmall v. Commissioner of Income tax ((1961) 42 I T R 392). Therein, the assessee, which owned a tea estate consisting of tea gardens, factories and other buildings, carried on the business of growing and manufacturing tea. The factory and other buildings on the estate were requisitioned for defence purposes by the military authorities. Though the assessee continued to be in possession of the tea gardens and tended them to preserve the plants the manufacture of tea was stopped completely. The assessee was paid compensation for the years 1944 and 1945 under the Defence of India Rules calculated on the basis of the out‑turn of tea that would have been manufactured by the assessee during that period. The question was whether the compensation received was revenue receipt taxable in the hands of the assessee. The Court held;
"the first consideration before holding a receipt to be profits or gains of business within section 10 of the Income‑tax Act was to see if there was a business at all of which it could be said to be income. The primary condition of the application of section 10 was that tax was payable by an assessee under the head Profits and gains of a business' in respect of a business carried on by him. Where an assessee did not carry on business at all, the section could not be made applicable, and any compensation for requisition of assets that he received could not bear the character of profits of a business.
That business' denoted an activity with the object of earning profit. To say that a business was being carried on, meant no more than that profit was to be earned by a process of production. The business of a tea‑grower and manufacturer was not merely to grow tea plants but to collect tea leaves and render them fit for sale. The tending of his tea gardens to preserve the plants, was not a continuation of the business of the assessee which had come to an end for the time being."
Their Lordships further held that " the measure and method of its payment was not decisive of the character of a payment of compensation". The Court came to the conclusion that what was received by the assessee was compensation for loss of business and not an income within the meaning of that expression in the Act.
For the reasons mentioned above, our answer to the question, referred to us, is that on the facts and in the circumstances of the case, the payment of Rs. 18,000 received by the assessee at the rate of Rs. 1,500 per month under the terms of the agreement, dated March 12, 1951, is a revenue receipt in the hands of the assessee.
The assessee to pay the costs of this reference. Advocate's fee Rs. 250.
Question answered in the negative.
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