Case Note & Summary
The assessee firm, Ram Kumar Agarwalla and Brothers, carried on business as share brokers and paper merchants. Together with D, a chartered accountant, and R, a solicitor, they engaged in negotiations to purchase the controlling interest in a company referred to as S company. Simultaneously, M and his associates were also negotiating to acquire the same controlling interest. M wrote a letter to D offering that if D and his associates secured the controlling interest for M and abandoned their own claims, M would pay them Rs.6 lakhs upon completion of the purchase. Eventually, M succeeded in purchasing the shareholding in S company for over Rs.4 crores. Subsequently, Rs.6 lakhs was paid, out of which the assessee firm received Rs.2 lakhs as its share. In the assessment year 1947-48, the assessee claimed that the sum of Rs.2 lakhs was exempt from income tax under section 4(3)(vii) of the Income-tax Act, 1922, which provided exemption for receipts of a casual and non-recurring nature. Alternatively, the assessee argued that the receipt was a capital receipt and not a revenue receipt. The Income-tax Officer rejected the claim, and the Appellate Assistant Commissioner confirmed the rejection. Before the Appellate Tribunal, there was a difference of opinion between the two members. The matter was referred to a third member, who called for certain findings on evidence from the Appellate Assistant Commissioner and disposed of the entire appeal against the assessee, holding that the amount was received for services rendered and not as consideration for refraining from competing. The High Court, on a reference, confirmed the view taken by the Tribunal. On appeal to the Supreme Court, the primary legal issue was whether the receipt of Rs.2 lakhs was exempt under section 4(3)(vii) or, alternatively, was a capital receipt. The Supreme Court, after considering the findings of fact recorded by the Tribunal, held that the receipt arose from the business of the assessee and was therefore not exempt under section 4(3)(vii). The Court emphasized that on the factual finding that the amount was for services rendered, it constituted business income. The appeal was accordingly dismissed, and the decision of the High Court was affirmed.
Headnote
A) Income Tax - Exemption under Section 4(3)(vii) - Business Income - Receipt from services rendered - Income-tax Act, 1922, s.4(3)(vii) - Assessee firm received Rs.2 lakhs as its share of Rs.6 lakhs paid by M after M purchased controlling interest in S company. Assessee claimed exemption under section 4(3)(vii) which exempts receipts of a casual and non-recurring nature, or alternatively contended it was a capital receipt. Tribunal found the amount was received for services rendered, not for refraining from competing, and thus was business income. Court upheld that finding, dismissing the appeal. Held that on the finding, the receipt arose from business and was not exempt under section 4(3)(vii). (Paras not mentioned)
Issue of Consideration
Whether the sum of Rs.2 lakhs received by the assessee was exempt from tax under s.4(3)(vii) of the Income-tax Act, 1922, or alternatively, was a capital receipt and not a revenue receipt
Final Decision
Appeal dismissed; receipt of Rs.2 lakhs held to be business income, not exempt under s.4(3)(vii)
Law Points
- Receipt arising from business of assessee is not exempt under s.4(3)(vii) of Income-tax Act
- 1922
- amount received for services rendered is taxable as business income
