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P.D Ghanekar v. Commissioner Of Income-Tax, Bombay City I.

Bombay High Court

Feb 3, 1970

Judgment

Subsequent
References

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Factual and Procedural Background

This is a reference under section 66(2) of the Indian Income-tax Act, 1922. The specific question referred was whether sums of Rs. 42,500 and Rs. 35,000 received by the assessee in the assessment years 1957-58 and 1958-59 respectively were exempt under section 4(3)(vii) of the Income-tax Act as receipts that were casual and non-recurring.

Facts (as stated in the opinion):

One Dandekar claimed Rs. 3,25,000 from Messrs. H. Fischer and Co. Pvt. Ltd.; correspondence between the parties occurred between late May and early July 1956. The company disputed the claim and Dandekar threatened suit.
Mr. Vartak was chairman and S. G. Pradhan managing director of the company. The assessee, Mr. Ghanekar, was a practising chartered accountant acquainted with the parties. The company wanted to avoid litigation and indicated a willingness to settle the claim up to Rs. 2,25,000.
On 10 July 1956 a document was executed whereby Dandekar assigned his claim to the assessee for Rs. 1,25,000 payable in six quarterly instalments (not later than 31 December 1967). Dandekar notified the company of this assignment.
On 14 July 1956 the assessee executed a transfer and assignment of the claim in favour of Mr. Vartak (treated as for the company) for Rs. 2,10,000 payable in six quarterly instalments. The net gain to the assessee from these transfers amounted to Rs. 85,000.
Of that Rs. 85,000, the assessee received Rs. 42,500 in the accounting year ending 31 March 1957 and Rs. 35,000 in the accounting year ending 31 March 1958. In assessments for the respective years the assessee claimed exemption under s.4(3)(vii) as the receipts were casual and non-recurring.
The Income-tax Officer, the Appellate Assistant Commissioner and the Income-tax Tribunal all rejected the assessee's contention. The Tribunal found the transaction non-recurring but not casual and therefore not exempt.

Legal Issues Presented

Whether, on the facts and circumstances of the case, the sums of Rs. 42,500 and Rs. 35,000 received in the assessment years 1957-58 and 1958-59 were exempt under section 4(3)(vii) of the Income-tax Act — i.e., whether those receipts were of a casual and non-recurring nature.

Arguments of the Parties

Assessee's Arguments (as advanced by Mr. Mehta)

The assessee was asked to intervene at the company's instance and was not acting on his own initiative; he was not acting in the course of his professional practice.
The company had not entered into any pre-existing binding agreement with the assessee to pay any remuneration; the payment received (Rs. 85,000) was essentially voluntary or ex gratia, given in recognition that the assessee brought about a settlement and saved the company from litigation, worry and expense.
Because the company paid the amount without pre-existing obligation, the income in the hands of the assessee was of a casual nature and therefore exempt under s.4(3)(vii) (subject to the non-recurring requirement, which was accepted).

Respondent / Revenue Position and Tribunal Findings

The assessing authorities and the Tribunal held that, although the receipt was non-recurring, it was not casual. The Tribunal found that the company had told the assessee it would be willing to settle up to Rs. 2,25,000 before the assessee acquired the claim.
The Tribunal found the assessee had no means to pay the purchase price and thus had taken a substantial risk; by acquiring the claim the assessee embarked on a venture expecting profit, similar to acquiring an asset or stock-in-trade.
Accordingly, the benefit obtained did not depend merely on the whim or caprice of the company and therefore was not casual; it was taxable rather than exempt under s.4(3)(vii).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Surat District Cotton Dealers' Association v. Commissioner of Income-tax [1959] 35 I.T.R. 121 (Bombay)	Test of "casualness": a receipt must be not merely non-recurring but also "casual" — i.e., not anticipated or foreseen; may depend on the caprice or whim of the payer.	The court quoted this test and applied it to determine whether the receipt depended on the whim of the company or was anticipated by the assessee; concluded receipt was anticipated and therefore not casual.
Commissioner of Income-tax v. V.P. Rao [1950] 18 I.T.R. 825 (Madras)	Definition of "casual" as accidental or fortuitous receipts occurring without stipulation, contract, calculation or design; akin to unforeseen windfalls (e.g., finding valuables, lottery, unexpected gift/legacy).	The court relied on this definition to contrast unforeseen windfalls with the present case, holding the assessee's receipt was not an unforeseen windfall but a calculated acquisition and therefore not casual.
Lala Indra Sen, In re (Allahabad High Court) and B. Malick v. Commissioner of Income-tax [1968] 67 I.T.R. 616 (All.)	Authorities cited on the concept of casual receipts (as per the opinion's references).	The court noted these authorities were cited but stated they did not add to the principles already laid down in the Bombay and Madras decisions; they were not relied upon to alter the legal test applied.

Court's Reasoning and Analysis

The court began by identifying the statutory requirement under section 4(3)(vii): for exemption the receipt must be both non-recurring and casual. The Tribunal and parties agreed the receipts were non-recurring; the real question was casualness. The court examined authoritative definitions and tests of "casual" from earlier decisions (Bombay and Madras precedents), which require that casual receipts be unforeseen, accidental, or dependent on the whim or caprice of the payer, and not the result of stipulation, contract, calculation or design.

The court acknowledged that before 14 July 1956 (the date the assessee executed the transfer to the company) there was no binding agreement obliging the company to pay the assessee Rs. 85,000. However, the court stressed the factual background known to the assessee prior to his acquiring the claim: the company had already informed him that it was willing to settle Dandekar's claim for up to Rs. 2,25,000.

Key analytical steps in the opinion:

Recognition that the company had expressed a willingness (though not legally bound) to settle for up to Rs. 2,25,000 before the assessee negotiated with Dandekar.
The assessee acquired the claim for Rs. 1,25,000 — a figure substantially below the company's stated maximum — and thus became owner of the claim and assumed the risk and potential reward associated with that asset.
By acquiring the claim the assessee embarked on a venture on his own account, analogous to a trader acquiring stock-in-trade with expectation of profit but also of possible loss; he had the legal power (e.g., to sue) to compel or pressure the company into settlement.
Because the assessee's acquisition and subsequent receipt of profit derived from a calculated risk taken with knowledge of the company's likely behaviour, the receipt did not depend solely on the whim or caprice of the payer and was not unforeseen in the relevant sense.
Only the exact amount eventually realised was uncertain; that uncertain quantum did not convert the receipt into a "casual" one under the tests applied in the cited precedents.

The court therefore applied the legal tests from the precedents to the concrete facts and concluded the receipts, while non-recurring, were not casual.

Holding and Implications

Holding: The court answered the referred question in the negative — the sums of Rs. 42,500 and Rs. 35,000 were not exempt under section 4(3)(vii) because, although non-recurring, the receipts were not casual.

Direct implications and consequences:

The assessee's receipts are not characterized as casual and therefore do not qualify for exemption under s.4(3)(vii) on the basis advanced.
As a direct consequence of the decision, the assessee is not entitled to the claimed exemption for those amounts in the assessment years in question.
The court ordered that the assessee pay the respondent's costs.

No broader precedent or novel legal principle was asserted by the court beyond applying the established tests for casual receipts from the cited authorities.

Show all summary ...

Mody, A.C.J:— This is a reference under section 66(2) of the Indian Income-tax Act, 1922.

2. The question referred is:

“Whether, on the facts and circumstances of the case, the sums of Rs. 42,500 (rupees forty-two thousand five hundred) and Rs. 35,000 (rupees thirty-five thousand) received in the assessment years 1957-58 and 1958-59, respectively, were exempt under section 4(3)(vii) of the Income-tax Act?”

3. One Dandekar was claiming a sum of Rs. 3,25,000 from Messrs. H. Fischer and Co. Pvt. Ltd. In respect of that claim certain correspondence was exchanged between Dandekar and the company and/or their respective legal advisers, between the end of May and about the beginning of July, 1956. In the course of that correspondence the company disputed the claim and Dandekar threatened to file a suit for recovering his claim. Mr. Vartak was the chairman of the company and one S.G Pradban was its managing director at the relevant time. The assessee, Mr. Ghanekar, is a chartered accountant and has been practising as such. He, Mr. Vartak and Pradhan were well acquainted with each other. He had some acquaintance with Dandekar also. The company was desirous of avoiding litigation threatened by Dandekar. Some time before the 10th July, 1956, the company more or less decided “to settle the claim of Dandekar amicably in a sum not exceeding Rs. 2,25,000”. The company requested the assessee to intervene in the dispute and he was informed that the company would be willing to settle the claim of Dandekar up to Rs. 2,25,000. A document was executed between Dandekar and the assessee dated the 10th July, 1956. It was executed in pursuance of an agreement arrived at between them shortly before the 10th of July, 1956. By that document Dandekar transferred and assigned his actionable claim against the company and/or its directors and shareholders to the assessee in consideration of the assessee paying to Dandekar a sum of Rs. 1,25,000. The sum was agreed to be paid in six quarterly instalments, but in any case not later than 31st December, 1967, without interest. After executing this document Dandekar, through his attorneys, gave a notice to the company of the fact of his having executed the said document of transfer and assignment. Thereafter, on the 14th of July, 1956, the assessee, in his turn, executed a deed of transfer and assignment in favour of Mr. Vartak of the said claim of Dandekar against the company. The consideration for this transfer was that Mr. Vartak agreed to pay to the assessee a sum of Rs. 2,10,000 in six quarterly instalments. This document recites the fact of the said document dated the 10th July, 1956, by which Dandekar had assigned and transferred his said claim to the assessee for the said sum of Rs. 1,25,000. It has to be noticed that the assignment by the assessee is in favour of Mr. Vartak personally and not in favour of the company. Mr. Vartak, however, was admittedly the chairman of the company at that time. The case appears to have proceeded on the footing that the assignment by the assessee in favour of Mr. Vartak was really in favour of the company, Mr. Vartak taking the assignment for and on behalf of the company. We will, therefore, proceed on the basis that the assignment by the assessee in favour of Mr. Vartak is an assignment in favour of the company itself.

4. By reason of the transfer in his favour and his subsequent transfer to the company the assessee earned Rs. 85,000. Against this sum of Rs. 85,000 he received Rs. 42,500 during his accounting year ending 31st March, 1957, and Rs. 35,000 in his accounting year ending 31st March, 1958. In the assessment proceedings relating to the assessment years 1957-58 and 1958-59, relating to the said two respective accounting years, the assessee contended that the said two sums of Rs. 42,500 and Rs. 35,000 were exempt under section 4(3)(vii) on the ground that they were receipts not arising from business or the exercise of a profession, vocation or occupation which were of a casual and non-recurring nature. The Income-tax Officer, as also the Appellate Assistant Commissioner, rejected the contention of the assessee; so also has the Income-tax Tribunal. The Income-tax Tribunal held that before the assessee started negotiations between the company on the one hand and Dandekar on the other, it had been stated to him on behalf of the company that the company would be willing to settle the claim of Dandekar at not more than Rs. 2,25,000 and that it was with this knowledge that he purchased the claim of Dandekar against the company. The Tribunal further held that the assessee had admitted that he had no resources of his own at that time. The Tribunal further held that the assessee was, therefore, clearly taking a big risk in entering into the said transaction of purchase with Dandekar in which he had to pay a very large sum. The Tribunal held, as had the Income-tax Officer and the Appellate Assistant Commissioner before it, that the transaction was of a nonrecurring nature, but that it was not casual and that it was not exempt from income-tax as contended by the assessee. The facts in this case are few and simple. As is usual in cases under section 4(3)(vii) it is the application of the law to the facts which presents difficulty. Now Mr. Mehta, the learned counsel for the assessee, has pointed out that the relevant facts are that the assessee was brought into this transaction not of his own seeking, but at the instance of the company because the assessee knew both the parties. He further pointed out that the assessee is practising as a chartered accountant and that this was not a transaction entered into by him as a part of his business nor had it even arisen out of his business. He further pointed out that before 14th July, 1956, when he assigned the claim to the company, the company did not at any time stipulate with him and agree to pay any amount as and by way of remuneration or reward. He argued that the company has paid the amount of Rs. 85,000 to him because he brought about a settlement of the company's dispute with Dandekar to the great satisfaction of the company and saved the company from the worry, anxiety and expenses of the threatened litigation by Dandekar against the company and that because of that reason, even without any previous stipulation, the company, in effect, paid to him Rs. 85,000 merely as ex gratia. He further pointed out that the recitals in the document dated 14th July, 1956, as also the statement of the company's managing director, Pradhan, recorded in the assessment proceedings show that before the company agreed to take over the claim from the assessee by the said document dated 14th July, 1956, the company was fully aware that the assessee had acquired the claim for Rs. 1,25,000 and nonetheless, with such knowledge, agreed to pay and paid to the assessee the much larger sum of Rs. 2,10,000. He contended that as the company had paid this amount to the assessee without having any previous obligation to do so completely and voluntarily, the income in the hands of the assessee is of a casual nature.

5. In order to fall within section 4(3)(vii), so far as it is relevant to this case, this particular receipt of the assessee must be shown to be of a casual and non-recurring nature. There is no dispute, and the Tribunal has also held that this income is of a non-recurring nature. The only dispute is whether the income was casual. Now a judgment of Chagla C.J, delivered on behalf of a Division Bench of this court in Surat District Cotton Dealers' Association v. Commissioner of Income-tax [1959] 35 I.T.R 121, 137 Bom.., lays down the test of casualness of a receipt to be “not merely that it must be of a non-recurring nature; but it must also be casual”, that is, that:

“it is not anticipated or foreseen… Another test that might be applied with regard to an income being casual and non-recurring is that the income must depend upon the caprice or whim of the person who pays the amount which constitutes the receipt in the hands of the assessee.”

6. A Division Bench of the Madras High Court has in Commissioner of Income-tax v. V.P Rao [1950] 18 I.T.R 825, 838, 839 Bom.. stated that the word “casual” can only be applied to accidental or fortuitous receipts; occurring without stipulation, contract, calculation, or design. It further stated that it must be in the nature of an unforeseen windfall like the finding of an article of value, or money won in a bet and the getting of an unexpected gift or legacy.

7. Mr. Joshi had cited in this connection a judgment of the Allahabad High Court in the case of Lala Indra Sen, In re3 and Mr. Mehta had cited another judgment of the Allahabad High Court in the case of B. Malick v. Commissioner of Income-tax [1968] 67 I.T.R 616 All.. It is unnecessary to multiply authorities because these two authorities do not add to the principles laid down in the above Bombay and Madras judgments.

8. Now, Mr. Mehta's contention is correct when he says that prior to 14th July, 1956, when the actual deed of transfer was executed by the assessee in favour of the company, there was no pre-existing binding agreement between the assessee and the company under which the assessee could compel payment by the company to the assessee of the sum of Rs. 85,000 or even any other sum. But it must be noted that what the company wanted the assessee to do was to bring about a settlement of Dandekar's claim against the company for a sum not exceeding Rs. 2,25,000. What was intended was a settlement between Dandekar and the company directly. Before the assessee commenced his work of negotiating with Dandekar, he already knew that the company was willing and had more or less decided to pay a sum not exceeding Rs. 2,25,000 by way of settling the claim of Dandekar. Although the assessee was requested to bring about only a settlement between Dandekar and the company directly, he obtained the assignment of the claim from Dandekar in his own favour and for a sum of Rs. 1,25,000, which was less by as large an amount as Rs. 1,00,000 than the maximum sum at which the company had expressed its willingness to settle the claim. Now, after he obtained that assignment, the position of the assessee was that he became the owner of that claim. It is true that he knew that the company was willing to pay the maximum amount of Rs. 2,25,000, but there was at that time no obligation on the company. By taking the assignment in his own favour the assessee embarked on a venture, a venture on his own account. In view of his previous knowledge, he was, as it were, to use the racing language, betting on a certainty. But that certainty was only an estimate of the future based on his knowledge. That “certainty” may or may not materialise as there was no legal agreement or obligation on the company at that time. If the company did not settle the claim acquired by him from Dandekar, the assessee stood the risk of incurring a heavy loss. He had already obtained the assignment from Dandekar, but had yet to pay practically the whole of the sum of Rs. 1,25,000. The Tribunal has found that the assessee did not possess means to make that payment. If the company did not satisfactorily settle his claim, he might have had to start litigation. He must, therefore, be considered to have acquired the claim just as a trader acquires an asset or stock-in-trade with the expectation of making profit, but at the time not ruling out a possibility of making a loss. The acquisition of profit, which in this case actually amounted to Rs. 85,000, did not depend merely on the whim or the caprice of the company. The assessee had a powerful weapon in his hands by which he could force the company to make payment to him to his satisfaction. He was the legal owner of Dandekar's claim. He could file a suit or other litigation against the company. He knew, when he acquired this claim, that the company was reluctant to face a litigation and that because of that reason the company would be agreeable to settle the claim for an amount not exceeding Rs. 2,25,000. There was, therefore, nothing unanticipated in this receipt. It was a calculated move on the part of the assessee made with the intention of making a profit. What was unforeseen was only the exact quantum which he would earn in the transaction. For these reasons, we hold that the receipt of the sum of Rs. 85,000 by the assessee was not of a casual nature, although it was of a non-recurring nature. We, therefore, answer the question in the negative.

9. The assessee to pay the respondent's costs.