S.N Andley, J.:— At the instance of the Lakshmi Insurance Co. Ltd., New Delhi, hereinafter referred to as the “assessee company”, the Income-Tax Appellate Tribunal has referred the following question for the opinion of this Court:

“Whether on the facts and in the circumstances of the case, the Tribunal rightly held that the amount of Rs. 56,028 re-presented assessee company's income liable to tax?”

The said amount was paid to the assessee company by the Central Government in accordance with the provisions of section 7 of the Life Insurance (Emergency Provisions) Act, 1956 in the assessment year 1957-58, the previous year having ended on March, 31, 1957. The assessee company had been carrying on life insurance business up to January 18, 1956. On January 19, 1956, the President of India promulgated the Life Insurance (Emergency Provisions) Ordinance, 1956 (No. 1 of 1956) which was replaced on March 21, 1956 by the Life Insurance (Emergency Provisions) Act, 1956 (No. IX of 1956). The Ordinance and the Act were passed to provide for the taking over, in the public interest, of the management of the life insurance business pending nationalisation thereof. The assessee company's business consisted wholly of the business of life insurance and, therefore, the whole of its business was “controlled business” as defined in the said Act. By section 3 of the said Act, the management of the assessee company, amongst others, vested in the Central Government and this section provided that pending the appointment of a Custodian for the controlled business of any insurer, the persons in charge of the management of such business immediately before the appointed day were to be in charge of the management of business for and on behalf of the Central Government and the business was to be carried on by them subject, inter alia, to such directions as may be given by the Central Government. sub-section (2) of this section terminated as on the appointed day any contract, express or implied, providing for the management of the controlled business of an insurer made between the insurer and any person in charge of the management of such business immediately before the appointed day. Sub-section (3) contained prohibition and regulations against the insurer with respect to making of payments or granting loans; incurring any expenditure from the assets appertaining to the controlled business; transferring or disposing of the assets of the insurer; investment of the monies of the insurer; acquisition of immovable property; contracts of service or agency and any other transaction relating to the controlled business of the insurer.

Section 7 of the said Act provided for payment of compensation for management of the controlled business vesting in the Central Government in these words:

“The amount of compensation payable in respect of the vesting in the Central Government of the management of the controlled business of an insurer shall, for every month during which the management thereof remains vested in the Central Government, be a sum which is equivalent to one-twelfth of the annual average of the share of the surplus allocated to share-holders as disclosed in the abstracts prepared in accordance with Part II of the Fourth Schedule to the Insurance Act in respect of the last two actuarial investigations relating to the controlled business as at dates earlier than the first day of January, 1956.

Provided that if in respect of the controlled business of an insurer no such surplus as is referred to in this sub-section has been allocated to share-holders either because there are no shareholders or for any other reason, the compensation shall be payable at the rate of one rupee per month for every two thousand rupees or part thereof of the premium income of the insurer relating to his controlled business during the year 1954.”

Section 8 provided for the payment and distribution of the compensation and it is in these terms:

“ (1) The amount of compensation payable under section 7 shall in the first instance be payable out of the seven and a half per cent of the surplus referred to in sub-section (1) of section 49 of the Insurance Act earned by the insurer during the period the management of the controlled business of the insurer vests in the Central Government, and where such compensation or any part thereof cannot be so paid out the Central Government shall make due provision for the payment of such compensation or part thereof as the case may be.

(2) The compensation payable under section 7 shall be distributed among the persons entitled thereto by the Central Government in such manner as may be prescribed by rules made in this behalf:

Provided that in the case of an insurer who is a company the Central Government shall have due regard to the wishes of the members expressed by them at any general meeting convened for the purpose.”

The result of the said Ordinance and the said Act, shortly stated, was that the insurer was divested of its own management which vested in the Central Government to be exercised through a Custodian to be appointed by it and for such divesting the insurer was to be paid compensation as provided in sections 7 and 8 of the said Act. The compensation provided was payable for every month during which the management of the insurer remained vested in the Central Government and was equivalent to one-twelfth of the annual average of the share of the surplus allocated to the shareholders as disclosed in the abstracts prepared in accordance with Part II of the Fourth Schedule to the Insurance Act in respect of the last two actuarial investigations relating to the controlled business as at dates earlier than January 1, 1956. The quantum of compensation was based on what may be described in common parlance as the profits of the insurer. But in the case of an insurer which had not made any profits, compensation was still payable at the rate of one rupee per month for every two thousand rupees or part thereof of the premium income of the insurer relating to his controlled business during the year 1954 and in such a case also the quantification of the compensation was on the basis of hypothetical profits. The compensation paid was to be distributed by the Central Government among the persons entitled thereto in accordance with the prescribed rules subject to due regard being paid to the wishes of the members of the insurer.

In accordance with the provisions of the said Ordinance and the said Act, the assessee company were paid the amount mentioned in the question as compensation. The contention of the assessee company that the said amount of Rs. 56,028 did not re-present its income making it chargeable to tax was rejected by the Revenue authorities. In the appeal taken by the assessee company to the Appellate Tribunal (Delhi Branch “B”), the Tribunal held that the said amount of “compensation was paid as a surrogatum for the profits that would have been earned during the period when the management vested in the Custodian” and the Tribunal did not accept the contention of the assessee company that the compensation in question should be regarded as price paid for the loss or sterilisation of a capital asset. At the instance of the assessee company, the Tribunal referred the question for the opinion of this Court.

It cannot be disputed that the method and manner of quantification of the compensation do not give an answer to the question as to whether the amount of compensation received is income or not. The nature of and the reason for the compensation have to be determined. The said Ordinance and the said Act were passed for the taking over of the management of life insurance business pending nationalisation thereof. These two legislations were the preliminary steps for taking over the controlled business of all insurers. After the coming into force of the said Ordinance and the said Act no insurer could have a management of its choice and its business was to be managed by the Central Government through a Custodian appointed by it and, until such appointment, the persons in charge of the management of the business of an insurer were to be in charge for and on behalf of the Central Government. The existing management of an insurer, therefore, ceased to be a management of its choice at and from the appointed day and compensation was paid for the divesting of the existing management of the insurer and vesting the management of the insurer in the Central Government. The insurer, therefore, was precluded as from the appointed day to carry on its business through a management of its choice.

One of the two questions which were decided by the Supreme Court in the second Sholapur case in re: Dwarkadas Shrinivas v. The Sholapur Spinning & Weaving Co. Ltd. and others reported in A.I.R 1954, Supreme Court 119 (1) was whether the provisions of the Ordinance in that case for taking over the management and administration of the company contravened the provisions of Article 31 (2) of the Constitution. Section 3 of the Ordinance which was being considered by the Supreme Court gave power to the Central Government to appoint as many persons as it thought fit to be the directors of the company for the purpose of taking over its management and administration. The result of the provisions of that Ordinance, in the words of the Supreme Court was:

“That all the properties and effects of the company pass into the hands of persons nominated by the Central Government who are not members of the company or its share-holders, or in any way connected with it, and who are merely the creatures of the Central Government or its dummies. The combined effect of the provisions of sections 3, 4 and 12 is that the Central Government becomes vested with the possession, control and management of the property and effects of the company, and the normal function of the company under its articles and the Indian Companies Act comes to an end. The share-holders' most valuable right to appoint directors to manage the affairs of the company and be in possession of its property and effects is taken away. Resolutions passed by them lose all vigour and become subject to the veto of the Central Government. Their power of voluntarily winding up the company formed by them or of winding it up through Court also becomes subject to the veto of the Central Government. The Central Government by executive action can override, if it likes, all the provisions of the Indian Companies Act.”

The Supreme Court, therefore, held that by the provisions of the said Ordinance, the company and its share-holders as well as its directors and managing agents have been completely deprived of the possession of the property and effects of the company and its possession had been taken by the Central Government. The effect of the said Ordinance and the said Act on insurers was the same as they contain provisions similar to the provisions contained in the Ordinance which the Supreme Court were considering. It cannot, therefore, be doubted that the right of management was equated to property thereby attracting Article 31 (2) of the Constitution. We, therefore, find substance in the contention of the assessee company that the right of management, being property, has to be equated to a capital asset as being a part of the profit making apparatus of the assessee company and, for that reason, compensation paid for divesting the assessee company of its management is compensation for acquisition of a part of its profit making apparatus and must be a capital receipt rather than a revenue receipt for income.

The argument on behalf of the Revenue is that the assessee company still carried on its business despite the divesting of its management and, therefore, it is not a case of sterilisation of a capital asset. Reliance is placed upon the decision of the Supreme Court reported in 39 Income Tax Reports 90 in re: Commissioner of Income-Tax/Excess Profits Tax, Bombay City v. Shamsher Printing Press (2) where compensation paid for requisitioning the premises in which the press of the assessee was housed and which had been paid on account of the compulsory vacation of the premises, disturbance and loss of business was held to be a revenue receipt. This case has no application to the facts of the present case as the assessee was not divested of its business or of the right to manage its business but, as held by the Supreme Court, was paid compensation for loss of profits as a result of the requisitioning of the premises.

Another case relied upon by Revenue is the opinion of the Privy Council reported in A.I.R 1932 Privy Council 138 in re: Commissioner of Income-tax, Bengal v. Shaw Wallace and Company (3). In this case the assessee was paid compensation for cessation of two of its agencies, and the question was whether such compensation was in the nature of a capital receipt. Their Lordships of the Privy Council approached the question not from the point of view whether the compensation was a capital receipt but whether the compensation was income within the meaning of the Indian Income-Tax Act, 1922. It was observed:

“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.”

It is urged by Mr. Dalip Kapur, learned counsel for Revenue, that in this case there was complete cessation of the business of agency of the assessee in so far as the two principal companies were concerned and even though the assessee earned profits, such profits were, in the words of the Privy Council, “the fruit of a different tree, the crop of a different field”. The significant point to be noticed is that there was no complete cessation of the business of the assessee even upon the termination of the two agencies of the assessee. Therefore, even if the Revenue is right in saying that the business of the assessee company in the present case continued despite the divesting of its management as a result of the said Ordinance and the said Act, it is to be seen whether the compensation paid was income or whether it was for the divesting of a part of its profit making apparatus. The compensation paid cannot be said to be in respect of the profits or gains of any business carried on by the assessee company nor can it be profit earned by a process of production according to the test laid down by the Privy Council.

All the authorities on the subject have been summarised by Hidayatullah J. (as his Lordship then was) in the Supreme Court decision reported in 42 Income Tax Reports 392 in re: Senairam Doongarmall v. Commissioner of Income-tax Assam (4). After a review of the decisions the following principles have been laid down:

(i) that 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;

(ii) that the 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 being earned by a process of production;

(iii) that the measure and method of its payment was not decisive of the character of a payment of compensation; and

(iv) that compensation paid to the assessee cannot partake of the character of profit if business has not been done by the assessee.

Applying these principles, we are of the opinion that the assessee company having been divested of its management did not and could not carry on business in the sense of carrying on an activity with the object of earning profit by a process of production. The divesting of its management was really divesting the assessee company of its property. The compensation paid was, therefore, for the loss of a capital asset. The mere fact that the compensation paid to the assessee company was measured by its past profits does not make the compensation paid the income of the assessee company as a result of business done by it. In our opinion the compensation paid to the assessee company is not income and the answer to the question referred has to be in the negative.

We may only mention that this reference had earlier come up before a Division Bench of this Court (Kapur and Jagjit Singh JJ.). By order dated March 18, 1969, this Court had called for a further statement of the case on the question whether the compensation paid to the assessee company had been paid out of the monies earned by the insurer during the period the management of the controlled business was with the Central Government out of the funds of the company to the company itself. The Tribunal submitted a supplementary statement of the case stating that from the records available, it was not ascertainable as to whether the compensation was paid to the assessee company out of the monies earned by the insurer during the period of the management of the controlled business.

In the result, the answer to the question referred to this Court is in the negative. The assessee company will have its costs. Counsel's fee is assessed at Rs. 200.

Reference answered accordingly.