Sree Hanuman Trading Co. v. Commr. Of Incometax

The Judgment of the Court was delivered by

G. Balagangadharan Nair, J.:— The Income Tax Appellate Tribunal, Cochin Bench, has referred, under S. 256(2) of the Income-tax Act, 1961 as directed by this Court at the instance of the assessee, the following questions of law:

(1) Whether on the facts and circumstances of the case the receipt of Rs. 1,87,870 constituted income taxable under the Income-tax Act?

(2) Whether on the facts and circumstances of the case, the sum of Rs. 1,87,870 arose from business?

2. The assessee is a firm in Alleppey and is engaged in the business of exporting hill produce like pepper. The assessment year concerned is 1969-1970. On 18-4-1966 and 7-5-1966 the assessee entered into two separate contracts with a party in Russia to sell 50 tons of pepper each, at the rate of Rs. 4,170/- per ton. The payment was to be made in Indian rupee out of an irrevocable letter of credit established by the Russian buyer with the bank for foreign trade of the U.S.S.R for the total value of the contracts 95% of the price was to be paid on shipment and the balance of 5% after the goods reach the destination. The goods covered by the two contracts were duly shipped on May 21, 1966. The buyer had opened the letter of credit and the assessee realised 95% of the price on May 27, 1966. In realising this amount the assessee had to face some difficulty, as the Russian bank had advised the letter of credit to be opened in the name of “Hanuman Trading Company” whereas the assessee's name is “Sree Hanuman Trading Company.” The assessee however managed to negotiate documents by giving a guarantee to the Indian Overseas Bank, Alleppey where the letter of credit had been opened on May 27, 1966 the assessee wrote to the Russian buyer to get this mistake corrected. On June 7, 1966 the Russian bank sent a letter to the Indian Overseas Bank, Alleppey, asking that the name “Hanuman Trading Company” be corrected as “Sree Hanuman Trading Company”. The Indian Overseas Bank, Alleppey received this letter on June 9, 1966. However in the meanwhile on 6, 1966 the Indian rupee was devalued. This devaluation did not affect the two contracts because they were for payment in Indian rupees and the assessee had no right to get enhanced value for the price. But within a short time the Governments of India and Russia reached an agreement that all the Indian shipments should be given an increase of 475% on “the unimplemented portion of their contracts”. On July 27, 1966 a Press Note was issued to announce this policy decision. The Press Note defined “unimplemented portion of the contract” in the following terms:

(i) Payment due on shipments effected on or after the 6th June, 1966;

(ii) Payments due on or after the 6th June, 1966 under terms of deferred payment on earlier shipments; and

(iii) Payments due in full or in part of the 6th June, 1966 on earlier shipments for which documents were on that date in the process of negotiation or were sent already on collection basis.

3. Pursuant to this decision the assessee got 47.5% increase on the 5% of the unpaid price because that was definitely an unimplemented portion of the contract within the second limb of the definition. The surplus so obtained was brought to tax and is not in controversy. However the assessee also got an additional amount which is equal to 47.5% of the 95% of the price which it had received on May 27, 1966. The question in issue relates to the taxability of this amount which was received under the following circumstances: On November 5, 1966 the assessee made a claim for 47.5% of 95% by writing a letter to the Russian buyer in these terms:

“We regret very much to write that so far we have not been favoured with the balance amounts due to us on our above shipments which were made by us on 21-5-66. As we have to render relative statements to our Exchange Control Authorities we shall feel highly thankful if you would kindly expedite remittances of the balance amounts as per Protocol signed between the Governments of U.S.S.R and India consequent on devaluation of Indian rupee.”

4. The Russian buyer denied the claim. Then followed some correspondence between the parties each repeating its stand. On September 27, 1967 the assessee wrote a letter to the Secretary, Ministry of Commerce, Government of India, requesting the Government to intervene in the matter of payment. On the representation made by the assessee to the Government of India, the Indian Embassy at Moscow sent a letter dated October 18, 1967 to the assessee informing it that the matter had been taken up with the Russiah buyer. On November 21, 1967 the Embassy informed the assessee that it had received a letter from the Russian buyer that it had made the payment to the assessee. That letter is in these terms:

“We have received your letter No. 10.Com/8/66 dated the 18th October, 1967 and wish to inform you that we instructed the Bank to remit the amount of Rs. 1,87,870.45 to Messrs Sree Hanuman Trading Company which is due to it per Devaluation for delivery of Black Pepper-100 tons according to contracts 218 and 227.”

5. It is in this way that the assessee got Rs. 1,87,870.45, being 47.5% of 95% of the sale price. The Income Tax Officer, Alleppey who was the assessing Officer brought this amount to tax rejecting the assessee's claim that being a casual receipt which did not arise from its business it was exempt from tax liability. On appeal by the assessee the Appellate Assistant Commissioner, Trivandrum confirmed the assessment agreeing with the Income-tax Officer. On further appeal the Income-tax Appellate Tribunal settled the following 4 questions for consideration: (1) Whether the receipt of Rs. 1,87,870/- is income, (2) Whether this is a receipt of a casual nature, (3) Whether this is a receipt of a non-recurring nature, and (4) Whether this is a receipt arising from business. On question (1) the Tribunal found that it is income and on question (4) that it is a receipt arising from business. In view of these findings it did not decide questions (2) and (3). As the amount was the income of the assessee and not exempt under S. 10(3) of the Income-tax Act the Appellate Tribunal dismissed the appeal.

6. The questions under reference cover points (1) and (4) formulated by the Tribunal in the appeal and in attacking the findings of the Tribunal the twofold endeavour of counsel for the assessee was to show that the sum of Rs. 1,87,870/- was not income or business income and that in any event it was liable to be excluded being a receipt which was only of a casual and non-recurring nature within S. 10(3), Income Tax Act. The questions are interlinked and arise on the same facts and can therefore be discussed and decided together.

7. The basic argument on behalf of the assessee was that 95% of the price was realised by the assessee on May 25, 1966 from the Indian Overseas Bank at Alleppey although by giving a guarantee owing to the mistake in the letter of credit and that as the receipt was before June 6, 1966 this part of the amount did not fall within any of the limbs of the expression “unimplemented portion of the contract” as defined in the Press Note of July 27, 1966 and therefore the 47% of the 95% which the Russian buyer paid was not profits and gains of the business liable to be included in the turnover. Counsel submitted that it was not a business income and that position coupled with its casual or non-recurring nature—he called it a windfall—would justify its exclusion. It was contended that the circumstance that this sum was not legally or factually due under the contract in terms of the Press Note far from being against the assessee only supported its claim to immunity. Counsel also placed reliance upon CIT. v. Union Engineering Works. 105 ITR. 311 (Kerala), and Shiner v. Lindblem (1960) 3 All ER. 832, in support of his contention.

8. We are unable to accept these contentions. The assessee had no transactions with the Russian buyer except these shipments and no claims against the Russian buyer except under these shipments. The transactions had not been fully settled or “implemented” when the Indian rupee was devalued on June 6, 1966 and the Press Note was issued on July 27, 1966. It was in that situation that the assessee put forward its demand for 47.5% of 95% by its letter dated November 5, 1966 expressly basing it on the shipments and claiming it as the balance amount due under the shipments. Despite certain earlier resistance the Russian buyer ultimately yielded and accepting the assessee's stand made the payment. The intervention of the Indian Embassy at Moscow at the instance of the assessee might have facilitated settlement of the difference between the assessee and the Russian buyer, but there is nothing on the record to conclude that the Russian buyer made the payment, de hors the contracts and as a matter of gift, under pressure from the Indian Embassy. The result is, the amount was claimed, paid and accepted as the enhanced value of the balance sale price under the contracts, consequent upon the devaluation. In our view, the receipt was income obtained by the assessee in the course of the business and was not a windfall. We might add that as the amount was received in the course of business it would be still taxable even if it was a voluntary payment and that for the same reason it would be hit even if it be casual, which it was not.

9. In Union Engineering Works' case the facts were entirely different. Tin sheets imported by the assessee were found to be rusty and unfit. The assessee however agreed to accept the sheets at a discount agreed between them and the insurer in London with whom the sheets had been insured. Pursuant to this agreement the assessee forwarded a bill to the insurer on December 9, 1965 claiming Rs. 32,920/-. After deducting certain charges from the bill the insurer issued a cheque for £1,762.10 sh. on a London Bank. The assessee received the cheque on May 26, 1966 On June 6, 1966 the Indian rupee was devalued. Subsequently the assessee deposited the cheque with a Bank at Quilon for collection. The Bank credited the cheque to the account of the assessee on June 27, 1966 and after its collection credited the proceeds to the account on January 21, 1967 On account of the devaluation the assessee realised an excess amount of Rs. 13,45,575. The assessee's claim that the excess amount was not liable to tax, was rejected by the Income Tax Officer and the Appellate Assistant Commissioner but was upheld by the Tribunal in the view that it was not a receipt arising from business. On a reference at the instance of the Revenue this Court held that the amount “was part of the compensation received by the assessee from the insurer for damage caused to its goods. The claim for compensation for damage caused to the goods had been settled with the insurer and the sum so settled did not include any excess profit. The excess profit arose entirely due to the devaluation. This excess amount was in the nature of a windfall, being the unexpected fruit of devaluation, and it cannot, therefore, be regarded as a receipt arising from business though it may be said in a sense to be a receipt in the course of business.” The facts and the nature of the payment were totally different and the principle laid down has no application to the instant case.

10. Shiner's case has less application. The tax-payer (assessee) who was an actor and had no other source of income brought an option to purchase the film rights of a novel. He was able to interest a motion picture producing company in making a film of the book. After paying an additional sum he exercised the option and purchased the rights in the novel. The company arranged for a part in the film to be enlarged so as to be suitable for the tax-payer. The tax-payer played the leading part in the film under an agreement which also provided for sale to the company of the film rights for £4,000. This was £2,300 in excess of the amount he had paid to the novelist for acquiring the rights. The General Commissioners of Income-tax held that the £4,000 formed part of the profits and gains arising to the tax payer in his profession as an actor and so was assessable to tax. On appeal a learned Judge of the Chancery Division reversed the assessment, holding that the sale price did not form part of the tax payer's remuneration or profits in respect of his profession as an actor but was the realisation of an investment nor was the sale a transaction in the nature of trade, since the tax payer acquired the rights as an investment and had no other transaction of a similar nature. This case has no application nor does it provide an assistance.

11. We might refer to two cases, M. Shamsuddin & Co. v. C.I.T, 90 ITR. 323, and Bank of Cochin Ltd. v. C.I.T 94 ITR. 93, decisions of this Court, both of which were distinguished in Union Engineering Works, 105 ITR. 311. In Shamsuddin & Co. the assessee was an exporter of cashew kernels and the agreements of sale fixed the price in dollars. At the time of payment the assessee used to receive the rupees equivalent of the price. The price which was due to the assessee under the sale on June 6, 1966, the date of devaluation, was paid subsequently at the post devaluation rate, resulting in a substantial profit. Confirming the view taken by the Appellate Tribunal and the assessing authorities this Court held that the larger price received by the assessee was a receipt arising from business and consequently a trading receipt, which was liable to be assessed as a trading profit. This case was followed and the same principle applied in Bank of Cochin Ltd. The Bank of Cochin Ltd. was dealing in foreign exchange and as part of its banking business it purchased cheques, payment orders, mail transfers, demand drafts, bills and other negotiable instruments in foreign currencies. It was held that consequent on the devaluation of the Indian rupee, the amount receivable by the Bank appreciated in value and this represented an appreciation in the value of the sale proceeds of the assets in which the assessee was dealing in the course of its business and that the appreciation in value of all such assets represented part of the trading receipts of the assessee and therefore revenue receipts liable to tax.

12. In our opinion, the principle of these two cases and not of the Union Engineering Works quoted by counsel for the assessee governs the instant case. We answer the questions under reference in the affirmative i.e, in favour of the Revenue and against the assessee. Parties will bear their costs.

13. A copy of this judgment under the seal of the court and the signature of the Registrar shall be sent to the Appellate Tribunal.