Commissioner Of Income-Tax/Excess... vs Shamsher Printing on 8 March, 1960

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 8 March, 1960

Coram: A.K. Sarkar, J.L. Kapur, M. Hidayatullah

In the case titled Commissioner of Income‑Tax/Excess … versus Shamsher Printing, decided on 8 March 1960, the Supreme Court of India sat in a bench comprising Justices A.K. Sarkar, J.L. Kapur and M. Hidayatullah, and rendered a judgment authored by Justice Sarkar. The matter before the Court centered on a fundamental question of tax law: whether a particular sum of money received by the respondent should be classified as a capital receipt, which would be exempt from income‑tax and excess‑profits‑tax, or as a revenue receipt, which would attract such taxes.

The respondent was a partnership firm that engaged in the purchase and sale of paper, stationery and related items, and also undertook the manufacture of books, exercise books, diaries and similar products. To facilitate its manufacturing operations, the firm owned and operated a printing press. Both the printing press and the trading activities were conducted in a building that belonged to the partners and in which they also lived. In September 1943, during the course of the Second World War, the Government requisitioned this premises for the duration of the war, thereby depriving the firm of its place of business. Consequently, the firm was compelled to relocate its operations to an alternative site, where it eventually resumed its business after a period of interruption.

Following the requisition, the respondent submitted several claims for compensation to the Government on various heads. Among these claims was a specific demand expressed in the following terms: “On account of the compulsory vacation of the premises, disturbance and loss of business on the basis of two years at Rs 2,29,450 per annum … Rs 4,58,900.” In response to this particular claim, the Government made a payment of Rs 57,435 to the firm.

The Court was asked to determine whether the amount of Rs 57,435 received by the respondent was liable to income‑tax and excess‑profits‑tax. The payment was unquestionably made in respect of an injury suffered by the firm as a result of the requisition. The decisive issue was whether the injury pertained to the firm’s capital assets, which would render the receipt a capital receipt, or whether the injury affected the firm’s trading activities, which would make the receipt a revenue receipt.

Upon examination, the Court observed that the requisition had not caused any physical damage to any of the firm’s tangible capital assets, and indeed the respondent did not contend that such damage occurred. The respondent’s argument was that the injury affected the “profit‑making apparatus” of the business. The Court noted that this phrase was not intended to suggest the existence of any intangible profit‑making mechanism separate from the firm’s tangible assets, unlike the situation described in Van den Berghs Ltd. v. Clark. Rather, the respondent claimed that the firm suffered a loss of goodwill—the benefit derived from the firm’s connection with the specific building in which it had operated. According to the respondent, this goodwill was forfeited because the business had to be shifted from the original premises to a new location as a consequence of the requisition. The Court identified this claim of loss of goodwill as the central contention requiring adjudication.

The Department, representing the tax authority, did not dispute that goodwill constituted a capital asset. However, the Department maintained that the respondent had not substantiated any claim for loss of such goodwill. The Department argued that, because a claim for loss of goodwill was absent, it could not be inferred that goodwill existed or that any compensation had been paid for it. The Court therefore needed to assess whether the wording of the claim made by the respondent indeed referred to a loss of goodwill, and, if so, whether the compensation paid should be treated as a capital receipt exempt from tax.

It was observed that the Department made no claim that any goodwill had been injured. The Department argued, correctly, that goodwill was a matter of fact: it could either exist or not, as indicated in the precedent cited. The Department did not assert that the existence of goodwill needed to be proved. Rather, the Department maintained that because it could not be assumed that every business possessed goodwill, any loss of such goodwill had to be specifically claimed; in the absence of such a claim, the logical conclusion was that no goodwill existed and consequently no payment could be awarded for it. This argument was treated as substantive, and it was noted that counsel for the respondent had not advanced a contrary position. In fact, the respondent’s counsel had simply stated that there was a claim for loss of goodwill.

The Court then examined the precise wording of the claim that had been set out earlier. The claim made no reference to any loss of goodwill. The respondent’s claim was described as being for “compulsory vacation of the premises” as well as for “disturbance and loss of business.” The respondent linked the claim for compulsory vacation of the premises to injury to goodwill, which seemed an unusual way to frame a claim for goodwill loss. The claim did, however, expressly include a loss of business, calculated as two years’ loss of profits. The reason for claiming loss of business was clear: the business would be interrupted or disturbed for a period because of the compulsory vacation of the premises. Consequently, the claim, as framed, appeared to be for a single item – loss of profits. The Department affirmed that this was the entirety of the claim. It was difficult to accept that the claim, as the respondent suggested, covered three separate items – compulsory vacation of premises, disturbance of business, and loss of business – because all three could not have been measured together by the single figure of two years’ loss of profit. If the claim truly covered loss of business as a distinct element, it would have required detailed particulars showing how that loss arose, which the claim did not provide. Therefore, it was reasonable to conclude that the reference to compulsory vacation of the premises served merely as an explanation of how the disturbance and loss of business occurred, for which a claim had indeed been made.

The Court found the matter to be beyond doubt when it considered the letter that accompanied and explained the respondent’s claim. The letter stated that if the factory were to be reconstructed on a temporary basis, the time required for such construction would constitute one of the largest items in the “Details of Claim.” The letter further identified this largest item of the claim as the one under consideration. The language of the letter made it clear that the primary concern was the loss of profit incurred during the period in which the business could not resume operations. This reinforced the conclusion that the claim was directed solely at loss of profit for the two‑year period anticipated, rather than at any alleged loss of goodwill.

The Court observed that the letter accompanying the claim specifically described the consequences of the forced evacuation. The letter explained that because the premises were no longer available, the firm had been compelled to store its machines, which were consequently idle and unproductive. The letter further stated that unless the firm were reinstated at an alternative temporary location with an electric connection and other necessary facilities, it estimated that its business would suffer for at least a period of two years. On that basis, the claim was measured. The Court emphasized that nowhere in this letter was there any reference or suggestion that the respondent intended to claim compensation for loss of goodwill. Rather, the letter made it perfectly clear that the claim sought only compensation for loss of profit for the two‑year period during which the business could not be restarted. The Court therefore concluded that the respondent’s claim was limited to loss of profit and did not extend to any alleged loss of goodwill.

The Court further noted that the Tribunal had not reached any contrary conclusion. The Tribunal, as recorded, had said that “the payment is on account of the compulsory vacation of the premises.” The Court explained that this observation did not imply that the Tribunal considered the payment to be for loss of goodwill. The Tribunal’s remark was made because it found that the respondent had not proved any actual loss beyond the vacancy itself; consequently, no question of proof of loss arose in support of a goodwill claim. The Tribunal therefore characterized the payment as being for the compulsory vacation of the premises, from which a loss of profit could reasonably be presumed. The Tribunal’s decision and the High Court’s record contain no mention of loss of goodwill. Additionally, the Court referred to another passage in the respondent’s letter, which spoke of competitors advancing in the open market during the respondent’s absence and the difficulty of re‑establishing the business later. The Court held that this passage did not constitute a claim for loss of goodwill; it merely reflected concern about competition while the business was stopped and was not linked to any specific claim. Accordingly, the Court concluded that the sum of Rs 57,435 received by the respondent was not compensation for injury to any capital asset but was, in fact, compensation for loss of profit during the period of forced business interruption.

The Court observed that the sum under consideration had been paid as compensation for the loss of profits that the respondent would incur during the interval in which, according to the assumption presented, its business would remain shut down until it could be re‑established at a new premises. In view of that description, the Court concluded that the payment was unmistakably a revenue receipt. The Court noted that there was no dispute that, if the amount was disbursed as compensation for lost profit, it would constitute a revenue receipt and therefore be liable to tax. Because the receipt arose from the ordinary course of trade, the Court held that it could not be placed under the exemption provided by section 4(3)(vii) of the Income‑Tax Act. Consequently, the Court answered both of the questions framed in the appeal in the negative. Accordingly, the appeal was allowed and the respondent was ordered to pay costs. The final order of the Court thus affirmed that the appeal was allowed.