The Commissioner of Income Tax, Madras vs S. Rm. Sathappa Chettiar, Pollachi

Satyanarayana Rao, J.—u/s 66(1) Income Tax Act, at the instance of the Commissioner of Income Tax, the Income Tax Appellate Tribunal

has referred to us the following question :

Whether on the facts and in the circumstances of the case, the sum of Rs. 75,000 resolved by the respondent from the Somasundaram Mills Ltd.,

in pursuance of Pars. 5 of the Arbitrator''s award, dated 9-7-1918, in full settlement of all his claim for compensation for the use of machinery, was

income liable to income tax?

The assesses, S. Rm. Sathappa Chettiar, and another one P. S. Sathappa Chettiar, entered into a partnership to erect and establish a spinning

mill at Pollaohi. A building was erected, it is stated, at the expense of the assesses, and P. S. Sathappa Chettiar, the other partner, purchased

machinery of the value of Sections 79 ,155 for installing it in the factory which was then under construction. The machinery seems to have been

imported by the year 1941. P. 8. Sathappa Chettiar was connected with a mill known as the Somasundaram Mills Ltd., Coimbatore. After the

factory was constructed, it became difficult for the partners to start the business as they could not get supply of electricity. P. S. Sathappa Chettiar

thereafter took machinery of the value of Rs. 56,817 to the Somasundaram Mills at Coimbatore and utilised this machinery for the purpose of the

business of that mill. The rest of the machinery was lying unused at Pollachi. As no business could be carried on by the partners, they presumably

wanted to settle their disputes and differences regarding the ownership of the machinery and also, the right of the assessee to compensation for the

use of the machinery by P. 3. Sathappa Chettiar in the Somasundaram Mills. Both the parties entered into a muchilika whereunder they referred

their disputes to a single arbitrator. In due course the arbitrator passed his award dated 9-7-1943. By this award Somasundaram Mills Ltd., was

to get the exclusive ownership in the entire property of the partnership, viz., the building and the machinery on condition of the mills paying to the

assesses a sum of Rs. 75,000 towards his share of the value of the properties. The award also further provided that the assessee should receive

from Somasundaram Mills Ltd. a sum of Rs. 75,000 in full settlement of his claims for compensation for the use of the machinery by the

Somasundaram Milla Ltd. Coimbatore. This amount was received from Somasundaran Mills by the assessee during the accounting year ending

12-4-1941. The Income tax Officer, during the assessment year 1944-46, levied tax on this sum also as part of the income of the assessee but

exonerated the assessee from liability to pay tax on the sum of Rs. 75,000 received by him as value of his share of the properties on the ground

that it was capital and not income. The decision of the Income Tax Officer was upheld on appeal by the Appellate Assistant Commissioner but

was reversed by the Appellate Tribunal. The simple question for consideration, therefore, is whether the sum of Rs. 75,000 received by the

assessee from Somasundaram Mills Ltd. as compensation for the use of the machinery by Somasundaram Mills is income assessable to Income

Tax under the provisions of the Indian Income Tax Act.

It would be seen that this amount was directed to be paid by Somasundaram Mills by the arbitrator as part of the assessee''s share of profits to

which he was entitled by reason of the use of the machinery by the mills. The Appellate Tribunal reversed the decision of the department on the

sole ground that this amount was not obtained by the assessee during the course of the business of the partnership as the partnership did not at all,

at any time, carry on any business, and presumably on the footing that his claim to impose the tax could be sustained only if this amount was

obtained by the assessee as profits during the course of the partnership business, Even it the partnership did not start and carry on its business, this

amount may be treated as and would legitimately be income from profits derived by the assessee from other sources u/s 12 , Income tax Act.

Whether the relationship between the assessee and P. S. Sathappa Chettiar was that of co. owners or co-partners it makes no difference so long

as the other partner P. S. Sathappa utilised the asset belonging to them in common to earn profits by allowing its user by Somasundaram Mills. He

is liable to account to the other partner, the assessee to the extent of his share of profits earned by him by utilising a partnership asset or an asset

which they owned in common. The argument which was strongly pressed on behalf of the assessee by Mr. Cubbaraya Ayyar is that this amount

really represents the value of the property which was paid to the assesses to make up depredation in its value. That is not the basis however on

which the award proceeded and we are not able to find in the whole course of these proceedings any justification in support of that view. It is

definitely stated both in the reference to the Arbitrator and in the award that the claim made by the assessee was that he was entitled to

compensation for the use of the machinery by Somasundaram Mills. This contention of his was upheld and Somasundaram Mills was directed to

pay to the assessee this sum of Rs. 75,000, which represents compensation for the use of the machinery not merely in the year of account but also

for a period prior to it. The decision in ''In re N. S. Mundy'', 57 Cal. 1330 does not at all support the argument of the learned counsel for the

assessee, as in that case the claim made by the assessee was that he was entitled to a quarter share in the partnership and in full settlement of his

claim a sum of Rs. 60,000 was paid. It was pointed out at p. 1333 that this sum of Rs. 60,000 really represented the assessee''s share in the

capital of the business and that therefore it was not liable to tax as it was not income. The decision of the Judicial Committee in ''Commissioner of

Income Tax, Bengal v. Shaw, Wallace and Co., 59 Cal 1343 was concerned with the question whether the amount of compensation paid to the

agent was ""income"" or not and the answer given was that it was not as there was no definite source from which it would be said that money paid

accrued as income within the meaning of the Indian Income Tax Act. In the present case, however, the profits arose and accrued by the utilisation

of the machinery by the Somasundaram Mills during a period of more than one year. It cannot be seriously contended therefore that the amount

received by the assessee is not income; nor can it be contended that it is merely a casual receipt not taxable under the provisions of the Indian

Income Tax Act. It may also be pointed out that the claim of the assessee was not one for damages for retention of the machinery by the

Somasundaram Mills but his claim was for compensation for the use of the machinery. The view taken therefore by the Appellate Tribunal, in our

opinion, is erroneous and the answer to the question referred to us must be in the affirmative and against the assessee. As the Commissioner of

Income Tax has succeeded, the respondent must pay him a sum of Rs. 250 as costs.