S.N. ANDLEY, J.

( 1 ) 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 represented assessee companys income liable to tax "

( 2 ) 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. I 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 companys 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.

( 3 ) 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

Custo- dian 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.

( 4 ) 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 represent 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 surrogaturn 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:

( 5 ) IT cannot be disputed that the method and manner ot 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.

( 6 ) 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 and

Weaving Co. Ltd. and others reported in AIR 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.

( 7 ) 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.

( 8 ) ANOTHER case relied upon by Revenue is the opinion of the Privy Council

reported in AIR 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.

( 9 ) ALL the authorities on the subject have been summarised by Hidayatullah. (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 assessed 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.

( 10 ) WE may only mention that this reference had earlier come up before a

Division Bench of this Court (Kapur and Jagjit Singh. ). 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. Counsels fee is assessed at Rs. 200.