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Commissioner of Income-tax, Bombay City-iii Vs. Khushalbhai Patel and Sons - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 37 of 1965
Judge
Reported in[1979]118ITR656(Bom)
ActsIncome Tax Act, 1922 - Sections 10(2)
AppellantCommissioner of Income-tax, Bombay City-iii
RespondentKhushalbhai Patel and Sons
Excerpt:
direct taxation - compensation - section 10 (2) of income tax act, 1922 - dispute pertains to assessment of amount receivable by assessee in five subsequent years for breach of contract entered between assessee and a company - arrangements by way of agreements gave assessee avenues for investment of its funds even after expiration of period of arrangement and till time as company carried on its business - amount became payable to assessee on termination of agreement - such amount was in lieu of an enduring benefit for assessee firm - held, amount receivable must be construed as capital receipt. - - 10,00,000. the company was to import in bombay as well as in madras the said goods from such sources of supply and on such terms and condition as were to be agreed upon between the.....talzapurkar, j. 1. this is a reference under s. 66(1) of the indian i.t. act, 1922, and at the instance of the commissioner of income-tax, bombay city-iii, bombay, the following question has been referred to us for our opinion : 'whether, on the facts and in the circumstances of the case, the amount of rs. 3 lakhs or any part of it receivable by the assessee under the consent terms dated 21-6-1956 was a revenue receipt chargeable to income-tax for the assessment year 1957-58 ?' 2. the facts leading to this question may be stated : the question relates to the assessment year 1957-58, the corresponding previous year being samvat year 2012. the assessee is a registered firm constituted under a deed of partnership was that of exporters, importers and commission agents and such other business.....
Judgment:

Talzapurkar, J.

1. This is a reference under s. 66(1) of the Indian I.T. Act, 1922, and at the instance of the Commissioner of Income-tax, Bombay City-III, Bombay, the following question has been referred to us for our opinion :

'Whether, on the facts and in the circumstances of the case, the amount of Rs. 3 lakhs or any part of it receivable by the assessee under the consent terms dated 21-6-1956 was a revenue receipt chargeable to income-tax for the assessment year 1957-58 ?'

2. The facts leading to this question may be stated : The question relates to the assessment year 1957-58, the corresponding previous year being Samvat year 2012. The assessee is a registered firm constituted under a deed of partnership was that of exporters, importers and commission agents and such other business or venture or venture or ventures as might from time to time be determined by the partners. The assessee-firm entered into two finance agreement with the Western India Oil Distributing Co. Ltd. (hereinafter referred to as 'the company'), one dated 29th August, 1953, and the other dated 11th January, 1955. The former finance agreement related to the finance that was to be made available by the assessee-firm to the company in respect of the business of the company in imports of petrol, kerosene oil and other petroleum products in Bombay, while the latter agreement related to the finance that was to be made available by the assessee-firm at Bombay in respect of the company's business of importing petrol, kerosene oil and other petroleum products in madras. Under these two agreements, the assessee-firm agreed to finance the company such sum or sums of money as the company from time required for importing the aforesaid commodities either in Bombay or in Madras on certain terms and conditions set out in the aforesaid respective agreements.

3. On 12th January, 1955, the first agreement dated 29th August, 1953, was varied to certain extent and the altered terms under which finance was agreed to be made available by the assessee-firm to the company were recorded in the said agreement. In substance, the assessee-firm was to finance the company any such sum or sums of money as the company required for importing the aforesaid products either in Bombay or in Madras not exceeding at any time of the aggregate a sum of Rs. 10,00,000. The company was to import in Bombay as well as in Madras the said goods from such sources of supply and on such terms and condition as were to be agreed upon between the assessee-firm and the company and the company was not to enter into any contract for import of the said goods without the consent in writing of the assessee-firm to the company, the company was not only to pay interest to the assessee but is was also to pay on the goods imported during the continuance of the agreement; whether the company took or did not take any finance from the assessee-firm, commission at certain rates specified in the agreements and the agreements were to be in fore for a period of 10 years from the date of execution and if any consignment was to remain outstanding on the date of expiration the same was to be included for determining the company's liability to the assessee-firm. In addition, even after the expiry of the period of the agreements, the company also agreed to pay to the assessee-firm so long as the company continued to carry on the said business of importing petrol, kerosene oil and petroleum products, commission at a lesser rate specified therein. The Bombay agreement dated 29th August, 1953, as varied by the further agreement dated 12th January, 1955, as well as the Madras agreement dated 11th January, 1955, were worked between the parties for about three or four years. The assessee-firm received interest amounting to Rs. 42,401 in S.Y. 2010 (assessment year 1955-56), Rs. 1,07,957 in S.. 2011 (assessment year 1956-57) and Rs. 1,01,180 in S.Y. 2012 (assessment year 1957-58). The assessee-firm also received commission amounting to Rs. 90,011 in the first year, Rs. 2,05,032 in the second year and Rs. 33,324 in the third year, It appears that in the meantime some differences and difficulties arose between the assessee-firm and the company, and the company, and the company informed the assessee-firm that the provisions of the agreements between them were illegal as offending against law and particularly the provisions of the Bombay Money-lenders Act and Usurious Loans Act and it would be prepared to pay only interest at the rate of interest as provided under the Moneylenders Act, on the amount advanced by the assessee-firm from time to time. The assessee did not accept the suggestions of the company and, therefore, the company filed a suit in this court, being Suit No. 87 of 1956, for certain reliefs. The assessee-firm filed a written statement in the suit and a counter-claim against the company. Ultimately, a consent decree dated 21st of June, 1956, came to be passed whereunder the company agreed to pay to the assessee-firm as and by way of compensation and/or damages for termination of the agreements, a sum of Rs. 3,00,000 by five equal instalments of Rs. 60,000 each; the firm of such instalments was paid on 31st of December, 1956, and the subsequent instalments on 31st of December of each succeeding year and it is with reference to this amount of Rs. 3,00,000, which was receivable by the assessee-firm from the company, that the question arose in assessment proceedings before the taxing authorities as well as before the Tribunal, as to whether the said amount represent capital receipt or revenue receipt.

4. The ITO included this amount of Rs. 3,00,000 in the total income of the assessee-firm for the assessment year 1957-58 on the ground that the assessee's business was that of earning commission, the agreements with the company had been entered into with a view to earn commission or profits and any compensation receivable or received was, therefore, a trading receipt. He, however, took the view that since the assessee-firm was following the mercantile method of accounting, the whole of the amount of Rs. 3 lakhs became due in the year of account and was, therefore, includible in the assessee-firm that the same represented a capital receipt, the ITO relied upon certain observations of the Supreme Court in two decisions, one in the case of CIT v. South India Pictures Ltd. : [1956]29ITR910(SC) and the other in the case of CIT v. Rai Bahadur Jairam Valji : [1959]35ITR148(SC) . The view of the ITO was confirmed by the AAC in the appeal which was preferred by the assessee-firm against the order passed by the ITO. The assessee-firm thereafter carried the matter to the Tribunal in second appeal and it was contended on its behalf that the amount of Rs. 3 lakhs receivable by the assessee-firm was essentially a capital receipt, that its main business was of commission agency in export of cloth and that the arrangement between the assessee-firm and the company was a separate return and that the arrangement covered by the three agreements was an elaborated arrangement ensuring to the assessee-firm a steady source of income not only by way of interest but also by way of commission and that commission was payable even after the expiration of the period of the agreements. It was further contended that the arrangement was not in the nature of a routine contract entered into by the assessee-firm for carrying on its day-to-day business, but that it was essentially an arrangement which formed the permanent framework of the assessee's business so that the amount of Rs. 3 lakhs receivable by it was by way of compensation or damages for injury to the said permanent framework. Without prejudice to this main contention, it was also contended that only Rs. 60,000 became payable during the accounting year in question and, therefore, only that amount if at all should have been charged to tax. On behalf of the department, the views taken by the ITO and the AAC were sought to be sustained before the Tribunal. After considering the nature of the agreement and particularly the several terms and conditions contained in the three agreements, the Tribunal took the view that the arrangement evidenced by the three agreements conferred certain rights on the assessee-firm as against the company which secured to the assessee-firm a benefit of investment of its funds and a steady source of interest, a steady source of commission on the profits earned by the company for 10 years and a steady source of commission on a smaller scale even after expiration of the period of 10 year till such time as the company carried on its said business in petroleum products in Bombay and Madras and since it was on cancellation of such arrangement that compensation or damages had become payable to the assessee-firm by the company under the consent decree dated 21st of June, 1956, the said sum was as and by way of compensation for the injury and in fact destruction of its source of income and, therefore, in the nature of capital receipt. The Tribunal, therefore, held that the amount receivable by the assessee-firm was not chargeable to tax and in that view of the matter it further held that the question whether the whole of the amount was includible in one year or in several years did not survive for consideration. In other words, it allowed the appeal preferred by the assessee-firm.

5. Mr. Joshi, the learned-counsel appearing for the revenue, has contended before us that the assessee-firm must be taken to have undertaken this particular venture or business of financing the company in view of clause 2 of the partnership deed dated 9th April, 1954. He pointed out that under clause 2 of the deed of a partnership, it was provided that the business of the partnership would be that of exporters, importers and commission agents and such other business or venture or ventures as might from time to time be determined by the parties, and he urged that entering into these three finance agreements must be taken to have been done by the assessee-firm in the ordinary course of its business and the three agreements, which were entered into by the assessee-firm with the company, were routine trade agreements under which for rendering financial assistant and other services to the company the assessee-firm was made to receive not only interest on the finances that were to be advanced but also a certain commission as mentioned in the agreements in question and if the said three agreements were terminated and under the consent terms, which were followed by a consent decree on 21st of June, 1956, a sum of Rs. 3 lakhs was receivable by the assessee-firm from the company by way of compensation or damages for such termination, the amount of compensation will have to be regarded as a revenue receipt, for, after all, it was nothing but a to be paid by the company to the assessee-firm by way of making good the profits which the assessee-firm could have otherwise made or earned had the agreements been allowed to run their full periods. He pointed out that, after all, the assessee firm was doing export business in cloth on commission and the arrangement of the assessee-firm with the company was also for earning commission and that, therefore, the said arrangement evidenced by the three agreements could, in essence, be regarded as a part of its financing business and, therefore, the termination of the arrangement between the assessee-firm and the company would be in the nature of a breach of an ordinary trade contract entered into by the assessee-firm in the course of carrying on its day-to-day business and the amount receivable was, therefore, by way of a trading receipt.

6. In support of his contention, Mr. Joshi placed strong reliance upon the two decisions of the Supreme Court, one in the case of CIT v. South India Pictures Lit. : [1956]29ITR910(SC) and the other in the case of CIT v. Rai Bahadur Jairam Valji : [1959]35ITR148(SC) . He also relied upon certain views of Lord President Cooper in the case of IRC v. Fleming & Co. (Machinery) Ltd. [1951] 33 TC 57, which had been quoted with approval by the Supreme Court in : [1964]53ITR261(SC) (Kettlewell Bullen & Co. Ltd. v. CIT) at p. 275 of the report. In regard to cases relating to determination of agencies Lords President Cooper expressed the view that, broadly speaking, such cases fell on two sides of the line drawn in the light of the varying circumstances, viz. :

'(a) the cancellation of a contract which affects the profit-making structure of the recipient of compensation and involves the loss by him of an enduring trading asset; and

(b) the cancellation of a contract which does not affect the recipient's trading structure nor deprive him of any enduring trading asset, but leaves him free to devote his energies and organisation released by the cancellation of the contract to replacing the contract which has been lost by other like contracts.' and he held that the case before him fell within the second class and not the first. In substance, according to Mr. Joshi, the instant case falls within the class mentioned at (b) above and not in the class mentioned at (a).

7. On the other hand, Mr. Mehta on behalf of the assessee-firm contended that the arrangement evidenced by the three agreements in question, which the assessee-firm entered into with the company, was the first venture of its kind which the assessee-firm had entered into with the company and certainly such a venture could not be regarded as one having been undertaken in the ordinary course of the day-to-day business of the assessee-firm and the question whether the amount of compensation that was receivable by the assessee-firm as a result of termination of the arrangement evidenced by the three agreements was a capital receipt or revenue receipt will have to be decided having regard to the nature of the agreement and the peculiar terms and conditions contained in the three agreements. He, therefore, urged that if regard be had to the special aspects which emerge on consideration of the relevant terms and conditions of the three agreements, it would be clear that the compensation that was receivable by the assessee-firm from the company upon termination of the said arrangement was in the nature of a capital receipt and the Tribunal, according to him, was right in taking the view that in such termination the assessee-firm had lost a profit-making apparatus or a steady source of income which it had by reason of the said arrangement.

8. On the question as to whether a particular receipt is a capital receipt or a revenue receipt, the Supreme Court had made certain general observations in the case of CIT v. Rai Bahadur Jairam Valji : [1959]35ITR148(SC) which, in our view, are very material. At page 152 of the report, the general observations made by the Supreme Court are to this effect :

'The question whether a receipt is capital or income has frequently come up for determination before the courts. Various rules have been enunciated as furnishing a key to the solution of the question, but as often observed by the highest authorities, it is not possible to lay down any single test as infallible or any single criterion as decisive in the determination of the question, which must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. Vide Van den Berghs Ltd. v. Clark [1935] 3 ITR 17. That, however, is not to say that the question is one of fact, for, as observed in Davies (H.M. Inspector of Taxes) v. Shell Company of China Ltd. [1952] 22 ITR (Supp) 1, 'these questions between capital and income, trading profit or no trading profit, are questions which, though they may depend no doubt to a very great extent on the particular facts of each case, do involve a conclusion of law to be drawn from those facts.''

9. After pointing out that there was a difference between a payment made as compensation for termination of an agency contract and an amount paid as solatium for the cancellation of a contract entered into by a businessman in the ordinary course of business, the Supreme Court went on to indicate what that difference was like and on this question the relevant part of the headnote runs as follows :

'There is a difference between a payment made as compensation for the termination of an agency contract and an amount paid as solatium for the cancellation of a contract entered into by a businessman in the ordinary course of business. In an agency contract the actual business consists in the dealings between the principal and his customers, and the work of the agent is only to brings about that business. What he does is not the business itself but something which is intimately and directly linked up with it. The agency may, therefore, be viewed as the apparatus which leads to the business rather that the business itself. Considered in this light the agency right can be held to be of the nature of a capital asset invested in business. But this cannot be said of a contract entered into in the ordinary course of business. Such a contract is part of the business itself, not anything outside it as is the agency, and any receipt on account of such a contract can only be a trading receipt.

Because compensation paid on the cancellation of a trading contract differs in character from compensation paid for the cancellation of an agency contract, it should not bed understood that the latter must always, and as a matter of law, be held to be a capital asset in the hands of one person may assume the character of a trading receipt in the hands of another as, for example, when the agent is found to make a trade of acquiring agencies and dealing with them. Therefore, when the question arises whether the payment of compensation for the termination of an agency is capital or a revenue receipt, it would have to be considered whether the agency was in the nature of a capital asset in the hands of the agent, or whether it was only part of his stock-in-trade.

Generally, payments made in settlement of rights under a trading contract are trading receipts and are assessable to revenue. But where a person who is carrying on business is prevented from doing so by external authority in exercise of a paramount power and is awarded compensation therefor, whether the receipt is a capital receipt or a revenue receipt will depend upon whether it is compensation for injury inflicted on a capital asset or on a stock-in-trade.'

10. These observations of the Supreme Court make the position quite clear that the question whether a particular receipt is a capital receipt or income ultimately depends upon the facts of the particular case and the authorities bearing on the question are valuable only s indicating materials that they had taken into account in reaching the decision. The observations also indicate that, though normally a payment made as compensation for payment of an agency contract may be regarded as a capital receipt, even then the question has to be considered as to whether the agency was in the nature of a capital asset in the hands of the agent or whether it was only a part of his stock-in-trade. In other words, it is not as if that simply because an agency contract is terminated any compensation that might be received for such termination would necessary amount to a capital receipt because, as has been pointed out by the Supreme Court, an agency contract, which has the character of a capital asset in the hands of one person may assume the character of a trading receipt in the hands of another as, for instance,. when the agent is found to make a trade of acquiring agencies and dealing with them.

11. Having regard to the aforesaid observations, therefore, the question in the instant case will have to be considered in the light of the facts and circumstances obtaining in this case and in that behalf of the nature of the arrangement that was undertaken and the terms and conditions upon which finances were agreed to be made available and services were agreed to be rendered by the assessee-firm to the company will have to be considered. It is no doubt true that the assessee-firm was constituted under a deed of partnership dated 9th of April, 1954. Under clause 2 of the deed, the business of the partnership was to be that of 'exporters, importers and commission agents and such other business or venture or ventures as may from time to time be determined by the parties hereto.' But as has been found by the Tribunal, the original business of the assessee-firm prior to entering into this arrangement as evidenced by the three finance agreements, was that of export of cloth on commission, and financing of parties was not its ordinary business till them. It is true that it was under clause 2 that such financing venture could be undertaken by the assessee-firm. But since the assessee-firm constituted itself as a partnership firm, it was really unnecessary to have clause 2 thereof worded in this particular fashion to enable the assessee-firm to undertake such a venture of the type which it did between 1953 and 1955. The partners of the assessee-firm could, by mutual agreement between the, start any kind of new business or trade as a partnership business. Position with regard to a limited company would be slightly different, for, unless the memorandum of association of such a company permitted the company to undertake a particular type of venture, it would not be open to such a limited company to undertake a venture which is not covered by its objects clause. In this case, we are concerned with a partnership firm and, as stated earlier, partners could, any time whenever they though fit, m undertake and venture they determined upon and could treat that venture as a partnership business and for that a clause like clause 2, which finds place in the deed, would not be an absolute necessity. however, it is one thing to say that partners can undertake any new type of venture or trade and treat is as a partnership business, but it is another thing to say that such a new venture, which it may undertake, is a venture undertaken by it in the ordinary course of its business. It is not disputed in this case that the original business carried on by the assessee-firm was that of export of cloth on commission. It is further not in dispute that the three finance agreements that were entered into by the assessee-firm with the company were the first of their kind entered into by the assessee-firm in 1953 and 1955 and presumably these were the last of their kind which it had undertaken. In other words, financing agreements or arrangements evidenced by the three agreements was not a venture in the ordinary course of its business.

12. Apart from this aspect of the matter, it will be necessary to deal with the relevant provisions of the three agreements evidencing the arrangement between the assessee-firm on the one hand and the company on the other, for, much will turn on the nature of the terms and conditions as that would really reflect on the question as to whether the arrangement under the three agreements had really created a profit-making apparatus for the assessee-firm or had given it a steady source of income or not, for it is only if that is the case that any compensation receive upon termination of such an arrangement will become a capital receipt and not otherwise.

13. Under the first agreement dated 29th August, 1953, the assessee-firm, which has been described as 'the financiers' agreed that it 'shall during the continuance of the agreement finance the company such sum or sums of money as the company from time to time required for importing petrol and/or kerosene oil and other petroleum products in Bombay not exceeding at any time in the aggregate sum of Rs. 10 lakhs'. Under clause 2, it was provided that the company shall, during the continuance of the agreement, pay to the assessee-firm interest on the said sum of Rs. 10 lakhs at the rate of 6% per annum from 1st October, 1958, 'whether the company shall or shall not take any finance from the financiers under these presents' and that such interest was payable every three months and in default thereof the company agreed to pay to the assessee-firm compound interest thereon at the rate of 6% per annum with quarterly rests.

14. Under clause 3, it was for the company to import in Bombay the said goods from such economical source or sources of supply and on such terms and conditions as cold be agreed upon between the company and the assessee-firm and that the company was not to enter into any contract for such import without the consent in writing of the assessee-firm.

15. Clause 5 provided the modes in which the assessee-firm was to finance the company in the matter of imports which the company was to make during the period of the agreement.

16. Under clause 7, all the goods that were to be imported by the company were required to be stored in its installations and possession thereof was to remain with the assessee-firm and the goods so stored were to remain in pledge with the assessee-firm. In other words, security over the goods so, imported was created in favour of the assessee-firm for payment of the dues payable by the company to the assessee-firm under the agreements.

17. Clause 13 is material and it runs as follows :

'In consideration of the services to be rendered by financiers to the company under these presents the company shall in addition to the interest and other charges payable by the company to the financiers as hereinbefore provided pay to the financiers on the goods imported by the company in Bombay during the continuance of these presented whether the company shall or shall not take any finance from the financiers for such imports as and by way of commission either : (a) in case of liquid oil six pies per gallon; (b) in case of asphalt five per cent. of the c.i.f. value thereof; or thirty per cent, of the net profits of the company calculated as provided in the Schedule hereto annexed whichever may be greater...'

18. Under clause 19, it was provided that the agreement shall operate as continuing security for all the moneys, indebtedness and liabilities of the company to the financiers under the agreement or any other account notwithstanding the existence at any time of any credit balance in favour of the company or any partial payments or fluctuations of account and that the security thereby created as to operate as a security for the ultimate amount that would be found due to the payable by the company to the financiers.

19. Clause 22 provided for the period of the agreement and, according to that clause, the agreement was to be in force for a period of 10 years from the date thereof and if any shipments were outstanding on the expiration of the period the same were to be treated as shipments under the agreement.

20. Clause 25 is again very material and it runs as follows :

'In further consideration of the services rendered by the financiers to the company under these presents for and during the said period of ten years the company doth hereby covenant with the financiers that if the company shall, after the expiration of the said period of ten years continue to carry on the business in petrol and/or kerosene or petroleum products in any area now served by the established oil companies in Bombay in or thought the port of Bombay, the company shall so long as the company continue the said business pay to the financiers as and by way of commission a sum equal to one and a half pies per gallon on liquid oils and one and a quarter per cent. of the c.i.f. value on asphalt dealt in by the company after the expiration of the said period of ten years.

This agreement was varied and its terms were altered by a subsequent agreement dated 12th January, 1955, and it may be stated that some alternations were made in cls. 5, 11, 13 and 14 and some other clauses of the original agreement. For our purpose, the substituted clause for the initial clause 13 would be material and it ran as follows : 'In consideration of the financial assistance and other services to be rendered by the financiers to the company under these presents the company shall in addition to interest and other charges payable by the company to the financiers as hereinbefore provided pay to the financiers on the goods imported by the company in Bombay during the continuance of these presents whether the company shall or shall not take any finance from the financiers for such imports, as and by was of commission either - (a) in case of liquid oil nine pies per imperial gallon; and (b) in case of asphalt seven and a half per cent. of the c. i. f. value thereof, or fifty per cent, of the net profits of the company's business in Bombay calculated as provided in the Schedule hereto annexed, whichever may be greater...'

21. In other words, the rate of commission, which was provided in the original clause 13, was altered and the same was enhanced as provided in the aforesaid substituted clause. But the point which deserves to be noted is both under the original clause 13 as well as under the substituted clause 13 the commission was payable by the company to the assessee-firm whether the company took or did not take any finance from the financiers for the imports that were to be made by the company.

22. The other agreement pertaining to the imports of petrol and petroleum products by the company in Madras was dated 11th January, 1955, and under this agreement also the assessee-firm agreed to finance such sum or sums or moneys as the company might from time to time require for importing petrol and/or kerosene or petroleum products in Madras not exceeding in the aggregate a sum of Rs. 10 lakhs. Similar provisions with regard to the payment of interest as well as commission and security of the goods imported, which were to remain under pledge with the assessee-firm, are to be found in this agreement dated 11th January, 1955. The benefit of the commission, which the assessee-firm was to receive at a lessor rate on goods imported by the company in Madras even after the expiration of the period of the agreement, also funds place in this agreement (vide clause 26).

23. Having regard to these material terms and conditions of the three agreements, three or four salient features of the arrangement become very clear. In the first place, the financing arrangement evidenced by the three agreements was entirely different and unconnected with the original business that was carried on by the assessee-firm, viz., export of cloth on commission, and the arrangement evidenced by the three agreements was entirely different and unconnected with the original business that the carried on by the assessee-firm, viz., export of cloth on commission, and the arrangement evidenced by the three agreements does not appear to be in the nature of a routine trade contract which the assessee-firm was entering into in its ordinary course of business of export of cloth. Secondly, the interest, which was to be earned by the assessee-firm from the company, was to be earned by it, and the company had undertaken to pay such interest to the assessee-firm, irrespective of the fact whether any finances were actually taken by the company from the assessee-firm or not during the period under the agreements. It does appear that since large finance to the extent of Rs. 10 lakhs each under the two agreements had been undertaken to be made available by the assessee-firm to the company, such a term with regard to the payment of interest was provided for in the agreement. In other words, the assessee-firm was bound to keep finance to the extent of Rs. 10 lakhs under each of the two agreements ready and available at any time whenever the company might require the same during the currency of the agreements and hence provision was made for the payment of interest by the company actually borrowed finance up to the limit mentioned in the agreements or not during the currency of the agreements. Thirdly, the commission that was payable by the company to the assessee-firm was in consideration of such financial assistance and other services that were to be rendered by the assessee-firm to the company and the payment of such commission on the import of goods also did not depend upon whether the company actually borrowed the finance from the assessee-firm and imported the goods with the help of such finance or not. Lastly, the provision with regard to the payment of commission by the company to the assessee-firm, even after the expiry of the period of the agreements, is very eloquent. Under clause 25 of the Bombay Agreement and under clause 26 of the Madras Agreement, it was provided that even after the expiry of the periods of the agreements, so long as the company imported the particular goods mentioned in the agreements through the two respective ports at Bombay and Madras, the assessee-firm was to receive commission, though at a lesser rate, as specified in the said clauses.

24. Having regard to these provisions, which are to be found in the three agreements, it seems to us clear that the assessee-firm could be said to have struck a most beneficial arrangement from its point of view with the company which secured to it certain rights of earning interest as well as earning commission irrespective of whether it actually advanced finances or not, and, therefore, the arrangement as evidenced by the three agreements will have to be regarded as a very peculiar one which really gave the assesses-firm avenues for the investment of its funds, a steady source of interest and a steady source of commission on profits earned by the company for 10 years and a further steady source of commission, though on a smaller scale, even after the expiration of the period of the arrangement and till such time as the company carried on its business of importing petrol and petroleum products in Bombay and Madras. In these circumstances, it is difficult to accept Mr. Joshi's contention that the arrangement evidenced by the three agreements was in the nature of a routine trade contract which the assessee-firm could be said have entered into with the company. On the other hand, the aforesaid salient features of the arrangement clearly show that the said arrangement as evidenced by the three agreements really created a profit-making apparatus or a steady source of income in favour of the assessee-firm and it is the termination of such arrangement, that is to say, loss or destruction of such a profit-making apparatus or a steady source of income which the assessee-firm had, which enabled the assessee-firm to receive compensation of Rs. 3 lakhs from the company under the consent terms which were followed by a consent decree dated 21st June, 1956.

25. This conclusion of ours also receives further support from the fact that as compared to the income by way of interest, which the assessee-firm received on account of the finances made by it to the company, the income by way of commission, which it received from the company was relatively very much more. We have already indicated above that before the arrangement was terminated under the consent decree, the assessee-firm had received interest amounting to Rs. 42,401 in S. Y. 2010, Rs. 1,07,957 in S. Y. 2011 and Rs. 1,01,180 in S. Y. 2012 (corresponding to assessment years 1955-56, 1956-57 and 1957-58, respectively), whereas it received commission amounting to Rs. 90,011 in the first year, Rs. 2,05,032 in the second year and Rs. 33,324 in the third year. The principal avenue of income was really the commission which the assessee was to receive from the company and, as we have stated above, such commission was receivable by the assessee-firm irrespective of whether finances were actually taken by the company from the assessee-company or not, at a certain rate or certain percentage of the profits earned by the company during the currency of the agreements and at the lesser rate even after the expiry of the period of the agreements so long as the company contained its business of importing the said goods though the ports of Bombay and Madras. It does appear that from the point of view of the company, the terms were very onerous and, therefore, the company tried to avoid the said arrangement by filing a suit in this court against the assessee-firm in which a counter-claim was made by the assessee-firm and, ultimately, the matter was settled by consent of parties and a consent decree was obtained on the 21st June, 1956, whereunder a sum of Rs. 3 lakhs became payable by the company to the assessee-firm. Having regard to the nature of the agreements, we have no hesitation in coming to the conclusion that the amount of Rs. 3,00,000 which was receivable by the assessee-firm was by way of compensation for the injury - injury or destruction of the source of income itself - and in this view of the matter we feel that the Tribunal was right in coming to the conclusion that the sum of Rs. 3,00,000 represented a capital receipt and not a revenue receipt.

26. Mr. Joshi for the revenue has relied upon two decisions of the Supreme Court to which we will now refer. First, reliance was placed by him on the decision of the Supreme Court in CIT v. South India Pictures Ltd. [1956] 29 ITR 910. In that case, the assessee carried on the business of distribution of films. In some cases, the assessee used to produce or purchased films and them distribute the same for exhibition in different cinema halls and in other cases the assessee used to advanced moneys to producers of films and secure the right of distribution of the films produced with the help of the monies so advanced by the assessee. In the course of such business, it advanced monies to Jupiter Pictures for the production of three films and acquired the right of distribution of these three films under three agreements in writing. The agreements, inter alia, provided that the assessee would advance a certain sum of money in instalments for the production of the films, the assessee acquiring the sole right to distribute the films for a period of five years from the date of release of each film. The assessee was to pay itself the money realised by the distribution of the films, its commission and the amount advanced to the producers and to pay the balance to the producers. The assessee had a charge by way of security on the negative and positive copies of the films for amounts due on account of advance. If the producers failed to deliver the films within the time specified, the assessee had the right to complete the picture at its own cost. On the expiry of the period of five years, the assessee had to return to the producers all copies of the films and the balance stock of loan and publicity materials. After the assessee had exploited to a certain extent its right of distribution of the three films, the agreements were cancelled and the producers paid an aggregate sum of Rs. 26,000 to the assessee towards commission. In the relevant accounting year, the assessee had distribution rights in respect of 11 films including these three films. The Tribunal and the High Court held that the sum was a capital receipt, but the Supreme Court took a contrary view and came to the conclusion that the sum represented a revenue receipt. Mr. Joshi contended that the facts in the instant case before us are very similar to the facts which obtained in the case before the Supreme Court and, therefore, a similar view should be taken that the sum of Rs. 3,00,000 receivable by the assessee-firm from the company in this case also represented a revenue receipt. It is not possible to accept this contention of Mr. Joshi, for, in our view, the nature and contents of the three agreements which the assessee in the Supreme Court case had entered into with the producers, were entirely different from the nature and contents of the arrangement which is evidenced by the three agreements in the instant case before us. The business that was carried on by the assessee in the case before the Supreme Court was that of distribution of films and the assessee carried it on in two ways; in some cases the assessee used to produce or purchase films and them distribute the same in different cinema halls, while in some cases the assessee-company used to advance monies to producers of films and secure the right of distribution of the films produced with the help of the monies so advanced by it and it was in the course of the latter type of business that the assessee had entered into agreements with Jupiter Pictures in that case. Moreover, as the Supreme Court has observed in that case, the sum that was paid to the assessee was not compensation for not carrying on its business, but was a sum paid in the ordinary course of its business to adjust the relation between the assessee and the producers and that the termination of the agreement did not radically or at all affect or alter the structure of the assessee's business. The Supreme Court also found that, in fact, the amount was received by the assessee 'towards commission', i.e., as compensation for the loss of the commission which it would have earned had the agreements not been terminated. The court also held that the amount was not received by the assessee as the price of any capital assets sole as surrendered or destroyed, but the amount was simply received by the assessee in the course of its going distributing agency business from that going business and that, therefore, the sum was an income receipt. In the instant case, as we have already indicated above, the nature of the terms and conditions of the three agreements evidencing the financing arrangement is entirely different. Moreover, the arrangement as evidenced by the three agreements could not be regarded as being one of the routine trade contracts entered into by the assessee-firm with the company in the ordinary course agreements, to which we have already alluded above, the arrangement must be held to be one which created a steady source of income for the assessee for the loss of which, upon termination of the agreement, the amount of Rs. 3 lakhs became payable to the assessee. The decision relied upon by Mr. Joshi, therefore, cannot apply to the facts of this case.

27. Mr. Joshi next relied upon another decision of the Supreme Court in CIT v. Rai Bahadur Jairam Valji : [1959]35ITR148(SC) , where the facts were these : On January 5, 1935, the B. I. Co. entered into an agreement with the respondent who had been supplying limestone and dolomite to the company since 1920 for the purchase of all its requirements of limestone and dolomite from him at specified rates. The rates were modified in December, 1935. The company went into liquidation and its assets and liabilities were taken over by another company called the I. I. S. Co. The I. I. S. Co. continued to purchase limestone and dolomite from the respondent for some time but when it found the rates uneconomical informed the respondent by notice of its decision to purchase its requirements from other sources. The respondent filed a suit against the I. I. S. Co. for specified performance of the contract dated January 5, 1935, as modified in December, 1935, and for an injunction restraining the company from purchasing limestone and dolomite from any person other than the respondent, and such an injunction was actually issued in those terms against the I. I. S. Co. Thereafter, the respondent and the company entered into an agreement on all the disputes between them of May 9, 1940. Under this agreement, the respondent was to work a quarry at G for a period of 25 years and to supply the limestone quarried therefrom to the company according to its requirements. Certain difficulties arose in working out this agreement as the railway authorities did not agree to the constitution of a siding and a loop line to the quarry with the result that the agreement could not be carried out any further. On August 2, 1941, a fresh agreement was entered into whereby the company agreed, (i) to pay a sum of Rs. 2,50,000 to the respondent as solatium besides the monthly instalments of Rs. 4,000 remaining unpaid under the contract of 1940, (ii) to take the limestone required for its furnaces at K from the respondent for a period of 12 years on specified terms, and (iii) to appoint the respondent as loading contractor for loading all iron ore of the company of M for a period of 12 years. Pursuant to this agreement, the respondent was paid Rs. 2,50,000 as well as the balance due towards the monthly instalments of Rs. 4,000 and the question was whether the sum of Rs. 2,50,000 received by the respondent was capital or revenue in his hands and the court held that the sum of Rs. 2,50,000 was not paid to the respondent as compensation, that the agreements of 1940 and 1941 were merely adjustments made in the ordinary course of business, that there was no profit-making apparatus set up by the agreement of 1941 apart from the business which was to be carried on under it, that at no time was there any agreement which operated as a bar to the carrying on of the respondent and that, therefore, the receipt of the sum of Rs. 2,50,000 was a revenue receipt and was chargeable to tax. On a consideration of all the relevant facts and circumstances pertaining to the several agreements that were entered into by the respondent with the company the court took the view that the agreement of 1940 and 1941 were merely adjustments made in the ordinary course of business and that there was no profit-making apparatus set up by the agreement of 1941 apart from the business which was to be carried on under it and, ultimately, the court observed as follows (p. 163) :

'In our opinion, therefore, when one it is found that a contract was entered into in the ordinary course of business, any compensation received for its termination would be a revenue receipt, irrespective of whether its performance was to consist of a single act or a series of acts spread over a period, and, in this respect, it differs from an agency agreement.'

28. The court also laid considerable emphasis on the fact that the respondent was not prevented from carrying on his usual business. in our view, the decision turned on the peculiar facts of that case and the ratio of that case will not be applicable to the instant case. As we have pointed out above, the agreement, which came into existence as a result of the three agreements in the instant case, did confer upon the assessee certain rights and created in favour of the assessee-firm avenues of enduring benefit which the assessee-firm was to receive even after the expiry of the periods of the agreements. In our view, therefore, the arrangement as evidenced by the three agreements, in the instant case, is a peculiar one and must be regarded as having created a profit-making apparatus in favour of the assessee-firm or the destruction of which a sum of Rs. 3,00,000 became receivable by the assessee-firm which will have to be held as a capital receipt.

29. Similar in the position with regard to the observations of Lord President Cooper in the case of IRC v. Fleming & Co. (Machinery) Ltd. [1951] 33 TC 57, on which reliance has been placed by Mr. Joshi. The observations relied upon by him have been set out in : [1964]53ITR261(SC) Kettlewell Bullen & Co. v. CIT at p. 275. With respect, there is no dispute or quarrel about the observations on which reliance has been placed by Mr. Joshi, for, after all, those observations merely indicate that cases relating to determination of agencies broadly fall on two sides of the line, which have been indicated therein, drawn in the light of the varying circumstances and that if the cancellation of a contract affects the profit-making structure of the recipient of compensation and involves loss by him of an enduring trading asset, then the compensation received by the recipient will have to be classified as a capital receipt, while, if the cancellation of a contract does not affect the recipient's trading structure, nor does deprive him of any enduring trading asset, but leaves him free to devote his energies and organisation released by the cancellation of the contract to replacing the contract which has been lost by other like contracts, then the compensation received for such cancellation will have to be regarded as a revenue receipt and the question in every case would be as to in which class the particular compensation, having regard to the facts and circumstances of the case, would fall. As we have indicate above, in our view, having regard to the nature and terms and conditions of the three agreements evidencing the arrangement between the assessee-firm on the one hand and the company on the other, the arrangement cannot be regarded as an ordinary routine trading contract entered into by the assessee-firm with the company in the ordinary course of its business and that the arrangement was one the cancellation of which affected the profit-making structure of the assessee-firm, and, therefore, the sum of Rs. 3,00,000 which was receivable by the assesse-firm, in our view, would fall in the first category indicated in the observations relied upon by Mr. Joshi. Having regard to this discussion, we are of the view that the Tribunal war right in coming to the conclusion that the amount of Rs. 3 lakhs was a capital receipt not chargeable to tax and, therefore, we answer the question referred to us in the negative and against the revenue. The revenue will pay the costs of the reference.


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