1. The question that arises on this reference is whether a receipt of Rs. 25 lacs was a capital or a revenue receipt. This question has vexed and troubled many Judges and many Courts and in Barr, Crombie & Co. Ltd. v. Commissioners of Inland Revenue Lord President Normand at page 60 points out :
'It has been truly said that every case must be considered on its own facts, and that no legal criterion for distinguishing between capital payments and income payments is readily applicable. Therefore, though we have had a considerable citation of cases, I do not propose to refer to more than a few of them.'
2. Notwithstanding this warning counsel go on citing cases and it is the duty of the Court to consider them although the Court has to observe that each case must be decided on its own facts.
3. Now, the facts here are an illustration of high finance, in this case at its highest, and one must confess that the manipulations which high finance requires leave one completely bewildered. The Moon Mills had appointed P. A. Hormarjee & Co. as its managing agents for several years, and on the 28th of June, 1943, a new managing agents for several was entered into between the Mills and Hormarjee & Co. This agreement was transferred by a deed of transfer to the assessee company on the 21st of July, 1944. On the 3rd of April, 1946, the assessee company surrendered its rights as managing agents of the company for a sum of Rs. 25 lacs. This sum was paid to the assessee company by the Moon Mills Ltd. and the taxing department treated this receipt as income and brought it to tax.
4. A question also arose in the assessment of the Moon Mills Ltd. as to whether the expenditure of Rs. 25 lacs by the Moon Mills Ltd. for getting rid of its obligations under the agreement to pay the managing agents was an expenditure incurred wholly and exclusively for the purposes of the business of the Moon Mills. The department rejected the claim of the Moon Mills that the amount was a permissible deduction. That decision of the department was upheld by the Tribunal, but with regard to the decision of the department in the case of the assessee company that the sum of Rs. 25 lacs was liable to tax it was not accepted by the Tribunal and therefore at the instance of the Commissioner this reference has been made and it raises two questions :
(1) Whether the receipt of Rs. 25 lacs by the assessee in consideration of the termination of its managing agency was a revenue receipt or a capital receipt and
(2) If the answer to question No. 1 is that it was a capital receipt, whether the sum of Rs. 25 lacs or any part thereof was income assessable under the head 'Capital Gains' under section 12B of the Act
5. Now, in order to appreciate the contentions put forward both on behalf of the Commissioner and the assessee it is necessary to have a certain background and to look into the past history which ultimately resulted in the deed of transfer of the 3rd of April, 1946. In the first place it is necessary to look at the managing agency agreement itself of the 28th of June, 1943. Looking at this agreement it is clear that it is a composite agreement and it is not a simple agreement which one often comes across of a company appointing some one as its managing agents. In other words this is not a simple managing agency agreement. As we shall presently point out, this is an agreement under which Hormarjee & Co. are appointed managing agents and as such certain rights are conferred upon them and therefore this agreement deals with the integrated rights which are conferred upon the managing gents.
6. Now, turning to the detailed provisions of this agreement, the duration of the agreement is 20 years, and clause (2) provides for the remuneration of the managing agents on the terms laid down in that clause. Then clause (8) is important and that clause provides that 'the company shall employ the managing agents as muccadums and brokers of the company for the said term of 20 years beginning as aforesaid or until the managing agents voluntarily give up the offices of muccadums and brokers of the company, or either of them and the company shall pay to the managing agents a voluntarily give up the offices of muccadums and brokers of the company, or either of them and the company shall pay to the managing agents a minimum remuneration for the muccadumage and brokerage at the following rates'. Therefore this clause casts an obligation upon the managed company to employ only the managing agents as muccadums and brokers. It is a right which belongs to the managing agents under this agreement not only to act as managing agents of the company but also to act as muccadums and brokers. Now, we are unable to accept Mr. Palkhivala's submission that this right is not conferred upon the managing agents but upon Hormarjee & Co. personally. Mr. Palkhivala has drawn our attention to the definition of 'managing agents' contained in clause (1). This is the usual definition of 'managing agents' which includes not only the managing agents appointed by the agreement but also their successors or assignees. Therefore what clause (8) means is that whoever at a particular time happens to be the managing agents of the company shall have the right to act as muccadums and brokers. There is no obligation upon the managing agents to continue as muccadums and brokers because they could give up of their own will this particular right conferred upon them. Then clause (9) casts a further obligation upon the company and that is that the company shall also employ its managing agents as the selling agents of the company and the clause provides what will be the remuneration to be paid for this extra service. Then clause (11) gives the right to the managing agents to assign their managing agency agreement. It not only makes it obligatory upon the managing agents to assign the rights as managing agents but also at the same time to assign their rights as muccadums and brokers as also selling agents, the intention being clearly that if a person ceased to be the managing agent he could not continue to be a muccadum or a broker or a selling agent of the company. Clause (16) provides that in the event of the company being wound up at any time for the purposes and with the object of transferring its business to another company, then it is made incumbent upon the company to make it one of the terms of the agreement for the transfer that the transferee company shall appoint the managing agents to be the managing agents of the new company as also muccadums and brokers and selling agents. Therefore, it is clear on a true construction of this agreement that the Moon Mills appoints Hormarjee & Co. as the managing agents and in that capacity Hormarjee & Co. are given further rights as muccadums and brokers and selling agents. It is not open to the mills to deprive the managing agents of the right as muccadums and brokers or selling agents, nor is it permissible to the managing agents to continue as muccadums and brokers and selling agents if they ceased to be managing agents. As we have already pointed out, the rights of Hormarjee & Co. were transferred to the assessee company on the 21st of July, 1944, and a deed of transfer was executed.
7. Then we come to certain resolutions passed both by the managed company and the assessee company respectively. On the 1st of March, 1946, at a meeting of the board of directors Mr. Narayanlal Bansilal drew the attention of the board to the fact that the remuneration and commission drawn by the managing agents every year constituted a heavy drain out of the profits and it would be in the interest of the company if the managing agency was terminated, and on that a resolution was passed that the unexpired portion of the agreement dated the 28th of June, 1943, so far as it relates to the appointment of the said company as the managing agents of this company be terminated as from the 31st of March, 1946, on payment of reasonable compensation to them for loss of office and that Mr. Narayanlal Bansilal, a director of the company, be authorised to negotiate and finalize the question of compensation. On the 4th of March, 1946, there was a meeting of the board of directors of the assessee company Mr. Jalan was in the chair. Now, it should be noted that he was the chairman of both the board of directors of the assessee company chairman of both the board of directors of the assessee company as also of the Moon Mills Ltd. and at this meeting of the board of directors of the assessee company it was resolved that in view of the termination of the managing agency by the Moon Mills Ltd., as from the 31st of March, 1946, a sum of Rs. 25,00,000 as compensation for loss of office be claimed from the Moon Mills Ltd. On the next day a meeting of the board of directors of the Moon Mills Ltd. was held and Mr. Jalan was again in the chair, and Mr. Narayanlal Bansilal reported to this meeting that he had been carrying on negotiations with the assessee company. He informed the board that it was not prepared to accept the termination of the contract and claimed Rs. 25,00,000 as full compensation for loss of office as managing agents of the company in the event of such termination. The board resolved that the employment of the assessee company as managing agents of the company should be terminated from the 31st of March, 1946. They also resolved that the assessee company should be paid a sum of Rs. 25,00,000 in full satisfaction of their claim for damages for earlier determination of their employment as such managing agents of the company. It was further resolved that the board of directors should take over the management of the affairs of the company as from the 1st of April, 1946. Pursuant to these resolutions a deed of release was executed on the 3rd of April, 1946, and it is rather significant to note that the reason given for the termination of the managing agency was that disputes and differences having arisen between the parties the directors of the release company decided to terminate the said agreement so far as it related to the managing agents as from the 31st of March, 1946. Now, it has been found as a fact by the Tribunal that there were no disputes and differences between the two companies and this recital in the deed of release is a false recital. The operative part of this deed is that 'In pursuance of the said release and in consideration of the said sum of Rs. 25,00,000 only so paid as aforesaid the released both hereby declare that they have ceased to be the managing agents of the release as from the 1st of April, 1946.' Therefore the result of this deed of release was that the assessee company ceased to perform the functions of managing agents under the agreement dated the 28th of June, 1943, but they retained to themselves the rights of selling agents and brokers and muccadums under that agreement. It is difficult to understand how, looking to the terms of that agreement to which we have drawn attention, it was possible for the assessee company to continue as brokers and muccadums and selling agents when they ceased to be managing agents, and it is also difficult to understand how there was any obligation upon the Moon Mills Ltd. to continue the assessee company as brokers and muccadums and selling agents. But in this reference we are not concerned to consider whether it was possible for the parties to enter into this deed of release pursuant to the terms of the agreement. It may be that this deed of release pursuant to the terms of the agreement. It may be that this deed of release constituted a breach of that agreement. It may be that this deed of release constituted a breach of that agreement. It may be that this deed of release constituted a variation or modification of that agreement. But the deed of release has not been challenged as a colourable document and therefore what we have to do in this reference is to consider the effect of this deed of release and to decide the rights of the parties according to the terms of this deed.
8. Certain other facts which have been set out in the statement of the case should also be pointed out. The Tribunal points out that the resolution which was passed by the shareholders of the company with regard to the termination of the managing agency agreement and the payment of compensation of Rs. 25,00,000 could have been got passed by the directors of the assessee company as these directors had sufficient voting strength with regard to a shareholders' meeting of the Moon Mills Ltd. It has also been pointed out how curious was the device resorted to for the purpose of paying this compensation of Rs. 25,00,000 to the assessee company. On the 26th of March, 1946, the Moon Mills Ltd. took a loan of Rs. 10,00,000, from Ganeshnarayan Onkarmal and a loan of Rs. 10,00,000 from Ganeshnarayan Mannalal in order to pay Rs. 25,00,000 to the assessee company. The assessee company having received these Rs. 20,00,000 on that very day advanced a sum of Rs. 10,00,000 to the very Ganeshnarayan Onkarmal and the sum of Rs. 10,00,000 to the very Ganeshnarayan Mannalal. Therefore except for book entries the position remained identically the same as sit was before the payment of Rs. 20,00,000 to the assessee company as it was afterwards. In other words, Rs. 20,00,000 remained with Ganeshnarayan Onkarmal and Ganeshnarayan Mannalal although in the books of the assessee company they became the debtors of the assessee company. The further important fact that has been pointed out is that even after the termination of the managing agency the persons who were in fact managing the Moon Mills continued to do the same work. Now, there were three persons : (1) Shyamdeo Deorah, (2) Bissessarlal Poddar and (3) Jagannath Prasad Gupta, who, when the assessee company was managing agents, were managing the mills under a power of attorney, and when the assessee company ceased to be the managing agents and the directors took over the management of the company a power of attorney was issued to these very three gentlemen and they continued to manage the mills as they had done before.
9. On these facts the Income-tax Officer who assessed the assessee company came to the conclusion that the termination of the managing agency was a stage managed affair, and Mr. Joshi has strongly emphasised this aspect of the case and his contention is that this payment of Rs. 25,00,000 was nothing more than a device for evasion of tax and we should not permit this device to succeed. Now, however much we may deprecate the manipulations entered into and the device resorted to, if legally the receipt of Rs. 25,00,000 in the hand of the assessee company constituted a capital receipt, we cannot possibly hold that that amount is liable to tax. The Income-tax Act fortunately or unfortunately is not concerned with moral considerations. It is only concerned with find out what is the income of a person and subjecting that income to tax, and if the assessee much to our regret succeeds in satisfying us that this sum of Rs. 25,00,000 is not income, we must hold that the Tribunal was right in coming to the conclusion that it did that this amount is not liable to tax.
10. Prima facie it would appear that this sum of Rs. 25 lacs is not an income receipt but a capital receipt. The amount has been paid by the Moon Mills Ltd. to the assessee company in order to bring about a cessation of the assessee company's business as managing agents, and it is well settled that an amount paid as solatium for the cessation of a business activity constitutes a capital receipt and not income receipt. Mr. Joshi, while accepting this principle, contends that looking to the facts of the present case there is no cessation of the assessee's business and therefore that principle would not apply. Now, this principle to which reference has just been made was laid down by the Privy Council in Shaw Wallace & Co. v. Commissioner of Income-tax, Bengal, and it is rather necessary to consider that case in some detail because that case advanced before us with regard to the taxability of this amount, and this case has also been looked upon as a locus classics by Courts which had to consider similar questions from time to time after the decision of the Privy Council. In this case Shaw Wallace & Co., assessee, carried on business in Calcutta as merchants and agents of various companies and had branch offices in different parts of India, and prior to 1928 they acted as distributing agents in India of the Burma Oil Company and the Anglo-Persian Oil Company. In 1927 these two companies combined and decided to make other arrangements for the distribution of their products. Therefore the assesses' agency of both the companies was terminated and the assesses received a sum of Rs. 12,00,000 in respect of the agency of the Burma Oil Company and Rs. 3,25,000 in respect of the agency of the Anglo-Persion Oil Company. The Income-tax Department included these two receipts as income in computing the assessable income for the relevant year, and the question amounts constituted 'income' within the meaning of the Income-tax Act, and at page 212 their Lordships give the definition of 'income' which has been often quoted and which has been accepted as a correct interpretation of the difficult expression 'income' used in the Income-tax Act. It would perhaps bear repetition because we have to apply this definition to the facts of this case.
'The object of the Indian Act is to tax 'income', a term which it does not define. It is expanded, no doubt, into 'income, profits and gains', but the expansion is more a matter of words than of substance. Income, their Lordship 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.'
11. Applying this test their Lordships at page 214 observe :
'Following the line of reasoning above indicated, the sums which the appellant seeks to charge can, in their Lordships' opinion, only be taxable if they are the produce or the result of carrying on the agencies of the oil companies in the year in which they were received by the respondents. But when once it is admitted that they were sums received, not for carrying on this business but as some sort of solatium for its compulsory cessation, the answer seems fairly plain.'
12. They further observe :
'If the business had been sold - even if that somewhat indeterminate asset known as the 'goodwill' had been assigned to the employing companies, as the High court seems to have thought it had - it is conceded that the price paid would not have been taxable. But why Plainly because it could not be regarded as profit or gain from carrying on the business, and their Lordships thin that the same reasoning must apply when the sum received is in the nature of a solatium for cessation.'
13. Now, it is clear that the Privy Council here draws a clear line of demarcation between a sum received by reason of the carrying on of a business and a sum received for putting an end to the business and being paid as solatium for its cessation. A page 214 the Privy Council is repelling an argument that was obviously advanced before them that the two receipts should be treated as income because the source of that was suggested was the other businesses that the assesses were carrying on; and it is in the light of what we have just stated that the passage at page 214 should be view :
'It is contended for the appellant that the 'business' of the respondent did in fact go on throughout the year, and this is no doubt true in sense. They had other independent commercial interests which they continued to pursue, and the profits of which have been taxed in the ordinary course without objection on their part. But it is clear that the sum is question in this appeal had no connection with the continuance of the respondents' other business. The profits earned by them in 1928 were the fruit of a different tree, the crop of a different field.'
14. Therefore, what the Privy Council decided was that the source which produced income was the two agencies which the assessees had. Those sources were dried up or ceased to exist and therefore the amounts received could not be attributable to income from those sources, because the amounts were received not as the produce from those sources but for a diametrically opposed purpose of putting an end to them or preventing them from functioning.
15. Now, applying the principle of this case to the facts before us, it is contended by Mr. Joshi that in our case the source is not the managing agency but the source is the congeries of rights conferred upon the managing agents by the agreement, and even though the right as managing agents may have come to an end, the other rights continued and therefore whatever may have been the position before the Privy Council, in the case before us it cannot be stated that the source has been dried up and therefore the sum of Rs. 25,00,000 cannot represent the source. On the other hand, Mr. Palkhivala urges upon us to look upon the rights of the assessee company under the agreement as constituting three separate sources, one, income from the managing agency which is one source, a separate source, the second source is the income derived by the assessee company as muccadums and brokers, and the third source is the income derived by the assessee company as selling agents, and Mr. Palkhivala says that as far as the managing agency source is concerned it has clearly come to an end and the sum of Rs. 25,00,000 has been paid in order that the functions connected with that source should no longer be discharged by the assessee company.
16. We are unable to accept the contention of Mr. Palkhivala. We agree with Mr. Joshi that the source of income is the congeries of rights conferred upon the assessee company under the deed and those rights must be looked upon as integrated rights. It is by reason of the fact that the assessee company enjoys the status or office of the managing agents that these other rights are conferred upon it and we cannot look upon these rights as separate and distinct as constituting separate and distinct sources. But even accepting Mr. Joshi's contention, a serious difficulty still remains in the way of the Commissioner. Assuming that the sum of Rs. 25,00,000 is not referable to a separate source, it would still be incumbent upon the Commissioner to satisfy us that this sum of Rs. 25,00,000 is income which is liable to tax. Now, it seems to us clear that the managing agency was productive of profit or income and as such it must be looked upon as a capital as a capital asset, one among others, which the assessee possessed for the purpose of carrying on his business under this agreement. It is either one of the rights or a part of the source or one of the capital assets in the business of the assessee. Whichever way one looks at it, as sum of Rs. 25,00,000 must be referable to a capital asset possessed by the managing agents; and the real questions that we have to consider is whether, if that be the true position, could it be said in law that the sum of Rs. 25,00,000 constitutes a revenue receipt merely because it is referable to a part of the sources or one of the many rights enjoyed by the assessee or one of the capital assets enjoyed by the assessee.
17. Now, Mr. Joshi says that the sum of Rs. 25,00,000 should be looked upon as referable to the status of the maintaining agents which was conferred upon the assessee under the agreement, and Mr. Joshi says that when one looks at the real nature of the transactions in this case the assessee continues to enjoy the status of the managing agents although it has given up its right to perform the functions as the managing agents. In our opinion that contention is obviously untenable. What is productive of income, what is the source of income, is not the status or position of managing agents but is the services rendered by the assessee company as managing agents; and there can be no doubt in this case that the assessee has surrendered its rights to perform services as managing agents and its right to derive profit by rendering the services. Therefore this sum of Rs. 25,00,000 can only be referable to the services rendered by the assessee as managing agents. Can it then be said that although the services have been terminated, although the assessee has been prevented from earning the profit and although there is a complete cessation of that particular activity of the assessee, still we must look upon the sum of Rs. 25,00,000 as income referable to the managing agency
18. The matter may be looked at from a different point of view. If in its business the assessee carries on 3 or 4 activities and each activity results in profit and there is a cessation of one of these activities and as a solatium for the cessation of that activity the assessee receives a compensation, can it be said that because the business is carried on with the other activities, therefore the solatium paid to the assessee is not capital but income Mr. Joshi says that the source of the assessee's income is the agreement, and so long as the agreement subsists and is operative, whatever amount the assessee receives which is referable to the agreement must be looked upon as income arising under the agreement. Now, that contention again is also untenable. It is clear that what produced income and profits for the assessee was not the agreement but the services rendered by the assessee as managing agents. Even though the agreement might have been subsisting, if the assessee has ceased to render service, he could not have made any profit or derived any income. Therefore the true and the real source of income as far as the assessee is concerned in respect of this particular activity is the fact that he renders services as managing agents and in respect of those services he is paid remuneration as laid down in the agreement.
19. Mr. Joshi relies on the passage on the Privy Council judgment to which reference has already been made at page 214 for the purpose of urging that the Privy council has clearly laid down that if the business of the assessee continues, then the mere fact that part of the business has come to an end and in respect of that part a compensation is paid to the assessee, then that compensation cannot be looked upon as capital. Now, in the first place it must be borne in mind that the Privy Council was not concerned with the question with which we are concerned. The Privy Council was not considering the question whether if part of the capital asset or part of the source has ceased to exit the income referable to that asset or that source was or was not income within the meaning of the Income-tax Act. The case before the Privy Council was the complete cessation of a particular activity and the complete drying up of a whole source. At the page 214 the Privy Council was considering other independent business carried on by the assessee and the principle that the Privy Council laid down was that unless the sum in question had some connection with continuance of the assessee's other business, the fact that the assessee carried on other business could not have any bearing on the question as to whether the sum received by the assessee was capital or income. Now if we were to apply the some test here, we would have to be satisfied that Rs. 25,00,000 which the assessee has received has some connection with the continuance of the assessee's other business which are muccadum, brokerage and selling agency. Now, it is impossible to understand what possible connection the assessee's receiving of Rs. 25,00,000 has got to do with the assessee continuing to function as muccadum and broker and selling agent under the agreement. It would have been open to the assessee the very next day after the agreement was executed to have given up his right under the agreement as muccadums, brokers and selling agents. The position might have been different if the deed of surrender had provided that in consideration of the Rs. 25,00,000 received by the assessee he undertook an obligation to continue as selling agents and muccadums and brokers of the company; then there would have been a clear connection between the receipt of Rs. 25,00,000 by the assessee and the continuance of the assessee as brokers, muccadums and selling under the agreement. But that is not the case here.
20. On principle also it is difficult to understand why a distinction should be made between the destruction of the whole of the capital asset or a part of the capital asset. In either case it is clear that the amount received as solatium for that destruction cannot be profits arising out of the business of the assessee. The assessee is sought to be taxed under section 10 and the department has to satisfy us that the sum of Rs. 25,00,000 was profit made by the assessee in the course of its business or profit earned out of its business. Surely when these Rs. 25,00,000 have been paid to the assessee for the cessation of its particular business, it could not be urged that this very sum of Rs. 25,00,000 were profits earned by the assessee in the course of its business. This is exactly what the Privy Council has emphasised at page 213 that once it is admitted that the sums were received not for carrying on the business but as some sort of solatium for compulsory cessation the answer seems fairly plain.
21. Now, a large number of authorities were cited at the Bar and it is our duty briefly to refer to them, but as we shall presently point out, excepting in the case of two authorities where there are certain observations which may seem to run counter to the view we have just expressed, all the other decisions are reconcilable with our view as the true position in law.
22. Mr. Palkhivala has rightly divided the cases cited by Mr. Joshi into certain categories and perhaps it would be convenient to follow that classification. The first are three cases dealing with the termination of appointment either as managing agents or director or any other officer. The first is the Privy Council case which we have already referred to. The second is a case reported in Henley v. Murray (H. M. Inspector of Taxes). That is a case of a director. What the Court of Appeal held in that case was that a certain sum paid to a director representing compensation for loss of office was not assessable, and it is in this connection considered, and the Master of the Rolls says this :
'A man who has a contract in respect of which he is entitled to periodic remuneration may say, `Well, I will take now a lump sum instead of the periodic remuneration in the future, and though I will continue to serve under my contract, I shall not be expected to do quite as much work', or he may even say 'I shall not be expected to do any work at all'. If that were the form of the arrangement in this case, I think it would be true to say that the lump sum which was paid was profits which became payable under his contract, and that it was paid to him by virtue of his office or employment of profit within the meaning of the Schedule.'
23. Now, the case that the Master of the Rolls was contemplating was whether a contract of service was not terminated, the relationship of master and servant continued, and the master told the servant not to render service or to render less service than he was rendering before. But the Master of the Rolls distinguishes this case from the case he was considering, because that case was of a director because that case was of a director whose office had been terminated.
24. Now, we cannot say in the case before us that the assessee company had the right to perform service as managing agents or receive any profit. Mr. Joshi says that the effect of the deed of surrender was that the status of the assessee continued as managing agents and the managed company, the Moon Mills Ltd., told the assessee not to render any service to them as managing agents. In our opinion that is not the real effect of the deed of surrender. The deed of surrender effectively puts an end to the relationship between the Moon Mills Ltd. and the assessee company as the managed company and the managing agents. The principle laid down the Master of rolls would only have applied if the relationship had continued although the assessee company was under no obligation to render service by reason of the agreement arrived at.
25. The third case is the Barr, Crombie's case : Barr, Crombie & Co. Ltd. v. Commissioners of Inland Revenue. In this case the appellant, the assessee company, acted as ship managers of a shipping company and the agreement provided that if the shipping company went into liquidation certain compensation would be payable to the assessee company. The special Commissioner held that the sum received by the assessee company on the shipping company going into, liquidation was remuneration under a service agreement and was a trading receipt on revenue account. The Court Session held that this sum payable as compensation if the carrying out of the agreement became impossible by reason of the liquidation of the shipping company and that therefore the payment made to the appellant company was of the nature of a capital payment and not of the nature of a payment chargeable to income-tax or excess profits tax as annual profits. At page 60 Lord President Normand refers to Kelsall's case which he himself had decided and which is reported in Kelsall Parsons & Co. v. Commissioners of Inland Revenue and to which we shall presently make a reference, and he reads Kelsall's case as laying down that the payment was in return for the low of a single agency out of about a dozen agencies carried on by the company, and the fact that the payment in that case did not represent the whole capital assets of the company was easily shown by the fact that in the year after the surrender of the single agency profits were no less than they had been the year before the surrender. With respect, we do not understand on principle why it should make any difference to the question that has got to be considered whether the payment represents the whole capital asset or part of the capital asset nor do we understand what difference there can be in principle whether the loss is of a single agency which the assessee has or the loss is of one agency out of several agencies with the assessee may have. It is clear that the decision of the Privy Council in Shaw Wallace's case which was not cited before that court lays down a principle which is opposed to what the learned Lord President says is the correct principle, because it will be remembered that in Shaw Wallace's case the assessee company had several agencies and yet the Privy Council came to the conclusion that the compensation paid for the loss of two agencies was a capital receipt and not an income or revenue loss of two agencies was a capital receipt and not an income or revenue receipt. Therefore, although on the facts of the case, with respect, the decision is correct, we find ourselves unable to agree with the observations made by the learned Lord President to which reference has just been made.
26. The second category of cases relates to variation or modification of agency agreements which are incidental to the business carried on by the assessee, and in this class falls Kelsall's case. In this case the assessee carried on business as agents on commission basis for the sale of the products of various manufactures and entered into agency agreements for that purpose. One of these agreements which was for a period of three years was terminated at the end of the second year in consideration of payment to the assessee of a certain sum as compensation and the question arose whether this receipt was capital or revenue receipt and that decision was confirmed by the Court of Session. Now, the learned Lord President Normand, with respect, came to the right conclusion in view of two important facts which were found in this case. One was that the contract which was terminated was incidental to the normal course of the assessees were not parting with something which could be described as an enduring asset of business. It was pointed out that the contract would have been terminated in any event within one year, but at page 619 the learned Lord President refers to one fact which also seems to have weighed with him in coming to his decision and that fact is, as set out be the learned Lord President, that the assessee's business was entirely different from the business carried on by some one who, under contract acts exclusively as agent for a single principal. That this fact considerably weighed with the learned Lord President is clear from what we have pointed out in Barr Crombie's case where the learned Lord President comments on this decision and deduces the ration of this decision. In our opinion the fact as to whether an agent acts exclusively for a single principal is entirely irrelevant on the question as to whether the compensation received by him in respect of the termination of that agency is income or capital gain. Now, this case is not of much assistance of Mr. Joshi because it cannot be said with regard to the case before us that the managing agency contract was incidental to the business carried on by the assessee nor can it be said that the variation or modification of the managing agency contract was incidental to the business of the assessee, nor can it be disputed that the managing agency was a valuable asset and at the date when it was surrendered the managing agency still 13 years to run.
27. The third category of cases is where an agent or an employee continues in service or employment, but he takes a reduced remuneration and takes compensation for accepting a reduced salary or remuneration. This is the case that we had to deal with in Godrej and Co. v. Commissioner of Income-tax, Bombay City. In that case the assessee was entitled for a period of 30 years to receive remuneration as managing agents at the rate of 20 percent on the annual net profits of the managed company. Subsequently an agreement was arrived at between the assessee, the managing agents and the managed company by which the assessee agreed to receive a lump sum of Rs. 7,50,000 from the managed company in consideration of the assessee agreeing to accept a flat rate of 10 per cent, on the annual net profits of the company for the remaining term of the managing agency. The question we had to consider was whether the sum of Rs. 7,50,000 received by the assessee was capital or income, and we held it was income because we pointed out that there was an obligation upon the assessee to continue to render service to the managed company's managing agents and that the sum of Rs. 7,50,000 represented an advance payment of the remuneration which the assessee was entitled to earn under the agreement. As we have already pointed out, in the case before us there is no continuation of the managing agency by the assessee company and therefore it cannot be said that Rs. 7,50,000 represents an advance payment for the remuneration which the assessee company would have earned by continuing to render service to the managed company as managing agents. The crucial fact in the case before us is that there was complete cessation of this particular activity on the part of the assessee company.
28. Then the next category of cases where the agreement is entered into as an ordinary normal part of the assessee's business and compensation is received for the breach of that agreement. That type of case is to be found in Bush, Beach and Gent Ltd. v. Road. In this case the assessee company entered into a contract to buy certain chemical salts. The vendor company terminated this contract and agreed to pay the assessee company, the buyer, a certain sum as compensation, and the question that arose was whether this amount was taxable as income. Mr. Justice Lawrence held that it was rightly taxed as income. Mr. Joshi relies on a passage at page 40 in the judgment of Mr. Justice Lawrence that 'the sum paid in my opinion represented profits which the appellants would or might have made under the contract, and not the purchase price of the contract itself'. Obviously if an assessee is doing business in a commodity and in respect of that business various contracts have been entered into and some contracts are not carried out and compensation is paid to the assessee company, those contracts is incidental to the business and are entered into in the ordinary course of business.
29. Now, the agreement that we have to consider is not a agreement which the assessee company has entered into in the ordinary course of business. It is the very foundation of the business. It does business which results in profits because it has been given the right under the agreement, and therefore it could not be said that when the assessee surrendered its rights as managing agents it did so in the ordinary course of business or incidental to the business.
30. As against these case, Mr. Palkhivala has drawn our attention to certain decisions which clearly lay down that a sum received in consideration of immobilisation, assignment or surrender of apart of a capital asset or a part of a source is capital and not income. The first is a case reported in Glenboig Union Fireclay Co. Ltd. v. Commissioners of Inland Revenue. There the assessee company carried on business as manufactures or fireclay goods and it was the lessee of certain fireclay fields over part of which ran the lines of a railway company. Now, the railway company prevented the assessee company from working these particular fields over which their lines ran ultimately a certain sum was paid to the assessee company after arbitration as compensation for this act on the part of railway company, and the question arose whether the compensation constituted income or capital, and the House of Lords held that it was capital and not income. Lord Buckmaster at page 463 points out :
'The argument in support of its inclusion can only be well founded if the sum be regarded as profits as profits, or a sum in the nature of profits, earned in the course of their trade or business. I am quite unable to see that the sum represents any thing of the kind. It is said, and it is not disputed, that the amount in fact was assessed by considering that the fireclay to which it related could only be worked for some two and a half years before it would be exhausted, and it is consequently urged that the amount therefore represents nothing but the actual profit for two and a half years received in one lump sum. I regard that argument as fallacious. In truth the sum of money is the sum paid to prevent the fireclay company obtaining the full benefit of the capital value of that part of the mines which they are prevented from working by the railway company. It appears to me to make no difference whether it be regarded as sale of the asset out and out, or whether it be treated merely as a means of preventing the acquisition of profits that would otherwise be gained. In either case the capital asset of the company to that extent has been sterilised and destroyed, and it is in respect of that action that the sum paid.'
31. Now, it would be noted that in this case this fireclay represented only a part of the assets of the assessee company. The assessee company was carrying on the business with regard to the other fireclay and it was in respect of only a part of the capital asset that compensation was paid and yet the House of Lords held that to the extent that a part of the capital asset was sterilised the compensation was capital and not income. At page 464 Lord Buckmaster says what has been often quoted that there is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the application of that test because it was calculating the profits of the assessee company. Therefore what one has to look at is the quality of the amount which is sought to be brought to tax. The mere fact that amount has been arrived at by computing the profits which are lost to the assessee or which the assessee would have entered if its capital asset had not been sterilised or destroyed has no bearing whatever upon the quality of the amount actually paid.
32. Then there are two cases, one dealing with copyright reported in Withers (Inspector of Taxes) v. Nethersole and the other reported in Margerison (H. M. Inspector of Taxes) v. Tyresoles Ltd. Now in both these cases only a part of the capital asset was assigned and the payment was made in respect of that part of the capital asset, and in both the cases the English Courts held that what was received in respect of the part of the capital asset was capital and not income. In Withers (Inspector of Taxes) v. Nethersole there was a partial assignment of a copy right and in Margerison (H. M. Inspector of Taxes) v. Tyresoles Ltd. the assessee company had parted with its freedom of action, its rights arising under its ownership of the patented process, for a certain limited period, for a certain limited area, and for a certain limited type of customer, and at page 68 Mr. Wrottesley says this :
'I find some difficulty in saying that there is not here material upon which the Commissioners could find that the company had sole part of its capital resources. It is not, in principle, unlike the case of a concern owning and trading by means of multiple shops, which sold one of them lock, stock and barrel including the goodwill. It is certainly not unlike the case of a grocer who for a money payment from a rival gives up trading in a given area, for a given period, or for good.'
33. So that this decision clearly lays down that if an assessee sells part of its capital resources and not necessarily the whole of it, the amount received by the sale of a part is capital receipt and not income receipt. Now, this is exactly what the assessee has done in this case. It is not exactly a case of sale, but it is a case of surrender of a part of its capital resources, the consisting of the managing agency muccadumage, brokerage business and the selling agency business. The mere fact that the assessee company still retains the other two capital resources cannot possibly lead to the inference that the amount received by the assessee company for the surrender of this part of capital resources is income receipt.
34. The third case is a case decided by us and reported in Commissioner of Income-Tax/Excess Profits Tax, Bombay City v. Shamsher Printing Press Bombay. That was a case of compensation for injury to a capital asset, and the injury was that the assessee was deprived of its place of business and had to shift to some other premised to carry on the business and under the Defence of India Rules Government paid compensation to the assessee for injury to its business, and the question was whether this compensation was income or capital, and we held that it was capital because it was referable to a capital asset and it was paid for injury to a capital asset. At page 367 we point out that :
'The department has attempted to tax this amount of compensation as income falling under section 10 of the Income-tax Act, and we have to be satisfied that the tax is payable in respect of the profits or gains of any business carried on by the assessee. Can it possibly be said that when damages are awarded to the assessee for his business or his earnings being injuriously affected by reason of the Government taking possession of his property, the compensation that he receives is in respect of his profits or gains of his business This compensation is certainly not received in the course of the business of the assessee.'
35. These observations would also apply to the facts of this case because the sum of Rs. 25,00,000 has not been received by the assessee in the course of its business not does it represent the profits or gains of any business carried on by the assessee.
36. Therefore, in our opinion, inasmuch as the sum of Rs. 25,00,000 was received by the assessee company in consideration of the termination of its managing agency, it was a solatium for the cessation of one of the several activities which the assessee company was entitled to carry on under the agreement, and if it was a solatium then it cannot be looked upon as income but must be looked upon as representing the capital asset which had ceased to exist. Therefore that question must be answered in favor of the assessee.
37. With regard to the next question, we have held in Provident Investment Co. Ltd. v. Commissioner of Income-tax, Bombay City, that section 12-B only applies to a case of sale, exchange or transfer. In that case we were dealing with the case of extinguishment of a right and we held the amount received as consideration for the extinguishment of the right did not fall within the ambit of section 12-B(1) and the amount received could not be taxed as a capital gain. Now, the position here is identical and Mr. Joshi does not dispute it though he disputes the correctness of our decision. The case which we are dealing with is certainly not a case of sale, exchange or transfer. It is a case of a surrender by an assessee and the position must be the same as the position in Provident Investment Co. Ltd. v. Commissioner of Income-tax. Mr. Joshi wanted us to decide that the view taken by the Tribunal that no capital gain was made in the year of account is not sound. The argument of Mr. Joshi is that the managing agents ceased to act as managing agents and the directors took over the management from the 1st of April, 1946, Mr. Joshi says that the date of payment of compensation which is the 26th of March, 1946, is irrelevant for the purpose of considering when the amount received is liable to tax under section 12-B. In our opinion, it is unnecessary to consider or decide that aspect of the matter. If our view is that the case does not fall under section 12-B at all, it is not necessary to consider what would have been the proper date for considering when the profits arose if the amount had been a capital gain. It is further necessary to decide that question because the question that has been submitted to us is a general question whether the income is assessable under the head 'capital gains' under section 12-B of the Act and our view clearly is that the income is not so assessable.
38. We would, therefore, answer question No. 1 'It is capital receipt' and question No. 2 in the negative. The Commissioner to pay costs.
39. Reference answered accordingly.