1. The following question has been referred to us by the Income-tax Appellate Tribunal, Madras Bench :
'Whether on the facts and in the circumstances of the case the sum of Rs. 40, 000 received from M/s. Chisty & Co., under the compromise deed dated 22nd December, 1943, is assessable to tax ?'
2. The facts which led to the reference being made by the Appellate Tribunal may be briefly stated :
The assessee in this case is a business man carrying on business in the manufacture and sale of oil expellers and was the sole distributor for a certain type of oil expeller manufactured by Chisty & Co., Lahore, for the whole of India. By an agreement dated 15th February, 1938, the assessee was appointed as the sole distributor. Under the terms of the agreement, the principals were not to deal directly or indirectly with any party. The agent agreed to purchase four expellers every month. Under the terms of the agreement this agency was to be in force for a period of six years certain, and the same was to continue automatically unless six months' notice was given for termination by either party.
3. According to the assessee, the principals at Lahore stopped supplying the expellers as contracted, because they had started the manufacture of armaments when the war broke out. The assessee, therefore, filed a suit being O. S. No. 125 of 1943 before the District Munsif, Bezwada, alleging that the principals failed to supply expellers and spares according to his requirements and that the expellers and spares manufactured by them were being sold outside the territory of the assessee. In consequence of this, the assessee stated that he could not keep up his business engagements with his constituents in the matter of the supply of expellers. The result was that he was put to heavy loss and inconvenience. He also claimed proprietary rights in a particular type of expeller 'Diamond'. He prayed that an injunction be issued restraining the merchants at Lahore from selling or otherwise disposing of any of the expellers with or without the trade name 'Diamond'. While the assessee filed a suit in Bezwada, as a counter blast to this the firm at Lahore, Chisty & Co., filed a suit in Lahore claiming the termination of the agency and for permanent injunction restraining the assessee firm from manufacturing expellers under the trade name 'Diamond.' Both these suits were compromised on 22nd December, 1943.The terms of the compromise are important for the purpose of the decision of the matter now before us. Under the terms of the compromise (a) both the parties were to withdraw the pending suits; (b) the sole distributorship granted to the assessee was to be cancelled, and (c) the respective parties were to continue to manufacture their own expellers, the firm at Lahore calling its expellers as 'Chisty Diamond' and the firm at Bezwada 'Andhra Diamond', and neither of the parties was permitted to imitate the patent of the other. Above all, the most important clause was that the Lahore merchant was to give four expellers, two 'N. S. Sholer type' and two 'Standard type', free of price (but without any ball bearing) by 25th January, 1944, and if he failed to do so, the assessee was entitled to claim compensation of Rs. 12, 000 for each expeller.
4. As per the last condition of the compromise the Lahore firm supplied four expellers in January, 1944, and their cost price was fixed at Rs. 40, 000. It is this amount in respect of which the assessee claims exemption from tax, as representing capital receipt.
5. The Income-tax Officer before whom exemption was claimed held that the four expellers that were given to the assessee were given to him in order that he might make good the loss of profits in consequence of the failure of the Lahore firm to implement the terms of the agreement of 15th February, 1938. Coming to that conclusion he held that the sum of Rs. 40, 000 represented a trading receipt. On appeal, the Appellate Assistant Commissioner concurred with the Income-tax Officer and confirmed the assessment and dismissed the appeal. In his view also the expellers were given free of cost to make good the loss of profits sustained by the assessee on account of the failure of M/s. Chisty & Co. to conform to the terms of the agreement. The matter was taken up in further appeal before the Income-tax Appellate Tribunal, and the Appellate Tribunal, while modifying the order of the Appellate Assistant Commissioner in other respects, held with regard to the sum of Rs. 40, 000 received by the assessee that the sum did not represent the compensation for terminating the business, but in a sense the receipt of the expellers was 'the receipt of stock-in-trade for the injury inflicted on him in the trade carried on in that line of business.' The Tribunal, therefore, treated it as a revenue receipt liable to tax. Learned counsel appearing for the assessee contended that by no stretch of imagination could this sum be regarded as revenue receipt, for under the terms of the agreement and the circumstances that have been set out already the amount was given to the assessee as compensation for the termination of the sole agency which was to last for some time. According to him the case fell directly under the decision of the Privy in Commissioner of Income-tax v. Shaw Wallace and Company. Counsel for the Department argued that the amount received was for loss of profit and further this amount was invested in another partnership concern which the assessee was running along with others and therefore the amount should be treated as one received in lieu of profit in the regular carrying on of the business. Reliance was sought to be placed on the case of Commissioners of Inland Revenue v. Fleming and Company.
5. The question as to whether a particular amount received by an assessee should be treated as a capital receipt or a revenue receipt has been a vested question and it is now agreed that the line which separates the two classes of cases is very thin and the determination of the question depends upon the facts and circumstances of each case. Learned counsel for the assessee invited our attention to the relevant decisions on this point and contended that from the uncontroverted facts the court can only come to the conclusion that it is a capital receipt and not a revenue receipt. As has been stated above, the assessee was the sole distributor of oil expellers from Chisty & Sons, Lahore, and he held exclusive agency for those types of expellers. This agency he got under an agreement of 15th February, 1938, and under the terms of the agreement he was prohibited from purchasing or selling expellers from any other Indian or foreign firm. This agreement was to be in force for six years and there was a further stipulation to say that it would continue automatically after that period unless six months' notice was given by either party. As pointed above, this agency came to be terminated in consequence of suits and counter suits between the parties and their having finally settled their disputes and come to arrangement. It was in pursuance of this arrangement that the assessee got the sum of Rs. 40, 000 which is sought to be taxed. It may also be mentioned here that after the termination of the agency he entered into a partnership and the partnership firm began manufacturing expellers from November, 1943, admittedly after the agency with the Lahore firm had terminated. These facts have a clear bearing upon the question to be decided by us. It would be useful to refer to the various decisions of the House of Lords, the Privy Council and the Supreme Court in order to know what tests have been laid in those decisions for arriving at a conclusion as to whether a particular amount should be treated as capital receipt or revenue receipt.
6. The first case which is often cited at the bar is the case of Glenboig Union Fire Clay Co., Ltd. v. Commissioners of Inland Revenue. In this case the fire clay company was carrying on business as manufacturers of fire clay goods and as they were excavating, they happened to approach a line of the Caledonian Railway and this company gave notice to the railway company of their intended extension of their working of the mines. There were disputes between the company and the railway, the one trying to stop the other from excavating, the other trying to carry on the mining operations, and finally arbitration proceedings ensued and a sum of Pounds 15, 316 was fixed as the amount payable by the railway to the company to prevent the further working by the company of the mines. The question was as to whether this amount received by the company should be treated as a capital receipt or revenue receipt. Lord Buckmaster observed that the amount was paid to prevent the fire clay company obtaining the full benefit of the capital value of that part of the mine which they are prevented from working by the railway company. He further observed : 'The capital asset of the company to that extent had been sterilised and destroyed.' Under those circumstances it was held that it should be treated as a capital receipt alone.
7. The next case which might be referred to in this connection is the case of Kelsall Parsons and Co. v. Commissioners of Inland Revenue. In this case the assessee commenced business as manufacturers, agents and engineers and acted as agents for various manufacturers on a commission basis of such manufacturers' produce. One of such manufacturers was George Ellison Ltd. of Birmingham. It would appear that during the subsistence of this agency George Ellison Ltd. requested that the agency agreement should be terminated and finally it was agreed that the agency should be terminated on certain conditions. As compensation for terminating the agreement, a sum of Pounds 1, 500 was paid. This sum the revenue authorities regarded as being liable to tax. On appeal the General Commissioners decided that the said amount should be included in the calculation of the taxable profits for the year in which it was received. It was held on further appeal that the decision of the General Commissioners was correct. While so holding the Lord President observed as follows :
'The appellants' business is entirely different from the business carried on by some one, who under contract, acts exclusively as agent for a single principal.'
8. It was also observed that the assessee in that case was not parting with something which could be described as an enduring asset. In any event the contract would have been terminated on the 30th of September, 1935, and upon the arrangement come to with George Ellison Ltd., the contract of agency was terminated just a year prior to the date on which it would have ordinarily terminated. In the result it was held that the sum paid should be regarded only as a surrogatum for one year's profits. This case was decided in 1938.
9. Yet another case of the House of Lords is the case of Commissioners of Inland Revenue v. Fleming & Co. The admitted or proved facts were that the company was carrying on business of agents and merchants engaging in the sale of machinery, explosives etc. It held the sole agency for Scotland for explosives from the Imperial Chemical Industries Ltd. The agency came to an end in 1948 and the terms of the termination of the agreement were incorporated in an agreement between the company and the Imperial Chemical Industries. Under this document, the agency was terminated as from 31st May, 1948, and the company received a lump sum of Pounds 5, 320 as compensation for the loss of the agency. The question of law posed for the opinion of the court was whether on the facts stated the sum of Pounds 5, 320 received by the company from the Imperial Chemical Industries could be treated as part of the company's taxable profits. After considering the respective contentions advanced on behalf of the assessee and the Inland Revenue Commissioners, the law Lords held that the aforesaid sum should be regarded as compensation for loss of profits and could not be treated as compensation for loss of profit earning asset. In so doing they took into consideration the following circumstances. The company's main business consisted in acquiring agencies which at one time was 10 and by reason of the cancellation of the agency their agencies were reduced to 7. It was observed that the diminution or the increase in the number of agencies should be regarded as a normal feature in the business of a concern whose business consisted mainly in the acquiring of agencies. It was also held that the loss of this agency involved no apparent disorganisation or disruption of the structure of the company's business. In so far as Indian cases are concerned, the leading case is the case of Commissioner of Income-tax v. Shaw Wallace & Co. The respondents in this case, viz., the company, were carrying on business in Calcutta as agents of various companies having branches in different parts of India. They acted as distributing agents in India of the Burmah Oil Co. and the Anglo-Persian Oil Co. for a number of years prior to 1928. In 1927 the two aforesaid companies decided upon making other arrangements for the distribution of their products and the agency of the Burmah Oil Co. was terminated on 31st December, 1927, and the agency of Anglo-Persian Oil Co. was terminated on 30th June, 1928. The Burmah Oil Co. paid to the respondents a sum of Rs. 12, 00, 000 as full compensation for the cessation of the agency. Likewise the Anglo-Persian Oil Co. paid a sum of Rs. 3, 25, 000 stating that this was being paid as compensation 'for loss of your office as agents to the company'. The Income-tax Officer in computing the assessable income for the relevant year took these amounts into account and treated them as profits or gains of their business and included them in the amount liable to tax. This assessment was confirmed by the Assistant Commissioner. This Commissioner on the request of the assessee drew up a statement of case and referred the question of law to the High Court. The reference was disposed of by a Bench of the Calcutta High Court and the learned Judges came to the conclusion that it partook of the nature of a capital asset and, therefore, was not liable to be taxed. The Commissioner of Income-tax appealed to the Privy Council. Their Lordships of the Privy Council while dismissing the appeal observed as follows :
'But when once it is admitted, that there were sums received, not for carrying on business, but as some sort of Solatium for its compulsory cessation, the answer seems fairly plain............ But it is clear that the sum in 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.' Making the above observation, their Lordships held that the High Court was correct in treating the amount as a capital receipt. It would, therefore, be apparent that the Privy Council drew a clear line of demarcation between the 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. Applying the above test laid down by the Privy Council it could very well be said that in the case now before us the amount of Rs. 40, 000 was paid to the assessee as compensation for the cessation of the agency business which he had with the firm at Lahore.
The matter came to be considered by the Supreme Court in the case of commissioner of Income-tax v. South India Pictures. This was an appeal against the judgment of the Madras High Court. The assessee company in that case was carrying on the business of distribution of films. It acquired the right of distribution in some instances by advancing money to the producers of films. The assessee company received from certain producers of films a sum of Rs. 26, 000 as compensation for the termination of three contracts which the assessee had entered into for distribution of three pictures, for a period of five years. The question raised was, as to whether this amount was taxable and should be treated as revenue receipt. The learned Judges of the High Court, Satyanarayana Rao and Rajagopalan, JJ., held that the sum was not a revenue receipt and, therefore, was not liable to be taxed. The matter went up to the Supreme Court in appeal and their Lordships of the Supreme Court by a majority (S. R. Das, C.J., and Venkatarama Ayyar, J.) allowed the appeal and set aside the judgment of the Madras High Court, while Bhagwati, J., dissented from the majority view. Strong reliance is placed upon this decision by the Income-tax Department as being conclusive in the matter and it is urged that the case before us fell exactly within the above decision. It has to be observed that their Lordships of the Supreme Court treated the receipt of the film distributors as partaking of the nature of a revenue receipt for the following reasons. In the first place they found that the assessee received the amount in return for its ceasing to engage in the business of distributing only the three films. The assessee had arrangements with the proprietors of different cinema halls. Business exigency necessitated the assessee to enter into an arrangement with a particular producer to cancel the agreement. The termination of one agreement with the Jupiter Pictures of Madras in consequence of which the amount was paid, was received only in the ordinary course of business. It did not radically or at all affect or alter the structure of the assessee's business of distribution of films. The assessee did not cease to carry on the business of film distribution, despite the cancellation of the agreement with one of the producers, the Jupiter Pictures Ltd. Their Lordships distinguished the Privy Council case of Commissioner of Income-tax v. Shaw Wallace & Co. on the ground that in that case the business of the distribution of oil which Messrs. Shaw Wallace were doing, was completely closed and compensation was paid to them for the closing of that business altogether.
We do not think that the case now under consideration can be said to be one like the case of the film distributing company. The agency in this case was completely terminated unlike the distributing film case, and this, therefore, comes directly within the case of Shaw Wallace & Co. decided by the Privy Council. Even in the Shaw Wallace case the assessees carried on business as the agents of various companies and yet the compensation paid for the termination of one of the agencies was held to be a capital receipt. Therefore, where the sum received is not for carrying on the business but as a sort of Solatium for compulsory cessation of business, it must be regarded as capital receipt. In the case of Glenboig Union Fire Clay Co. Ltd. v. Commissioners of Inland Revenue, Lord Buckmaster went to the extent of saying that even if the amount of compensation for cessation of business is computed on the basis of the profits which could have been earned by working the fire clay company, it did not make it an income receipt. The tests that have been laid down in the decided cases may be summed up as follows :The amount should have been paid for parting with something which could be described as an enduring asset of the business. The cessation of the business or the cancellation of the agreement should affect the profit-making structure. To quote the words 'it should materially destroy or cripple the structure of the profit-making apparatus.'
10. If there was an agreement ensuring for a period of years and by mutual consent the agreement is cancelled and payment is made, such payment would be regarded as capital payment. The fact that the assessee is carrying on similar other businesses would not alter the character of the receipt. The question to be put is the money received in the course of a going concern. If it is not, it would cease to be a revenue receipt. Further, even if the amount of compensation for the termination of the business is computed on the basis of profits which would have been earned but for the cessation of the business, it would make no difference, it would still be regarded as 'capital receipt'. A sum received for sterilising as it were a capital asset, the consequence of which would be that it becomes unproductive of profit, cannot be regarded as income for purposes of taxation. In Commissioners of Inland Revenue v. Fleming & Co. on which the Income-tax Department has placed much reliance, the main business consisted in acquiring agencies, of which they had acquired 10 and by reason of the cancellation of the one agency, they had still 9. In that case it was held that a diminution or increase in the agencies must be regarded as a normal feature incidental to the business. The further distinguishing feature about that case is that there was not what was called the parting of an enduring asset of business as we find here.
11. For all the above reasons we are of the opinion that this case could not be governed by the decision of the Supreme Court in Commissioner of Income-tax v. South India Pictures Ltd. and we, therefore, answer the question in the negative. The assessee will be entitled to his costs; Advocate's fee Rs. 250.Question answered in the negative.