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Kettlewell Bullen and Co. Vs. Commissioner of Income-tax, Calcutta - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtSupreme Court of India
Decided On
Judge
Reported inAIR1965SC65; [1964]53ITR261(SC); [1964]8SCR93
ActsIndian Companies Act, 1913 - Sections 87-A(2); Indian Companies (Amendment) Act, 1956
AppellantKettlewell Bullen and Co.
RespondentCommissioner of Income-tax, Calcutta
Cases ReferredDeccan v. Vazir Sultan and Sons
Excerpt:
direct taxation - assessment of compensation received - section 87-a (2) of indian companies act, 1913 and indian companies (amendment) act, 1956 - appellant appointed managing agent of another company - due to loss of office in appointing company appellant given compensation - appellant excluded compensation amount in tax assessment - income-tax officer included it - in appeal appellate assistant commissioner modified assessment - appellate tribunal confirmed order of appellate assistant commissioner - observed that compensation was not assessable to income-tax as a revenue receipt - matter referred under section 66 (1) to high court - amount received by assessee to relinquish managing agency was revenue receipt and assessable under the indian income tax act - appeal to supreme court -.....shah, j.1. the appellant is a public limited company, and has its registered officeat calcutta. by an agreement dated may 1, 1925, the fort william jute companyltd. appointed the appellant its managing agent upon certain terms andconditions set out therein. under the agreement the appellant was to receive asmanaging agent remuneration at the rate of the rs. 3,000 per month, commissionat the rate of ten per cent on the profits of the company's working, additionalcommission at three per cent on cost price of all new machinery and storespurchase by the managing agent outside india on account of the company, andinterest on all advances made by the managing agent to the company on thesecurity of the company's stocks, raw materials and manufactured goods. theappellant and its successors in.....
Judgment:

Shah, J.

1. The appellant is a public limited company, and has its registered officeat Calcutta. By an agreement dated May 1, 1925, the Fort William Jute CompanyLtd. appointed the appellant its managing agent upon certain terms andconditions set out therein. Under the agreement the appellant was to receive asmanaging agent remuneration at the rate of the Rs. 3,000 per month, commissionat the rate of ten per cent on the profits of the company's working, additionalcommission at three per cent on cost price of all new machinery and storespurchase by the managing agent outside India on account of the company, andinterest on all advances made by the managing agent to the company on thesecurity of the company's stocks, raw materials and manufactured goods. Theappellant and its successors in business, whether under the same or any otherstyle or firm, unless they resigned their office were entitled to continue asmanaging agent until they ceased to hold shares in the capital of the companyof the aggregate nominal value of Rs. 1,00,000 and were on that account removedby a special resolution of the company passed at an Extraordinary meeting ofthe company, or until the managing agent's tenure was determined by the windingup of the company. In the event of termination of agency in the contingenciesspecified, the managing agent was to receive such reasonable compensation fordeprivation of office, as may be agreed upon between the managing agent and thecompany and in case of dispute, as may be determined by two arbitrators. Byclause 8, the managing agent was at liberty at any time to resign the office ofmanaging agent by leaving at the registered office of the company previousnotice in writing of its intention in that behalf. The agreement did notspecify any period for which the managing agency was to tenure. Since thesuccessors of the appellant were also to continue as agents, unless theyresigned or became disqualified, the duration was in a sense unlimited. But byvirtue of s. 87-A(2) of the Indian Companies Act, 1913, the appointment of theappellant as managing agent would expire on January 14, 1957, i.e. on theexpiry of twenty years from the date on which the Indian Companies (Amendment)Act, 1956, was brought into operation. Section 87-A(2), however, did notprevent the managing agent from being re-appointed after the expiry of thatperiod.

2. Besides the managing agency of the Fort William Jute Co. Ltd. theappellant held at all material time managing agencies of five other limitedcompanies, viz., Fort Closter Jute ., Bowreach CottonMills Co. Ltd., Dunbar Mills Ltd., Mothola Co. Ltd and Joonktollee Tea Co. Ltd.The appellant had advanced Rs. 12,50,000 to the Fort William Jute Co. Ltd. onthe security of the stocks, raw materials and manufactured goods of thatcompany. The appellant held in 1952, 600 out of 14,000 ordinary shares of theface value of Rs. 100 each, and 6,920 out of 10,000 preference shares also ofthe face value of Rs. 100 each. On May 21, 1952, the appellant entered into anagreement with M/s Mugneeram Bangur and Co., the principal conditions of whichwere :

(i) M/s Mugneeram Bangur and Co.to purchase the entire holding of shares of the appellant in the Fort WilliamJute Co. Ltd - ordinary shares at Rs. 400 each and preference shares at Rs. 185each, and to make an offer to all holders of the company's shares - preferenceand ordinary - to purchase their holdings at the same rates;

(ii) M/s Mugneeram Bangur and Co.to procure repayment on or before June 30, 1952, of all loans made by theappellant to the principal company;

(iii) M/s Mugneeram Bangur andCo. to procure that the principal company will compensate the appellant forloss of office in the sum of Rs. 3,50,000, such sum being payable to theappellant after it submitted its resignation as managing agent; and

(iv) M/s Mugneeram Bangur and Co.to reimburse the company the amount payable to the appellant.

3. The reasons for which the appellant agreed to relinquish the managingagency were set out in a letter dated May 28, 1952, addressed by the appellantto the members of the company intimating that M/s Mugneeram Bangur and Co. werewilling to purchase the shares at the same rates at which they had agreed topurchase the share-holding of the appellant. It was recited in the letter thatthe installation of modern machinery in the company's factory entailed heavycapital expenditure and it was necessary to obtain a loan secured by debenturescharged on the company's property; that large sums were required for renewalsand replacements of machinery and it was not possible to obtain additional bankaccommodation; that the appellant had made large advances to the companyexceeding Rs. 12,50,000 and, having regard to its other commitments, it wasdoubtful if it would be able to make available to the company additionalfinance; that the arrangement with M/s Mugneeram Bangur and Co., by acceptanceof the terms offered by them, was the most satisfactory method of solving thecompany's difficulties; that it was in the best interests of the shareholdersto terminate the appointment of the appellant which in the normal course wouldnot fall due for renewal until January 14, 1957; that M/s Mugneeram Bangur andCo. had agreed to procure that the Fort William Jute Co. Ltd. will pay to theappellant Rs. 3,50,000 and that M/s Mugneeram Bangur and Co. will reimburse thecompany for the payment, it being anticipated that they will in due course beappointed managing agents of the company.

4. The arrangement with M/s Mugneeram Bangur and Co. was carried out. Theappellant tendered its resignation with effect from July 1, 1952, in pursuanceof the terms of the agreement and M/s Mugneeram Bangur and Co. were appointedas managing agent of the company. The sum of Rs. 3,50,000 received by theappellant from the company - which it is common ground was provided by M/sMugneeram Bangur and Co. - was credited in the profit and loss account of theappellant as received from the Fort William Jute Co. Ltd. on account ofcompensation for loss of office. But in arriving at the net profit in thereturn for income-tax for the year 1953-54 this amount was deleted. In theproceedings for assessment for the year 1953-54 the Income-tax Officer,Companies District IV, Calcutta, included this amount in the appellant'staxable income. In appeal the Appellate Assistant Commissioner modified theassessment holding that the sum of Rs. 3,50,000 received by the appellant ascompensation for surrendering the managing agency, which was to tenure for fiveyears more, and which in normal course might have continued for another term oftwenty years, was a capital receipt. The Appellate Tribunal confirmed the orderof the Appellate Assistant Commissioner, observing that compensation receivedunder an agreement for 'an outright sale of such an agency to a thirdparty', not being one which a businessman enters in the normal course ofbusiness, nor being one which amounts to modification, alteration or dischargeof normal incidents of such a business, was not assessable to income-tax as arevenue receipt.

5. At the instance of the Commissioner of Income-tax, the Tribunal referredunder s. 66(1) of the Income-tax Act, 1922, the following question to the HighCourt of Judicature at Calcutta :

'Whether on the facts and in the circumstances ofthe case of the case the sum of Rs. 3,50,000 received by the assessee torelinquish the managing agency was revenue receipt assessable under the IndianIncome-tax Act ?'

6. The High Court, for reasons which we will presently set out, answered thequestion in the affirmative. With certificate granted by the High Court, thisappeal is preferred by the appellant.

7. This case raises once again the question whether compensation received byan agent for premature determination of the contract of agency is a capital ora revenue receipt. The question is not capable of solution by the applicationof any single test : its solution must depend on a correct appraisal in theirtrue perspective of all the relevant facts. As observed in Commissioner ofIncome-tax v. Rai Bahadur Jairam Valji [(1959) Supp. 1 S.C.R. 110, 113.] byVenkatarama Aiyar, J., :

'The question whether a receipt is capital orincome has frequently come up for determination before the courts. Variousrules 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 laydown any single test as infallible or any single criterion as decisive in thedetermination of the question, which must ultimately depend on the facts of theparticular case, and the authorities bearing on the question are valuable onlyas indicating the matters that have to be taken into account in reaching adecision. Vide, Van Den Berghs Ltd. v. Clark (1935) 3 I.T.R. 17.That, however is not to say that the question is one of fact, for as observedin Davies (H.M. Inspector of Taxes v. Shell Company of China Ltd., (1952) 22 I.T.R. (Suppl.) 1 'these questions between capital and income, trading profitor no trading profit, are question which, though they may depend no doubt to avery great extent on the particular facts of each case, do involve a conclusionof law to be drawn from those facts'.'

8. The interrelation of facts which have a bearing of the questionpropounded must therefore first be determined. The managing agency was not,except in the circumstances set out in clause 2 of the agreement, liable to bedetermined at the instance of the company before January 14, 1957, unless theappellant by giving noticed of three weeks voluntarily resigned the agency. Atthe date of termination the agency had five more years to run, and theCompanies Act did not prohibit renewal of the agency in favour of theappellant, after the expiry of the initial period of twenty years. Theappellant company was formed for the object, amongst others (vide clause 3(2)of the Memorandum of Association of the appellant) of carrying on the businessof managing agencies. The appellant was entitled under the terms of theagreement to receive so long as the agency enured ten per cent of the profitsof the company's working, three per cent on all purchases of stores andmachinery abroad, and a monthly remuneration of Rs. 3,000. The appellantsubmitted its resignation in exercise of the power reserved under clause 8 ofthe managing agency agreement, but that resignation was, it is common ground,part of the arrangement with M/s Mugneeram Bangur and Co. dated May 21, 1952.Under the terms of the managing agency agreement, the principal company was notobliged to pay any compensation to the appellant for voluntary resignation ofthe agency, but in consideration of the appellant parting with its shareholdingand submitting resignation of the managing agency so as to facilitate theappointment of M/s Mugneeram Bangur and Co. as managing agent, the latterpurchased the shareholding of the appellant, undertook to make available Rs.3,50,000 for payment to the appellant and to discharge the debt due by thecompany to the appellant. Payment of Rs. 3,50,000 was therefore an integralpart of an arrangement for transfer of the managing agency. A managing agencyof a company is in the nature of a capital asset : that is not denied. It istrue that it is not like an ordinary asset capable of being transferred fromone person to another. Theoretically the power to appoint or dismiss the managingagent may lie with the directors of the company, but in practice the power lieswith the person or persons having a controlling interest in the share-holdingof the company. M/s Mugneeram Bangur and Co. were anxious to be appointedmanaging agents of the principal company; and for that purpose the appellanthad to be persuaded to agree to a premature termination of its agency. This wassecured for a triple consideration; sale of shares held by the appellant at anagreed price, stipulation to discharge the liability of the company to repaythe loans due by the company, and payment of Rs. 3,50,000 as compensation fortermination of the appellant's agency.

9. The High Court summarised the effect of the agreement between theappellant and M/s Mugneeram Bangur and Co. as follows : The sum of Rs. 3,50,000described as compensation for loss of office of the managing agent was part ofthe whole scheme incorporated in the agreement. Each clause of the agreementwas a consideration of the other clauses and payment of compensation for thealleged loss of office did not, being part of the total scheme, stand byitself. Determination of the managing agency of the appellant was notcompulsory cessation of business : it was a voluntary resignation for whichunder the agency agreement the appellant was not entitled to any compensation,but by the device of procuring a purchaser the appellant was doing'business of selling the managing agency and getting a profit and valuefor it which it otherwise could not have got'. The High Court stamped thistransaction with the nature and character of a 'trading or a businessdeal', because in their view the managing agency of a company - aninstitution peculiar to Indian business conditions - which creates a managingagent as an alter ego of the managed company with authority to utilise theexisting structure of the company's organisation to carry on business, earnprofits, and in fact, virtually to trade in every possible sphere open to thecompany, may be regarded as circulating capital, where several managingagencies are conducted by an assessee. Therefore in the view of the High Courtthe compensation received for surrendering the agency was remuneration receivedon account of conducting the business, and was income. The judgment of the HighCourt proceeded substantially upon the following two grounds :

(1) that on the facts of thecase, the managing agency held by the appellant of the Fort William Jute Co.Ltd. was stock-in-trade; and

(2) that the appellant was formedwith the object of acquiring managing agencies, and in fact held managingagencies of as many as six companies. Earning profits by conducting themanagement of companies, being the business of the appellant, compensation receivedas consideration for surrendering the managing agency was a revenue receipt.

10. We are unable to agree with the High Court that the managing agency ofthe Fort William Jute Co. Ltd. was an asset of the character of stock-in-tradeof the company. The appellant was formed with the object, among others, ofacquiring managing agencies of companies and to carry on the business and totake part in the management, supervision or control of the business oroperations of any other company, association, firm or person and to make profitout of it. That only authorised the appellant to acquire as a fixed asset, if amanaging agency may be so described, and to exploit it for the purpose ofprofit. But there is no evidence that the company was formed for the purpose ofacquiring and selling managing agencies and making profit by those transactionsof sale and purchase. A managing agency is not an asset for which there is amarket, for it depends upon the personal qualifications of the agent. Counselappearing on behalf of the Commissioner concedes that the case that themanaging agency was of the nature of stock-in-trade was not set up before theTribunal, and he does not rely upon this part of the reasoning of the HighCourt in support of the plea that the compensation received by the appellant isa revenue receipt. He relies upon the alternative ground, and contends that themanaging agency of the managing agency of the Fort William Jute Co. Ltd. was apart of the frame-work of the business of earning profit by working as managingagent of different companies, and in the normal course, termination ofemployment by the principal companies of the appellant as managing agent beinga normal incident of such business, compensation received by the appellant isnot for loss of capital, but must be regarded as a trading receipt, especiallywhen the termination of the agency does not impair the structure of thebusiness of the appellant.

11. In the present case there is a special circumstance which must first benoticed. In truth the amount of Rs. 3,50,000 was received by the appellant fromM/s Mugneeram Bangur and Co. in consideration of the former agreeing to foregothe agency which it held and which M/s Mugneeram Bangur and Co. were anxious toobtain. It was in a business sense a sale of such rights as the appellantpossessed in the agency to M/s Mugneeram Bangur and Co. This is supported bythe recitals made in clause 2 of the agreement that if at any time within sixmonths after the completion of such sale M/s Mugneeram Bangur & Co. wereunable to exercise the voting rights attached to the shares purchase by them,the appellant will appoint any person nominated by M/s Mugneeram Bangur and Co.to attend and vote for them at any meeting of the company or the holders of anyclass of shares to be held within such period in such manner as M/s MugneeramBangur and Co. may decide. The object underlying the agreement was therefore totransfer the managing agency to M/s Mugneeram Bangur and Co. or at least toeffectuate their appointment in place of the appellant as managing agent of theFort William Jute Co. Ltd. All the stipulations and the covenants of theagreement, viewed in the light of the surrounding circumstances, do stamp thetransaction as one of surrender of the rights of the appellant in the managingagency so that corresponding rights may arise in favour of M/s Mugneeram Bangurand Co. It would be irrelevant in considering the true nature of thetransaction, to project the somewhat legalistic consideration that a managingagency is not transferable. It is because it is not directly transferable, thatthe arrangement incorporated in the agreement was effected. It would bedifficult to regard such a transaction relating to a managing agency as atrading transaction.

12. Counsel for the assessee contended that even assuming that the form ofthe transaction under which for loss of the managing agency the appellantreceived compensation from the principal company is decisive, or has even adominant impact, and the ultimate source from which the compensation wasprovided is to be ignored, the compensation received for loss of agency by theagent must always be regarded under the Indian Income-tax Act as capitalreceipt. In support of that contention counsel placed strong reliance upon thejudgment of the Judicial Committee in Commissioner of Income-tax v. ShawWallace and Co L.R. 59 I.A. 206. In the alternative, counsel pleaded thateven if the extreme proposition was not found acceptable, the right of theassessee in the managing agency of the principal company was to tenure foranother five years and which in the normal course would have continued foranother twenty years was an enduring asset and consideration received by theappellant for extinction of that asset was a capital receipt.

13. On behalf of the Income-tax Department it was contended that ShawWallace and Co's case L.R. 59 I.A. 206 does not lay down any proposition ofgeneral application to compensation paid for determination of all agencycontracts. It was further submitted that, having regard to the nature of theagreement and the voluntary resignation submitted by the assessee, no enduringasset remained vested in the assessee, and none was attempted to be transferred: the compensation directly paid by the principal company (which compensationwas under the terms of the contract not payable) was only a 'measure ofprofit' which the appellant would, but for the resignation, have earned,and was therefore in the nature of revenue. It was also urged that compensationwas not payable to the assessee when resignation of the managing agency wastendered under clause 8 of the agreement, and therefore the amount sought to bebrought to tax was received by the assessee in the course of a normal tradingtransaction of the assessee. Finally, it was urged that, in any, event, by theloss of the agency the framework of the business of the assessee was not at allimpaired, and therefore also the compensation received must be regarded asrevenue and not capital.

14. Whether a particular receipt is capital or income from business, hasfrequently engaged the attention of the courts. It may be broadly stated thatwhat is received for loss of capital is a capital receipt : what is received asprofit in a trading transaction is taxable income. But the difficulty arises inascertaining whether what is received in a given case is compensation for lossof a source of income, or profit in a trading transaction. Cases on theborderline give rise to vexing problems. The Act contains no real definition ofincome; indeed it is a term not capable of a definition in terms of a generalformula. Section 2(6C) catalogues broadly certain categories of receipts whichare included in income. It need hardly be said that the form in which the transactionwhich gives rise to income is clothed and the name which is given to it areirrelevant in assessing the exigibility of receipt arising from a transactionto tax. It is again not predicated that the income must necessarily have arecurrent quality. We are not called upon to enter upon to enter upon anextensive area of enquiry as to what receipts may be regarded as incomegenerally, but merely to consider in this case whether receipt of compensationfor surrendering the managing agency may be regarded as capital or as revenue.In the absence of a statutory rule, payment made by an employer considerationof the employee releasing him from his obligations under a service or agencyagreement or a payment made voluntarily as compensation for determination ofright to office arises not out of employment, but from cessation of employmentand may not generally constitute income chargeable under ss. 10 and 12. It maybe mentioned that this rule has been altered by the Legislature by theenactment of s. 10(5A) by the Finance Act of 1955, which provides thatcompensation or other payment due to or received by a managing agent of anIndian company at or in connection with the termination or modification of hismanaging agency agreement with the company, or by a manager if an Indiancompany at or in connection with the termination of his office or modificationof the terms and conditions relating thereto, or by any person managing thewhole or substantially the whole affairs of any other company in the taxableterritories at or in connection with the termination of his office or themodification of the terms and conditions relating thereto, or by any personholding an agency in the taxable territories for any part of the activitiesrelating to the business of any other person, at or in connection with thetermination of his agency or the modification of the terms and conditionsrelating thereto, shall be deemed to be profits and gains of a business carriedon by the managing agent, manager or other person, as the case may be, andshall be liable to tax accordingly. But this amendment was made under theFinance Act, 1955, with effect from April 1, 1955, and has no application tothe present case.

15. The Indian Income-tax Act is not in pari materia with the English Income-taxStatutes. But the authorities under the English law which deal not with ininterpretation of any specific provision, but on the concept of income, may notbe regarded as proceeding upon any special principles peculiar to the EnglishActs so as to render them inapplicable in considering problems arising underthe Indian Income-tax Act. It is well-settled in England that money paid tocompensate for loss caused to an assessee's trade is normally regarded asincome. In Short Bros. Ltd. v. The Commissioners of Inland Revenue 12 T.C. 955 a sum received as compensation for loss resulting from cancellation of acontract was held to be revenue in the ordinary course of the assessee's trade,and liable to excess profits duty. Similarly in The Commissioners of InlandRevenue v. North fleet Coal and Ballast Co. Ltd. 12 T.C. 1102, compensationpaid by a person, who had agreed to purchase a certain quantity of chalk yearlyfor ten years, from a company, which was the owner of a quarry, inconsideration of being relieved of his liability under the contract was heldchargeable to excess profits duty as trading profit in the hands of thecompany.

16. In The Commissioners of Inland Revenue v. Newcastle Breweries Ltd. 12 T.C. 927 compensation received under an order of the War Compensation Court,under the Indemnity Act, 1920, in addition to what was paid by the Admiraltyfor rum taken over in exercise of the power under the Defence of the RealmRegulations was held to be revenue.

17. In Ensign Shipping Co. Ltd. v. The Commissioner of Inland Revenue 12 T.C. 1169. an amount paid by the Government to a ship-owner to compensate himfor loss resulting from detention of his ships during a coal-strike, and forwages etc. was held liable to excess profits duty. Again as held in Burma SteamShip Co. Ltd. v. Commissioners of Inland Revenue 16 T.C. 67 money receivedby a ship-owner from a firm of ship-builders to compensate for loss resultingfrom the failure by the latter to complete repairs to a ship within the stipulatedperiod was regarded as revenue.

18. These cases illustrate the principle that compensation for injury totrading operations, arising from breach of contract or in consequence ofexercise of sovereign rights, is revenue. These cases must, however, be distinguishedfrom another class of cases where compensation is paid as a solatium for lossof office. Such compensation may be regarded as capital or revenue : it wouldbe regarded as capital, if it is for loss of an asset of enduring value to theassessee, but not where payment is received in settlement of loss in a tradingtransaction.

19. In Chibbet v. Joseph Robinson and Sons 9 T.C. 48 the assessees, whowere ship-managers employed by a steamship company under a contract whichprovided that they should be paid a percentage of the company's income, werepaid compensation for loss of office in anticipation of liquidation of thesteamship company. It was held that payment to make up for loss resulting fromcessation of profits from employment was not itself and annual profit, but waspayment in respect of termination of employment and was not assessable to tax.

20. In Du Cros v. Ryall 19 T.C. 444 the assessee settled a claim made byhis employee for damages for wrongful dismissal and paid pounds 57,250 ascompensation for wrongful dismissal. It was held that no part could beapportioned to salary and commission and the whole escaped assessment.

21. In Duff v. Barlow 23 T.C. 633 the managing director of the appellantcompany who was employed for a period of ten years was asked by it to managethe business of one of its subsidiaries, and to receive a percentage of profitsmade by the subsidiary. The employment was terminated by mutual agreement twoyears after its commencement and pounds 4,000 were paid as compensation to themanaging director for loss of his rights of future remuneration. This was heldnot taxable, because it was a sum paid as compensation for loss of a source ofincome and hence a capital asset. This case was followed in Henley v. Murray31 T.C. 351 where the appellant employed as a managing director of a propertycompany under a service agreement which was not determinable till March 31,1944, was also appointed a director of a subsidiary company. At the request ofthe Board of directors of the property company the appellant resigned hisoffice in the property company as well as its subsidiary and received from theproperty company an amount equal to the remuneration which he would, under theagreement, have been entitled to, if his appointment had not been determined.It was held by the Court of Appeal that the use of the expression'compensation for loss of office' was not the determining factor whenthe bargain itself stood cancelled, and the sum paid was in consideration oftotal abandonment of all contractual rights which the other party had. Thereceipt was in the circumstances not taxable. The payment was not voluntarilymade; the bargain was that the appellant should resign and in considerationthereof, the company should make the payment.

22. In Barr, Crombie and Co. Ltd. v. Commissioners of Inland Revenue 26 T.C. 406 the appellant company managed the ships of another company under anagreement for a period of fifteen years. The shipping company went intoliquidation and sum exceeding pounds 16,000 was paid to the appellant companyfor the eight years which were still to run to the date of expiry of theagreement. Over a period upwards of sixteen years only two per cent of theappellant company's income was derived from other managements, and on theliquidation of the shipping company the appellant company lost its entirebusiness except for some abnormal and temporary business. It was held by theCourt of Session in Scotland that the sum in question was not a trading receiptof the appellant company. Lord President Normand observed :

'In the present case virtually the whole assets ofthe Appellant Company consisted in this agreement. When the agreement wassurrendered or abandoned practically nothing remained of the Company'sbusiness. It was forced to reduce its staff and to transfer into otherpremises, and it really started a new trading life. Its trading existence aspractised up to that time had ceased with the liquidation of the shippingCompany.'

23. These cases establish the distinction between compensation for loss of atrading contract and solatium for loss of the source of income of the assessee.

24. But payment of compensation for loss of office is not always regarded ascapital receipt. Where compensation is payable under the terms of contract,which is determined, payment is in the nature of revenue and therefore taxable.For instance in Henry v. Foster (1931) 145 I.T.R. 225 it was held that whencompensation stipulated under a contract is paid for loss of office, it istaxable under Sch. 'E', and it was also held in Dale v. De Soissons [1950] 2 All E.R. 460 that compensation paid under an agreement to an Assistant of themanaging director for premature termination of employment was held to beincome. The principle on which these cases proceeded was also applied by theCourt of Session in Scotland in Kessal Parsons and Co. v. Commissioners ofInland Revenue [21 T.C. 608, 620] to a case in which there was no express termfor payment of compensation on termination of employment. The appellants inthat case carried on business as agents on a commission basis for sale inScotland of the products of various manufacturers, and entered into agencyagreements for that purpose. At the instance of the manufacturer concerned, oneof the agreements which was for a period of three years was terminated at theend of the second year in consideration of a payment of pounds 1,500. It washeld by the Court of Session that no capital asset of the assessee wasdepreciated in value, or became of less use for the purpose of the assessee'sbusiness. The sum paid was accordingly included in the calculation of thetaxable profits for the year in which it was received. Lord President NormandObserved.

'We are not embarrassed here by the kind ofdifficulties which arise when, by agreement, a benefit extending over a tractof future years is renounced for a payment made once and for all. The sum paidin this case is really and substantially a surrogatum for one year'sprofits.'

25. The foundation of the distinction made in Kelsall Parsons and Co.'s case[21 T.C. 608, 620] : Henry v. Foster [1931] 145 i.T.R. 225 : and Dale v. DeSoissons [1950] 2 All E.R. 460 is to be found in the observations made byLord Macmillan in Van Den Berchs Ltd. v. Clark [19 T.C. 390, 431]. In that casetwo companies which were manufacturers of margarine and similar productsentered into an agreement with a view to end competition between them and towork in friendly alliance and to share the profits and losses in accordancewith an elaborate scheme. This arrangement was terminated by mutual agreementin consideration of the payment by the Dutch company pounds 450,000 to theappellant company as damages. It was held by the House of Lords that the amountwas received by the appellant as payment for cancellation of the appellantcompany's future rights under the agreements, which constituted a capital assetof the company, and that it was a capital receipt. Lord Macmillan observed.

'Now what were the Appellants giving up They gaveup their whole rights under the agreements for thirteen years ahead. Theseagreements are called in the States Case 'pooling agreements', butthat is a very inadequate description of them, for they did much more thanmerely embody a system of pooling and sharing profits. If the Appellants weremerely receiving in one sum down the aggregate of profits which they wouldotherwise have received over a series of years, the lump sum might be regardedas of the same nature as the ingredients of which it was composed. But even ifa payment is measured by annual receipt, it is not necessarily itself an itemof income.'

26. Cases which have lately arisen before the Courts in the United Kingdomhave elaborated this distinction. In Commissioner of Inland Revenue v. Flemingand Co. [33 T.C. 57], the Court, of Session held, following Kelsall Parsons andCos' case [21 T.C. 608, 620], that compensation paid the assessee who carriedon business as manufacturers' agent and general merchants and had acted as thesole agents since 1903 for certain products of the manufacturers fortermination in 1948 of the agency at the instance of the manufacturers wasregarded as revenue. In the view of Lord President Cooper the cases relating todetermination of agencies, broadly speaking, fell on two sides of the linedrawn in the light of the varying circumstances :

(a) 'the cancellation of acontract which affects the profit-making structure of the recipient ofcompensation and involves the loss of an enduring trading asset;' and

(b) 'the cancellation of acontract which does not affect the recipient's trading structure nor deprivehim of any enduring trading asset, but leaves him free to devote his energiesand organisation released by the cancellation of the contract to replacing thecontract which has been lost by other like contracts',

and held that the case fell within the second class, and not the first.

27. In Wiseburgh v. Domville [36 T.C. 527] the appellant had entered into anagreement in 1942 under which he acted as sole agent for the manufacturer. In1948 when this agreement could have been determined by notice expiring inOctober 1949, the manufacturer dismissed him. The appellant received pounds4,000 as damages for breach of agreement. The appellant had several agenciesfrom time to time as agents and it was one of the incidents of agency businessthat one agency may be stopped and another may come and it being a normalincident of the kind of business that the appellant was doing, that an agencyshould come to an end, compensation paid was regarded as income on theprinciple laid down in Kelsall Parsons and Co.'s case [21 T.C. 608, 620].

28. In another case, which soon followed - Anglo French Exploration Co. Ltd.v. Clayson [36 T.C. 545] - the appellant company carried on business, amongothers, as secretary and agent for a number of other companies. A South AfricanCompany appointed the appellant company as its secretary and agent at aremuneration of pounds 1,500 per annum under a contract terminable at sixmonths' notice. Under an arrangement with the purchaser of the controllinginterest of the shareholders under which the appellant company was to resignits office as secretary and agent of the South African company, an amount ofpounds 20,000 received by the appellant company was held by the Court of Appealin the nature of a trading receipt.

29. In Blackburn v. Close Bros. Ltd. [39 T.C. 164] the respondent companycarried on business of merchant bankers and of a finance and issuing house andderived income in the form of allowances for performing managerial andsecretarial services. Following a dispute with one 'S' for which therespondent company had agreed to provide secretarial services for three yearsat a remuneration of pounds 8,000 per annum, the agreement was terminatedwithin about 2 1/2 months from the date of its commencement. Pounds 15,000received by the respondent company as compensation for termination of theagreement was held to be a trading receipt. Pennycuick J., held that thecontract was one of a number of ordinary commercial contracts for renderingservices by the assessee in the course of carrying on its trade, and thereforethe sum received on the cancellation of the agreement was a receipt of arevenue nature.

30. It is manifest that the principle broadly stated in the earlier cases,that compensation for loss of officer, or agency, must be regarded as a capitalreceipt, has not been approved in later cases. An exception has been engraftedupon that principle that where payment even if received for termination of anagency agreement, the agency is one of many which the assessee holds, and thetermination of the agency does not impair the profit-making structure, but iswithin the framework of the assessee's business, it being a necessary incidentof the business that existing agencies may be terminated and fresh agencies maybe taken, the receipt is revenue and not capital.

31. A case on the other side of the line may be noticed : Sabine v. LookersLtd. [38 T.C. 120]. Under agreements, annually renewed with the manufacturers,the respondent company had acted for many years as their main distributors inthe Manchester area of the manufacturer's products, which it bought for resale.The respondent had sunk considerable sums in fixtures and equipment speciallydesigned for the trade of wholesale dealers and carried a large stock of spareparts mainly for wholesale sale. The whole of the trade of the respondent wasgeared to the display, sale, service and repairs of the manufacturer'sproducts. Upto 1952 inclusive, the manufacturers had included in its agreementswith distributors a standard 'continuity clause' giving thedistributors, on certain conditions, the option of renewal for a further year.But in 1953, the manufacturers adopted a new standard agreement, containing anew continuity clause which the respondent company regarded as giving it lesssecurity than before. As compensation for loss resulting from the alterations,the manufacturers paid to the respondent company, a sum calculated on sales tothe trade during the contract period. It was held that this was a capitalreceipt, because, by the modification the framework of the respondent'sbusiness was impaired.

32. Elaborate arguments were presented before us on the decision of theJudicial Committee in Shaw Wallace and Co.'s. Case. [L.R. 59 I.A. 206.] Theappellant contended that Shaw Wallace's Case [L.R. 59 I.A. 206.] laid down aprinciple of general application applicable to all cases of compensationreceived from the principal as solatium for determination of the contract ofagency. Counsel for the Revenue contended that the principle should berestricted to its special facts, and cannot be extended in view of the laterdecisions. It is necessary to closely examine the facts which gave rise to thatcase. Shaw Wallace & Company carried on business as merchants and agents ofvarious companies and had branch offices in different parts of India. For anumber of years they acted as distributing agents in India for the Burma OilCompany and the Anglo-Persian Oil Company, but without a formal agreement witheither company. The two Oil Companies having combined decided to make otherarrangements for distributing their products. Each Company terminated itscontract with Shaw Wallace and Company and paid compensation to it, whichaggregated to Rs. 15,25,000. This amount, subject to certain allowances, wassought to be assessed to income-tax under ss. 10 and 12. The High Court ofCalcutta held that the compensation received by the assessee was a capitalreceipt. In appeal to His Majesty in Council the decision of the High Court wasaffirmed.

33. The Judicial Committee declined to seek inspiration from the Englishdecisions cited at the Bar. The Board observed that the expression'income' which is not defined in the Act connotes a periodicalmonetary return coming in with some sort of regularity, or expected regularity,from definite sources : the source is not necessarily one which is expected tobe continuously productive, but it must be one whose object is the productionof a definite return, excluding anything in the nature of a mere windfall. Theyfurther observed that the income chargeable under head (iv) of s. 6business' read with s. 10 is to be in respect of the profits and gains ofany business carried on by the assessee, and therefore the sums which theIncome-tax Department sought to charge could only be taxable if they were theproduce or the result of carrying on the agencies of the Oil Companies in theyear in which they were received by the assessee. But when once it was admittedthat they were sums received, not for carrying on this business, but as somesort of solatium for its compulsory cessation, the answer seemed fairly plain.The Board observed that if compensation received for sale of the business orits goodwill was capital, the same reasoning ought to apply when the sumreceived was in the nature of a solatium for cessation of a part of thebusiness, and it was a matter of no consequence that the assessee continued topursue its other independent commercial interest, and profits from which weretaxed in the ordinary course, for the sums sought to be taxed had no connectionwith the continuance of the assessee's other business : the profits earned bythe assessee, it was observed, were 'the fruit of a different tree, thecrop of a different field', and if under s. 10 the compensation was not taxable,it was not taxable under s. 12 under the head 'other sources' aswell.

34. The judgment of the Board proceeds upon the ground that compensationreceived not for carrying on the business, but as solatium for its compulsorycessation, would be regarded as capital receipt, and for the application ofthis principle, existence of other independent commercial interests out ofwhich profits were earned by the assessee was irrelevant. Two comments may bemade at this stage. It cannot be said as a general rule, that what isdeterminative of the nature of the receipt is extinction or compulsorycessation of an agency or office. Nor can it be said that compensation receivedfor extinction of an agency may always be equated with price received on saleof goodwill of a business. The test, applicable to contracts for termination ofagencies is : what has the assessee parted with in lieu of money or money'sworth received by him which is sought to be taxed If compensation is paid forcancellation of a contract of agency, which does not affect the tradingstructure of the business of the recipient, or involve loss of an enduringasset, leaving the tax-payer free to carry on his trade released from thecontract which is cancelled, the receipt will be a trading receipt : Where thecancellation of a contract of agency impairs the trading structure, or involvesloss of an enduring asset, the amount paid for compensating the loss iscapital.

35. The view expressed by the Judicial Committee has not met withunqualified approval in later cases, Lord Wright in Raja Bahadur KamakshyaNarain Singh of Ramgarh v. Commissioner of Income-tax, Bihar and Orissa [L.R,70 I.A. 180] observed that it is incorrect to limit the true character ofincome, by such picturesque similies like 'fruit of a different tree, orcrop of a different field'. Again it cannot be said generally thatcompensation for every transfer or determination of a contract of agency iscapital receipt : Kelsall Parsons and Co. v. Commissioner of Inland Revenue [21T.C. 608, 620] : Commissioners of Inland Revenue v. Fleming & Co. [33 T.C.57] : Wiseburgh v. Downville [36 T.C. 527] and Commissioner of Income-tax andExcess Profits Tax, Madras v. South India Pictures Ltd. [29 I.T.R. 910]. Nor isit true to say that where an assessee holds several agency contracts, eachagency contract cannot without more be regarded as independent of the othercontracts, and income received from each contract cannot always be regarded asunrelated to the rest of the business continued by the assessee. The decisionin Shaw Wallace & Co.'s case [L.R. 59 I.A. 206] cannot therefore be read toyield the principle that compensation for loss of an agency may in all cases beregarded as capital receipt. Nor does it lay down that where the assessee has severallines of business each line must in ascertaining the character of compensationfor loss of a line of business be deemed an independent source. This view isexemplied by decisions of this Court and a decision of the Madras High Court.In the South India Pictures Ltd.'s case [29 I.T.R. 910] compensation receivedfor determination of the distribution rights of films was held taxable. Afterthe assessee had exploited partially its right of distribution ofcinematographic films to which it was entitled under the terms of agreementunder which he had advanced money to the producers, the agreements werecancelled and the producers paid an aggregate sum of Rs. 26,000 to the assesseetowards commission. It was held by Das C.J., and Venkatarama Aiyar, J.,(Bhagwati J., dissenting) that the sum paid to the assessee was notcompensation for not carrying on its business, but was a sum paid in theordinary course of business to adjust the relations between the assessee andthe producers, and was taxable. Similarly in Rai Bahadur Jairam Valji's case[1959] Supp. 1 S.C.R. 110 a contract for the supply of limestone and dolomitewas terminated when the purchaser the Bengal Iron Company Ltd. found the ratesuneconomical. A suit was then filed by the respondent for specific performanceof the contract and for an injunction restraining the company from purchasinglimestone and dolomite from any other person. A fresh agreement made betweenthe respondent and the company fell through because of circumstances over whichthe parties to the agreement had no control. The company then agreed to pay Rs.2,50,000 to the respondent as solatium, besides the monthly instalments of Rs.4,000 remaining unpaid under the contract of 1940. The Income-tax Departmentsought to bring to tax the amount of Rs. 2,50,000 and the balance due towardsthe monthly instalments of Rs. 4,000. It was held by this Court that the sum ofRs. 2,50,000 was not paid to the respondent as compensation for expenses laidout for works at the quarry of a capital nature and could not be held to be acapital receipt on that account, the agreements were merely adjustments made inthe ordinary course of business. There was in the view of the Court noprofit-making apparatus set up by the agreement of 1941, apart from the businesswhich was to be carried on under it and there was at no time any agreementwhich operated as a bar to the carrying of the business of the respondent andtherefore the receipt of Rs. 2,50,000 was chargeable to tax. Venkatarama Aiyar,J., observed, in an agency contract the actual business consists of dealingsbetween the principal and his customers, and the work of the agent is only tobring about the business : what he does is not the business itself, butsomething which is intimately and directly linked up with it. The agency may,therefore, be viewed as the apparatus which leads to the business rather thanthe business itself. Considered in this light the agency right can be held tobe of the nature of a capital asset invested in business. But this cannot besaid of a contract entered into in the ordinary course of business. Such acontract is part of the business itself, not some thing outside it, and anyreceipt on account of such a contract can only be a trading receipt. Becausecompensation paid on the cancellation of a trading contract differs incharacter from compensation paid for cancellation of an agency contract, itshould not be understood that the latter is always, and as a matter of law, tobe held to be a capital receipt. An 'agency contract which has thecharacter of a capital asset in the hands of one person may assume thecharacter of a trading receipt asset in the hands of another, as for example,when the agent is found to make a trade of acquiring agencies and dealing withthem.' Therefore, when the question arises whether the payment ofcompensation for termination of an agency is a capital or a revenue receipt, itmust be considered whether the agency was in the nature of a capital asset inthe hands of the agent, or whether it was only part of his stock-in-trade. Thelearned Judge also observed that payments made in settlement of rights under atrading contract are trading receipts and are assessable to revenue, but wherea trader is prevented from doing so by external authority in exercise of aparamount power and is awarded compensation therefor, whether the receipt is acapital receipt or a revenue receipt will depend upon whether it iscompensation for injury inflicted on a capital asset or on stock-in-trade.

36. In Pairce Leslie and Co. Ltd. v. Commissioner of Income-tax, Madras [38I.T.R. 356] the assessee company took up managing agencies of severalplantation companies. The managing agencies were liable to termination, but theassessee was entitled to compensation by the terms of the agreement. TheTalliar Estates Ltd. was one of the companies managed by the assessee. Theagreement was a composite agreement about the managing agency rights andcertain other rights. When the Talliar Estates Ltd. went into liquidation theassessee received Rs. 60,000 by way of compensation for loss of office and thequestion arose whether that amount was income in the hands of the assessee. TheMadras High Court held that the loss of one of several managing agencies hadlittle effect on the structure of the assessee's business even in tea or on itsprofit earning apparatus as a whole and the termination of the agreement withthe Talliar Estates could well be said to have been brought about in theordinary course of business of the assessee and therefore the amount receivedwas a trading receipt.

37. In the South Indian Picture Ltd.'s case [29 I.T.R. 910] : Rai BahadurJairam Valji's case [[1959] Supp. 1 S.C.R. 110] and Peirce Leslia Company'scase [38 I.T.R. 356] it was held that the receipt of compensation for loss ofagency was in the nature of revenue. In the South India Pictures Ltd.'s case[29 I.T.R. 910] the amount received was not compensation for not carrying onits business, but was a sum paid in the ordinary course of business to adjustthe relations between the assessee and the producers; the termination of theagreements did not radically or at all affect or alter the structure of theassessee's business, and the amount received by the assessee was only soreceived towards commission i.e. as compensation for the loss of commissionwhich it would have earned, had the agreements not been terminated. Therefore,the amount was not received by the assessee as the price of any capital assetssold or surrendered or destroyed, but the amount was simply received by theassessee in the course of its doing distributing agency business and thereforeit was an income receipt. In that case the majority of the Court held on threedistinct grounds, viz., (i) that the assessee did not part with any capital asset;(ii) that the amount was received in the course of the distributing agencybusiness which was continued, and (iii) that the termination of the agreementsdid not radically or at all affect or alter the structure of the assessee'sbusiness, that the sum received was revenue. Rai Bahadur Jairam Valji's case[1959] Supp. 1 S.C.R. 110 was one of compensation received for termination ofa trading contract. In Peirce Leslie and Company's case 38 I.T.R. 356 therewas termination of office, but it was held to be brought about in the ordinarycourse of the trading operations of the assessee.

38. On the other side of the line are cases of Commissioner of Income-tax,Hyderabad-Deccan v. Vazir Sultan and Sons [36 I.T.R. 175] and Godrej and Co. v.Commissioner of Income-tax, Bombay City [37 I.T.R. 381]. In Vazir Sultan andSon's case [36 I.T.R. 175] the majority of the Court held that compensationpaid for restricting the area in which a previous agency agreement operated wasa capital receipt, not assessable to income-tax. It was held that the agencyagreements were not entered into by the assessee in the carrying on of theirbusiness, but formed the capital asset of the assessee's business which wasexploited by the assessee by entering into contracts with various customers anddealers in the respective territories; it formed part of the fixed capital ofthe assessee's business and was not circulating capital or stock-in-trade oftheir business and therefore payment made by the company for determination ofthe contract or cancellation of the agreement was a capital receipt in thehands of the assessee.

39. In Godrej and Co.'s case [36 I.T.R. 175] the managing agency agreementin favour of the assessee of a limited company which was originally for aperiod of thirty years and under which the assessee was entitled to acommission at certain rates was modified and remuneration payable to themanaging agents was reduced. As compensation for agreeing to this reduction,the assessee received Rs. 7,50,000 which was sought to be taxed as income inthe hands of the assessee. This Court held, having regard to all the attendingcircumstances, that the amount was paid not to make up the difference betweenthe higher remuneration and the reduced remuneration, but in truth as compensationfor releasing the company from the onerous terms as to remuneration as it wasin terms expressed to be; so far as the assessee firm was concerned it wasreceived as compensation for the deterioration or injury to the managing agencyby reason of the release of its rights to get higher remuneration and,therefore, a capital receipt.

40. On an analysis of these cases which fall on two sides of the dividingline, a satisfactory measure of consistency in principle is disclosed. Where ona consideration of the circumstances, payment is made to compensate a personfor cancellation of a contract which does not affect the trading structure ofhis business, nor deprive him of what in substance is his source of income,termination of the contract being a normal incident of the business, and suchcancellation leaves him free to carry on his trade (freed from the contractterminated) the receipt is revenue : Where by the cancellation of an agency thetrading structure of the assessee is impaired, or such cancellation results inloss of what may be regarded as the source of the assessee's income, thepayment made to compensate for cancellation of the agency agreement is normallya capital receipt.

41. In the present case, on a review of all the circumstances, we have nodoubt that what the assessee was paid was to compensate him for loss of acapital asset. It matters little whether the assessee did continue after thedetermination of its agency with the Fort William Jute Co. Ltd. to conduct theremaining agencies. The transaction was not in the nature of a tradingtransaction, but was one in which the assessee parted with an asset of anenduring value. We are, therefore, unable to agree with the High Court that theamount received by the appellant was in the nature of a revenue receipt.

42. We accordingly record the answer on the question submitted by theTribunal in the negative. The appellant would be entitled to its costs in thisCourt.


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