1. The appellant which is a public limited company incorporated under theIndian Companies Act, 1913, has its registered office at Calcutta, and branchesin Bombay, Madras, New Delhi and Kanpur. The appellant carried on business indiverse lines, which may broadly be classified as (1) buying and selling on itsown account, (2) introducing customers to principals (3) acting as managingagents, (4) acting as shipping agents, (5) acting as purchasing agents, (6)acting as sole importers and distributors on behalf of United Kingdomprincipals having no organisation in India and (7) acting as secretaries.
2. Since January 21, 1886, M/s. Gillanders Arbuthnot & Co.predecessors-in-interest of the appellant were the sole agents and distributorsin India of explosives manufactured by the Imperial Chemical Industries(Export) Ltd. Glasgow, Scotland, hereinafter called 'the principal company'.There was no written agreement between the principal company and M/s GillandersArbuthnot & Co. incorporating the terms of the agency agreement. It ishowever common ground that the agency agreement was terminable at the option ofthe principal company. The appellant was incorporated for taking over thebusiness of M/s Gillanders Arbuthnot & Co. and since it took over thedistributing agency the appellant acted as the sole agent and distributor ofexplosives manufactured by the principal company, but without a writtenagreement.
3. In May 1945 the principal company desired to set up its own organisationfor distributing its products, and intimated the appellant that the agency ofthe appellant may be cancelled after two or three years. By letter dated March,11, 1947, the principal company informed the appellant that the agency willstand terminated from April 1, 1948, and that it desired to compensate theappellant for termination of the agency on the following basis :
(1) 'For the first threepost-transfer years' the principal company shall pay to the appellanttwo-fifths of the commission accrued on actual sales in the territory of thelatter's agency taken over the principal company, such commission to becomputed at the commission rates formerly paid to the appellant;
(2) That 'in the thirdpost-transfer year', the principal company shall pay the appellant inaddition a sum equivalent to full commission on the sales for that yeareffected by the principal company in the appellant's territory calculated atthe same rates.
(3) That payments would be madeto the appellant after the end of each year as soon as the amount due wasascertained.
4. Certain other matters in the letter which have a bearing on the dispute,may be reproduced :
'For the purpose ofcalculating the commission due to you, the post-transfer will be deemed to runas from the date of the transfer of your agency to Imperial Chemical Industries(India) Ltd., We trust that you will find these proposals acceptable.
As a condition of our paying youcompensation on the basis outlined above, we would request you to be goodenough to give us a formal undertaking to refrain from selling or accepting anyagency for explosives or other commodities competitive with those covered bythe agency agreement now being terminated.
In this connection, we are askingour Legal Department to prepare a formal agreement which we will submit to youfor signature as soon as possible.'
5. It is common ground that no formal agreement in writing, which wascontemplated to be taken from the appellant, was executed : not even a draft ofthe agreement was submitted by the principal company to the appellant.
6. Pursuant to conditions (1) and (2) incorporated in the letter dated March11, 1947, which have been set out earlier, the appellant received the followingamounts from the principal company.
For the previous year corresponding to the
assessment year ending 31st March, 1949. ...Rs. 1,53,471/11/-
For the previous year corresponding to the
assessment year ending 31st March, 1950. ...Rs. 1,59,271/4/-
For the previous year corresponding to the
assessment year ending 31st March, 1951 ...Rs. 6,20,131/2/-
7. These amounts were included in its profit & loss account by theappellant as commission received by it. But in the course of the proceedingsfor assessment to income-tax and Business Profits Tax, the appellant claimedthat the amounts were compensation received on determination of the agencybeing receipts of a capital nature and were not liable to be included in thetotal income of the appellant. the Income-tax Officer, Companies District IV,Calcutta, rejected the contention of the appellant, holding that cancellationof a single contract of agency out of a number of selling agencies held by theappellant was in the ordinary course of business and the sums received by theappellant as compensation for cancellation were revenue, taxable under theIndian Income-tax Act, 1922. The Income-tax Officer also assessed the relevantamount of compensation to Business Profits tax for the chargeable accountingperiod ending March 31, 1949.
8. In appeal to the Appellate Assistant Commissioner, the contention of theappellant was accepted principally on the ground that the amounts received bythe appellant were compensation for termination of the agency with theprincipal company and as consideration for agreeing to refrain from carrying onin future competitive business in explosives. The Appellate Tribunal held thatthe compensation received by the appellant was merely incidental to thecarrying on of the business. The Tribunal negatived the contention of theappellant that the explosives agency was a separate business or thattermination of that business amounted to loss of an enduring asset. TheTribunal also held that the covenant referred to in the letter dated March, 11,1947, about the appellant agreeing to refrain from carrying on a competitivebusiness in explosives did not form consideration for the amount paid, becausealthough proposed in the letter dated March 11, 1947, there was no formalacceptance of the offer or an undertaking in writing given by the appellantagreeing not to carry on a competitive business. In the view of the Tribunalthe offer relating to the undertaking not to carry on a competitive businesscontained in the letter was not accepted, and the amounts paid by the principalcompany could not therefore be regarded as forming consideration partially orwholly for acceptance of that offer.
9. The Tribunal thereafter referred three questions under s. 66(1) of theIndian Income-tax Act, 1922 to the High Court of Judicature at Calcutta. Thesequestions were :
(1) Whether the assessee's agencyof the Imperial Chemical Industries (Export) Ltd. was a separate business byitself, the closure of which resulted in the destruction of a capital asset ofthe assessee;
(2) Whether on the facts and inthe circumstances of this case, the compensation sums received by the assesseefrom the Imperial Chemical Industries (Export) Ltd. are income chargeable inthe hands of the assessee; and
(3) Whether on the facts and inthe circumstances of this case no part of the compensation money was receivedby the assessee on the condition not to carry on a competitive business in thesame line of activity in explosives and as such no part of the money was in thenature of capital being exempt from Indian Income-tax levy
10. The High Court recorded answers to the question as follows :
'Question 1. - Theassessee's agency of the Imperial Chemical Industries (Expert) Ltd. was not aseparate business by itself and the closure of this business did not result inthe destruction of a capital asset of the assessee.
Question 2. - The amounts ofcompensation received by the assessee from the Imperial Chemical Industries(Export) Ltd. were income chargeable in the hands of the assessee.
Question 3. - No part of thecompensation money was received by the assessee on condition not to carry on acompetitive business in explosives and consequently no part thereof was exemptfrom Indian Income-tax levy.'
11. With certificate of fitness granted by the High Court, these appealshave been preferred by the appellant.
12. The principal question in dispute is whether the amount received by theappellant as compensation for loss of agency are of the nature of capital orrevenue. It is necessary in the first instance to eliminate two subsidiarycontentions raised by the appellant. It was urged that the amounts received bythe appellant were in lieu of compensation for cancellation of the agency bythe principal company, for loss of goodwill of the appellant's business, andalso in consideration of the appellant's agreeing not to carry on anycompetitive business in explosives or other commodities in which business wascarried on by the appellant under the agency agreement. It cannot seriously bedisputed that compensation paid for agreeing to refrain from carrying oncompetitive business in the commodities in respect of which the agency wasterminated, or for loss of goodwill would, prima facie, be off the nature of acapital receipt. But there is no evidence that compensation was paid to theappellant as consideration for giving the undertaking not to carry on acompetitive business, or as compensation for loss of goodwill.
13. In the letter dated March 11, 1947, it was expressly recited that as acondition of payment of compensation on the basis outlined therein theprincipal company had called upon the appellant to give a formal undertaking torefrain from selling or accepting any agency for explosives or othercommodities competitive with those covered by the agency agreement, but no suchformal undertaking was ever given. It was recited in the past paragraph of theletter that the principal company will submit a formal agreement to theappellant for execution. But it appears that at the time of payment of thecompensation and thereafter also both sides ignored this condition. Payment ofcompensation was spread over a period of three years, but that will not give riseto an inference that the object behind the payment was to enforce theundertaking, for the undertaking, if any, would have operated permanentlywhereas full compensation was payable within three years. If importance wasattached to the undertaking the principal company would have declined to makeeven the first payment without insisting upon a formal agreement incorporatingthe undertaking. Whether the appellant did not in fact carry on any competitivebusiness was never investigated, and the absence of evidence on that point mayreasonably justify the inference that the appellant never attempted toestablish that part of its case. Granting that an agreement to refrain fromcarrying on a competitive business may be implied from subsequent conduct, inthe absence of any material at any stage of the proceedings before the Revenueauthorities, it would be reasonable to hold that the appellant did not placeany reliance upon the case that part of the compensation was attributable to anundertaking not to engage in competitive business.
14. No part of the compensation may be attributed to loss of goodwillsuffered by the appellant. It is true that the agency has continued in thehands of the predecessors of the appellant and thereafter with the appellantfor upwards of sixty years. It was urged that an extensive market had beenbuilt up in India and the goodwill of that business was on termination of theappellant's agency taken over by the new agents of the principal company andcompensation paid in that behalf must be regarded as capital. But this questionalso was never raised before the Revenue authorities, nor even before theTribunal. The Tribunal observed that it had not been supplied with 'anymaterial regarding the basis of the value of the goodwill, nor anything toindicate as to what the written down value of the goodwill was, due to thetermination of the agency'. It therefore held that the inference sought tobe drawn by the appellant that compensation was referable to the loss ofgoodwill, was based on no evidence and the High Court agreed with thatconclusion. We are unable to hold that the High Court was, in so holding inerror. If it was the case of the appellant that a part of the compensation wasin fact paid for loss of goodwill of the business, the appellant could have ledevidence to establish that it was the intention of the parties that the loss ofgood will was to be compensated by payment of an amount which was included inthe compensation ultimately paid by the principal company to the appellant. Thebusiness of agency had undoubtedly continued for more than sixty years, butthere is no evidence about the terms of the agency agreement. There was nowritten agreement, and it is common ground that the agency was terminable atwill. The principal company had, as early as 1945, informed the appellant thatthe distribution arrangement 'would be terminated after two or threeyears'. The appellant had sufficient notice of the proposed determination.Thereafter the agency was cancelled with effect from April 1, 1945, and in thecorrespondence which is tendered in evidence, there is not even an indirectreference to any negotiation for payment of Compensation for loss of goodwill,or any agreement in that behalf.
15. We may now address ourselves to the question, whether compensation paidby the principal company for cancellation of the agency may be regarded as acapital or revenue receipt. We have in a recent case in Kettlewell Dullen & Co. v. The Commissioner of Income-tax, Calcutta  S.R.L. 93. made asurvey of the importance cases which have arisen before the Courts in theUnited Kingdom and in India about the principles which govern the determinationof the nature of compensation received on the termination of an agency. Weobserved in that case :
'On an analysis of these cases will fall on twosides of the dividing line, a satisfactory measure of consistency in principleis disclosed. Where on a consideration of the circumstances, payment is made tocompensate a person for cancellation of a contract which does not affect thetrading structure of his business, nor deprive him of what in substance is hissource of income, termination of the contract being a normal incident of thebusiness, and such cancellation leaves him free to carry on his trade (freedfrom the contract terminated) the receipt is revenue : where by thecancellation of an agency the trading structure of the assessee is impaired, orsuch cancellation results in loss of what may be regarded as the source of theassessee's income, the payment made to compensate for cancellation of theagency agreement is normally a capital receipt.'
16. Examining the circumstances of the present case in the light of thatprinciple, we agree with the High Court that what was received by the appellantwas income and not capital. Compensation received by the appellant forcancellation of the agency which was terminable at will, the appellant was tobe paid an amount which was to be computed on the basis of the profits of thebusiness. Under the letter dated March 11, 1947, the appellant was to be paid'for the first three post-transfer years' two-fifths of thecommission accrued on actual sales in the territory of the appellant's agencytaken over by the Imperical Chemical Industries (India) Ltd., such commissionto be computed at the rates of commission formerly paid to the appellant, andthat in 'the third post-transfer year' the principal company was topay the appellant in addition a sum equivalent to full commission on the salesfor that year effected by the Imperical Chemical Industries (India) Ltd. in theappellant's territory calculated at the same rates.
17. The appellant was conducting business as selling or distributing agentof numerous principals. The agency which was terminated was one of many suchagencies in which the appellant functioned as distributing agent of a foreignprincipal. There is not even a suggestion, that by the determination of theagency held by the appellant in explosives from the principal company, thetrading structure of the assessee's business was impaired. It is manifest thatthe agencies of the companies conducted by the appellant must have beenobtained at different times. There is no evidence that these agencies were ofany fixed duration. It would be reasonable to infer that some of the agenciesmay be cancelled and fresh agencies obtained. The list furnished by theappellant before the Tribunal analysing the different classes of businesscarried on by it disclosed that the business was done in many lines. The appellantacted as managing agent of some concerns, distributing agent of others, and assecretary of still other class of concerns. Again it deal as an exporter andimporter, shipping agent, and as a buyer and dealer in diverse commodities. Alarge amount of business wad done by the appellant as an agent of foreigncompanies. The appellant had obtained agencies for paints, varnishes,petroleum, kerosene oil, medicines and toilet preparation, cement, timber,stationery, metals, tea, engineering goods, air- conditioning equipment and alarge number of other commodities. It may reasonably be held, having regard tothe vest array of business done by the appellant as agents, that theacquisition of agencies was in the normal course of business and determination ofindividual agencies, a normal incident, not affecting or impairing the tradingstructure of the appellant. The appellant was compensated by payment to it theloss of profit it suffered by the cancellation of its agency, leaving it freeto conduct its remaining business.
18. It was said that the appellant had employed expert officers who wereaccustomed to handle explosives which are a specialised commodity and thecancellation of that agency seriously affected the organization of its tradingoperations. But the appellant was undoubtedly dealing in several kinds ofinflammable substances, such as, petroleum, kerosene oil, timber and similarother commodities. It is true that explosives would require great care inhandling. It appears, however, that eighty per cent of the staff attached tothe Magazine Section was maintained not at the expense of the appellant, but atthe expense of the principal company. Out of the officers who were attached tothe explosives business, services of five officers were taken over by theprincipal company and six others were retained by the appellant and absorbed inother branches. It cannot, therefore, be said that termination of the agencyresulted in impairment of the trading organisation of the appellant. One of theagencies was undoubtedly lost to the appellant, and even temporary dislocationin the organisation of the business thereby may be assumed. There is noevidence, however, that the appellant could not in the ordinary course ofbusiness repair the dislocation. There is no evidence that it could not obtainan agency from another manufacturer of explosives. Even assuming that such anagency in explosives may not be replaced, that circumstance by itself may notjustify the inference that the agency was independent of the other lines ofbusiness conducted by the appellant, or that by the cancellation of the agencyan enduring asset was lost to the appellant. The circumstance that the agencywas determinable at the will of the principal company which maintained a largestaff at their expense justifies the inference that upon cancellation of thatagency the appellant's business organization was not substantially impaired.The cancellation, it may be held, was an incident of the trading operations ofthe appellant in the normal course of business. The payment received by theappellant could not, therefore, be regarded truly as compensation for notcarrying on the business : it was a sum which was worked out in terms ofprofits which the appellant would have earned during the period of notice andpaid in the ordinary course of business to adjust the relations between theappellant and the principal company.
19. There is, in our judgment, no immutable principle that compensationreceived on cancellation of an agency must always be regarded as capital. Ineach case the question has to be determined in the light of the attendantcircumstances. In the judgment in Kettlewall Bullen and Co.'s case : 53ITR261(SC) we have explained that the judgment of the Judicial Committee in theCommissioner of Income-tax v. Shaw Wallace and Co. L.R. 59 IndAp 206. was notintended to, and did not lay down that in every case, cancellation of an agencyresulted in loss of a source of revenue or that amounts paid to compensate forloss of agency must be regarded as capital loss.
20. On a careful consideration of all the circumstances we agree with theHigh Court that cancellation of the contract of agency did not effect theprofit-making structure of the appellant, nor did it involve a loss of an enduringtrading asset; it merely deprived the appellant of a trading avenue, leavinghim free to devote his energies after the cancellation to carry on the rest ofthe business, and to replace the contract lost by a similar contract. Thecompensation paid, therefore, did not represent the price paid for loss of acapital asset. We therefore dismiss the appeals with costs.
21. Appeal dismissed.