1. In this reference under Section 256(1) of the I.T. Act, 1961, the following question has been referred :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that no part of the amounts received by the assessee amounting in the aggregate to Rs. 1,50,000 from Blaze in terms of the agreement of April 1, 1966, was liable to be assessed in any of the assessment years 1968-69, 1969-70 and 1970-71 ?'
2. The assessee is a registered firm of five partners. The previous years are the calendar years preceding the relevant assessment years. The firm came into existence in January, 1960, and started carrying on the business of arranging exhibition of advertisement films of M/s. Lintas Ltd., originally done under a letter dated 15th January, 1960. By this letter, the rights for distribution and exhibition of films had been secured for the calendar years 1960 to 1962 for the areas, Madras and Rajasthan. Subsequently, there was a formal contract on 22nd April, 1961, which reduced the terms of the informal arrangement obtaining previously into a formal character. The agreement was as between principal and principal and the rates at which the assessee was to be paid were stipulated in the agreement. Lintas was to provide the assessee with the necessary prints, etc. The prints were to be of films in the Indian languages.
3. The terms of the contract, as reduced to writing on 22nd April, 1961, were continued for the calendar year 1962 and also for 1963. On 26th June, 1963, the arrangement was again reduced to writing, but it was to be enforced up to 31st December, 1963. In the last mentioned agreement, there was a new clause that Lintas, during the period of the agreement, had the right to enter into agreement with other persons for distribution and exhibition of their films even in the towns covered by the agreement with the assessee.
4. The agreement continued for the calendar year 1964, also under a contract dated 9th April, 1964. On 25th June, 1965, Lintas wrote to the assessee that they would continue to handle the distribution and screening of advertisement films during the calendar year 1965, on the same terms and conditions as contained in the contract dated 9th April, 1964. The period could further be extended up to not more than twelve months at a time by exchange of letters. No letters were produced to show that there was any further extension under the terms of the agreement dated 9th April, 1964. However, it is common ground that the contract continued on the same terms for the calendar year 1965. The terms were reduced to writing on 25th June, 1965.
5. During the subsistence of the agreement with Lintas in the manner mentioned above, the assessee entered into an agreement on 16th May, 1965, with Miss Freni Variava and Mr. M. J. Bijlani, collectively known as 'Blaze'. The agreement was to have effect for a period of nearly ten years up to 31st March, 1975. This agreement was for the distribution and exhibition of advertisement shorts. In the agreement, the assessee is referred to as 'Saraswathi', and Blaze as 'Blaze'. Blaze as well as Saraswathi had earlier entered into independent arrangements with various parties for the distribution as well as exhibition of the films. The agreement dated 16th May, 1965, was for the purpose of seeing that the business of each other did not suffer by competitions in the territories of the whole of the States of Madras, Andhra, Kerala and Mysore. But, as far as the State of Mysore was concerned, it excluded the districts of Belgaum, Dharwar and Bijapur, There were certain mutual obligations, and the Schedule to the agreement set out the list of businesses handled by Blaze as well as Saraswathi. The Schedule contained 118 items, but as far as the assessee was concerned, its main agreement was with Lintas Ltd. and the advertisements were for various products of Hindustan Lever, such as, soaps, tooth pastes, etc. The other clients of the assessee were Colgate-Palmolive, the Orwo Films and Estrella Batteries.
6. From 1960 up to the end of the calendar year 1964, the assessee had contract or arrangement for exhibition of films only with Lintas, with an arrangement of only a minor magnitude with another entity, and that too only in the year 1964. Only in the year 1965, it secured similar contracts from Colgate-Palmolive, Orwo Films and Estrella Batteries. In the year 1965, the total receipts from Lintas came to Rs. 2,55,047.41, from Colgate Rs. 1,22,299.71 and from others Rs. 22,068.55.
7. The agreement with Lintas came to an end on 31st December, 1965. On 1st April, 1966, the assessee entered into a further agreement with Blaze modifying the terms of the agreement of 16th May, 1965, to some extent. In this agreement of 1st April, 1966, it was mentioned that by the earlier agreement of 1965, it had been agreed that neither party should interfere with the business of the other during the life of the agreement, i.e., till 31st March, 1975, and that the main business of the assessee was the business of exhibition of film shorts of Lintas in the agreed areas. It was also stated that Blaze was exhibiting film shorts of Lintas Ltd. in areas other than the agreed areas and was desirous of having the business of M/s. Hindustan Lever Ltd. and/or Lintas Ltd. in the agreed area also. Under the agreement of 16th May, 1965, the assessee had agreed not to represent or otherwise do business in film shorts and any sort of advertisement on the cinema screens for Hindustan Lever Ltd. or Lintas Ltd. in the agreed area. The assessee had agreed also to Blaze 'taking over and handling' the said business from April 1, 1966, and further agreed to refrain from carrying on the business with Hindustan Lever Ltd. or handle any film advertising business till the end of 1975. In consideration of these terms, Blaze agreed to pay the assessee (Saraswathi) a sum of Rs. 1,50,000. The amount was payable by Blaze to Saraswathi irrespective of whether Blaze secured the said business from Hindustan Lever Ltd. or Lintas Ltd, or not. This amount of Rs. 1,50,000 was payable in instalments, three instalments of Rs. 25,000 each in 1968, and three instalments of Rs. 25,000 each in 1969. If there was a default in paying any one instalment the entire amount that remained due as on that date would become payable immediately to the assessee. In the event of Blaze failing to pay such amount, Saraswathi was entitled to claim from Blaze such amount jointly and severally from the parties constituting Blaze. There were other clauses in the agreement that in the event of Saraswathi or its allied concerns, approaching Hindustan Lever or Lintas for business, then an amount of Rs. 3,00,000 would have to be paid as liquidated damages by Saraswathi to Blaze.
8. The ITO brought to tax a sum of Rs. 25,000 for the assessment year 1968-69, as according to the assessee only that amount had been received in that year. For the assessment year 1969-70, similarly he brought to tax another sum of Rs. 25,000 which alone had been received from Blaze. However, for the assessment year 1970-71, the ITO considered that the whole of the balance of the amount would have to be assessed and he brought to tax the sum of Rs. 1,00,000.
9. The assessee appealed to the AAC. While the AAC was of the prima facie view that the assessments for 1968-69 and 1969-70 should be enhanced by bringing to tax the entire sum of Rs. 1,50,000 at the rate of Rs. 75,000 in each of those two years, ultimately on the representation of the assessee, he did not disturb the assessments of Rs. 25,000 each made for those two years. However, he held that the entire amount of Rs. 1,50,000 was not assessable in any of the three years, as, in his view, the covenant, concluded on 1st April, 1966, was very specific about the assessee imposing on itself certain restrictions on its activities in the designated areas for a specified period of ten years. Following the decisions of the Supreme Court, he considered that the amount was not liable to be taxed. In effect, his view was that the amount represented capital receipt.
10. The department appealed to the Tribunal, and the Tribunal also considered that all that the assessee had agreed under the agreement dated 1st April, 1966, was to refrain from carrying on any business with Hindustan Lever or Lintas or to canvass such business till the end of 1975, and that the receipts in this connection could be only of a capital nature. It is this order of the Tribunal that has given rise to the question already extracted.
11. The only point to be examined is whether the sum of Rs. 1,50,000 represents a capital or a revenue receipt. At this stage, it may be mentioned that in the assessment on Blaze, the sum of Rs. 1,50,000 was claimed as deduction and it was disallowed. The matter reached this court on reference in T.C. No. 235/74 [Blaze & Central (P.) Ltd. v. CIT : 120ITR33(Mad) . The question that was referred in that case was whether the sum of Rs. 1,50,000 was not deductible as an allowable expenditure. In the course of the judgment, this court referred to the finding in that case, namely, that the sum of Rs. 1,50,000 had been paid for the acquisition of an asset which was a right of an enduring character for a period of nine years without any competition from Saraswathi and that, as the expenditure had been acquired for securing such an enduring advantage, it could not be regarded as a revenue expenditure. It was this finding that was examined, and in the course of the judgment, the matter was considered from two standpoints. One was that Blaze had taken over the business as such in regard to the exhibition and advertisements of films in so far as it concerned Hindustan Lever or Lintas. The other aspect was that Blaze had warded off competition in business by this bargain. It is on the basis of this finding that the court came to the conclusion that the expenditure was not of a revenue nature. It is, however, unnecessary to consider the judgment in the said case any further, because the principle that applies to the allowability of an expenditure is not necessarily applicable to the receipts.
12. In the present case, the finding of the Tribunal was :
'In terms of the agreement of April 1, 1966, hence, all that the assessee did was to agree to refrain from carrying on any business with Hindustan Lever or Lintas or to canvass for such business till the end of 1975.' (para. 10)
13. Again, in para. 17, the Tribunal found :
'In the light of the facts as ascertained by us, it is clear that the agreement of April 1, 1966, which the assessee entered into with Blaze did not bring to an end any agreement or contract which the assessee had with Lintas, since the assessee's agreement with Lintas had come to an end much earlier, i.e., on December 31, 1965.'
14. In other words, this part of the finding was that there was no business taken over or acquired by Blaze in terms of the agreement of 1st April, 1966. We have, therefore, to consider the law applicable only to the covenants of restrictions and the receipts in connection therewith.
15. In Kettlewell Bullen and Co. Ltd. v. CIT : 53ITR261(SC) , the Supreme Court dealt with a case where the assessee had several managing agencies and received a certain amount for the voluntary relinquishment of one of the managing agencies. The question was whether the receipt was of a revenue nature or of a capital nature. The Supreme Court held that the arrangement was not in the nature of a trading transaction, but was one in which the assessee had parted with an asset of an enduring nature. What the assessee was paid in that case was, therefore, considered to be in the nature of a receipt for compensation for loss of a capital asset and, was, therefore, not a revenue receipt.
16. Each managing agency agreement was considered to be a separate asset. On the same day, the Supreme Court delivered judgment in another case in Gillanders Arbuthnot and Co. Ltd. v. CIT : 53ITR283(SC) . In this case, the assessee carried on business in several lines. Besides acting as managing agents, shipping agents, purchasing agents and secretaries, the assessee carried on business as importers and distributors on behalf of foreign principals. There were also trading transactions on the assessee's own account. The assessee was the sole selling agent and distributor in India of explosives manufactured by the Imperial Chemical Industries (Exports) Ltd., Glasgow (hereinafter called ICI), since 1886. There was no written agreement between the principal company and the assessee incorporating the terms of the agency agreement. The agreement was terminable at the option of ICI. In 1945, ICI desired to set up its own organisation for the distribution of its products and intimated the assessee that the agency was to be cancelled after a short period of two or three years. ICI later informed the assessee that the agency would stand terminated from 1st April, 1948. The assessee was to be compensated for the termination of the agency in a particular manner. It is unnecessary to go into the details of or the manner in which the compensation was to be paid. The question was whether the amounts received by the assessee were of capital or revenue nature. It was held that having regard to the vast array of business done by the assessee as agents, the acquisition of agencies was in the normal course of business and determination of individual agencies was a normal incident not affecting or impairing its trading structure. Each agency agreement was taken to be part of the trading activity. The amounts received by the assessee for the cancellation of the explosive agency were, therefore, held not to represent the price paid for the loss of a capital asset, but were of the nature of income. At p. 287, the Supreme Court set down the principles applicable to receipts on account of restrictive covenants as follows :
'It cannot seriously be disputed that compensation paid for agreeing to refrain from carrying on competitive business in the commodities in respect of which the agency was terminated or for loss of goodwill would prima facie be of the nature of a capital receipt.'
17. But, in that particular case, there was no evidence that the compensation was paid as a consideration for giving the undertaking not to carry on a competitive business.
18. A similar question, as in the last-mentioned case, came up for consideration again before the Supreme Court in CIT v. Best and Co. (P.) Ltd. : 60ITR11(SC) . The assessee in that case also was carrying on business in innumberable lines and had acquired in the course of its business, selling agencies from manufacturers both inside and outside India, One of them was from Imperial Chemical Industries (Exports) Ltd., Glasgow, for the distribution of their explosives in certain centres, since the year 1900. This agency was also terminable at will but continued up to 1947, in which year ICI decided that all its agencies in India and Ceylon should be taken over by another Indian subsidiary of its, and gave notice to the assessee terminating the agency from 1st April, 1948. As compensation for transfer of the agency, the assessee was paid certain amounts calculated on the basis of the agreement between the parties. The assessee claimed that the amounts received were capital in nature, and the Supreme Court held that the compensation agreed to be paid was not only in lieu of loss of agency but also for the assessee accepting a restrictive covenant for a specified period (five years, in that case), that the restrictive covenant was an independent obligation which came into operation only when the agency was terminated, and that part of the compensation attributable to the restrictive covenant was a capital receipt and hence not taxable. The Supreme Court referred to the decision in Gillanders Arbuthnot and Co. Ltd. v. CIT : 53ITR283(SC) and pointed out as to what was decided in that case, at pp. 16 and 17 of 60 ITR as follows :
'The question was whether the amounts received by the appellant for those three years were of the nature of capital or revenue. This court held that the amounts paid were of the nature of income and, therefore, assessable to tax. The reason given for that conclusion was that, having regard to the vast array of business done by the appellant as agents, the acquisition of agencies was in the normal course of business and determination of individual agencies a normal incident not affecting or impairing its trading structure. The material facts of that case are on all fours with the present case. Indeed, the principle in both the cases was the same and the agency terminated was also a similar one. The compensation given was worked out on the same lines. The only difference is that in that case it was not found that the restrictive covenant entered into the bargain.' (Underlined by us).
19. After considering the agreement in the case in CIT v. Best and Co. (P.) Ltd. : 60ITR11(SC) , the Supreme Court held that the compensation agreed to be paid was not only in lieu of the giving up of the agency but also for the assessee accepting a restrictive covenant for a specified period. As far as the loss of agency was concerned, it was only a normal trading loss and the income received on that account was only a revenue receipt. But, with reference to the loss on account of the restrictive covenant. after referring to the decision in Gillanders Arbuthnot and Co. Ltd. v. CIT : 53ITR283(SC) , the Supreme Court reiterated that the restrictive covenant was an independent obligation undertaken by the assessee not to compete with the new agent in the same field and that part of the compensation attributable to the restrictive covenant was a capital receipt, not assessable to tax. As to how the compensation was to be apportioned was left to be determined by the assessing authorities.
20. The cases decided by the Supreme Court thus fall into two categories. The first category consists of those cases where there is a mere loss of a trading agency of a company which has a number of such agencies. The second category covers those cases where the receipt is not for the loss of an agency but for certain restrictive covenants preventing the assessee from carrying on business to that extent. While the learned counsel for the revenue proceeded as if the case on hand fell within the ambit of the first of the two propositions, the attempt of the learned counsel for the assessee was to bring it in the latter category. In view of the finding of the Tribunal, which we have already extracted, that in the present case the receipt is referable to a restrictive covenant, we have to hold that the principle of the decision in CIT v. Best and Co. (P.) Ltd. : 60ITR11(SC) in so far as it considers the restrictive covenant and the receipt therefor, will be applicable here. The question referred to us, is accordingly, answered in the affirmative and in favour of the assessee. The assessee will be entitled to its costs. Counsel's fee Rs. 500.