1. This is a Reference under Section 66 (1) of the Indian Income-tax Act, by which the Income-tax Appellate Tribunal has referred to this Court a short question of a familiar shape. The question asks whether certain payments received by a director of a company of Chief Agents which was a part of the total payment made by the principal company on the termination of the Chief Agency, were income receipts in the hands of the director or were capital receipts. The tribunal have held that the sums were capital receipts. The Commissioner of Income-tax, being dissatisfied, has brought up the question before us for an expression of the Court's opinion.
2. The Reference relates to two assessment years, namely, 1950-51 and 1951-52. It has arisen out of the following facts.
3. The assessee is, or perhaps was, a director of a company, going by the name of D. M. Das and Sons Ltd. I say 'was', because it is not clear whether after the termination of the Chief Agency, the company which had this particular agency as its main, if not the only business, has at all continued to exist. The present assessment of the assessee is an assessment in his capacity of an individual.
4. It appears that D. M. Das and Sons Ltd., held the Chief Agency of the Empire of India Life Assurance Company Limited for Bengal, Eihar, Orissa and Assam. As such Chief Agents, the company procured considerable business for the principal company and built up for it a fine business reputation in the area covered by the Chief Agency. Nevertheless in 1948, the Life Assurance Company decided to terminate the Chief Agency and take up the business directly into his own hands. Certain negotiations as regards the terms on which the Agency was to be terminated followed and it appears that ultimately a set of proposals was made by the Chief Agents. Those proposals were accepted by the Assurance Company with certain modifications and the terms, as so modified, are evidenced by a letter which the Assurance Company wrote to the Chief Agents on the 26th of June 1948. The seventh term, as set out in that letter, states that a formal agreement, giving effect to the arrangement agreed to between the parties, would be drawn up subsequently with the approval of the company's solicitors and it may be presumed that an agreement was in fact drawn up. In those circumstances, it would have been proper if the formal agreement had been produced in the case as evidence of the terms on which the Chief Agency was terminated. But since both parties proceeded on the footing that the terms, as set out in the letter of the 26th of June 1948, were the terms upon which the termination took place, I shall overlook what appears to me to have been a slight irregularity.
5. The effective terms were six In number, although there were in some of them what I may call sub-terms. It was agreed that the termination of the Agency would have effect as from the 1st of January 1948. On and from that date, the Chief Agents would not be entitled to and would not be paid any commission or renewal commission on business secured by them during the period of their Chief Agency. The amounts of commission or renewal commission which had already accrued due for the period ending on the 31st of March 1947, but which had not been paid or accounted for, would be adjusted and paid to the Chief Agents, but as regards the period after that date the bills for commission submitted by the sub-agents would be settled by the Assurance Company directly. As a corollary to that term, it was further agreed that all expenditure incurred by the Chief Agents on account of establishment and other usual charges would be payable by the company from the 1st of January 1948, till the actual date of the handing over of the Chief Agents' business. The handing over would be in the form that the entire organisation of the Chief Agents would be taken over by the Assurance Company as from the 1st of January 1948.
6. As a consideration for the termination of the Chief Agency, the Assurance Company agreed to pay to certain persons nominated by the Chief Agents certain amounts which were collectively called 'compensation'. There were seven share-holders of the company of Chief Agents, namely, Mr. Amiya Kumar Sen, Mr. Anil Kumar Sen, Mr. P. K. Das, Mrs. Maya Bose, Mr. Dilip Bose, Mr. A. B. Gupta and Mr. Anupam Sen, but of them, Mr. Amiya Kumar Sen, Mr. Dilip Bose and Mr. Anupam Sen were not to receive any payment at all. For Mr. Anil Kumar Sen, Mr. A. B. Gupta, Mrs. Maya Bose and Mr. P. K. Das, who is the assessee before us, payments at certain rates per month, to be made for a period of seven years, were provided for. A further provision was made for payment of Rs. 1,000 per month to one Mrs. A. C. Sen, who was the mother of Mr. Amiya Kumar Sen, to be made for the period of her life. Mrs. Maya Bose, it may be stated here, was the mother of Mr. Dilip Bose who was himself a director, but for whom no provision was made by the agreement.
7. It appears, and the tribunal has so found, that even the share-holders who were to get monthly payments under the terms of the agreement were to receive benefits which were not in proportion to their share-holdings.
8. A further covenant provided that neither the company, nor any of the recipients of the compensation would carry on life assurance business or work for any other Life Office during the period of the payment of the compensation, but, on the other hand, the company and its directors, more particularly Mr. Amiya Kumar Sen, would extend their full co-operation to the Assurance Company.
9. The question before us concerns the nature of the payment which one of the directors of the company of Chief Agents, who held twenty-three shares in the company, was to receive from the Assurance Company under the terms on the agreement. The amount receivable by him was Rs. 1,000 per month for a period of seven years.
10. The assessee, Mr. P. K. Das, did not enter appearance in the Reference and has not been represented before us at the hearing. Probably, the reason is to be found in Clause 3 (b) of the agreement which states that if any income-tax is levied on any of the payments provided for in the agreement, the same will be borne by the Assurance Company.
11. In the letter of the 26th of June 1948, to which I referred a moment ago, the terms of the agreement are referred to as 'the terms of relinquishment of your appointment as Chief Agents'. If the compensation was compensation for a voluntary relinquishment of the Chief Agency, the principles applicable in judging its true character would obviously be different. It was, however, agreed before us, and so it appears to have been agreed before the tribunal, that there was no voluntary relinquishment by the Chief Agents of their office, but the appointment was terminated by the principal company. The description 'terms of relinquishment of your appointment as Chief Agents' does not, therefore, appear to be correct. On the other hand, the appellate order of the tribunal states that the agreement was that the Assurance Company would pay the Chief Agents 'compensation for the loss of the Chief Agency', Not only is that statement made in the course of the preliminary narration of the facts, but it also appears that while giving their reasons for the view they are going to take, the tribunal make it a point that the payments were 'described as compensation for loss of agency'. Wherefrom the tribunal imported that description is not clear, unless it was from the case of Commissioner of Inland Revenue v. Fleming & Co. (Machinery) Ltd., (1952) 33 Tax Cas 57 (A), to which they have referred and in Which it occurs. If, on the other hand, they look the description from the formal deed of agreement referred to in the last of the clauses set out in the letter of the 26th of June 1948, it is all the more regrettable that the formal deed was not referred to or included in the paper book. It is true that nothing decisive turns on the words employed by either the payer or the recipient of a certain sum in describing the payment made, but they are some evidence as regards how the parties themselves regarded the payment and thus some evidence of their intention. So far as the description quoted by the tribunal is concerned, we do not find any materials before us to show that the parties themselves had used it and, therefore, we shall leave it out of account.
12. The decision of the tribunal falls into two parts. They have held that the payments provided for in the agreement, regarded as payments made to D. M. Das and Sons Limited, could not possibly be anything but capital receipts. Proceeding a step further, they have held that it made no difference that the payments were made to the nominees of the Chief Agents, nor did it make any difference that the payments were made and taken in the form of monthly payments, spread over a number of years. According to the tribunal, the receipts by the nominees of the Chief Agents were equally capital receipts.
13. As regards the first of their findings, I am prepared to accept the view taken by the tribunal. The Question whether a particular receipt is an income or a capital receipt is always a vexed question and no test of a hard and fast character can be laid down. It is fashionable to say that each case must be decided on its own facts, but to suggest that form of approach is not by any means to solve the difficulty. Broadly stated, a principle which I think may safely be acted on is the principle which I ventured to state in the case of National Cement Mines Industries Ltd. v. Commissioner of Income-tax, West Bengal, : 29ITR629(Cal) . You have to consider the look of the thing and having taken notice of the look, you have to ask yourself this question: Was the assessee realising an as-Set or was he merely using an asset as a means of obtaining an income or even if he was realising an asset, was he doing it in such a form that the payments arranged by him lost their character of capital receipts and become income?
14. I am prepared to hold that, judged by that test the payment, as received by D. M. Das and Sons Limited from the Assurance Company, can be said to have been a capital receipt. It has not been found, nor is it the case of anybody, that D. M. Das and Sons Limited was carrying on the business of obtaining Chief Agencies from different companies and exploiting such Chief Agencies for profit. If such had been the nature of the trading adventure of D. M. Das and Sons Limited, it might have been said, as was said in the case of (1952) 33 Tax Cas 57 (A), that loss of one of the Chief Agencies was an ordinary trading risk of the company and compensation received for such loss would be a trading receipt. The finding in the present case, on the other hand, is that the Chief Agency of the Assurance Company was the principal, if not the only, business of D. M. Das and Sons Limited. This Chief Agency, therefore, was its profit making apparatus and the termination of the Chief Agency meant that the whole structure of that apparatus was destroyed with no means left for making any profits in the future. I do not think that it is necessary to enlarge on the distinction between the loss of an income and the loss of the source from which income is received. It is well-settled that when the loss is a loss of the sourceitself, the compensation received for that loss is a capital and not an income receipt. On the facts of the present case, it must, in my view, be held that tne loss which D. M. Das and Sons Limited suffered was a loss of the source of its income.
15. Coming now to the specific terms of the agreement, one of them is that neither the company, nor the directors would carry on any lite assurance business or work for any other Life Office during the period of the payment of the compensation, either directly or indirectly. That, it is clear, is a restrictive covenant and it is equally well-settled that the price received for submitting to a restrictive covenant in regard to one's business or profession is a capital receipt. Another term is that the company and its directors, more particularly one of them, would extend their full co-operation to the Assurance Company, but it has been found by the tribunal on admission made before them that the co-operation contemplated was only co-operation in observing the terms of the agreement and not co-operation with the Assurance Company in carrying on its assurance business. That being so, this particular term is of no consequence.
16. Some difficulty, in my view, is created by a further term which provides that on and from the date when the termination of the Chief Agency would take effect, the Chief Agents would not be entitled to, nor be paid, any commission or renewal commission on business secured by them during the period of their Chief Agency. The tribunal did take notice of this term and observed that if the payments, agreed to by the Assurance Company, had been in part in commutation of the right of the Chief Agents to receive the renewal commissions - I should think that it would have been more correct to say 'payments agreed to by the Chief Agents to be received in commutation of their rights' - it might have been necessary to allocate a reasonable proportion of them to that right and to consider whether, at least, the portion reasonably attributable to that right would not be an income receipt. The tribunal, however, thought that the matter was disposed of by Clause 2 (a) of the agreement which provided that on and from the 1st of January 1948, the Chief Agents would not be 'entitled to or paid any commission or renewal commission' and they added that there was nothing to cast any doubt on the good faith of that clause. I confess I find some difficulty in appreciating what the tribunal could have really meant. If the clause relied on by them provides, as it undoubtedly does, that on and from the date on which the Chief Agency would stand terminated, the Chief Agents would no longer be entitled to and would no longer be paid any commission or renewal commission, I cannot see that such meaning of the clause excludes the argument that a part of the receipts was the price for the surrender of the recurring right to receive commission or renewal commission and, therefore, an income receipt. Probably, what the tribunal meant was that the Chief Agents elected to bar-gain with the Assurance Company on the basis that they would not merely forbear from demanding commission or renewal commission after the appointed date, but they would treat their right to receive such commission as extinguished or as having never existed, so that no commission or renewal commission would be claimable. In any event, the finding is that in determining the amount of the compensation, the right to receive commission or renewal commission in the future was not in the minds of the parties at all and that the right was treated as non-existent, being mentioned only for pointing out that it was so. If this term be left out of account, as on the finding of the tribunal, I think it may be, the payment to the Chief Agents, as provided for by the agreement can, in my view, be properly regarded as a capital receipt in their hands.
17. I, however, find myself unable to accede to the second proposition of the tribunal. In my view, the fact that the payment with which we are here concerned is not a payment received by D. M. Das and Sons Limited as such, but a payment received by a nominee of the company, although a director, does make a difference and a further difference is made by the form in which the payments were arranged to be paid and received. One of the tests applied in deciding whether a particular instalment payment is capital or income is, although it is not a decisive test, to see whether the instalment has any relation to any ascertained capital sum. If the payment is only an instalment of a capital sum, it is obviously not an income receipt in the hands of the recipient, but an instalment of a debt and therefore a capital receipt. In the present case the assessee, it might be useful to remind ourselves, is not D. M. Das and Sons Limited, but Mr. P. K. Das. The payments in which he was to participate under the agreement were, it is true, payments agreed to by and between D. M. Das and Sons Limited and the Assurance Company, but those payments were to be made not to the company of the Chief Agents as such, but to its nominees and such nominees included at least one stranger. Mrs. A. C. Sen, although the mother of Mr. Amiya Kumar Sen, one of the directors, was a stranger to the company. Even where the nominees were share-holders of the company of the Chief Agents, the provision made for them was not in proportion to their share-holdings. The look of the thing, therefore, is that the Chief Agents were, by the agreement, buying annuities and providing for an income for certain persons of their choice and doing so with the compensation that they were themselves entitled to receive,
18. Looked at from another point of view, the receipts by the several nominees would appear to bear the same character. There was no fixed sum agreed to and determined as the compensation payable. On the other hand, the sum payable was left very much at large. The payment provided for Mrs. A. C. Sen was a payment for her life and naturally its quantum would depend upon the number of monthsshe might live and, therefore, according as her life was long or short, the amount payable to her would be large or small. The payments provided for the other recipients were also monthly payments for the specified period of seven years and, in their case too, the amount payable to each would be greater or smaller according as he or she lived the full period of seven years or died earlier. It can, therefore, by no means, be said that the monthly payments receivable by the several nominees of the company of Chief Agents were merely instalments of a determined amount, agreed to as the total compensation payable.
19. A third circumstance' which stamps these receipts with the character of income is that they are obviously not being paid to the several recipients for the reason or at least the sole reason that they are member's of the company of Chief Agents. As I have already pointed out, at least one recipient was a stranger. The real character of the arrangement, therefore, is not that the several recipients are receiving portions of the compensation paid by the Assurance Company to the Chief Agents as such compensation and as share-holders of the company of Chief Agents, but that the company of Chief Agents is using its right to receive compensation from the principal company or, to go a step further, using the compensation received which is an asset in its hands, for providing an income for the several nominees who are not receiving the same directly from the Assurance Company in exchange for some rights of their own, but receiving it from the Chief Agents in the form of an annuity provided by the Chief Agents for them. I cannot see that, on the facts of the case, the receipts by the several nominees can be said to bear any other character. This is not even a case when a person is receiving a capital sum in a form which makes it income in his hands, but it is a case where a person, receiving a capital sum, is using it to provide incomes for third parties, one of whom is the assessee before us.
20. There is one obligation cast on the nominees which must, however, be referred to. As has been seen, they too are required to refrain from carrying on any life assurance business or working for any other Life Office directly or indirectly during the period of the payment of the compensation. It might be argued that, at least to a certain extent, they are getting the monthly payments as a price for their submission to this restrictive covenant and, therefore, at least a portion of the payments which may be found reasonably attributable to this restriction should be treated as a capital receipt. I do not think that the argument is sound, because the agreement is not an agreement between the Assurance Company and the nominees of the Chief Agents. It is not as if the nominees themselves are contracting with the Assurance Company and surrendering certain rights for a compensation. The term I have referred to is only a term imposed by the immediate parties to the agreement on the nominees of one of them and, whether in law or fairly regarded on the facts, I do not think itcan be said that any part of the payments provided for the nominees was determined on the basis of the restraint sought to be imposed. It is important to recall again in this connection that the persons who are promising to the Assurance Company are the company of the Chief Agents and the directors. The promise is not by the nominees, although some of them are share-holders and certainly there is no promise by the nominee who is a stranger.
21. In all the facts of the case and from the look of the thing, it appears to me that the receipts of the nominees of the company of Chief Agents which are the only receipts, with which we are concerned in this Reference, were in their hands income and not capital receipts. The question referred by the tribunal must, therefore, be answered in the affirmative.
22. Since there has been no appearance on behalf of the tax payer and he has not resisted the Reference, there will be no order as to costs.
23. I agree.