G.K. MITTER J. - The questions referred to this court by the Tribunal arise out of the termination of the agency business carried on by the assessee of explosives manufactured by a Scottish company, the Imperial Chemical Industries (Export) Limited. In the eightys of the last century Gillanders Arbuthnot & Co., a firm, became the agents of the Scottish Company for the sale of their explosives of various kinds in India. The original agreement in writing is not before us but the parties have proceeded on the basis that there was such an agreement. The business of the firm was taken over in the year 1935 by the assessee company along with the above-mentioned agency as well as other agencies of various manufacturers and producers. In the year 1945 the Scottish Company appears to have informed the assessee that its agencies in India and Ceylon were going to be taken over by the Imperial Chemicals Industries (India) Limited within two or three following years. In fact the agency came to an end as from April 1, 1948, on the basis of a letter written by the Scottish company to the assessee on March 11, 1947. As the arguments addressed to us focused on the text of this document it is necessary to set forth the same in extenso :
'Messrs. Gillanders Arbuthnot & Co.
P.O. Box No. 174,
We would refer to the interview which we had with your London associates in May, 1945, when it was intimated that as a matter of long term policy, our agencies in India and Ceylon would ultimately be taken over by Imperial Chemical Industries (India) Ltd. It was indicated at that time that a period of two to three years might elapse before any steps were taken as regards this transfer. We now have to advise you that the matter has been receiving further consideration and Imperial Chemicals Industries (India) Ltd. desire to take over the various agencies as from the 1st April, 1948.
It is with regret, therefore, that we have to intimate our intention of transferring your agency, as from the above date, to Imperial Chemical Industries (India) Ltd. and would take this opportunity of expressing to you our sincere appreciation of the valuable services you have rendered to us over a period of many years.
As a result of the transfer of your agency to Imperial Chemical Industries (India) Ltd., we propose that compensation should be paid to you on the following basis :
1. For the first three post-transfer years, we shall pay you two-fifths of the commission accruing on annual sales in the territory of your agency taken over by Imperial Chemical Industries (India) Ltd., such commission to be computed at the commission rates formerly paid to you.
2. In the third post-transfer we shall pay you, in addition, a sum equivalent to the full commission on sales for that year affected by Imperial Chemical Industries (India) Ltd., in your territory calculated at the same rates.
3. Payment will be made to you after the end of each year as soon as the amount due is ascertained.
For the purpose of calculating the commissioner due to you, the post-transfer years will be deemed to run as 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 you compensation on the basis outlined above we would request you to be good enough to give us a formal undertaking to refrain from selling or accepting any agency for explosives or other commodities competitive with those covered by the agency agreement now being terminated.
In this connection, we are asking our legal department to prepare a formal agreement which we will submit to you for signature as soon as possible.
For Imperial Chemical Industries (Export) Ltd.,
(Sd.) J. Robinson.'
In terms of the above letter the assessee received the following amounts and included the same as commission in its profit and loss account.
For the assessment year ending March 31, 1949 ... Rs. 1,53,471-11-0
For the assessment year ending March 31, 1950 ... Rs. 1,59,271-4-0
For the assessment year ending March 31, 1951 ... Rs. 6,20,131-2-0
The assessee does not appear to have signified its acceptance of the proposal contained in the above letter in writing, but there is no dispute that payment was received by the assessee in terms of the same. It should further be noted that the assessee never gave a formal undertaking not to accept any agency for explosive as mentioned in the penultimate paragraph of the letter nor did the principals ever submit a formal agreement to the assessee for execution. According to the statements of activities file by the assessee before the income-tax authorities, so far as the Calcutta organisation is concerned, it carried on business as agents classified under seven heads. They are as follows :
Category A - Buying and selling on own account including maintenance of own stocks of the goods dealt in, but prices and other terms regulated by agency agreements.
Category B - Introducing clients to principals, submission of bills to clients and collection thereof. No stocks held or handled by the agents on own account or on behalf of principals.
Category C - Managing agency.
Category D - Shipping agents.
Category E - Purchasing agents.
Category F - Sole importers and distributors on behalf of U.K. principals having no organisation in India. Stocks held and handled by the agents on behalf, and on account, of the principals and, at the letters risk and expense; but agents responsible for observance of statutory regulations connected with the special type of goods dealt in and also for submission and collection of bills.
Category G - Secretaries.
It will be noticed that the assessee dealt in various kinds of goods for various principals and manufacturers both foreign and Indian. To give only a few instances of the said activities : (a) it bought and sold paints manufactured by five different companies, (b) it engaged in similar activities on behalf of different manufacturers for diverse kinds of goods, to wit, cement, copper, petrol, kerosene oil, medicine, tea chests, beltings, wire nails, timber, etc., (c) it had a shipping business and an agency in engineering business, (d) it acted as managing agents of two jute mills. The agency in question was one of importing and distributing explosives on behalf of the Scottish company. According to the assessee, this business stood by itself and its activities in connection therewith were entirely different from its activities in respect of other agencies. It is said that the assessee was required to maintain technical experts and specialists qualified to handle the special class of commodities and the termination of the agency resulted in a large number of members of the staff working in this department being transferred to the new agents or being taken over in other departments. The Income-tax Appellate Tribunal found that 'the assessee was carrying on various businesses in different lines as general merchants, manufacturers, brokers, agents, etc. The agency included the agency of distributing, buying and selling, and also managing agents of different companies as well as secretaries of different joint stock companies.'
The Tribunal referred to the activities of the assessee contained in annexure 'B' top the statement of the case relating to its organisation in places like Bombay, Madras, New Delhi and Kanpur to show that it was buying and selling goods at various places, acting as the local agents for Indian principals in respect of some classes of goods and in yet others it was introducing clients to principals besides acting as secretaries for one or two concerns.
According to the Tribunal 'broadly speaking, all sorts of selling agency business came under one head and commission earned on account of these agency agreements were clubbed together under one head and incorporated in the assessees revenue account. It is not material that for a particular agency or a group of agencies the assessee maintained separate subsidy account books, but in the end the total of the receipts as commission earned has been taken into account under the head commissions. In the circumstances, the loss of one agency is incidental to the business and the receipt on account of such loss arose out of the business of carrying on of the agency and, as such, was income-taxable under the Income-tax Act.'
On behalf of the assessee particular stress was laid on the character of the agency in explosives and it was argued that it differed widely from the other agencies. Reference was made to an affidavit affirmed by one G.W. Easson, the chief accountant of the assessee company, on September 5, 1956, with the enclosure thereto and the explanatory statement addressed to the Income-tax Tribunal by the assessee in October, 1956. According to the explanatory statement 'the department in explosives was a specialized business and an independent commercial unit. Secondly, the agency was being handled for an unbroken period of more than 60 years and but for a change of policy of the Imperial Chemicals Industries (Export) Ltd. it would have continued indefinitely. Thirdly, the department which handled the import, storage and distribution of explosives and its administration had a separate staff of its own. The conduct of this business was governed by the provisions of the Indian Explosives Act and its Rules and Regulations at each stage, and accordingly technical and skilled personnel had to be and were employed. As a consequence of the termination of the agency, this staff had to be disbanded and the department of explosives had to be wound up. Fourthly, this department maintained separate books of accounts, and annual balance-sheets and profit and loss statements were prepared separately for this business which were finally incorporated in the consolidated published accounts. Fifthly, due to the termination of the agency, a substantial loss in the income of the assessee resulted, varying from 10% to 15% of the total income of the assessee. Sixthly the compensation paid was referable to an undertaking and covenant by the assessee with the Imperial Chemicals Industries (Export) Ltd. not to carry on any competitive business in the same line of explosives. Lastly, even on the assumption (which was not conceded) that the agency in explosives could be regarded as merely a part of a bigger activity of selling agency in other commodities, the compensation referable to that part of the activity in explosives was nevertheless capital in nature'.
The enclosures to the affidavit of G.W. Easson, which were not included in the paper book but were allowed to be used at the hearing before us, show that the assessee had eleven officers in the explosives department on March 30, 1948, five on these were taken one by the Imperial Chemical Industries (India) Ltd. and the rest continued in service with the assessee, some of them retiring in due course. Besides these officers, the department had also a staff numbering about eighty working in the magazine section. This staff was being maintained by the assessee at the expense of the Scottish principals and was taken over by the Imperial Chemicals Industries (India) Ltd. on and from April 1, 1948.
The question referred to this court are as follows :
'1. Whether the assessees agency of the Imperial Chemicals Industries (Export) Ltd. was a separate business by itself, the closure of which resulted in the destruction of a capital asset of the assessee ?
2. Whether, on the facts and in the circumstances of this case, the compensation sums received by the assessee from Imperial Chemical Industries (Export) Ltd. are income chargeable in the hands of the assessee and
3. Whether, on the facts and in the circumstances of this case, no part of the compensation money was received by the assessee on the condition not to carry on a competitive business in the same line of activity in explosives and as such no part of the money was in the nature of capital being exempt from Indian income-tax levy ?'
It will be noticed that the agency agreement was not for a fixed period and as such was terminable at will. There can be no justifiable complaint on the ground that it was brought to an end without any notice leading to a dislocation in the structure of the assessees business. Indeed, as far back as 1945, the assessee was warned that the distribution agreement would at best be given effect to for two or three more years. There is no dispute in this case and in view of the authorities there is little room for it that if compensation is paid to an agent on consideration of an undertaking not to engage in any rival business the same would be treated as a capital receipt not liable to income-tax. It was, however, strenuously contended by counsel for the department that the agreement read as a whole does not show that compensation was referable to such an undertaking. It was argued very cogently that the restriction in trading mentioned in the penultimate paragraph of the letter of March 11, 1947, was in such wide terms that it would be held void under section 27 of the Indian Contract Act. It was pointed out that no limits had been specified for the operation of the restriction both as to the area and as to the period of time. Consequently, counsel argued, consideration for a void agreement was no consideration. Moreover, the undertaking asked for in the letter was never given and payments were made notwithstanding the absence thereof leading to the inference that no importance was attached to any such undertaking. It was further argued that what the Scottish company was aiming at was the transfer of the agency to the Imperial Chemical Industries (India) Ltd. and it was only for this transfer that compensation was being paid. It was contended that the paragraph of the letter relating to the above undertaking showed that the condition of the payment of compensation was the giving of the undertaking by the assessee and as the assessee never gave it the condition was waived. The consideration for the compensation, counsel argued, was not referable to the undertaking but to the transfer of the agency.
As against this, it was argued on behalf of the assessee that (a) the document read as a whole showed that the consideration for the compensation was not only for the loss of the agency but the undertaking imposing restriction on trading; (b) although no formal undertaking was given the acceptance by the assessee of the compensation spread over three years amounted to an acknowledgment of the restriction on trading; (c) the very fact that the compensation was not being paid in a lump sum but was being spread over three years showed that the principals were retaining some measure of control over the agents to enforce the undertaking; in other words it was argued that if the principals detected any violation of the embargo on trading they could have withheld payment of the balance of compensation.
Beak v. Robson was a case where a manager and director engaged at a salary of Pounds 2,000 per annum for five years covenanted not to engage or be interested in the business of a coal exporter or coal merchant or ship-broker within 50 miles of Newcastle-upon-Tyne for a period of five years from April 1, 1937, in case of termination of his contract of service. Such service was terminable by six months notice in writing and in consideration of the restrictive covenant the company paid him Pounds 7,000. The question arose whether the above mentioned sum was income in his hands. In delivering the judgment of the House of Lords Viscount Simonds held that the consideration which Robson had to give under the covenant fell not during the period of his employment but after its termination and that in fact he was selling to the company for a sum of Pounds 7,000 the benefit of a covenant which would only come into effect when the service was concluded.
In my view, if the undertaking asked for had been given a portion of the compensation might well have been referable to it. The fact that the manner in which the undertaking was to be given infringed section 27 of the Indian Contract Act does not matter. After all, for the purpose of income-tax the substance of the transaction must be looked at. Even if the undertaking was in a form too wide both as to the field of its operation and the space of time during which it was to be in force, for income-tax purposes it would be enough if the assessee had given the undertaking in good faith. I am not impressed by the argument as to waiver of the condition because waiver is a question of fact on which there is no finding by the Tribunal. Now, does the point seem to have been canvassed before the said body. As our attention has not been drawn to any letter between the assessee and its principals with regard to the undertaking I can only conclude that the parties gave no more thought to it. I do not think that the fact that the compensation was to be spread over three years necessarily gives rise to an inference that the object behind it was to enforce the undertaking. If so, it should have been clearly mentioned. In any event, if any importance was being attached to the undertaking, the principals would have declined to make even the first payment before insisting upon the same being given.
On the facts of this case I would hold that no part of the moneys paid to the assessee by the Scottish company is attributable to any undertaking not to engage in a competitive business. The facts of a case may show that although an undertaking was not expressly given it was to be implied from the circumstances of this case. In this case such implication does not arise. As already pointed out no letters between the assessee and the Scottish company after March, 1947, have been disclosed. This can only lead to the inference that there is no letter which would help the court in deciding in favour of the assessee. The complete absence of all corresponding regarding the undertaking negatives any such being even impliedly.
Before the Tribunal and before this court it was argued on behalf of the assessee that its predecessors having acted as the agents of the Imperial Chemical Industries (Expose) Limited for over sixty years a goodwill in the business of handling explosives had been built up and this goodwill along with the orders had been valued at the time of the transfer of the business to the assessee company at Rs. 34,92,849. On the termination of the agency the assessee had written off the proportionate value of the goodwill in several years amounting approximately to Rs. 12,00,000 of which the amount written off in the assessment year ending on March 31, 1949, was Rs. 5,00,000. It was argued that the elimination of the agency was the cause of the reduction in the value of the goodwill and that Rs. 12,00,000 was the proper valuation put upon the goodwill on the basis of three times the yearly commission which was nearly Rs. 4,00,000. On this basis it was argued that the amount received from the Scottish company could be treated as compensation for loss of goodwill and as such in the nature of capital. This argument seems to have little merit. The Tribunal recorded that it had not been supplied with any statement regarding the basis of the valuation of the goodwill nor with any material to indicate that the writing down of the value of the goodwill was due to determination of the agency. In my opinion, the Tribunal rightly characterised the inference sought to be drawn on behalf of the assessee that the compensation paid was referable to the loss of goodwill as being without any evidence or material.
This brings us to the crucial question in this case, namely, if the compensation is not referable either to the undertaking not the engage in any rival business or to loss of goodwill, is it in replacement of any part of a capital asset of the assessee or does it form any part of the income, profits or gains of any business carried on by the assessee.
The sheet anchor of the assessees case is the judgment of the Privy Council in Commissioner of Income-tax v. Shaw Wallace & Co. In this case the assessee carried on business as merchants and agents of various companies having branches in different parts of India. For many years prior to 1928 they acted as distributing agents in India of the Burma Oil Company and the Anglo-Persian Oil Company without any formal agreement either. In 1927 the two oil companies combined and decided to make other arrangements for distribution of their products. The assessees agency of the Burma Oil Company was terminated on December 31, 1927, and that of the other company on June 30, 1928. Early in 1928 the Burma Oil Company paid to the assessee the sum of Rs. 12,00,000 'as full compensation for cessation of the agency' and very soon thereafter the Anglo-Persian Oil Company paid another sum of Rs. 3,25,000 as 'compensation for the loss of office as agents to the company'. Making allowance for certain deductions in respect of compensation paid by the assessee to various employees the Income-tax Officer found the sum of Rs. 9,83,361 out of the sums paid to the assessee to be a part of the income for the year 1929-30. At the hearing of the reference before this Court the question to be answered was framed by Rankin C.J. in the following terms :
'Whether the sums were income, profits or gains within the meaning of the Indian Income-tax Act ?'
This court answered the question in the negative. The judicial Committee upheld the judgment of Rankin C.J. and observed that in deciding this question English authorities based on English income-tax statutes were hardly relevant. Sir George Lowndes pointed out that the object of the Indian Income-tax Act was to tax income and although it was expanded into 'income, profits and gains' this expansion was more a matter of words than of substance. According to the his Lordship 'Income... connotes a periodical monetary return coming in with some sort of regularity, or expected regularity from definite source. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall.... It is essentially the produce of something, which is often loosely spoken of as capital.' His Lordship went on to examine the various sources from which taxable income under the Act were to be derived and pointed out that under section 2(4) of the Act business included any trade, commerce or manufacture or adventure or concern in the nature of trade, commerce or manufacture. It was observed that underlying each of the expressions used in the said sub-section was the fundamental idea of the continuous exercise of an activity and that under section 10 of the Act tax was to be payable by the assessee under the head 'business in respect of the profits or gains or any business carried on by him'. According to the Judicial Committee, '... the sums which the appellant seeks to charge can... only be taxable if they are the produce, or the result, of carrying on the agencies of the oil companies in the year in which they were received by the respondents. But when once it is admitted that they were sums received, not for carrying on this business, but as some sort of solatium for its compulsory cessation, the answer seems fairly plain.'
Since the decision in Shaw Wallaces case the Indian Income-tax Act has been amended on many occasion but the wording of the section relied on by the Judicial Committee being substantially still the same it was argued on behalf of the assessee that the same result ought to follow. The definition of 'income' in Shaw Wallaces case has been the matter of some comment in recent cases before the Supreme Court of India, but so far as the actual decision in the case is concerned it has been said that on the facts as contained in the judgment of the Privy Council the assessee seems to have been carrying on no other agency business and as such the receipt was of a capital nature.
Although it has been observed by our Supreme Court that English statutes of income-tax are not in pari materia with the Indian statutes and that questions of law arising under the Indian Income-tax Act ought not to be decided on the basis of decisions given under English statutes, yet reference has always been made to English decisions to find out and deduce principles of law which are of general application.
English and Scottish decisions can be usefully considered to ascertain the tests formulated by learned judges to find out whether a receipt is a capital receipt or partakes of a revenue nature. That the matter is not a simple one will at once be appreciated from the fact that what may be a capital receipt in the hands of A will be a revenue one in the hands of B. Thus for instance consideration for the sale of land or machinery by a manufacturer who had bought these assets for setting up a factory would be capital receipts but the position would be entirely different in the case of a person who deals in land or machinery. In the case of a manufacturer the asset mentioned would be taken as fixed capital, whereas in the case of the other, they would be treated as circulating capital and the profits arising from the two different sources would be treated differently both under the Indian Income-tax Act and the corresponding English statutes.
There can be no dispute that if an assessee has only one agency business out of which it derives its profits termination of the business would destroy its capital structure and compensation paid therefor would be treated as a capital receipt. Again if it be the business of an assessee to deal in agencies as its stock-in-trade by securing agencies either for distribution or for sale of different kinds of commodities and transferring the rights acquired thereby to others, there can be no controversy that the transfer of a particular agency by such an assessee would be in the ordinary course of his business and any profit made thereby would be a profit arising out of his business. Normally, however, an assessee does not part with his agency in favour of another. He may give it up if he finds it unremunerative or as happens more usually the principal puts an end to the agency or alters the terms of the agency because of altered circumstances. Here again the question may arise as to whether any moneys received as a consequence of alteration of the terms of the agency are capital receipts or revenue receipts and the decision will depend upon the facts of the case and the nature of the alterations.
Reference was made by counsel for the Commissioner of Income-tax to sub-clauses (2) and (40) of the objects clause in the memorandum of association of the assessee. Sub-clause (2) of the objects clause of the company shows that it was established inter alia 'to carry on all kinds of agency business, and to take part in the management, supervision or control of the business or portions of the business of another company, association, firm or person and to act as managing agents, agents, secretaries, general managers or other officers and commission agents, insurance agents and brokers of any such company, association, firm or person and in connection therewith to appoint and remunerate any directors, accountants, assistants and other officers or experts or agents.' Under sub-clause (40) the company could do all or any of the things mentioned in sub-clauses (1) to (39) of the object clause. One cannot however ignore the other sub-clauses of this clause and it was within the competency of the assessee to carry on business as general merchants, manufacturers, brokers, contractors, to purchase and otherwise acquire and deal in, hold, manage, maintain and assign moveable and immoveable properties of all kinds, to carry on the business of banking in all its branches and departments, ect.
In my view, the matter cannot be judged from a portion of the objects clause in the memorandum of association of the assessee. The objects clause in this case as in the case of many other companies empower the assessee to engage itself in ventures of many different kinds. Thus in the case of the assessee itself not only could it carry on agency business of the types mentioned but it was authorised to work as general merchants, manufacturers, exporters and importers, ship-owners and carriers by land air and sea. Further, it could deal in all kinds of properties; it could carry on the business of banking and insurance in all its branches; it could also facilitate and engage in the creation, issue or conversion of shares; it could hold and acquire shares, stock and debentures and deal therein. But leaving aside the objects clause for a moment one finds that the assessee acts as agents in various capacities and indeed according to the statement of activities filed by the assessee in regard to the head office at Calcutta it was acting as agents in some form or other in all of them. In categories A to G of the said statement of activities the main purpose of the assessee was to act as agents. No doubt its dealings in the various agencies were of diverse character. In some cases it dealt in paints of various manufacturers; it also dealt in petrol and kerosene oil, medicines and toilet preparations, carpets, cement, timber, etc. It was argued that explosives are things which cannot be handled like other commodities and that the storing and handling thereof are regulated by provisions of the Explosives Act. Taken in conjunction with the averment that it had a special class of officers dealing only with explosives the contention was raised that this activity of the assessee was different from all others and sterilisation thereof inflicted loss of a capital asset. This argument does not seem to be found. Kerosene for instance is an inflammable substance and the handling and storing of it must be done in a way peculiar to volatile and inflammable goods. Special care has to be taken in the matter of storing and handling cement; so also in the case of timber which must be guarded from risks of fire. It cannot be suggested that a business in any of these commodities is a distinct and several capital asset in the hands of an assessee who deals in all of them. As already pointed out only five officers connected with the explosives department of the assessee were taken over by the Imperial Chemical Industries (India) Limited. Six others were retained by the assessee itself. So far as eighty persons attached to the magazine section were concerned they were being maintained at the expense of the Scottish principals. It is difficult to say on the materials before the Tribunal that they formed an integral part of the staff of the assessee. The termination of an agency certainly brings about some dislocation so far as the staff of a businessman is concerned and affects his profit earning capacity. But the result might have been the same if, for instance, the assessee lost the agency with regard to cement or with regard to the paints of Imperial Chemicals Industries (India) Limited. It cannot be suggested in the case of an assessee like the one before us with so many different agencies in various kinds of goods that the loss of any one of them will affect its capital structure.
It was argued by reference to several English and Indian decisions that the case is one of a loss of capital asset but in my view a close examination of these cases does not bear that out. In Van den Berghs Ltd. v. Clark the facts were as follows : The appellant company, which carried on the business, inter alia, of manufacturing and dealing in margarine and similar products, entered into an agreement with a competing Dutch company by which the two companies bound themselves for the future to work in friendly alliance, to share the profits of their business in specified proportion, to bring within the operation of the agreement, if required, any interest in other margarine concerns acquired by companies under their control not to enter into any pooling or price arrangements with third parties inimical to the interest of the two companies and to set up a joint committee to make arrangements with outside firms as to prices and limitation of areas of supply of margarine. By further agreements executed in 1913 and 1920 the arrangement of 1908 was to continue in force until 1940 with certain modifications. Between 1908 and 1913 payments were made by the appellant company to the Dutch company and vice versa. From 1914 to 1919 the two companies were unable to compute their profits owing to the difficulties caused by the World War. In 1922 the appellant company claimed Pounds 449,042 as being the amount due to it by the Dutch company under the agreement. This liability was not admitted and a counter claim was made. The matter was referred to arbitration which proved abortive. Ultimately, a settlement was reached in 1927 whereby it was agreed that in consideration of the Dutch company paying to the appellant Pounds 450,000 as damages, the agreement would be treated as determined on December 31, 1927. The question arose as to whether the appellant company was assessable to income-tax under Schedule D. Finlay J. held that the company was not assessable. The Court of Appeal took a different view but the House of Lords concurred with the judgment of Finlay J. According to Finlay J. The payment by way of damages for the cancellation of the agreement was a payment in respect of future rights. His Lordship observed (page 413) : 'the agreement, being an agreement whereby this company had a share in the profits of another company, was a capital asset. I think that the case is to be distinguished from the case where there is a cancellation of a contract made in the ordinary course of the companys business. If the company had had a contract for the supply of materials for making margarine and that had been cancelled and a sum received in respect of it, it is quite obvious, I think, that that would have been a proper trade receipt.' His Lordship distinguished the case from Glenboig case, where a company dealing in fire-clay was prevented from working such clay under the lines of a railway company and it was held that the company had lost a portion of its capital asset and compensation paid in respect thereof was not assessable as income. Finlay J. pointed out that this was quite different from Short Brothers case, where compensation paid for cancellation of a contract to build ships was held to be trade receipt on the ground that it was receipt had in the course of a going business. Rowlatt J. observed in Short Brothers case that if the contract had been executed the receipts would have come into the accounts in a year or two after the entry thereof. He went on to say : 'The contract might have taken longer, and the receipts would have gone into more years. It might have been accelerated by the agreement of the parties, and the receipts would have gone into shorter periods.' According to Lord Hanworth M.R. in Short Brothers case : 'It was not truly compensation for not carrying on their business : it was a sum paid in ordinary course in order to adjust the relation between the shipyard and their customers.'
The above dictum may be usefully compared with that of Lord Wrenbury in the Glenboig case, where his Lordship said :
'Is a sum profit which is paid to an owner of property on the terms that he shall not use his property so as to make a profit The answer must be in the negative. The whole point is that he is not to make a profit and is paid for abstaining from seeking to make a profit. The matter may be regarded from another point of view : the right to work the area in which the working was to be abandoned was part of the capital asset consisting of the right to work the whole area demised. Had the abandonment extended to the whole area all subsequent profit by working would, of course, have been impossible, but it would be impossible to contend that the compensation would be other than capital. It was the price paid for sterilising the asset from which otherwise profit might have been obtained. What is true of the whole must be equally true of part.'
Judged in this light there is no difficulty in appreciating Shaw Wallaces case if the only agencies which the assessee there had were of the two oil companies. In that case it will be noted the assessee had to pay considerable sums of money as compensation to members of its staff working in the said agencies. Nothing of the kind has been shown here.
In my view, the case before us falls rather in line with Kelsall Parsons case and Fleming & Co.s case. In Kelsall Parsons & Co. v. Commissioners of Inland Revenue, the facts were as follows : The appellants commenced business in 1914 as manufacturers agents and engineers. At all material times their business was to act as agents for the sale in Scotland for various manufacturers on a commission basis of such manufacturers products. In 1914 they had two agencies only, one of which was for George Ellison Ltd., who manufactured electric switch gear, etc. There was an agreement between the appellants and the said George Ellison Ltd. in 1914 to subsist for a period of 12 months only. This was renewed from time to time for various periods on slightly varying terms up to September, 1923, when a new agreement was entered into providing for payment of a commission of five per cent. of the net invoice of all orders received from customers and a minimum sum of Pounds 2,000 per annum, whether such amount became due as commission or not. The appellants were required to employ sufficient staff of competent salesmen for the proper performance of the duties. There was some variation again in the year 1932 whereby the rate of commission was increased and the agreement was to enure for a period of three years. George Ellison Ltd. did not seem to be satisfied with the conduct of their agents and requested that the agency agreement should be terminated in May, 1934. It was agreed between the parties that the agency would be terminated on September 30, 1934, instead of the corresponding date in 1935 and the principals would pay to the appellants Pounds 1,500 to cancel all obligations on either side. It was observed by Lord President Normand (page 619) :
'The sum which the appellants received was,..... for cancellation of the agency contract. That was a contract incidental to the normal course of the appellants business. Their business, indeed, was to obtain as many contracts of this kind as they could, and their profits were gained by rendering services in fulfillment of such contracts. The appellants business is entirely different from the business carried on by some one who, under contract, acts exclusively as agent for a single principal..., these agency contracts might be for a fixed term, or they might be terminable at will. It was a normal incident of a business such as that of the appellants that the contracts might be modified, altered or discharged from time to time, and it was quite normal that the business carried on by the appellants should be adjustable to variations in the number and importance of the agencies held by them, and to modifications of the agency agreements, including modifications of their duration, which might be made from time to time..... In parting with the benefit of the contract, moreover, the appellants were not parting with something which could be described as an enduring asset of the business. The contract would have been terminated in any event as at the 30th September, 1935. The appellants not only had no legal right to insist on the continuance of the agreement beyond that date, but they had, after May, 1934, no reasonable expectation, in view of the known attitude of Ellisons, that the agreement would, in fact, be continued beyond September, 1935...... We are not embarrassed here by the kind of difficulties which arise when, by agreement, a benefit extending over a tract of future years is renounced for a payment made one and for all. The sum paid in this case is really and substantially a surrogatum for one years profits.'
With regard to the argument that a payment for loss of a profit making apparatus was necessarily a capital payment in the hands of the recipient who received it as compensation for such loss, his Lordship said that the proposition was too vague and too wide. He referred to the case of Short Brothers and said that it could be treated as of high authority as it passed the scrutiny of the House of Lords without adverse comments in Van Den Berghs case. According to his Lordship '.... the business carried on by the appellants was in fact, as the nature of the business required, so designed as to absorb such shocks as the cancellation of a single, albeit an important, agency contract'. Short Brothers case was also relied on by Lord Fleming who said, however, that the fact that the agreement had only one year to run at the date of its termination was a matter of importance and a different result might have been arrived at if the agreement when terminated had still a period of several years to run. His Lordship observed :
'A payment made in respect of a loss to be sustained over a period of years may well have a different character from a payment made in respect of a loss to be sustained in the year in which the payment is received'.
Lord Moncrieff took the same view and said :
'In the present case, as in the case of Short Brothers, cancellation of the agreement has resulted in the disturbance of the contracted profits of the appellants, and for such a loss, subject to one distinction, compensation when paid seems to share the revenue quality of the benefit in respect of the loss of which it has been paid. The distinction I would draw was incidentally recognised in the case of Short Brothers. The trading profits which had been contracted for in that case were trading profits which were to be ingathered within what I may call the revenue period of the outlook of a shipbuilding business'.
His Lordship agreed with Lord Fleming that if the agreement had several years to run, when brought to an end, the result might have been different.
The case before us bears a close resemblance to the facts of Commissioners of Inland Revenue v. Fleming & Co. Ltd. In this case the assessee was a company formed in 1914 to acquire the business formerly carried on by the firm of Fleming & Co. The company carried on the business of agents and merchants engaged in the sale of machinery, explosives, etc. The firm held the sole selling agency for Scotland for explosives manufactured by Imperial Chemical Industries Ltd. for many years. Their appointment, embodied in a letter of December, 1903, continued until May, 1948, when it was terminated. There had been some modifications in the agreement from time to time. The termination of agency was effected by an agreement dated June 18, 1948, whereby company received a lump sum payment of Pounds 5,320 as compensation for the loss of it. It also received; Pounds 590 in respect of the restrictive covenant under which the company and its directors were barred for a period of ten years from entering the explosives industry in Great Britain, Northern Ireland, etc. The company further received a sum of Pounds 800 for an agreement to assign leases of certain premises which the company occupied. A statement made by the directors of the company showed that (1) in addition to the agency for Imperial Chemical Industries Ltd., the company held during a part of the period either other agencies and during a part of the period seven other agencies, (2) that the gross commissions on agencies in each year throughout the period greatly exceeded the companys gross profits from merchanting, (3) that the commission received by the company from the agency of Imperial Chemical Industries Limited constituted from 30% to 45% of the total agency commission received by them, (4) that over the seven complete years ending December, 1947, the average commission received from Imperial Chemical Industries Limited amounted to Pounds 2,677 per annum, and (5) that the agency of the Imperial Chemical Industries Limited was worked by all the directors of the company and no special sales organisation or staff was employed exclusively for it and that there was no reduction in staff following the loss of the agency. The company contended that they had lost a very large part of their business and had to give the restrictive covenant for ten years. It was argued that for practical purposes a substantial portion of the companys business could be regarded as gone for good and consequently the sum of Pounds 5,320 should be regarded as capital. On behalf of the Commissioners it was contended that the company acted not only as commissioner agents but general merchants, that the general structure of the companys business had not been affected by the loss of the agency, and the loss of one agency out of eight was a normal feature of the companys business. Lord President Cooper, in delivering the judgment, said that 'the problem thus belongs to a type exemplified by a number of recent cases in which, broadly speaking, the line has been drawn in the light of varying circumstances between, (a) the cancellation of a contract which affects the profit making structure of the recipient of compensation and involves the loss by him of an enduring trading asset; and (b) the cancellation of a contract which does not affect the recipients trading structure nor deprive him of any enduring trading asset, but leaves him free to devote his energies and organisation released by the cancellation of the contract to replacing the contract which has been lost by other like contracts'. His Lordship added that although it was not possible to formulate the distinction exhaustively or with complete accuracy, but a sufficient indication of the relevant considerations would be found by contrasting such cases as Van den Berghs Ltd. and Barr Crombie & Co., in which the payment was held to be of a capital nature, with Short Brothers case and Kelsall Parsons & Co.s case, in which the payment was held to be of a revenue nature. His Lordship noted that the difficulty was created by the fact that the substance of the transaction could not easily be equated with the formal deed by which the transaction received effect. After examining the facts of the case his Lordship said that 'the net result of all this was of course that the company, which prior to 1948 had an explosives branch and a machinery branch, parted with its explosives branch to Imperial Chemical Industries for Pounds 6,710, and after 1948 became restricted to its machinery business. If that were the whole story I should have no difficulty in holding that the purchase consideration for the virtual transfer to Imperial Chemical Industries of between one-third and one-half of the companys business undertaking was a capital payment.' His Lordship observed further that the facts of the case excluded the inference because against the loss of the agency was set the surprisingly large sum of Pounds 5,320 although it was an agency at will and the restricted convenant given by the directors, which must have been by far the most valuable part of the bargain, was against the consideration of Pounds 590 only. His Lordship went on to say :
'It is against the Pounds 5,320 alone that the challenge is directed, and taking the agreement at its face value the Inland Revenue maintain that clause 1 specifically records simply the loss by a selling agency of one agency (out of eight which they held in 1948) and that such a loss is or must be treated as a normal trading risk. I can see no satisfactory answer to this contention unless we can impart a special meaning to clause 1 by reading along with it the rest of the agreement. I am of course willing to have regard to the agreement as a whole but I am not able to reframe the agreement in such a fashion as to telescope clauses 1, 2 and 3 into a single composite clause with a single money consideration'.
According to Lord Russell :
'When the rights and advantages surrendered on cancellation are such as to destroy or materially cripple the whole structure of the recipients profit making apparatus, involving the serious dislocation of the normal commercial organisation and resulting perhaps in the cutting down of the staff previously required, the recipient of the compensation may properly affirm that the compensation represents the price paid for the loss or sterilisation of a capital asset and is therefor a capital and not a revenue receipt.... On the other hand when the benefit surrendered on cancellation does not represent the loss of an enduring asset in circumstances such as those above mentioned-where for example the structure of the recipients business is so fashioned as to absorb the shock as one of the normal incidents to be looked for and where it appears that the compensation received is no more than a surrogatum for the future profits surrendered - the compensation received is in use to be treated as revenue receipt and not a capital receipt.'
Both Lord President Cooper and Lord Russell stated that it was not admissible to ignore the legal effect of a document construed in its surrounding circumstances and to have regard merely to what was called the substance of the matter. The restrictive covenant having been valued at Pounds 590 only his Lordship (Lord Russell) said that 'in the result the sum of Pounds 5,320 paid for the loss of an agency which had been terminable at will, when viewed against the background of the companys business organisation and profit making structure so fully detailed in the findings, seems to me to be no more than a surrogatum for the loss of future profits. In my opinion this case furnishes a reasonably clear instance of the type of case considered and decided in Kelsall Parsons & Co.s case and the sum in question falls to be treated as an income receipt forming part of the companys taxable profits.' According to Lord Keith '... the sum of Pounds 5,320 must be regarded as compensation for loss of profits and not for loss of a profit earning asset. This may seem a large sum for loss of profits to an agency terminable at will : but is may reflect the long period during which the agency had continued and a desire on the part of Imperial Chemical Industries Ltd. to act generously. Also reasonable notice would have been required to terminate the agency and there might have been contentions questions as to what notice was required. Compensation in lieu of notice would in my opinion quite clearly be a revenue receipt.'
It is difficult to distinguish the facts of Fleming & Co.s case from the facts before us. Here too the agency was terminable at will. Three years notice had been given that it would be put an end to. According to the letter of March 11, 1947, the compensation was going to be said for the transfer of the agency to Imperial Chemical Industries (India) Ltd. No undertaking was given by the assessee to refrain from selling explosives or accepting any competing agency. The assessee had a large number of agencies of buying and selling or for selling alone of goods manufactured by others. The compensation must, therefore, be regarded as one for loss of profits and not for loss of a profit earning asset. It must, therefore, be treated as surrogatum for the future profits surrendered.
The latest English case in which the question came up for consideration is that of Anglo-French Exploration Co. Ltd. v. Clayson. The essential facts of the case as noted in the judgment of Lord Evershed M.R. are as follows :
'The Anglo-French Exploration Company Limited, was formed as an English company at the end of last century, its business being that of a mining and finance company particularly concerned with seeking scope for the investment of capital in South Africa. Among the South African companies in which the English company held a substantial shareholding for many years was the Kleinfontein company. In this the English company held at all material times about one-third of the total of the share capital and a similar shareholding was held by the trustees of the estate of Sir George Farrar. The English company and the said trustees had each of them two nominee directors on the board of Kleinfontein; but, in fact, the fees which were paid to the nominee directors were in turn paid over by them to the English company. In addition to the shareholding interest Anglo-French had for many years acted under the terms of a written agreement as agents and secretaries of Kleinfontein for the annual fee of Pounds 1,500. The English company provided office accommodation and office staff for Kleinfontein in Johannesburg. The agreement was terminable by six months notice on either side but in practice, and so long as the English company, and the trustees co-operated, the agreement could not be determined. In May, 1949, Philip Hill Securities Corporation Limited, another English company, offered to buy the shares of the Kleinfontein at a price of 35 s. per share. It was also part of that offer that when the stage was reached whereby more than 50% of the issued shares of Kleinfontein had been acquired the Philip Hill Company would pay the sum of Pounds 20,000 in consideration of the resignation by Anglo-French of its office as agents and secretaries. Those offers were accepted and in due course and in accordance with the terms of the arrangement the Pounds 20,000 having been received, part of it was payable by Anglo-French to the Farrar trustees retaining Pounds 16,138 4s. 2d. The question was whether this sum could be included within the annual profits or gains arising or accruing to Anglo-French from any trade, profession, employment or vocation exercised within the United Kingdom.'
Lord Evershed found himself bound by the previous decisions and said that 'if the matter were res integra, I think that there is much to be said for the simple view that a sum of money received in consideration for the giving up or destruction of an agreement under which you look to earn an annual sum is capital and not income : for in such case the sum received might be described fairly as the capitalised equivalent at the present time of income prospects. But the question remains, not whether that sum in some senses or in some contexts might sensibly be called a capital payment, but whether within the terms of Schedule D it is a profit or gain arising from the trade of the recipient'. His Lordship went on to add that the matter was covered by the authorities and that 'sums received for the cancellation of an agency or of other similar agreements which have been entered into by into by the recipient in the ordinary course of its trade will themselves, prima facie, be regarded as received in the ordinary course of trade unless the transaction involves a parting by the recipient with a substantial part of its business undertaking'. His Lordship discussed the cases mentioned above and said that 'it is true that the facts show that Anglo-French held some eight agencies and secretarial contracts and have done so for a considerable time with little variation. Nevertheless, the making of such contracts was part of the business of Anglo-French, and the cancellation of this one contract in no sense affected the profits-making apparatus of the company which retained its offices and staff etc., in Johannesburg exactly as before.' His Lordship was not able to find that the agency contract was a capital asset although it was of long standing and further discountenanced the argument that dealing in agency was necessary in order to find that the compensation received was a trading receipt and referred to Kelsall Parsons case and Fleming & Co.s case in this connection.
These English cases have been considered by our Supreme Court from time to time. In Commissioner of Income-tax v. South India Pictures Limited the facts were as follows : The assessee was a private limited company carrying on the business of distribution of films. In some instances it used to produce and purchase the films and then distribute the same for exhibition in different cinema halls and in other cases it used to advance moneys to producers of films and secure the right of their distribution. In the course of such business it advanced moneys to Jupiter Pictures for producing three films and acquired the right to distribute these films under three agreements in writing dated 1941, 1942 and 1945. The agreements were expressed in similar language and by these the assessee bound itself to advance a certain sum in instalments specified in each and retain the balance to be utilised for the purpose of publicity. Jupiter Pictures in its turn bound itself to arrange for the delivery to the assessee of twelve copies of the film after passing by the Board of Censors. The agreement specified territories within which the assessee was to have the right of distribution and exploitation. Such right was to enure for five years, the assessee being given the same right to distribute the films at such rates and on such terms and conditions and in such manner as it might consider fit. The amount realized by the distribution of films was to be utilised by the assessee first in paying itself its distribution commission and, secondly, in retaining the available balance until the entire amount of advance could be discharged and thereafter to pay to Jupiter Pictures the net realisations from the film after deducting its commission. In case the full amount of advance could not be recouped from the realisations of the film within a year and a half of the date of its first release, Jupiter Pictures was to be liable to pay to the assessee whatever balance would remain due interest. The assessee was given liberty to appoint sub-agents and sub-distributors and a charge in its favour was created by way of security on the negative and positive copies of the film for whatever amount might be due to it on account of the advances made. If Jupiter Pictures failed to deliver the film within the time specified the assessee was given the right at its option to complete the picture at its own cost and in such event Jupiter Pictures was to be liable to the assessee for all such expenses with interest. In the accounting year ending March 31, 1946, and in the previous years the assessee had exploited its right of distribution of the three pictures. On October 31, 1945, the parties entered into an agreement cancelling the three several agreements relating to the distribution rights in respect of the three films and in consideration thereof Jupiter Pictures agreed to pay to the assessee Rs. 8,666-10-8 for each of the three pictures aggregating Rs. 26,000. The question was whether this sum was a revenue receipt.
The Supreme Court by a majority upheld the catenation of the department and said that the sum was not received by the assessee in return for its ceasing to engage in the business of distributing these films. Das C.J. observed :
'Here was the assessee whose business was to distribute films, purchased or produced by itself or in respect of which it secured the distribution rights under agreements with the producers. For the purpose of this distribution business the assessee obviously had arrangements with the proprietors of different cinema halls. If any producer failed to delivery any film as agreed then the exigencies of the assessees business would certainly have required the assessee to treat that agreement as terminated by breach and to enter into another agreement for securing the distribution right in some other film so as to enable it to fulfill its engagement with the proprietors of the cinema halls by distributing the new film in the place of the one that had not been supplied. Likewise if a particular film secured by the assessee failed to attract public enthusiasm, business exigencies might well have required the assessee to enter into an arrangement with the producers concerned to cancel the agreement for distribution of that film and to enter into another agreement with the same or other producers for acquiring the distribution right in another film likely to bring a better box-office collection.'
According to his Lordship 'the termination of the agreement in each of the circumstances hereinbefore mentioned could well be said to have been brought about in the ordinary course of business and money paid or received by the assessee as a result of or in connection with such termination of agreements would certainly be regarded as having been so paid or received in the ordinary course of its business and, therefore, a trading disbursement or trading receipt.' His Lordship relied on several factors to arrive at this conclusion : (1) there was no convenant made by the assessee with Jupiter Pictures not to enter into agreements with other producers or not to distribute films secured from other producers; (2) the cancellation of these agreements must have left the assessee free, if it so chose, to secure other films which could be distributed in the place of these films and which might have brought in better box-office collections; (3) the whole trade of the assessee did not depend upon the agreements which were cancelled and there was no loss of such a fundamental asset as was in the case in Barr, Crombie & Co. Ltd. v. Commissioners of Inland Revenue; (4) the termination of the agreements did not radically or at all affect or alter the structure of the assessees business. His Lordship repelled the plea that the films were capital assets in the hands of the assessee because they were received in consideration of the financing agreements and said that these financing agreements gave it no right to distribute the films or otherwise work them for making income, profits or gains. His Lordship noted that there was no suggestion that any part of the moneys advanced by the assessee for the production of the films was outstanding. The amount received by the assessee could only be treated as having been received towards commission, that is to say, compensation for the loss of the commission which it would have earned had the agreements not been terminated. It should be noted that Bhagwati J. gave a dissenting judgment. According to him, the agreements were composite agreements and if the assessee acquired capital assets those assets continued in its possession as such all throughout the period of the agreements and it would not be legitimate at any intermediate period of time to see what was the position obtaining at that time for the purpose of converting what were acquired as capital assets at the dates of the agreements into stock-in-trade of its business of distribution and exploitation of the pictures.
All these cases came up for consideration by the Supreme Court in Commissioner of Income-tax v. Jairam Valji. Here the assessee was a businessman whose trading activities were manifold. He was a railway contractor; he ran a rice mill and a sugar factory; he was also a supplier of limestone and dolomite. He had acquired a quarry at Paraghat and had been himself working it and selling limestone to Bengal Iron Company Ltd. On January, 1935, he entered into an agreement with the said company whereby the company was to purchase all its requirements of limestone and dolomite from the assessee at specified rates. These rates were subsequently modified. In 1936 the company went into liquidation and its assets and liabilities were taken over by the Indian Iron and Steel Company Ltd. After taking limestone from the assessee for sometime the Indian Iron and Steel Company Ltd. found the rates to be uneconomic and decided to purchase its requirements from others and informed the assessee accordingly in 1939. The assessee filed a suit for specific performance of the contract of 1935 and for an injunction restraining the Indian Iron and Steel Company Ltd. from purchasing dolomite from others. The company and the respondent then entered into an agreement to settle their disputes whereby the assessee was to work a quarry of the company for 25 years and to supply limestone therefrom. There was no siding facilities near the quarry and it was anticipated that some time would elapse before such facilities became available. During this period before the construction of the siding the company agreed to pay to the assessee Rs. 4,000 every month. The work of the quarry was left entirely in the hands of the assessee who undertook not to engage during the subsistence of the agreement in any other contract business for working of any quarry within an area of 20 miles from the companys quarry. The railway authorities did not agree to the construction of the siding. The parties then entered into another agreement in 1941 whereby the company agreed to pay to the assessee Rs. 2,50,000 to him as solatium besides the monthly instalments of Rs. 4,000 remaining unpaid and further covenanted to take from the assessee all the limestone required for its furnaces at Kulti for a period of 12 years on certain terms and conditions. The question arose whether the sum of Rs. 2,50,000 was a capital receipt or a revenue receipt.
Delivering the judgment of the Supreme Court Venkatarama Aiyar J. noted the English decisions already mentioned and said that 'the question to be considered is whether the contract entered into in 1940 was in the usual course of the assessees business'. According to his Lordship if the answer was in the affirmative then the amount paid for the termination of the contract must be held to be a trading receipt. His Lordship stated that there would be some difference between the cases where a trading contract was cancelled and those in which an agency agreement was terminated and said that 'in an agency contract, the actual business consists in the dealings between the principal and his customers, and the work of the agent is only to bring about that business. In other words, what he does is not the business itself but something which is intimately and directly linked up with it. It is, therefore, possible to view the agency as the apparatus which leads to business rather than as the business itself on the analogy of the agreements in Van den Berghs case.' His Lordship did not mean to lay down that all agency contract must be treated as capital assets. According to his Lordship 'when once it is found that a contract was entered into in the ordinary course of business, any compensation received for its termination would be a revenue receipt, irrespective of whether its performance was to consist of a single act or a series of acts spread over a period and in this respect, it differs from an agency agreement.' His Lordship discussed Kelsall Parsons case, but nowhere stated that the reasoning therein employed would not be applicable to the cases governed by the Indian Income-tax Act.
The case of modification of an agency agreement came up before the Supreme Court in Commissioner of Income-tax v. Vazir Sultan and Sons. Here the assessee firm was appointed the sole selling agent and distributor for the Hyderabad State for the cigarettes manufactured by Sultan Tobacco & Co. Ltd. There was no written agreement but there was a resolution dated January 6, 1931, of the board of directors of the tobacco company recording the arrangement of the distributorship of Chairman cigarettes within the Nizams dominions at a certain discount. In 1939 there was another agreement whereby the assessee was given a discount of 2% not only on the goods sold in Hyderabad State but also outside the State. There was no resolution of the board of directors nor any agreement in writing. In 1950 the directors of the company passed a resolution to the effect that the resolution of January, 1931, would be adhered to and a sum of Rs. 2,26,263 would be paid to the assessee by way of compensation. It was contended on behalf of the Income-tax Commissioner that by the reversion to the old arrangement of 1931, the profit-making apparatus of the assessees business was not affected and that the expansion of the assessees territory or reduction therefore was in the ordinary course of the assessees business and was a mere accident of the business. The Supreme Court by a majority decided in favour of the assessee. Delivering the judgment of the majority of the judges Bhagwati J. observed that the definition of income in Shaw Wallaces case required further consideration and that it was not necessary that income should be of a recurring nature. He referred to the tests in South India Pictures case and the observation of Venkatarama Aiyar J. that an agency contract was generally in the nature of a capital asset. He noted that there was no agreement between the assessee and the tobacco company the termination of which could be made the subject-matter of a legal claim for damages and said 'in all these cases one has really got to look to the nature of the receipts in the hands of the assessee irrespective of any consideration as to what was actuating the minds of the other party'. He placed great reliance on the facts that there was nothing on the record to show that the acquisition of an agency constituted the assessees business or that these agency agreements were entered into by the assessee in the carrying on of any such business. According to the judgment of the majority of the judges the agency arrangement really formed a profit-making apparatus of the assessees business of distribution of cigarettes.
According to Kapur J., who gave a dissenting judgment, 'compensation for the loss of an agency would be for the loss of a capital asset if the termination of the agency was a damage to the recipients business structure such as to destroy or materially cripple the whole structure involving serious dislocation of the normal commercial organisation but if it was merely compensation for the loss of trading profit, i.e., in respect of commissions, or it took the place of commission that would have been earned if the engagement had continued then it is revenue.' His Lordship relied on the case of Wiseburgh v. Domville.
It will, therefore, be noticed that any dislocation of the assessees structure will not necessarily point towards the loss or damage of a capital asset.
The Supreme Court had to deal with this question once again in Godrej & Co. v. Commissioner of Income-tax. In this case the assessee firm were acting as managing agents of a company and getting a yearly commission at the rate of 20% on the net profits of the company. On the agitation of some of the shareholders of the managed company negotiations followed for the alteration of the terms of the managing agency whereby in consideration of the company pay in Rs. 7,50,000 as compensation for being released from the onerous terms as to remuneration contained in the existing managing agency agreement the assessee firm agreed to accept the remuneration at the rate of 10% of the net profits of the company. All the judges were agreed that so far as the managed company was concerned the release from liability to pay a higher remuneration for over 17 years was an advantage gained by the managed company for the benefit of its business and the immunity thus obtained could be regarded as the acquisition of an asset of enduring value by means of a capital outlay. They took care to observe that this did not lead to the conclusion that the receipt in the hands of the firm would necessarily be a capital receipt. According to the Supreme Court there was a distinct deterioration in the character and quality of the managing agency viewed as a profit-making apparatus and this deterioration was of an enduring kind. It was further observed that the sum of Rs. 7,50,000 was paid and received not to make up the difference between the higher remuneration and the reduced remuneration but was in reality paid and received as compensation for releasing the company from the onerous terms as to remuneration as it was in terms expressed to be. A review of these Supreme Court authorities shows that the principles which have been laid down in England have been adopted in India also. Comparing the facts in South India Pictures case with the case before us it may be said that the compensation received by the assessee was not in return for its ceasing to engage in the business of an agency in explosives. Again compared with Jairam Valjis case it may be said that the agency agreement in explosives had been entered into by the assessee with the Imperial Chemical Industries (Export) Limited in the usual course of its business as a consequence whereof the amount paid for the termination of this agreement must be held to be a trading receipt. There is no likeness between the facts of this case and Vazir Sultans case or Godrej & Companys case. In Vazir Sultans case the distributorship of chairman cigarettes was the profit-making apparatus. Similarly in Godrej & Companys case it was the managing agency agreement which was being modified to the serious injury of the assessees profit earning machinery.
Nor again can I see how the case of Senairam Doongarmall v. Commissioner of Income-tax helps the assessee. In this case the assessees tea estate was requisitioned by the military authorities with all the factory buildings, etc. Possession of the tea garden was not disturbed and the assessee was free to attend to its gardens and to preserve the plants although it could not carry on the business of manufacturing tea. Compensation paid for such requisition was held by the Supreme Court not to be revenue in the hands of the assessee. The court observed :
'Now when the payment was made to compensate the assessee, no doubt the measure was the out-turn of tea which would have been manufactured; but that has little relevance. The assessee was not compensated for loss or destruction of or injury to a capital asset. The buildings were taken for the time being, but the injury was not so much to the fixed capital as to the business as a whole. The entire structure of business was affected to such an extent that no business was left or was done in the two years.'
It was further observed that the Indian Income-tax Act divided the sources of income, profits and gains under various heads in section 6 and that the primary condition of the application of section 10 was that tax was payable by an assessee under the head 'profits and gains of a business' in respect of a business carried on by him. According to the Supreme Court, where an assessee does not carry on business at all, the section cannot be made applicable and the compensation that he receives cannot bear the character of profits of a business.
The last observation along with the definition of income in Shaw Wallaces case were relied on by learned advocate for the assessee in support of his contention that the agency having been terminated any money received in respect thereof could not be described as profits and gains of a business carried on by the assessee. I do not think that this contention is sound. If the assessees business stops altogether then no doubt it can be urged that section 10 of the Indian Income-tax Act cannot apply but where the assessee carries on business of various kinds and loses a particular business in a particular accounting be said that the sum is not in lieu of the profits or gains which he would have made if that particular business had not been interrupted.
The last point urged on behalf of the assessee was that the business in explosive was of a different nature altogether from its other business and that it had no connection with the other agencies and to quote the words of a learned judge in Scales v. George Thompson & Co. Ltd., 'there was no interlacing and no dovetailing of this business with the other business and consequently the loss of its business inflicted injury to the whole structure of the assessees business.' In Scales v. George Thompson & Co. Ltd., the assessee was a company incorporated in 1905 to take over as a going concern the business of George Thompson & Co., shipowners, ship and insurance brokers, underwriters and merchants. As regards their underwriting business the firm had been represented by two of their partners who acted on behalf of the firm as 'names' or members of a syndicate whose credit was used by an underwriting agent in underwriting risks at Lloyds. The monetary deposit made at Lloyds in respect of these two partners was transferred to the company but since Lloyds would not recognise a company as a 'name', these two partners continued to act as nominees and agents of the company, to which all underwriting profits were handed over, the company being responsible for any losses. These profits were brought into the companys accounts with those of the rest of their business. In 1919 one of the nominees retired and in 1920 the other died, whereupon the underwriting business came to an end. The company claimed that the underwriting business was separate from their other activities and that it should be treated as a separate business in computing their liability. The company claimed relief from income-tax assessment consequent upon the cessation of the underwriting business. On behalf of the revenue department it was contended that although the company had more than one activity its activities including the underwriting constituted one trade. In coming to the conclusion that the company carried on two business, Rowlatt J. observed that because the profits of the two businesses were brought in together it did not mean that they constituted one business and according to the learned judge 'the real question is, was there any interconnection, any interlacing, any interdependence, any unity at all embracing those two business'. His Lordship found that the business of owning ships and running them did not dovetail into the business of underwriting.
This decision has been referred to by the Supreme Court in India in Setabganj Sugar Mills Ltd. v. Commissioner of Income-tax. In this case Setabganj Sugar Mills was established to take over some sugar mills run by a firm. For the first few years the company carried on the business of manufacturing and sale of sugar only. In the accounting year ending August 31, 1945, the company had some transactions in gunnies and made a profit. In the next accounting year the company made a profit in gunnies and jute. In the year ending August 31, 1947, the company made profit in business in mustard-seeds, gunnies and hessian. Thereafter the company ceased to have any business other than the manufacture and sale of sugar. In the assessment year 1948-49 the profits of the company from the sale of gunnies, mustard and jute amounted to Rs. 6,14,018. During this year the sugar business resulted in a loss of Rs. 2,09,306. This loss was set off against the profits of the other business and the company was assessed on the difference between the two sums. The company claimed to set off against this profit, business losses of former years in its business in sugar amounting to Rs. 13,43,069. The contention of the company was that these losses were of the same business and that section 24(2) of the Income-tax Act applied. This was not accepted by the department. Having lost before the Tribunal the company wanted a reference to the High Court on four question of law. The Tribunal declined to do so. An application under section 66(2) before the High Court met with no better fate. The company then by special leave appealed against the order of the Tribunal reversing the decision of the Appellate Assistant Commissioner and the order of the High Court declining to call for a statement of the case. Their Lordships relied on the case of Scales v. George Thompson & Co. Ltd., and took the view that a question of law did arise as to whether the business activities of the company in the manufacture and sale of sugar and sale and purchase of gunnies, jute and mustard seeds constituted the same business within the meaning of section 24(2) of the Indian Income-tax Act.
No doubt for certain purposes the court may have to consider whether there is interlacing or dovetailing between the different activities of an assessee for certain purposes but this does not mean that if the assessee has business of the same nature in different kinds of commodities he can be said to posses several independent profit-making apparatus the loss of one of which will sterilise his apparatus to that extent. After all it is a question of fact dependent on the circumstances of a particular case and the assessees business in different kinds of goods may be so conducted that one has no relation to the others and the business structure relating to one of a particular class of goods is entirely separate and distinct from that in respect of the others, but there is no evidence on the record before us to justify such a conclusion in this case.
In the result the answers to the questions are as follows :
Question 1 : The assessees agency of the Imperial Chemical Industries (Export) Ltd. was not a separate business by itself and the closure of this business did not result in the destruction of a capital asset of the assessee.
Question 2 : The amounts of compensation 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 the compensation money was received by the assessee on condition not to carry on a competitive business in explosives and consequently no part thereof was exempt from Indian income-tax levy.
The assessee must pay the costs of this reference.
RAY J. - I agree
Reference answered accordingly.