P.B. MUKHARJI J. - This is a reference by the Income-tax Tribunal at the instance of the Commissioner of Income-tax under section 66(1) of the Income-tax Act. The question of law on which the decision of this court is sought is as follows :
'Whether on the fact and in the circumstances of the case the sum of Rs. 3,50,000 received by the assessee to relinquish the managing agency was revenue receipt assessable under the Indian Income-tax Act ?'
It raises the proverbial controversy between a capital receipt and a revenue receipt. The sum taxed represents the sale price of a managing agency sold by the assessee whose usual business under the memorandum of association is carrying on managing agencies of different companies. The cases are far from unanimous on the point. Before discussing the numerous cases cited at the Bar and the principles laid down there, it will be appropriate to have first a short account of the main facts on which this question arises.
The assessee is Messrs. Kettlewell Bullen & Co. Ltd. The assessment year is 1953-54 and the relevant previous year is the calendar year 1952. The assessee is a public limited company. They have now five managing agencies in five different companies, namely :
'(1) Fort Gloster Jute ., (2) Bowreach Cotton Mills Co. Ltd., (3) Dunbar Mills Ltd., (4) Mothola Co., Ltd., and (5) Joonktollee Co. Ltd.,'
In addition to these five different companies of which the assessee is the managing agent, the assessee was also the managing agent of another company, namely, Fort William Jute Co. Ltd., It is in connection with the managing agency of this fort William Jute Co. Ltd., that the question in this reference arises.
The assessee tendered resignation from the office of managing agents of the Fort William Jute Co. Ltd., from July 1, 1952, in terms of a sale agreement dated May 21, 1952, entered into between the assessee company and Messrs. Mugneeram Bangur & Co. This agreement describes the assessee company as the vendor and Messrs. Mugneeram Bangur & Co. as the purchaser. Under clause 6 of this agreement it is provided :
'The purchasers shall procure that the company shall compensate the vendors for their loss of office in respect of such managing agency in the sum of Rupees three lakhs and fifty thousand such sum to be payable to the vendors against submission of their resignaton as managing agents of the company and the purchasers shall reimburse the company such amount.'
The question raised related to this sum of Rs. 3,50,000. The question is : Is this a revenue receipt assessable under the Indian Income-tax or is it a capital receipt
The sum of Rs. 3,50,000 was credited in the profit and loss account of the assessee company and was described as having been received from Fort William Jute Co. Ltd on account of 'compensation for loss of office'. The assessee deducted this amount in arriving at the net profit as shown in the return to the income-tax authorities. The contention of the assessee before the revenue authorities was that this sum represented compensation for loss of office and as such was not assessable to tax.
The Income-tax Officer disallowed this contention of the assessee and held that this was revenue receipt and not capital receipt. The Income-tax Officer emphasised the special feature and facts of the case, namely, that it was a case not of compulsory cessation, but of voluntary resignation to make room, in the interest of the managed company and its shareholders, for another party, namely, Messrs. Mugneeram Bangur and Co., more competent to carry on the financial and other business obligation as managing agents towards the managed company.
From this the assessee appealed to the Appellate Assistant Commissioner of Income-tax. The assessee relied particularly on the decision in the case of Commissioner of Income-tax v. Asiatic Textile Co. Ltd., a Bombay Division bench decision and also the Privy Council decision in Commissioner of Income-tax v. Shaw Wallace & Co. The department on the other the other hand relied on the recent English decision in Kelsall Parsons & Co. v. Commissioners of Inland Revenue.'
The Appellate Assistant Commissioner rejected the contention of the revenue authorities and allowed the appeal of the assessee holding that the receipt for Rs. 3,50,000 in this case was a capital receipt and not a revenue receipt. He distinguished the English decision in Kelsall Parsons & Co. v. Commissioners of Inland Revenue, mainly on the ground that this particular agreement for managing agency between the assessee and the managed company had still five years to run and on the ground that there was no reason to expect that the agreement would not be renewed at the end of that term. For this purpose he relied on the observations of Lord Fleming and Lord Moncrieff in Kelsall Parsons case, where their Lordships appeared to suggest that although in that case it was held to be a revenue receipt the decision might have been different if the agreement had a longer number of years like a period of ten years to run but the Lord President of the Court of Session in Kelsall Parsons case, however, did not appear to be impressed with this aspect of duration at all in his judgement. The second point on which the Appellate Assistant Commissioner distinguished the case of Kelsall Parsons was that he thought that in the case of Kelsall Parsons the entering into the contract was frequent enough to be considered as part of the normal carrying on of the business but it was not so in the facts of the present case. The Appellate Assistant Commissioner, however, completely ignored and missed article 127 of Fort William Jute Co., to which attention was drawn by the Income-tax Officer and also to clause 3(2) of the memorandum of association of the assessee company itself. This will be considered later on in the course of this judgement.
Against this order of the Appellate Assistant Commissioner, the Income-tax Officer preferred an appeal to the Appellate Tribunal. The Tribunal upheld the decision of the Appellate Assistant Commissioner that the receipt by the assessee of the sum of Rs. 3,50,000 was a capital and not a revenue receipt. The Tribunal distinguished Kelsall Parsons case, by suggesting that the similarity between that case and the present case was only superficial and that it was distinguishable and by holding that the managing agency agreement was not a contract that a businessman enters in the normal course of business nor it is normal course of business to have modification, alteration or discharge of such managing agency agreement.
Upon these facts at the instance of the Commissioner of Income-tax the Tribunal has now made this reference to this court on the question stated above.
Before discussing the numerous decisions on the point it is essential to carefully analyse and scrutinise the facts relating to the managing agency in this case and the circumstances in which it was sold by the assessee because almost all the cases lay down the wholesome rule that each case must have to be decided on its individual facts and decisions are only illustration of certain principles. General principles laid down in the decisions may act as good guides but are never sufficient so far as their application to the facts of individual cases is concerned. That has to be done individually on the facts of each case.
The first and foremost feature in this case is that the main business of the assessee company is to run managing agencies of other companies. Not only in actual fact does the assessee carry on the business of conducting several managing agencies of several companies, but also that is one of its main and foremost objects declared in its memorandum of association. Clause 3, sub-clause (2) of the memorandum of association of Kettlewell Bullen & Co. expressly provides for carrying on the business of managing agents in these terms :
'To carry on all kinds of agency business and to take part in the management, supervision or control of the business or operations of any other company, association, firm or person and to act as the managing agent, agents, secretaries or other officers 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.'
The other allied objects of the assessee company as set out in clause 3(19) and 3(27), etc., of the memorandum include, inter alia, objects such as to acquire and undertake all or any part of the business of any company carrying on any business which the company itself is authorised to carry on, to take or acquire or hold shares in any other company having objects altogether in part similar to those of the company or even of carrying on any business capable of being conducted so as directly or indirectly to benefit the company.
It is, therefore, clear that the main business of the assessee company is to run managing agencies. The assessee company itself admits that this is so. That fact appears also from the findings here, noticed even by the Appellate Assistant Commissioner, that the 'main business of the assessee is that of managing other companies and earning income by way of commission and allowance, that the company is the managing agent of five other companies apart from the managed company concerned.' This also follows from the accepted fact that the managing agency of Fort William Jute Co. Ltd. is only one out of five several other managing agencies held by the assessee.
The second significant feature of the managing agency in this case will appear from article 105 and article 127 of the articles of association of the managed company itself, namely, Fort William Jute Co. Ltd. Under article 105 the assessee managing agent has the right to appoint a director to the board of the managed company and that director is the chairman of the board of directors of the managed company. Article 127 of the articles of association of the managed company, Fort William Jute Co. Ltd., shows the nature of the business of managing agency on the facts of this case. It expressly grants the managing agents the power to 'carry on the business of the managed company and have the general direction, management, superintendence and control of the managed company and of its business transaction, books, papers, investments, securities, stocks, funds, effects, property, affairs and concerns, with full power to purchase or otherwise acquire and sell or otherwise dispose of for the company any property, rights or privileges which the company is authorised to acquire at such price and generally on such terms and conditions as they think fit, to engage and dismiss salesmen, assistants, engineers, mechanics, and workmen in and for the purposes of the company, to purchase and obtain all necessary machinery, stores and raw material for the purposes of the company, and to sell any such raw material or any of the articles manufactured by the company, and likewise to make and sign all such contract.' In short, the assessee managing agent actually on the facts of this case carries on the entire business of the managed company. We direct that the memorandum and articles of association of both the assessee, Kettlewell Bullen & Co. Ltd. and of Fort William Jute Co. Ltd., be filed with the record of this reference.
The other features which stand out prominently on the facts of this case will appear from the nature of the managing agency agreement in this case and of the agreement for sale of the managing agency.
The original managing agency agreement between the assessee and Fort William Jute Co. Ltd., is dated 1st May, 1925. It expressly refers to the articles of association of the managed company to show that the assessee is by name described to be the managing agents of the managed company. In fact, the managing agency agreement is annexed in the form of a schedule to the articles of association of the managed company. By clause 2 of this managing agency agreement it is provided that the managing agents shall be the managing agents of the company and they and their successors in business, unless they shall sooner resign office as in clause 8 of such agreement, shall continue to act as such managing agents until they shall cease to hold shares in the capital of the company of the aggregate nominal value of Rs. 1,00,000 and shall by reason thereof, be removed from office by a special resolution of the company passed at an extraordinary meeting of the company of which not less than six calendar months notice shall be given and at which persons holding or representing by proxy or power or attorney not less than three-fourths of the issued capital of the company for the time being shall be present. Secondly, it is provided that in the event of the winding up of the company the managing agents tenure of office will also be determined unless of course such winding up was with their consent or at the instance of a creditor or creditors of the company or pursuant to any extraordinary resolution under section 203(3) of the Indian Companies Act, 1913, in which event the managing agents will be entitled to be paid 'reasonable compensation for the deprivation of their tenure of the office of managing agents and the company' or in the event of any disagreement under the Arbitration Act.
An analysis of clause 2 of this managing agency agreement shows that there are two eventualities. One is, if the shareholding of the managing agents in the managed company falls below a particular value, then the managing agent becomes liable to be removed by a special resolution on notice as provided there. No compensation, however, is payable in that event. Reasonable compensation is expressly provided for only in the specific case of winding up of the company as expressly stated in clause 2.
By clause 8 of this managing agency agreement the managing agents are given express liberty to resign in the following terms :
'The managing agents shall be at liberty at any time to resign the office of managing agents upon leaving at the registered office of the company three weeks previous notice in writing of their intention in that behalf.'
The effect of clause 8 of the managing agency agreement is that the managing agent has the right to resign from the office of managing agent at any time on three weeks previous notice. This resignation under clause 8 does not also provide for any compensation. In other words, if the managing agent of his own volition resigns the office of the managing agents he is not entitled to any compensation under clause 8. He is also not entitled to any compensation for the loss of his office when he allows his shareholding to fall below the required value under clause 2 and when he is removed by the special resolution as provided therein. The managing agency agreement only provided for reasonable compensation for the loss of office in case of winding up of the managed company in the special circumstances provided in clause 2 and in no other case. This is not a case of winding up and, therefore, the assessee managing agent could not as part of the bargain or contract of managing agency agreement claim any compensation in the facts of this case.
The facts of this case make it abundantly and indisputably clear that the assessee voluntarily resigned the office of the managing agency of Fort William Jute Co. Ltd. In fact, he could only resign in according with the terms of the managing agency agreement or else he would commit a breach thereof. As clause 2 does not apply to the facts of this case, the managing agent in the facts here could only and did in fact resign under clause 8 of the managing agency agreement, and it is therefore a case of voluntary resignation. It is not a case of compulsory or forced cessation of business. This fact will be supported and borne out by the agreement of sale dated the 21st May, 1952, which, inter alia, produced the receipt of this sum of Rs. 3,50,000.
The other clauses of the managing agency agreement like clauses 3, 4 and 5 describe the work and the remuneration of the managing agent. Broadly speaking, clause 3 provides Rs. 3,000 per month for the managing agents as part remuneration of their services, a commission of 10 per cent. on the profits of the companys working; the company has also to pay the salary and other remuneration of any jute expert employed by the managing agent for purposes of the companys business as determined by the managing agent, and also other remuneration of necessary assistants who may be employed by the managing agent in connection with the companys business, and a further 3 per cent. commission on cost price of all new machinery and stores which may be purchased out of India by the managing agents on account of the company and also interest on all advances made by the managing agents to the company on the security of companys stocks and raw materials and/or manufactured goods. Indeed, the admitted fact is that the assessee advanced to the company more than Rs. 12,50,000.
I shall now proceed to examine the terms of the agreement of sale between the assessee, Kettlewell Bullen & Co., described as 'vendors' and Mugneeram Bangur & Co., as 'purchasers' and bearing the date 21st May, 1952.
The recital of this agreement shows (1) the share distribution and the share capital of the managed company, (2) that the managing agent holds 600 ordinary shares and 6,920 preference shares in the managed company, (3) various loans of money made by the managing agent to the managed company and by claue 3 of the recital it is expressly provided :
'The vendors are desirous of disposing of their shareholding in the company and obtaining repayment of the said loans and have agreed at the request of the purchasers to resign from the managing agency thereof in manner and subject to the conditions hereinafter contained.'
This recital is significant, first, in showing that what the assessee is doing is voluntarily resigning from the office of the managing agency, secondly, as showing the consideration and motive for such resignation being, first, disposal of its shareholding in the managed company and for the express purpose of obtaining repayment of the said loan. This recital also expressly makes it clear that the purchasers have requested the managing agents to resign and the managing agents were resigning accordingly.
The recital further goes on to record the fact that the purchasers have agreed to purchase the vendors share in the company and to make an offer to all holders of the companys shares to purchase their respective shareholdings. Clause 2 of this agreement with the sellers shows that 600 ordinary shares of the company of 100 -rupees each were being sold to the purchasers at the high premium of four times their value, namely, at Rs. 400 per share. The preference shares were also sold at a high premium. They were sold at Rs. 185 per share while its value was Rs. 100 per share. The purpose of showing these features is to bring out the fact that it was a profitable business deal. Clause 3 contains the formal offer by the vendors to sell and the purchasers to buy those shares at the above noted prices. Clause 4 of this agreement for sale empowers the purchasers to authorise the vendors to take all necessary steps to bring such offer to the notice of the shareholders of the company and it took necessary steps in connection therewith. Then follows clause 5 which reads :
'The vendors shall forthwith tender their resignation from the office of managing agents of the company such resignation to take effect as on the first day of July one thousand nine hundred and fifty-two.'
This shows that the agreement was made on the 21st of May, 1952, but resignation was being forthwith tendered although it was to take effect on the 1st July, 1952. Clause 6 of the agreement has already been quoted above. Its special feature is that the purchaser engages to procure that the company shall compensate the vendor. Its second feature is that it is described as 'loss of office'. Its other feature is that the purchaser engages to reimburse the managed company to the extent of this sum of Rs. 3,50,000.
If the assessee voluntarily resigned, as in fact it did in this case, then the managing agency agreement between it and the managed company did not provide for any compensation of any kind to be paid by the managed company to the managing agent for its voluntary resignation. But by this device the assessee was getting an income and return for such resignation. Here again, the assessee managed to produce an income which otherwise under the managing agency agreement it could not.
Proceeding with the other clauses of this agreement by which the managing agency was sold it is provided by clause 7 that the purchaser shall procure that all existing agreements with managers and assistants in Indian shall be fulfilled and that any pensions now paid by the company to such person shall continue to be paid. It is followed by clause 8 which is wrongly printed in the paper book and in its correct form it reads as follows :
'The purchasers shall procure that all loans made by the vendors to the company shall be repaid on or before the 30th June, 1952.'
Here again, the assessee is having another business deal. The assessee had already advanced over many years more than Rs. 12,50,000 to the managed company. By this agreement it is getting the covenant of the purchasers to procure that all such loans should be repaid within barely a month from the date of this agreement. This is good business.
It is followed by clause 9 which again is wrongly printed in the paper book and its correct form is :
'In the event of the purchasers failing to comply with all or any of the provisions in clauses 3 and 4 hereof the vendors shall be entitled (without prejudice to any other right they might have), to recover from the purchasers their shares in the company referred to in clause 2 on repayment of the purchase price and the purchasers shall pay all costs and charges including stamp duty and registration fees in connection with such recovery and retransfer of the shares to the vendors.'
A moratorium on the assessees power of disposal of the managed companys assets is provided by clause II of this agreement saying that pending resignation of their office of managing agents of the company taking effect the vendors undertake not to dispose of any of the assets of the company save in the ordinary course of business.
A broad review of different clauses of this agreement for sale makes prominent some of the essential features of this transaction. The sum of Rs. 3,50,000 which is described as the compensation for loss of the office of the managing agents in clause 6 of this agreement is a part of the whole scheme provided in this agreement. Each clause is a consideration of the other. The payment of compensation for the alleged loss of office in clause 6 does not stand by itself but is a part of the total scheme. Secondly, as the memorandum of objects itself describes, it is trading in managing agency because it is selling one out of five managing agencies which the assessee holds. Thirdly, it is not a compulsory cessation of business either by winding up or by any other cause and is purely a case of voluntary resignation. If the assessee had voluntarily resigned it would not get any compensation under the managing agency agreement with the managed company. By this device of procuring a purchaser it was doing business of selling the managing agency and getting a profit and value for it which it otherwise could not have got. Fourthly, the sum of Rs. 3,50,000 contained in clause 6 for loss of office of the managing agency is part of the other two considerations of (1) sale of the ordinary and preference and (2) arrangement for procuring the recovery of large sums of money exceeding Rs. 12,50,000 within the short period of barely a month. These four significant facts stamp this sale with the nature and character of a trading and a business deal.
The assessee had to secure the consent of the managed company because otherwise it would have committed a breach of the managing agency agreement with the managed company. This will be confirmed by the circular letter dated May 28, 1952, which the assessee addressed to all the shareholders of Fort William Jute Co. Ltd., the managed company. This letter again unmistakably shows the significance of the transaction and how the transaction can only be regarded as trading. It first recites the assessees agreement with Messrs. Mugneeram Bangur & Co. to sell the assessees entire ordinary and preference shareholdings; then it says that it was a condition of the agreement that the assessee would tender its resignation from the office of the managing agency of the company from July 1, 1952. The high premium considerations for the shares were also indicated. Then the letter proceeds to describe that this sale was in the best interest of both the managed company and its new shareholders. The reason put forward is that recent installation of modern machinery in the managed companys mills entailed heavy capital expenditure and that further larger sums are now required for renewal and replacement of such machinery. It then pleads difficulty of obtaining additional bank accomodation for the purpose. Next it pleads that the assessee advanced more than Rs. 12,50,000 to the managed company which is still outstanding and that having regard to the assessees other commitments they would not be able to find additional finance. The assessee as managing agent carried through its proposals and obtained the consent of the managed company. It received the sum of Rs. 3,50,000 and presumably also the high price of its shares sold and it did offer its resignation of the office of the managing agency.
From this account of the facts it is clear that it is part of the assessees normal and ordinary course of business, confirmed by its agreed objects in the memorandum to carry on and enter into contracts of managing agency of other companies. In fact, it has five other managing agencies. The profit making apparatus is exploitation and use of other companies by the device of managing agency business. There is no finding here in this case in fact that there has been any deterioration in the structure or organisation of the assessees business or profit making apparatus of managing agency business of different companies. By selling this one managing agency there has been no substantial or material alteration of that profit making apparatus at all. This single instance of a sale has not put out of gear any other managing agency business which the assessee is running. It is, therefore, not correct in the facts and circumstances of this case to say that managing agency is not a normal course of business with the assessee or that even alteration or variation is not its normal business. Indeed the managing agency agreement itself in this case was altered and varied on December 1, 1941, by insertion of additional words in clause 3 of the original agreement of managing agency agreement of May 1, 1925. A managing agency agreement being a contract can always be varied and modified by mutual consent of the contracting parties.
Two special considerations must receive due weight in dealing with the question how far managing agency is itself trading activity. First, the managing agency agreement is not like an ordinary agency agreement. A managing agent of a company is not an ordinary agent. Secondly, the managing agency is a peculiar institution in company jurisprudence in India. It is not known in the English and the American law. The courts in India will, therefore, have to exercise great care and caution in applying to a managing agent of a company and to the relative managing agency agreement the decisions of the English and American courts and also decisions of courts dealing with other agency rights different from managing agency rights.
Section 2(25) of the Companies Act, 1956, says :
'Managing agent means any individual, firm or body corporate entitled, subject to the provisions of this Act, to the management of the whole or substantially the whole, of the affairs of a company by virtue of an agreement with the company, or by virtue of its memorandum or articles of association, and includes any individual, firm or body corporate occupying the position of a managing agent, by whatever name called.'
A managing agent of a company is to be distinguished from a manager who is expressly defined under section 2(24) of that Act not to be a managing agent and who is also subject to the superintendence, control and direction of the board of directors, a kind of superintendence, control and direction from which the managing agent is free by this definition. This freedom from the superintendence, control and direction of the board of directors is also the feature which distinguishes the peculiar status of the managing agent of the companies in India from such offices as 'secretaries and treasurers' as defined under section 2(44) of the Companies Act, 1956, and which office is also known in British and American company legislation. As I have shown from article 127 of the articles of association of Fort William Jute Co. Ltd., the managed company in this case, the article itself provides that the managing agent is to carry on the whole business of the company and has the entire general direction, management and superintendence and control of the company. In fact, although it is called an agent, it becomes virtually the principal. The managing agent becomes the very alter ego of the managed company itself. The managing agent does not own or acquire the land, building, furniture or other assets of the managed company as such. In fact, the managed company in theory retains its full legal ownership of its assets and remains 'distinct and separate legal entity' as a limited joint stock company. What in effect happens under the managing agency agreement in India is that the managing agent comes to utilise the existing structure of the managed companys organisation, to carry on business, earn profits and, in fact, virtually to trade in every possible sphere open to the managed company. The facile distinction in economies between fixed and circulating capital is not easy to draw in the case of such a managing agency. The common notion that a managing agency prima facie is a capital asset, has many fundamental limitations when the true concept and nature of managing agency in Indian company law are analysed and borne in mind. It may equally be truly said that the managing agency is, prima facie, a circulating capital. It is only a right to manage which itself is business. That is why the Supreme Court was careful to point out this essential feature that managing agency is itself business in the two recent decisions I am about to refer.
In Lakshminarayan Ram Gopal & Son Ltd. v. Government of Hyderabad, it was held that a managing agent one the terms of the managing agency agreement in that case must be held to carry on general management of the business of the company and there even the control and supervision of the directors were said not to make it any the less a business. The rest of the decision of the judgement delivered by Bhagwati J. discussed the various factors along with the fixity of tenure, the nature of remuneration and the assignability of their rights which were held to be sufficient to prove that the activities of the appellants as the agents of the company constituted business and it was, therefore, held that the remuneration which the appellants received from the company under the terms of the managing agency agreement was income, profits or gains from business. In this case, the Supreme Court illustrated the nature of managing agency agreement by reference to the relevant articles of association and the clauses of the managing agency agreement. The observations of Bhagwati J. at page 461 may be seen in this connection. This view again was reaffirmed by the Supreme Court in J.K. Trust v. Commissioner of Income-tax. This case is also an authority for the proposition that the managing agency itself is a business and is to be treated even as property. The observations of Venkatarama Ayyar J. at pages 540-41 in J.K. Trust v. Commissioner of Income-tax may be seen in support of this point.
While the provisions of the memorandum of association and articles of association are always relevant to consider and analyse the nature and character of the business of a company, they are never conclusive against or in favour of the company, for the question is not what business the taxpayer professes to carry on but what business the actually carries on. Here, on the facts, of course, not only the memorandum of association and articles but also the actual carrying on of five other managing agencies, confirm and establish the facts that the assessee carries on the trade and business of managing agency and as the record shows, it is the main business of the assessee.
On the facts, therefore, of this particular reference before us, we have no hesitation in holding that the sum of Rs. 3,50,000 was received by the assessee in the course of its ordinary and normal trading and was a revenue receipt assessable under the Income-tax Act.
Having answered the question on the facts of this particular case, it now remains necessary for us to examine the cases cited at the bar to find out, whether the view that we are taking is in accord with the decisions or not. It may be useful to point out at the very outset that the decision of the Appellate Assistant Commissioner which was upheld by the Tribunal relied on three authorities : (1) The Privy Council decision in Shaw Wallaces case. (2) The original decision of Bombay bench in Jairam Valji v. Commissioner of Income-tax and (3) a decision of the Lahore High Court in In re P.D. Khosla. All these decisions are broken reeds. The authority of the Privy Council decision in Shaw Wallaces case has been considerably shaken by the pronouncement of the Supreme Court in Commissioner of Income-tax v. South India Pictures Ltd. and Commissioner of Income-tax v. Vazir Sultan & Sons. The original Bombay decision of Jairam Valji has been reversed and overruled by the Supreme Court in Commissioner of Income-tax v. Jairam Valji. The third decision on which reliance was placed by the Appellate Assistant Commissioner in In re P.D. Khosla as aforesaid is wholly irrelevant and it was concerned with a claim for exemption under Explanation 2 of section 7(1) of the Income-tax Act.
We can appropriately begin our review of the cases with the decision of the Judicial Committee in Commissioner of Income-tax v. Shaw Wallace & Co. The decision was not concerned with managing agency of companies at all and the respondents there were only acting as distributing agents. It was a case of compulsory cessation of business, not of voluntary resignation. The two oil companies in the Privy Council case having combined and decided to make other distributing arrangements each terminated the respondents agency and in 1927-28 paid them compensation for its cessation. It was held by the Privy Council that the sums so received by the respondents were not taxable under section 6(iv) (business) because they were not the produce, nor the result, of carrying on the agencies of the oil companies in the year in which they were received; nor under section 6(vi) (other sources) for the same reason. Some outstanding features which distinguish the Privy Council decision from the present reference will be found from the following observations of Sir George Lowndes who delivered the opinion of the Judicial Committee at page 282 of the report :
'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.
If the business had been sold - even if that somewhat indeterminate asset known as the goodwill had been assigned to the employing companies, as the High Court seems to have thought it had - it is conceded that the price paid would not have been taxable. But why Painly because it could not be regarded as profit or gain from carrying on the business, and their Lordships think that the same reasoning must apply when the sum received is in the nature of a solatium for cessation.'
Now as we have already indicated, the present reference is not a compulsory cessation at all. Secondly, on the facts of this case, the assessee is not ceasing to carry on its normal business of managing agency at all but is only giving up one managing agency and making a profit out of it while retaining five other managing agencies, and its memorandum permits acquiring another managing agency in the place of the one it is relinquishing.
The next distinguishing feature of the decision of the Judicial Committee will be clear from the further observations of the same learned judge at page 282 of the report where his Lordship observed.
'It is contended for the appellant that the business of the respondents did in fact go on throughout the year, and this is no doubt true in a sense. They had other independent commercial interests which they continued to pursue, and the profits of which have been taxed in the ordinary course without objection on their part. But it is clear that the sum in question in this appeal had no connection with the continuance of the respondents other business. The profits earned by them in 1928 were the fruit of a different tree, the crop of a different field.'
Here on the facts there is no question of any independent business. The general and main business of the assessee is the business of carrying on managing agencies. Therefore, this consideration to which reference is made by Sir George Lowndes does not arise in this case. Besides this observation of Sir George Lowndes trying to draw a distinction on the basis of 'the fruit of a different tree' and 'the crop of a different field' apparently did not seem to find favour with Lord Wright in the subsequent decision of the Privy Council in Kamakshya Narain Singh v. Commissioner of Income-tax where at page 522 Lord Wright said :
'.... such picturesque similies cannot be used to limit the true character of income in general,...'
The Privy Council decision is also to be distinguished on the ground that it was not a case of managing agency at all but of distributing and selling agents. It was a very different proposition and a very different contract.
Lastly, the authority of the Privy Council decision in Shaw Wallaces case is shaken by the observations of the Supreme Court (1) in Commissioner of Income-tax v. South India Pictures Ltd. and (2) in Commissioner of Income-tax v. Vazir Sultan & Sons.
For the above reason we are satisfied that the decision of the Privy Council in Commissioner of Income-tax v. Shaw Wallave & Co. is distinguishable and instead of helping the respondent is really against his contention on the facts of this case.
The next case on which reliance was placed for the assessee was Commissioner of Income-tax v. Asiatic Textile Co. Ltd., a division bench decision of Chagla C.J. and Tendolkar J. of Bombay High Court. The ratio of that decision is that the amount received by the managing agents as solatium for the determination of the managing agency could not be profits arising out of their business but constituted only a capital receipt. The learned counsel for the Commissioner of Income-tax contends that in the light of subsequent decisions of the English courts approved by the Supreme Court and in the light of the more recent decisions of the Supreme Court itself this Bombay decision can no longer be said to be good law in all its aspects. He further contends that it relied on the older Bombay decision in Godrej & Co. v. Commissioner of Income-tax, which was itself reversed by the Supreme Court in Godrej & Co. v. Commissioner of Income-tax, and is also against the decision in Anglo-French Exploration Co. Ltd. v. Clayson (H.M. Inspector of Taxes).
It is true that in the Asiatic Textile Co.s case, at page 330 of the report Chagla C.J. expressed the view that '...... managing agency was productive of profit or income and as such it must be looked upon as a capital asset.....' It is also equally true that Chagla C.J. held that in that case the receipt of Rs. 25,00,000 was a capital receipt. It is not necessary for us to pursue the question whether this decision is good law or not because it can be distinguished on very fundamental grounds from the present case. The first ground of distinction can be found in the following observation of Chagla C.J. himself in that case at pages 336 and 337 :
'The Crucial fact in the case before us is that there was complete cessation of this particular activity on the part of the assessee company.'
On the facts here before us this postulate cannot be made. There the assessee did not carry on the normal business of dealing with or acquiring managing agencies of other companies. That is 'the crucial fact' which distinguishes that case from the one before us. Secondly, Chagla C.J. while discussing the view of Mr. Justice Lawrence in Bush Beach and Gent Ltd. v. Road, himself draws the distinction by clearly pointing out :
'Obviously if an assessee is doing business in a commodity and in respect of that business various contracts have been entered into and some contracts are not carried out and compensation is paid to the assessee company, those amounts would represent income because the entering into of those contracts is incidental to the business and are entered into in the ordinary course of business.
'Now, the agreement that we have to consider is not an agreement which the assessee company has entered into in the ordinary course of business. It is the very foundation of the business. It does business which results in profits because it has been given the right under the agreement, and therefore it could not be said that when the assessee surrendered its rights as managing agents it did so in the ordinary course of business or incidental to the business.'
From this it would follow that where, as in the present reference before us, the ordinary course of business is dealing with or acquiring managing agency or making such contracts or dealing with them, then it becomes itself a commodity in the business. It therefore becomes trading. It therefore ceases to be capital asset. It is then no longer the foundation of business as Chagla C.J. describes it. It is actually the sale of the product of the commodity of the business. Right of profitable management is the business itself. Management under managing agency agreement is the commodity itself and that is being sold for profit.
We are, therefore, unable to apply the decision in Commissioner of Income-tax v. Asiatic Textile Co. Ltd. to the facts of this case before us.
It will be now appropriate at this stage to notice the principles laid down by the Supreme Court in four recent cases : (1) Commissioner of Income-tax v. South India Pictures, (2) Commissioner of Income-tax v. Jairam Valji, (3) Commissioner of Income-tax v. Vazir Sultan & Sons, and (4) Godrej & Co. v. Commissioner of Income-tax.
Now the first Supreme Court decision in South India Pictures Ltd. does not deal with a case of a managing agency. There the assessee which carried on the business of distribution of films entered into agreements for advancing monies to certain motion picture producers towards the production of films and acquiring the rights of distribution thereof. It was held there that the sum paid to the assessee was not compensation for not carrying on its business but was a sum paid in the ordinary course of business to adjust the relation between the assessee and the producers; the termination of the agreements did not radically or at all affect or alter the structure of the assessees business. The majority decision, with Bhagwati J. dissenting, came to the conclusion that it was a revenue receipt and as such assessable to tax. It will be, therefore, seen from the majority decision that both the facts of the case as well as the actual decision making the sum liable to revenue are against the respondent.
The learned Chief Justice of the Supreme Court delivering the majority judgement in the case at page 919 observed as follows :
'In our opinion, in the events that had happened, the amount was not received by the assessee as the price of any capital assets sold or surrendered or destroyed or sterilised but in the language of Rowlatt J. in Short Bros. case, the amount was simply received by the assessee in the course of its going distributing agency business from that going business. In our judgement, on the facts and in the circumstances of the present case, it falls within the principles laid down in Short Bros. and Kelsall Parsons & Co.s cases rather than within those laid down in Shaw Wallaces case or Van den Berghs case or Barr Crombies case.'
Upon a parity of reasoning expressed in the above observations of the Supreme Court it may be noticed and emphasised here that the managing agency continues in this case as a going concern. The managed company, namely, Messrs. Kettlewell Bullen & Co. Ltd., continued to be managed company. Instead of 'X' being the managing agent 'Y' comes in his place. It is true that so far as Xs managing agency is concerned it is finished but that does not make 'X' cease his managing agency business as his normal business. As has been noticed already in this case, the assessee continues to carry on his usual managing agency in five other companies under the memorandum or articles of association of the company.
The second case of the Supreme Court is Commissioner of Income-tax v. Rai Bahadur Jairam Valji. This case emphasises the principle that in the determination of the question whether a receipt is capital or income, it is not possible to lay down any single test as infallible or any single criterion as decisive. The Supreme Court laid down as principle that the question must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. Secondly, it lays down another fundamental principle that 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. Applying the second principle, it is impossible to avoid the conclusion in the facts of this case that the contract in this case was entered into in the ordinary course of business and the compensation received for its termination must, therefore, be regarded as a revenue receipt. The third principle which this decision of the Supreme Court lays down is the difference between payments made as compensation for the termination of any agency contract on the one hand and payments made as solatium for the cancellation of a contract entered into by a businessman in the ordinary course of business. It is pointed out 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. What he does is not the business itself but something which is intimately and directly linked up with it. It is, therefore, laid down by the Supreme Court that the agency may, therefore, be viewed as the apparatus which leads to the business rather than the business itself. Considered in that light, the agency right could be held to be of the nature of capital asset invested in business. But this could not be said of a contract entered into in the ordinary course of business where the contract is part of the business itself, and not anything outside it as is the managing agency, and any receipt on account of such a contract could only be a trading receipt.
Before noticing further observations of the Supreme Court laid down in that case, it is essential to bear in mind that Jairam Valjis case was not at all concerned with managing agency agreement. There, the assessee entered into an agreement with a company for supplying limestone and dolomite. Then the company went into liquidation and its assets and liabilities were taken over by another company which continued to purchase limestone and dolomite from the assessee for some time but when it found the rates uneconomical, it informed the respondent by notice of its decision to purchase its requirements from other sources. These disputes were ultimately composed by a fresh agreement whereunder the company agreed to pay a sum of Rs. 2,50,000 to the assessee as solatium besides certain other monthly instalments and also to take the limestone required for its furnaces from the assessee for some period of time, and to appoint the assessee as a loading contractor. It was over this sum of Rs. 2,50,000 that the question arose before the Supreme Court. It was not a case of dealing, disposing or trading in managing agencies. Venkatarama Aiyar J., who delivered the judgement of the Supreme Court in Jairam Valjis case at page 163 of the report already quoted, made the following observations which provide a guide in coming to a conclusion of this vexed question :
'In holding that compensation paid on the cancellation of a trading concept differs in character from compensation paid for cancellation of an agency contract, we should not be understood as deciding that the latter must always, and as a matter of law be held to be capital receipt. Such a conclusion will be directly opposed to the decisions in Kelsalls case and Commissioner of Income-tax v. South India Pictures Ltd. The fact is that an agency contract which the character of a capital asset in the hands of one person may assume the character of a trading receipts in the hands of another, as, for example, when the agent is found to make a trade of acquiring agencies and dealing with them. The principle was thus stated by Romer L.J. in Golden Horse Shoe (New) Ltd. v. Thurgood.'
Now this exactly is what we have found as a fact in the present case before us. Here the facts lead to the irresistible conclusion that the managing agent is making 'a trade of acquiring agencies and dealing with them.' That being so, on the above principle laid down by the Supreme Court the amount paid in selling that managing agency in this case will be ordinary trading receipt. This conclusion is all the more fortified by the observations of Romer L.J. in the above case which are quoted by the Supreme Court in that case and which are as follows :
'The determining factor must be the nature of the trade in which the asset is employed. The land upon which a manufacturer carries on his business is part of his fixed capital. The land with which a dealer in real estate carries on his business is part of his circulating capital. The machinery with which a manufacturer makes the articles that he sells is part of his fixed capital. The machinery that a dealer in machinery buys and sells is part of his circulating capital, as is the coal that a coal merchant buys and sells in the course of his trade. So, too, is the coal that a manufacturer of gas buys and from which he extracts his gas.'
Looked at from this point of view and in the light of the observations of Romer L.J. the fixed capital in this case is the structure and assets of the managed company which continued to remain with the managed company as a separate legal entity. But the business is the right of management which produces the income, and it is that which is being sold. In the light of the distinction drawn by Romer L.J. between fixed and circulating capital, this particular trading in managing agency can only be regarded as a circulating capital being sold here at all. Here also there is no question of agency being treated as an apparatus. Here the managing agency is the business itself.
The next Supreme Court decision is the Charminar case otherwise known as Commissioner of Income-tax v. Vazir Sultan & Sons. At the outset, again, it must be noticed that this is not a case of managing agency. It is a case of sole selling agency. The assessee in that case was appointed as a sole selling and distributing agent for the Hyderabad State for Charminar cigarettes manufactured by the company and as such agent, the assessee was allowed a discount of 2% on the gross selling price. In 1939, an arrangement was arrived at between the assessee and the company by which the assessee was given a discount of 2% not only on the goods sold in the Hyderabad State but on all goods sold in and outside the Hyderabad State. This arrangement was altered subsequently and in 1950 the assessee and the company reverted to the old arrangement confining the sole agency of the assessee to the Hyderabad State and the assessee was paid a sum of Rs. 2,19,343 by way of compensation for the loss of the agency for the territory outside the Hyderabad State. The question before the Supreme Court was whether this particular sum of money was a revenue receipt assessable to income-tax or a capital receipt not so assessable. Now, the majority judgement in that case of Bhagwati and Sinha JJ. came to the finding of fact that the agency agreements were not entered into by the assessee in the carrying on of their business but formed the capital assets of the assessees business which was exploited by the assessee by entering into contracts with various customers and dealers in the respective territories. Therefore, it was held that it formed part of the fixed capital of the assessees business and not the circulating capital or the stock-in-trade of that business. The majority held that it was a capital receipt. It was also pointed out by the majority decision that the fact that the agreement was terminable at will and was not an enduring character was immaterial and it was also immaterial that only one of the agency agreements was cancelled by the company. Naturally, great reliance has been placed on behalf of the respondent on this decision to support their contention. Kapur J. who gave the dissenting judgement held otherwise. That case again is fundamentally distinguishable from the present reference. There the assessees whole contention was entirely different from the one made before us. It was contended by the assessee there that it did not carry on the business of acquiring and working agency (see the observation at page 178 of that report, where it is stated : 'It was, on the other hand, contended on behalf of the assessee that it did not carry on the business of acquiring and working agencies,...'). Here, the assessee, in fact, does carry on the business of acquiring and working an agency. That is its avowed object in the memorandum of objects as well as its actual trading proved by its carrying on five other managing businesses. This fact is further emphasized at page 187 of the report in the judgement of Bhagwati J. in the following terms :
'There is nothing on record to show that the acquisition of such agencies constituted the assessees business or that these agency agreements were entered into by the assessee in the carrying on of any such business. The agency agreements in fact formed a capital asset of the assessees business worked or exploited by the assessee by entering into contracts for the sale of Charminar cigarettes manufactured by the company to the various customers and dealers in their respective territories. This asset really formed part of the fixed capital of the assessees business. It did not constitute the business of the assessee but was the means by which the assessee entered into the business transactions by way of distributing those cigarettes within the respective territories. It really formed the profit-making apparatus of the assessees business of distribution of the cigarettes manufactured by the company. If it was thus neither circulating capital nor stock-in-trade of the business carried on by the assessee, it could certainly not be anything but a capital asset of its business and any payment made by the company as and by way of compensation for terminating or cancelling the same would only be a capital receipt in the hands of the assessee.'
This is followed by the approval of the following observations by Lord Wrenbury in Glenboig Union Fireclay Co. Ltd. v. Commissioners of Inland Revenue :
'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.'
It would, therefore, seem to be quite clear on this enunciation of the principle that a major consideration in this respect is whether the transaction itself constitutes the business or the means by which the assessee carries on the business. The distinction is between the apparatus and what is produced by the apparatus. The managing agent as a rule does not acquire or own the apparatus. He is only, and as a rule unless otherwise excluded by the specific terms of the managing agency agreement, concerned with the right to manage the apparatus belonging to somebody else. That distinguishes the present reference before us in the facts of this case. The principle is summarised by Bhagwati J. at page 185 in the following terms :
'The position as it emerges on a consideration of these authorities may now be summarised. The first question to consider would be whether the agency agreement in question for cancellation of which the payment was received by the assessee was a capital asset of the assessees business, constituted its profit-making apparatus and was in the nature of its fixed capital or was a trading asset or circulating capital or stock-in-trade of his business. If it was the former the payment received would be undoubtedly a capital receipt; if, however, the same was entered into by the assessee in the ordinary course of business and for the purpose of carrying on that business, it would fall into the latter category and the compensation or payment received for its cancellation would merely be an adjustment made in the ordinary course of business of the relation between the parties and would constitute a trading or a revenue receipt and not a capital receipt.'
Applying that principle to the facts of this case, we have come to the conclusion that the agreement here dated 21st May, 1952, to sell the managing agency by the assessee to Messrs. Magneeram Bangur & Co. was entered into by the assessee in the ordinary course of business and in the ordinary trading way and that he made a good business profit out of that transaction of sale.
The last of the Supreme Court decisions in this connection to be noticed is Godrej & Co. v. Commissioner of Income-tax. This is a case of managing agency, but this was a case of one sole managing agency and what is more the ordinary business was not carrying on of different managing agencies of different companies. Godrejs decision is, therefore, distinguishable from the present reference before us. There the fact was that the assessee firm was appointed the managing agent of a company for a period of thirty years and under clause 2 of that agreement it was entitled to a commission at the rate of 20% of the net profits of the company. The arrangement was finally altered by a formal resolution of the company stating that the agreement arrived at between the managing agent on the one hand and the directors of the company on the other is that the managing agents in consideration of the company paying Rs. 7,50,000 as compensation for releasing the company from the onerous term as to remuneration contained in the present managing agency agreement should accept as remuneration for the remaining term of their managing agency 10% of the net annual profit of the company. The controversy before the Supreme Court was with regard to the character of this sum of Rs. 7,50,000, whether it was a capital receipt or a trading receipt. It was held there by the Supreme Court that this 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 in reality as compensation for releasing the company from the onerous terms as to remuneration. In other words, so far as the managed company was concerned, it was paid for securing immunity from the liability to pay higher remuneration to the assessee firm for the rest of the term of the managing agency and, therefore, a capital expenditure and so far as the assessee firm was concerned, it was received as compensation for the deterioration of injury to the managing agency by reason of the release of its rights to get higher remuneration and, therefore, a capital receipt.
This decision is distinguishable on the ground (1) that it was a case of only one managing agency agreement where it was not the business of the assessee to carry on a business in ordinary trade in managing agency, and (2) that it was not a compensation for lower remuneration but was found as a fact that it was given for the injury done to the managing agency agreement itself. These two features distinguish that authority from the present reference before us. It will be appropriate here to quote the observation of the learned Chief Justice of the Supreme Court who delivered the judgement in that case at page 386 :
'The learned Attorney-General, however, contends that this case is not governed by the decisions in Shaw Wallaces case or Vazir Sultan & Sons case, because in the present case there was no acquisition of the entire managing agency business of sterilisation of any part of the capital asset and the business structure or the profit-making apparatus, namely, the managing agency, remains unaffected. There is no destruction or sterilisation of any part of the business structure. The amount in question was paid in consideration of the assessee firm agreeing to continue to serve as the managing agent on a reduced remuneration and, therefore, it bears the same character as that of remuneration and, therefore, a revenue receipt. We do not accept this contention. If this argument were correct, then, on a parity of reasoning, our decision in Vazir Sultan & Sons case would have been different, for, there also the agency continued as before except that the territories were reduced to their original extent. In that case also the agent agreed to continue to serve with the extent of his field of activity limited to the State of Hyderabad only. To regard such an agreement as a mere variation in the terms of remuneration is only to take a superficial view of the matter and to ignore the effect of such variation on what has been called the profit-making apparatus. A managing agency yielding a remuneration calculated at the rate of 20 per cent, of the profits is not the same thing as a managing agency yielding a remuneration calculated at 10 per cent. of the profits. There is a distinct deterioration in the character and quality of the managing an enduring kind. The reduced remuneration having been separately provided, the sum of Rs. 7,50,000 must be regarded as having been paid as compensation for this injury to or deterioration of the managing agency just as the amounts paid in Glenboigs case or Vazir Sultans case were held to be.'
It is clear then that the whole basis of the ratio of the decision of the Supreme Court in Godrej & Co. v. Commissioner of Income-tax on this particular point rests (1) on the finding that there was a distinct deterioration in the character and quality of the managing agency viewed as a profit-making apparatus, (2) this deterioration was of an enduring kind, and (3) the reduced remuneration having been separately provided, the sum could not be regarded as anything but a capital receipt. Now not one of these three considerations is present before us. There is no distinct or any appreciable deterioration in character and quality of the managing agency in this case even if it be viewed as a profit-making apparatus far less any deterioration of an enduring kind and there was no question of any other remuneration being provided for and this sum of Rs. 3,50,000 in this case being something separate therefrom. We are, therefore, satisfied that both on the facts and on the principles laid down, this decision cannot affect the answer which we have already given to the question asked.
This brings us to the end of our discussion of the Supreme Court decisions that are relevant on this point.
We consider it will be useful to refer at this stage to two decisions, one of the Madras High Court and the other of the Bombay High Court, before discussing the English case law on this point. A division bench of the Bombay High Court consisting of Shah and Desai JJ. in Divecha v. Commissioner of Income-tax considered a case of agency but not managing agency. There a firm which was conducting business in electrical goods entered into an agreement with Philips Electrical Co. by which the firm got monopoly rights to purchase and sell electric lamps manufactured by Philips in certain areas. Philips decided to take over the distribution of lamps and served a notice upon the firm terminating the agreement, the firm being free to deal in their lamps as regular lamp dealers. As a gesture of goodwill Philips agreed to pay Rs. 40,000 per annum for 3 years to each of the partners in instalments. The question was whether the sum of Rs. 20,000 received in 1954-55 by each of the assessees was assessable to income-tax. The Bombay bench took the view that the amount was a business receipt and so liable to tax. The basis of the Bombay decision again is that the termination was made in the ordinary course of business of the assessee as dealers in electrical goods and for the purpose of carrying on their business and it was further held by the Bombay bench that the benefit conferred by the agreement did not constitute a trading asset and its termination did not extinguish the whole or any part of the trading asset. Shah J. who delivered the judgement of the Bombay bench at page 219, noticed and distinguished the Supreme Court decision in Commissioner of Income-tax v. Vazir Sultan & Sons and also Commissioner of Income-tax v. Asiatic Textile Co. Ltd.
The other decision is the recent one of the Madras High Court in Pierce Leslie & Co. Ltd. v. Commissioner of Income-tax, a decision of a bench of the Madras High Court consisting of Rajagopalan and Balakrishna Ayyar JJ. This again is a case of managing agency. It held that the loss of one or several managing agencies had little effect on the structure of the assessees business even in tea or on its profit-earning apparatus as a whole and the termination of the agreement could well be said to have been brought about in the ordinary course of business of the assessee. It was further held in this case that the amount received by the assessee constituted a trading receipt received in the usual course of its business activities. This Madras decision reviews practically all the decisions up to date on the point. In that case, the assessee was a company incorporated in the United Kingdom having an office in India. In the course of its varied business activities which included the export of tea produced in India, the assessee took up the managing agencies of several plantation companies of which it also acted as secretaries. The managing agencies were liable to termination in which event the assessees received the compensation to which it was entitled by the agreement. There the Talliar Estates Ltd. was one of the companies managed by the assessee. The agreement with the company was a composite one securing the managing agency as well as other rights which helped the assessee in its trading activities in tea. When the Talliar Estates went into liquidation the assessee received Rs. 60,000 by way of compensation for loss of office and the question before the Madras High Court was whether that amount was income in the hands of the assessee. The Madras bench decided that it was income and not capital.
This Madras case, on the facts, has many similarities with the present reference before us. The points of similarity are : (1) one of several managing agencies carried on by the assessee, (2) the agreement provided for compensation, but here even compensation under the managing agency agreement was not provided, but a device by the agreement for sale was resorted to, to produce a compensation which was not otherwise available, and (3) here also the managing agency included all the trading activities of the managed company under article 127 as indicated already. Even then the Madras High Court held that it was income. At page 365 of the report, Rajagopalan J. who delivered the judgement of the Madras bench observed as follows :
'In the case of the assessee, taking up managing agency along with secretaryship to the plantation company and other trading rights was part of the assessees normal trading activities. The assessee dealt with, among other things, the export of tea produced in India, and obtaining managing agencies and other rights from the plantation companies certainly facilitated that trade in tea. The managing agencies the assessee obtained were liable to termination, in which event the assessee received the compensation it was entitled to by agreement. We should point out that the agreement... was not a contract for securing simpliciter the managing agency for Talliar Estates. It was a composite agreement securing other rights as well to the assessee, which helped it in its trading activities in tea. The assessee was in a position to obtain such contracts with plantation companies because of its large experience in handling tea for export and also in managing plantations in India. Even confining ourselves to the managing agency the loss of one of several such managing agencies could have little effect on the structure of the assessees business even in tea or on its profit-earning apparatus as a whole. They endured virtually unimpaired by the termination of the managing agency for the Talliar Estates even as the business of the assessee remained unimpaired when other managing agencies were terminated in the past. The assessees business in tea proceeded apace notwithstanding the termination of such agreements. To adopt the words of Das C.J. at page 916 of the report in Commissioner of Income-tax v. South India Pictures Ltd., the termination of the agreement with the Talliar Estates could well be said to have been brought about in the ordinary course of the business of the assessee and the money paid to the assessee as a result of or in connection with the termination of such agreements should certainly be regarded as money received in the ordinary course of the business of the assessee and that therefore it was a trading receipt.'
These observations both on facts and on the law apply all the more to the facts before us. Here also the termination of one of several managing agencies had little effect on the structure of the assessees business. The assessees business continues and there is nothing on record to show that it suffered any impairment at all. Here also it was a part of the normal trading rights of the assessee company. Here also the agreement was not a pure managing agency agreement simpliciter. It contained numerous clauses which coupled with the articles of association of both the assessee company as well as the managed company gave the assessee virtually the complete control of the business of the managed company.
This completes our review of almost all the relevant Indian cases on the point. What remains now is to notice some of the most recent leading English decisions bearing always in mind the signal distinction that the English law does not recognise the same statutory type of managing agency as the Indian Companies Act does. The first case is Kelsall Parsons & Co. v. Commissioners of Inland Revenue. There, the appellants carried on business as agents on a commission basis for the sale in Scotland of the product of various manufacturers, and entered into an agency agreement for that purpose. At the instance of the manufacturer concerned one of the agreements, which was for a period of three years, was terminated at the end of the second year in consideration of payment to the appellants of the sum of Pounds 1,500 as compensation. The Court of Session with Lord Normand (the Lord President) and Lords Fleming, Moncrieff and Carmont came to the conclusion that the sum was not a capital receipt but a taxable profit upholding the decision of the Commissioners of Inland Revenue. It is essential to remember that this case was not and could not be a case of managing agency as found in India under the Indian company law. Lord Normand, the Lord President of the Court of Session, at page 621 of the report observed as follows :
'Counsel maintained 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. This proposition is, I think, too vague and too wide. I find it imposssible to reconcile with some of the decided cases, for example, Short Bros. Ltd. v. Commissioners of Inland Revenue and Commissioners of Inland Revenue v. North fleet Coal & Ballast Co. Ltd. These two cases were referred to by Lord Macmillan in his speech in Van den Berghs Ltd. v. Clark, and I think they can be treated as of high authority since they passed the scrutiny of the House of Lords without adverse comment.'
The second proposition of importance at the same page of the report in Lord President Normands judgement is as follows :
'Then it was urged that the whole structure of the appellants business was affected by the cancellation and that on the authority of Van den Berghs Ltd. v. Clark the payment should therefore be treated as a capital payment. I have already given reasons for thinking that, the structure of 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 contact..... The shock, therefore, such as it was, consisted merely in this, that the end of the agency came by agreement 12 months earlier than its contemplated term.'
In fact earlier in the judgement the Lord President Normand at page 620 of the report explains the nature of this compensation and why it was taxable profit and not capital receipt by observing :
'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 once and for all. The sum paid in this case is really and substantially a surrogatum for one years profits.'
It was also important to remember that there the Lord President Normand also emphasised the point at page 620 of the report that :
'Further, 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 fact such modification took place in the facts of the reference before us. The modifications here also are influenced by the statutory provisions of the Indian company law. Formerly, under section 87A of the Indian Companies Act, 1913, as amended by the Act of 1936, it was provided that no managing agent after the commencement of the Act of 1936, could be appointed to hold office for a term more than twenty years at a time as provided therein its various sub-sections. Later on again by the new Companies Act of 1956, many statutory provisions are made in respect of duration, variation and restrictions of the managing agency agreements. Under section 328 of the 1956 Act the periods provided are fifteen and ten years and the variation of the managing agency agreement requires a resolution of the company in general meeting and previous sanction of the Central Government before such resolution is passed. Section 332 of the 1956 Act also puts a limit to the number of managing agencies that a company may hold, the limit being ten companies. Under section 324 of the new Companies Act the Central Government can prohibit managing agents in companies engaged in specified class of industry or businees. Section 325 of the 1956 Act provides :
'No company acting as the managing agent of any other company shall, after the commencement of this Act, appoint a managing agent for itself, whether it transacts any other kind of business for addition or not...'
All these provisions indicate that the Indian Companies Act and its statutory provisions proceed on the assumption that managing agency itself is business as indicated by the Supreme Court, and that its terms can be varied and modified.
Both Lord Fleming and Lord Moncrieff adverted to the possibility of the compensation money in Kelsall Parsonscase being considered as capital and not revenue if the duration of the period was much longer. But the Supreme Court did not approve of this view in Commissioner of Income-tax v. Jairam Valji nor was it approved by Harman J. in Anglo-French Exploration Co. Ltd. v. Clayson or by Lord Evershed M.R. in the same case.
The next English case material for the purpose of this reference is Anglo-French Exploration Co. Ltd. v. Clayson. In this case the assessee carried on business as mining finance company and also acted as secretary and agent for a number of other companies. The companies for which it provided these services included a South African company from which it received remuneration of Pounds 1,500 per annum under a contract terminable at six months notice. The assessee companys shareholding together with that of a second shareholder constituted a controlling interest in that company. These two shareholders arranged to sell all their shares in the South African company and it was part of the arrangement with the purchaser of the shares that the assessee company would resign its office as secretary and agent of the South African company in consideration of the further payment by the purchaser of the sum of Pounds 20,000. It was also arranged that the assessee company would pay a proportionate part of this sum to the second shareholder in the South African company. The question arose whether the assessee companys contract to provide agency and secretarial services for the South African company constituted a capital asset, and that the sum received was a capital receipt. The Court of Appeal held that the sum received was compensation for the loss of business and alternatively, that it arose from a financial dealing and that in their case it was revenue receipt. Harman J., who first decided this question and who was ultimately upheld by the Court of Appeal, makes certain important observations in this case which are relevant for our purpose. They are as follows :
(1) 'I find it very difficult to understand this distinction which seems to go at least very near to saying that the question depends on the importance to the company of the assets in question. I cannot suppose that the answer depends on a mere question of amount.'
(2) 'Nor do I see why the duration of the contract should make any difference though this has been suggested as a test, for instance in the Barr, Crombies case.'
(3) 'For the taxpayer, it was argued that this was the purchase price paid by a third party on the sale by the company of a capital asset and was therefore capital. I do not think the true view lies here either.'
(4) 'This was a mining finance company and its stock-in-trade consisted of shares in other companies which it bought and sold. It also had another branch to its business which consisted in the performance of duties as secretary or registrar for a fee to a number of companies in some of which it held shares and in others it did not. It was no part of the day-to-day business of the appellants to buy and sell these secretaryships. They are not indeed things which can be bought and sold in the ordinary sense.'
(5) 'Apart from the holding of the shares, the secretaryship was worth little or nothing. It was only the appellants special position that enabled them to obtain this money. It was in fact a sum earned in the course of the companys trade, namely, the sale of shares, and, even though not part of the purchase price, was only earned because of the holding of the shares and by way of inducement to part with them. On this analysis, as it seems to me, this was money earned by the company in the course of its trade and therefore a trading receipt and must be charged to tax accordingly.'
Here also it may be recalled and remembered that the assessee was not simply selling its managing agency to Messrs. Mugneeram Bangur & Co. for Rs. 3,50,000, but indicated that that sale was the sale of shares it held in the managed company. To adopt the words of Harman J. without those shares the sale of managing agency would be worth little or nothing because without the control of those shares even the formal appointment of a managing agent would mean no control and the action of the managing agent would be vetoed by the shareholders of the managed company.
An appeal was taken to the Court of Appeal from the judgement of Harman J. in Anglo-French Exploration Co. Ltd. v. Clayson. Lord Evershed M.R. discusses the well known trilogy of English cases in Commissioners of Inland Revenue v. Newcastle Breweries Ltd.; Short Bros. Ltd. v. Commissioners of Inland Revenue and Commissioners of Inland Revenue v. Northfleet Coal & Ballast Co. Ltd., emphasising that sums received for the cancellation of an agency or of other similar agreements which have been entered 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. Lord Evershed M.R. further points out that the case of Barr, Crombie & Co. Ltd. v. Commissioners of Inland Revenue was a case of that exceptional character but the most important observations of Lord Evershed M.R. relevant to decide the present reference before us occur at page 559 as follows :
'It is true that the facts show that Anglo-French held some eight agency and secretarial contracts and had 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 profit-making apparatus of the company which retained its offices and staff, etc., in Johannesburg exactly as before. In my judgement, Mr. Monroes first alternative proposition is really inconsistent with the cases. The taxpayers in the Kelsall Parsons case and the Flemings case were not dealers in agency contracts.'
This particular observation applies with great force to the facts before us. It is established here also that making of such managing agency contracts was part of the very business of the assessee here. It is also established that the cancellation of this one contract in no sense affected the profit-making apparatus of the company which retained its office and staff to adopt the language of Lord Evershed M.R. If Kelsall Parsons case and Flemings case could be decided in the way they were, when the taxpayers in those cases were not even dealers in agency contracts, then the decision in the present reference before us where the assessees avowed and actual object is to trade and do business in managing agency, can only be that the compensation in this case must be a trading receipt.
Lord Evershed M.R. proceeds to approve in the following term, Harman J.s observation that it is immaterial that the compensation proceeds from a stranger to the agency contract :
'I should add that the fact that the Pounds 20,000 was paid, not by the Kleinfontein company, but by a stranger to the agency contract, namely, the Philip Hill company, in my judgement, is immaterial. It has been clearly established that a question of this sort must be determined by having regard to the nature of the payment in the recipients hands. I, therefore, think that Harman J. arrived at an entirley correct conclusion in this case.'
In addition to this reasoning of Lord Evershed M.R. that it is immaterial that the compensation proceeds from a stranger the language of clause 6 of the agreement for sale quoted elsewhere even says 'the company shall compensate'. It is all the more immaterial here.
A contemporaneous English decision is Wiseburgh v. Domville. This was a case where the assessee acted as a sole agent for a company and he was dismissed and there was a claim for damaged for wrongful dismissal. It was held that a sum of Pounds 4,000 paid as damages for wrongful dismissal represented profit that would or might have been made out of the agreement and that it was a taxable and not a capital receipt. Of particular relevance are the following observations of Harman J. at pages 533-34 :
'If this man had carried on no other business at all other than his agency for these people and they had been his sole work, it may well be that the loss of it would have been the loss of a capital asset. It cannot, I think, depend on volume on whether it is one-eighth, or one quarter or one-third but one may look on it as being a mans entire livelihood and then say that that is the mans capital asset. That is much easier to say in the case of a limited company than in the case of a private individual, as two cases illustrate. One is Van den Berghs Ltd. v. Clark where the English company received a large sum of money from the Dutch company and agreed, as a result, to give up one side of its business. The other case which well illustrates that is Barr, Crombie & Co. Ltd. v. Commissioners of Inland Revenue, a Scottish case, where Lord Normand, the Lord President, points out, at page 412, that in the Van den Berghs case and indeed in the case before him the ending of this agreement radically affected the whole structure of the company and the character of its business.
I do not myself think that observations about business structure apply here. This man was a manufacturers agent. He had other agencies from time to time and carried on business as an agent, and one of the incidents of such a business is that one agency may be stopped and another begun, as table D does show. The fact that an agency was a key agency; and, therefore, was important to him and represented half of his income, seems to me to be irrelevant. He must have expected as part of the normal course of such a business that one agency would end and another start... However that may be, it was a normal incident in this kind of business that an agency should come to an end, and the compensation paid is, it seems to me quite clearly, income.'
These observations again apply to the facts of the case before us. Managing agency business was part of the normal trade and business of the assessee. There is nothing in law to show that one managing agency cannot terminate and another begin. The statutes and articles of association and memorandum provide for such change. In fact this very managing agency agreement has been altered once before. It is a matter of agreement between the parties. Indeed here the managing agency agreement at least provides that the managing agent at any time could resign from the office. A company whose business is to acquire managing agencies certainly would not be debarred from resigning one managing agency and acquiring another. It is, therefore, a part of their normal trading and the compensation received, therefore, is a trading receipt, on the principle indicated by Harman J. as above. Before the Court of Appeal in this case Lord Evershed M.R. distinguished Wiseburghs case from Kelsall Parsons case and his Lordships observations at page 539 bring out the salient points of distinction and their effect as follows :
'First, the agencies which Mr. Wiseburgh held were but two. Secondly, as I have said earlier, although the agency which we are considering was expressed to be determinable at relatively short notice, in truth, if all had gone well, there would have been no reason to suppose that it would have been. And thirdly, as the Commissioners pointed out, the effect of the loss of this contract was, quoad Mr. Wiseburghs agency business very substantially to depreciate his earnings; whereas in the Kelsall Parsons case the court pointed out that the earnings of the taxpayer out of the agency business were not much different from what they had been before the cancellation of the material contract. I agree that in respect of those matters this case differs from the Kelsall Parsons case; but I am unable to agree that those differences are of such significance as to bring the case from the territory, so to speak, of Kelsall Parsons into the land of Barr, Crombie.'
Lord Evershed M.R. in Wiseburghs case decided that it was more closely resembling the case of Commissioners of Inland Revenue v. Fleming & Co. (Machinery) Ltd. It will not be inappropriate here to refer to the speech of Lord Russell in that case at page 63 of that report :
'The sum received by a commercial firm as compensation for the loss sustained by the cancellation of a trading contract or the premature termination of an agency agreement may in the recipients hands be regarded either as a capital receipt or as a trading receipt forming part of the trading profit. It may be difficult to formulate a general principal by reference to which in all cases the correct decision will be arrived at since in each case the question comes to be one of circumstance and degree. When the rights and advantages surrendered on cancellation are such as to destroy or materially to 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 therefore a capital and not a revenue receipt.'
On a consideration of the facts in the present reference before us we are unable to bring this case within the principle laid down by Lord Russell to make it a capital receipt. This sale of the managing agency has certainly not destroyed or materially crippled the whole structure of the assessees profit-making apparatus. Nor has been involved in dislocation of the assessee company. The facts of this case do not bring it within the principle laid down in Californian Oil Products Ltd. (in liquidation) v. The Federal Commissioner of Taxation at page 47, where the learned Chief Justice of Australia and Dixon J. said 'In the present case the sum in question was paid as the consideration for the termination of the agency which constituted the only business carried out by the taxpayer company. It was truly compensation for not carrying on their business.' It comes within the principles expressed by Rowlatt J. in Chibbet v. Joseph Robinson and Sons, when he said 'A payment to make up for the cessation for the future of annual, taxable profits is not itself an annual profit at all.' It is not within the qualification of that statement made by Lord Macmillan in Dewhursts case, which, in effect, was that if the payment represented deferred or contingent remuneration for services performed, the payment does not necessarily cease to be remuneration for services because it is payable when the services come to an end.
The fact here do not show that this agency was the only business carried on by the taxpayer company, but on the contrary show that the assessee company carried on five other managing agencies.
For the reasons stated above we decide that the sum of Rs. 3,50,000 in the facts and circumstances of this case is a revenue receipt assessable to tax under Indian Income-tax Act and return an answer in the affirmative to the question asked.
The commissioner of Income-tax will get the costs of this reference.
NIYOGI J. - I agree.
Question answered in the affirmative.