SINHA J. - This is a reference under section 66(1) of the Income-tax Act. The facts are as follows :
The assessee in this case is a firm called Ghasiram Srinivas, which had been acting for more than 30 years as the guaranteed brokers of Messrs. Imperial Chemical Industries (India) Ltd. In fact, they acted as banyans or guaranteed brokers for the predecessor-in-interest of Messrs. Imperial Chemical Industries (India) Ltd., namely, Messrs. Brunner Mond & Co. (India) Ltd. The terms of the banyanship agreement are to be found in an indenture dated the 28th of August, 1940, which exhibit A, annexed to the statement of case dated the 3rd August, 1955, and appears at page 5 of the paper-book containing that statement of case. Several features of this agreement are relevant to be considered. The agreement, to start with, had no time limit. On the other hand it was precarious for two reasons. The first reason is that it was terminable by either party giving to the other party three months written notice at any time. This is clause 13 of the said agreement. The other clause is clause 2 of the agreement, whereby it was agreed that the agreement would not be effective with regard to certain products set out in the schedule, but the company was at liberty, by giving written notice to the banyans, to add to or exclude from the said schedule, any product or products at any time. Notwithstanding the precarious nature of the agreement, it did continue for a substantial period of time and there is nothing to show that the company was not satisfied with the work of the banyans. The work of the banyans related to the credit given by the company to purchasers. It is this credit that was guaranteed for a consideration. In January, 1952, there was a conference and on the 3rd of January, 1952, the company wrote a letter to the assessee terminating their appointment as banyans with effect from the end of December, 1951. It will be observed that this termination was not upon three months notice. On the other hand, it was a summary termination with retrospective effect. Upon that, on the 10th of January, 1952, a letter was written on behalf of the banyans protesting against this termination. The tone of the letter shows dismay rather than anger. In substance, it was stated that the banyans had been working for a long time to the best of their ability and this termination was a severe blow to them. There was no repudiation of the termination nor any complaint about the termination being contrary to law. On the other hand, it was stated that the blow was so severe that the partners, one of whom was a very old man, would have to live on the compensation money for the rest of their lives and in awarding compensation they appealed that the company should bear in mind the reputation and social position of the banyans. In other words, the termination was accepted and a prayer was made for adequate compensation so that the severity of the blow would be mitigated. The letter itself shows that the termination was virtually a death-blow to the partnership firm. It turns out that this was in reality its effect. On the 1st of February, 1952, there were two letters written on behalf of the company to the assessee firm. One of them appears at page 7 of the supplementary paper-book and the other at page 9. The first letter mentions that Rs. 1,80,000 had been awarded as compensation for the termination of the banyanship agreement. The second letter also mentions the fact that the amount was paid as compensation for loss of office as a result of the summary termination by the company of the banyanship agreement. On the 2nd of February, 1952, a cheque was issued for the sum of Rs. 1,80,000 stating that it was 'compensation for loss of banyanship'.
On the 24th of February, 1952, the company again wrote to the assessee firm to the effect that the compensation had been paid for the summary termination of the banyanship agreement. It was categorically mentioned that it was not for compensation of the banyanship agreement for three months, being the period stipulated in the agreement for serving notice of termination. On the 30th of March, 1952, the assessee firm wrote back to say that the firm itself would have to be discontinued and, therefore, an early adjustment of all accounts was desirable. Now I come to the assessment proceedings. During the assessment year 1952-53 the payment of Rs. 1,80,000 mentioned above came to the notice of the Income-tax Officer. He found, however, that it had not been shown in the return submitted by the firm. Upon being asked why this had not been shown, it was contended that the receipt was a capital receipt and not subject to income-tax. The Income-tax Officer did not agree with this and brought the entire amount under tax. The firm appealed to the Appellate Assistant Commissioner but without success. There was a further appeal to the Appellate Tribunal and this time a partial relief was obtained. The Tribunal held that, as it was found that on an average the remuneration which was earned by the firm during a period of three months would be Rs. 50,000, that amount at least must be said to be referable to the contract of service and must be deemed to be paid in lieu of notice, that is to say, represented the earnings which the firm would have made during the period of three months for which notice had to be given to terminate the agency but had not in fact been given. Therefore, the Tribunal held that at least Rs. 50,000 should be treated as revenue but the balance of Rs. 1,30,000 should be treated as capital receipt. Both the assessee and the department were dissatisfied with this decision. The assessee wanted a reference in order to have the opinion of this court as to whether the Tribunals treatment of Rs. 50,000 was right or not. The department also wanted the matter to be referred to court in order to have its opinion on the question whether the treatment of Rs. 1,30,000 as a capital receipt was right. The Tribunal was of the opinion that both were points of law that did arise in the case, and the following two questions were referred :
'(1) Whether, on a proper construction of the agreement dated 28th August, 1940, between the assessee and the Imperial Chemical Industries (India) Ltd. and the facts and circumstances of this case, the Tribunal was justified in holding that the sum of Rs. 50,000 out of the sum of Rs. 1,80,000 was referable to the contract of service as payment in lieu of notice was as such assessable as income ?
(2) Whether on a proper construction of the agreement dated 28th August, 1940, the whole of Rs. 1,80,000 should be referred to the said agreement and as such assessed as income of the assessee ?'
The matter came up before a Bench of this court presided over by Chakravartti C.J. The learned Chief Justice, in his order dated 22nd August, 1957, pointed out that the case was of the type which was often been called 'troublesome'. The trouble lay in the fact that there were two lines of cases upon the subject and the determination of the questions asked depended upon the facts of each case. Thus, without knowing sufficient facts, it was not possible to decide as to which side of the border line the case was. As often happens in income-tax cases, a very few facts one way or the other would determine the question as to upon which side of the border line the case lay. The learned Chief Justice ultimately formulated four questions which he considered as essential in order to come to a decision and to advise the Tribunal. These four questions were as follows :
'(1) The nature and effect of the correspondence between the parties and the indications furnished thereby and by other materials, if any, as to how they were respectively regarding the payment;
(2) Whether or not the assessee firm had long been engaged in business of a general kind in banking and money-lending, involving various contracts and ventures and whether or not it was in the course of that business that it had taken up the banyanship under the Imperial Chemical Industries (India) Ltd;
(3) Whether it was as a result of the loss of the banyanship that the assessee firm had to close down its business; and
(4) Whether any part of the sum of Rs. 1,80,000 represented remuneration for the realisation of arrears of sale proceeds.'
The reason why these questions were asked were, briefly, as follows :
The learned Chief Justice pointed out that, in such matters, one must know precisely the nature of the payment that was being made. The correspondence would show how the parties themselves regarded the payment, which would be an important factor in determining the nature of the payment although it would not be conclusive. The learned Chief Justice next pointed out that there were two classes of cases in one of which it had been held that if a business had various contracts and ventures and only one contract or venture came to an end and compensation was received, but that the termination of that particular contract or venture did not seriously affect the working of the business of the recipient, that led to one conclusion. On the other hand, if the contract terminated was the sole contract upon which the whole edifice of the recipient was built up, and as a result of its termination the edifice crumbled, and compensation was given, it would lead to a different conclusion. In the first case, it might be said to be a revenue receipt, but in the second case it would be considered as a payment of a capital nature. Therefore, the learned Chief Justice considered that amongst other things the fact should be investigated as to whether the Appellate Assistant Commissioner was right in saying that the assessee firm carried on a banking business and had all kinds of other contracts.
We have now before us the answers given by the Appellate Tribunal in a supplementary statement of case dated the 21st November, 1958. It has now been found that the assessee firm was not carrying on any business before it started the business as banyans of the company. In fact, it borrowed certain moneys from strangers in order to deposit a sum of Rs. 1,00,000 with the company in connection with the banyanship agreement. The other facts found show that the banyanship firm was actually built up around this contract with the Imperial Chemical Industries (India) Ltd. It had no other business. Neither did it have any business of a general kind of banking or money-lending involving various contracts and ventures. The relevant correspondence has now been set out and, as mentioned above, shows clearly that upon the termination of this contract the banyanship firm received a death-blow, leading to its dissolution. In other words, the termination of the contract brought about the termination of the banyans themselves. Apart from this, the correspondence shows clearly that the parties contemplated that this amount of Rs. 1,80,000 was given, not in lieu of three months notice, but as a consolidated amount paid for the purpose of compensating the banyans for the termination of their services. As I stated above at no time did the banyans raise the point of insufficiency of the notice nor was any investigation made into the question as to what they would have earned during the three months for which notice would have to be given under the contract if the banyanship was terminated in accordance with it. These being the facts, we have to consider the law that has to be applied. I think the position in law is very well set out in a case decided by the Court of Appeal in England - Wiseburgh v. Domville [ 1 All E.R. 754;  30 I.T.R. 295.]. In that case, Lord Evershed M. R. pointed out that there were two cases which represented the two different views on the subject. The first was Kelsall Parsons & Co. v. Inland Revenue Commissioners [ 21 Tax Cas. 608.] and the case on the other side of the border line was the case of Barr, Crombie & Co. v. Inland Revenue Commissioners [ 26 Tax Cas. 406;  15 I.T.R. (Suppl.) 56.]. I will shortly state the facts in both the cases and the conclusions arrived at. In the case of Kelsall Parsons & Co., the appellants carried on business as agents on a commission basis for the sale in Scotland of the products of various manufactures and entered into an agency agreement for that purpose. One of the agreements was for a period of 3 years, and this was terminated at the end of the second year, but compensation was paid to the extent of 1,500. The question was whether this payment was of the nature of revenue or capital. The Lord President (Normand) said that these cases depended on their own facts. He pointed out that where a merchant has a number of agencies then it was a normal incident of his business that one or more of them might be modified, altered or discharged from time to time. Since he had other contracts, those would go to bear the shock of the termination of one of them. In parting with the benefit of one of the contracts, the assessee was not parting with something which could be described as an asset of an enduring nature. On the facts of the case it was held that the sum paid was really and substantially a surrogatum for one years profit and, therefore, it was of a revenue nature. On the other hand, in the case of Barr, Crombie & Co. v. Inland Revenue Commissioners [(1945) 26 Tax Cas. 406;  15 I.T.R. (Suppl.) 56.], the agency that was cancelled amounted in substance to the termination of the whole business of the assessee company because its receipts from this particular source amounted to nearly 9/10ths of its total earnings. The termination of this particular agency took the bottom out of its business and the entire substratum of it was gone. In fact, it had to reorganise itself in a different manner altogether. It was held that in such a case, the compensation received was of a capital nature. In the particular case that the Master of Rolls was considering, he came to the conclusion that the assessee had more than one agency and the termination of one of them did not destroy his business, although it may have been a disaster. The Master of Rolls pointed out that in such cases the argument that it was still a capital receipt was quite attractive, but the matter was now set at rest by authority. There are other cases on the subject : for example, Short Bros. Ltd. v. Commissioners of Inland Revenue [ 12 Tax Cas. 955.] referred to in Kelsall Parsons & Co. [ 21 Tax Cas. 608.]. It is, however, unnecessary to multiply cases. That being the legal test to be applied, let us apply them to the facts of this case and see where we arrive. The facts found herein have established that the assessee firm had only this one banyanship business and no other. In fact, the whole business was built round the banyanship agreement, and the termination of it made it collapse completely. It ceased to exist any further. The parties undoubtedly never thought about a compensation to be given for three months or for any particular period. The compensation was offered and accepted as a solatium for the destruction of the whole banyanship business. In my opinion, there cannot be any doubt that it was in the nature of a capital receipt and the conduct of the parties confirms it. The case, therefore, leans towards the decision in Barr, Crombie & Co.s case [ 26 Tax Cas. 406;  15 I.T.R. (Suppl.) 56.] rather than that of Kelsall Parsons & Co. [ 21 Tax Cas 608.].
The argument of Mr. Pal on behalf of the appellant was that as a fact we should come to the conclusion that at least part of the money, namely, Rs. 50,000 was given, a not on a general basis of compensation but as the remuneration which would have been earned by the assessee firm if the banyanship agreement continued. I do not find any warrant for such a conclusion. The argument was that the agreement was terminable at any time upon three months notice. If the company could bring the agreement to an end within three months, there is no reason why it should not be taken to have had that in mind in making payment of at least a part of the amount that was actually handed over. It was argued, therefore, that at least Rs. 50,000 should be held to be receipt of a revenue nature and that the Appellate Tribunal was correct in its findings. I am unable to agree. On the facts and circumstances of this case, either the whole sum is revenue or it is of a capital nature. There cannot be a half-way house. Neither the position in law nor the facts of this case warrant the splitting up of the sum into two payments of a different kind. It was paid in one lump sum and for one purpose. That purpose has been indicated in the correspondence. I do not say that by itself this would be conclusive, but it throws a light on the nature of the payments, and the overall view of the case confirms that it was the true view of the nature of the payment. In order words, there was no intention of paying a part of the money as compensation for the revenue which the firm would have earned during the three months for which they were entitled to notice and the balance by way of compensation for loss of office. The whole sum was paid as compensation for the loss of office and, as I have stated above, the facts in the case show that the loss of office in this particular case entirely destroyed the whole business of the assessee firm. There is nothing to show that both the payer and the payee were not fully cognisant of this fact. The result is that by applying the well established tests to the facts of this case, it must be held that the entire payment of Rs. 1,80,000 was payment of a capital nature, and not in the nature of a revenue receipt.
The result is that both the question should be answered in the negative and that no part of the sum of Rs. 1,80,000 should be treated as assessable income of the assessee. The assessee is entitled to costs. The assessee will also get the costs of the hearing before the Division Bench presided over by Chakravartti C.J. as mentioned in the order of that Bench dated the 30th August, 1957. Certified for two counsel.
DATTA J. - I agree.