TMI Blog1967 (1) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... e, vide an agreement dated 2nd of April, 1938. This agreement was to be operative for 25 years in the first instance, and, at the option of the aforesaid Shanti Parsad, was liable to be extended to 100 years. Later a public limited company, named Messrs. Dalmia Dadri Cement Limited (hereinafter referred to as the company), was incorporated and the benefits of the above-mentioned agreement were transferred to that public company. The assessee also assisted in the promotion of the aforesaid company. For the aforesaid services rendered by the assessee the company entered into an agreement on 27th of May, 1938, by which it agreed to pay to the assessee by way of commission 1 per cent. on the yearly net profits earned by the company from the said cement factory. This agreement was to last so long as the monopoly rights granted by Jind State, vide its agreement dated 2nd of April, 1938, subsisted. The assessee was paid his 1 per cent. commission regularly till 1950. As no commission was paid thereafter, the assessee filed a suit against the company, and in that suit a compromise was entered into by which the assessee was paid a total amount of Rs. 15,000 as commission for the years 1951 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e calculated in a particular manner. The second category of cases is the one where the assessee has to render some sort of services or has to supply certain articles, and, in lieu of something that is to be done by the assessee, he is to be paid certain remuneration, or for the supply of goods, he is to be paid certain amount. The remuneration received by him in one case and the profits made by him in the second are certainly of a revenue type, and if such contracts are terminated, the compensation paid would normally be of a revenue nature. The present case, however, also does not fall in this category. The assessee, in this case, was not to supply anything to the company, nor was he to render any service for which he was to be paid the commission as agreed in the contract. The cases, which deal with contracts of this type, therefore, are also not of any assistance in determining the question before us. The third catergory of contracts can be those under which the assessee has not to do anything. Mr. Awasthy, learned counsel appearing for the department, vehemently urged that the case, which was on all fours with the present one, was Shove v. Dura Manufacturing Co. Ltd. The Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and affected the whole conduct of their business. I have difficulty in seeing how money laid out to secure, or money received for the cancellation of, so fundamental an organisation of a trader's activities can be regarded as an income disbursement or an income receipt. . . . In the present case, however, it is not the largeness of the sum that is important but the nature of the asset that was surrendered. In my opinion, that asset, the congeries of rights which the appellants enjoyed under the agreements and which for a price they surrendered, was a capital asset.... The agreements formed the fixed framework within which their circulating capital operated ; they were not incidental to the working of their profit-making machine but were essential parts of the mechanism itself. They provided the means of making profits, but they themselves did not yield profits. The profits of the appellants arose from manufacturing and dealing in margarine." The learned counsel for the appellant urged that the learned Tribunal was in error in considering that this case was applicable to the facts of the present case. Here, there was no machinery set up affecting or, in any way, regulating the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tailed by Lord Moncrieff. He urged that, in the present case, the contract was directed to result in trading profits and not to regulate the conditions under which he was to carry on his trade. No doubt, the present contract does not fall under the second category, as detailed by Lord Moncrieff. The question still remains whether it falls under the first category or whether it forms a category different even from that. In Sadasivam's case the appellant and his wife Subbulakshmi were preparing a picture and joined with them another party as financier. They entered into an agreement by which (1) Subbulakshmi was to continue to act in the picture ; (2) out of the net collections over and above the amount advanced by the financier, 50 per cent was to be paid to Subbulakshmi and the assessee " towards remuneration for services rendered by them " ; (3) the copyrights in the songs, etc., were to vest in all the three jointly and the royalties were to be shared equally ; and (4) the parties were to have the right of pre-emption. When accounts were taken the two had overdrawn their account by a sum of nearly Rs. 29,000 and in consideration of this amount, both executed a release deed in f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital or revenue in his hands. Venkatarama Aiyar J. delivering the judgment of the Supreme Court, discussed the case law on the point at length and observed as follows : " There is a difference between a payment made as compensation for the termination of an agency contract and an amount paid as solatium for the cancellation of a contract entered into by a businessman in the ordinary course of business. 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. The agency may, therefore, be viewed as the apparatus which leads to the business rather than the business itself. Considered in this light the agency right can be held to be of the nature of a capital asset invested in business. But this cannot be said of a contract entered into in the ordinary course of business. Such a contract is part of the business itself, not anything outside it as is the agency, and any receipt on account of such a contract can only be a trading receipt.... Generally, payments made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nkar or conveying the aforesaid discovery to the parties, who had sufficient means to exploit this discovery, and in helping the other party in getting concessions from the State Government and also in formally assisting in the promotion of the company which was ultimately to exploit the concessions, he was doing something with an eye to make money out of it and this was not an act or series of acts done by him without an eye to make profit or with a view to get something that may be paid to him ex gratia. He, therefore, urged that what he did was a business activity and, as was held by Lawrence J. in Shove v. Dura Manufacturing Co. Ltd., if such an activity is not ultra vires, the contract entered into by him must be taken to be in the ordinary course of business, provided it is a revenue-yielding contract. It cannot be denied that the facts in Shove v. Dura Manufacturing Co. Ltd. are very similar to those of the present case. There, the introduction of the aero-valves was made to the manufacturing company by the assessee-company and nothing further was to be done by the assessee. The assessee being a limited company, the sphere of its work was governed by its object and it was he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant and what rejected, they cannot be regarded in any sense as precedents to follow." The learned counsel for the respondent urged that section 6 of the Indian Income-tax Act deals with six heads of income, profits and gains that are chargeable to income-tax. These are : (i) Salaries (ii) Interest on securities (iii) Income from property (iv) Profits and gains of business, profession or vocation (v) Income from other sources (vi) Capital gains. Admittedly, the income arising from the contract before us cannot fall under the first three heads or the last one. We are, therefore, left with heads Nos. (iv) and (v). Under the contract the assessee was not carrying on any profession or vocation and the payment that was to be made to him was not in lieu of any services of that type. It was, therefore, urged that the question only arises whether income arising from this contract can be categorised under " profits and gains of business " or whether it was only an " income from other sources ". Senairam Doongarmall's case referred to above gives us an idea as to what is to be considered a business. In that case the assessee owned a tea estate and carried on business of growin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se admittedly no business was actually being carried on by the assessee. If the income arising from the contract could not be treated as profits or gains of business then a fortiori the aforesaid contract cannot be taken to have been entered into in the ordinary course of business. At best, as a result of this contract, there came into existence a source of income and the income derived can be categorised as " income from other sources." Furthermore this source was of an enduring nature and, therefore, was, in a way, a capital asset and not a stock-in-trade, and if this source dries up and compensation is paid in respect thereof, the same must again be treated as capital. Reference in this respect was made to Kettlewell Bullen Co. v. Commissioner of Income-tax. There, the appellant-company was formed with the object of carrying on the business, including the Fort William Jute Company Ltd. An arrangement was entered into with another party whereby the party agreed to purchase the entire holding of shares of the appellant in the jute company and to procure repayments of all loans, etc., made by the appellant to the managed company. It was further agreed that the appellant-company w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived as consideration would be treated as a capital receipt. I feel that there is force in this contention, and the contract cannot possibly be treated as a trading contract entered into in the ordinary course of business and must be taken to be a source which was certainly of an enduring value, which yielded income to the assessee, which, of course, varied from year to year according to the amount of profits made by the company. This source was to last till the life of the company which, under the concessions given, could be for 100 years. Now, this source dried up as a result of the agreement between the parties, and the compensation in respect thereof must be treated as capital. This capital, if invested, would replace the source which has dried and would start yielding income. For the reason given above, I feel that, though for reasons different from those given by the Income-tax Appellate Tribunal, the amount in question must be treated as capital receipt. Our answer to the question, therefore, is that the receipt of Rs. 70,000 by the assessee on 11th of June, 1954, was capital in nature. The assessee will have his costs of this reference from the department. J. N. KAUSHAL ..... X X X X Extracts X X X X X X X X Extracts X X X X
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