TMI Blog1962 (12) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows : Before the year 1938, the two appellants and one Jehangir Irani were carrying on business in electric goods including electric bulbs under two firm names. One of the firms was called the Precious Electric Co. and the other was named J. Pirojsha Co. In June, 1938, Precious Electric Co. entered into an agreement with M/s. Philips Electrical Co. (India) Ltd. by which the company demarcated a territory for the firm, undertaking to sell and deliver electric bulbs therein exclusively to the firm. By a letter which formed an annexure to the agreement the company agreed to sell electric bulbs to the firm at ex-warehouse prices subject to a commission of 12 1/2% on the gross invoice amount and the firm was allowed a further discount of 2% on the net invoice prices to cover breakage or fault in manufacture. It was further agreed that if the company sold any goods directly to the buyers in the territory the company would pay to the firm compensation amounting to 5% of the net amount of invoices covering such sales. The firm on its part undertook to sell only Philips bulbs in the territory and to prevent re-exportation of the bulbs by third parties. In addition to other condit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between Messrs. Precious and the parties exists. The commission related to the above special cases, executed after the termination of the existing agreement will be due to Messrs. Precious if no technical objection emanating from ELA'S agreement will come forward." "(b) STOCK : Messrs. Philips, Bombay, will take care that the stocks of Messrs. Precious will be disposed of in way or the other as soon as possible in order to avoid that Messrs. Precious' capital might unnecessarily be tied up. In order to achieve this, the available goods will be classified in three categories, viz : (i) Easily saleable goods. (ii) Goods which require some sales efforts, which means that they might be disposed of in a period of four to six weeks. (iii) Slow moving items which will be taken over by Bombay branch. The goods mentioned under (iii) above will be taken over by Messrs. Philips at the original invoice price if not otherwise decided due to deterioration of the goods whilst a deduction is valid for cost incurred for transfer." The following minutes, headed "Miscellaneous", were at the end and read : MISCELLANEOUS :As a gesture of good will, Messrs. Philips are prepared to pay in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii) Does the said receipt fall within the mischief of section 10(5A)(d) and as such liable to tax accordingly ?" The reference was heard by the High Court and the learned judges answered the first question as follows : The receipt of Rs. 20,000 is a taxable for the purpose of the Indian Income-tax Act, 1922." In view of the answer the High Court observed as follows : "As we have already held that the amount is a taxable receipt, being receipt arising from business, section 4(3)(iii) does not exempt it from liability to tax. We are in the view we have taken not called upon consider whether even if the receipt of Rs. 20,000 is a capital receipt, by operation of section 10(5A)(d) the amount can be regarded as a revenue receipt. We answer the second question as follows : It is liable to be included in the total income notwithstanding section 4 because it arose from because." The third question was left unanswered. The High Court certified the case fit for appeal and hence this appeal. The High Court in reaching its conclusion examined the agreement of 1938 and came to the conclusion that thought it involved a "monopoly purchase" and gave to the firm an exclusive right to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pensation for invasion of territory and a right to discount in the case of breakage or faulty manufacture. In other words, the agreements was not an ordinary trading agreement by which the stock-in-trade was secured but involved something more than the purchase of stock-in-trade. It constituted the means of earning profits or as it is commonly described "the money-making apparatus" of the appellants. When this agreement was terminated, he continued, it was not a premature termination but the expectancy was that it was to run unless terminated and the compensation which was paid though described as remuneration was, in a business sense, merely compensation for the loss of those rights which the firm had enjoyed and which it excepted to enjoy in the feature of the agreement was not terminated. In the alternative, Mr. Viswanatha Sastri contends that even if the amount could not be referable to a loss of a capital asset it was not referable to any future services to be rendered by the assesses who had by the termination of the agreement become ordinary dealers in bulbs like any other dealer in the same territory. Nor was it referable to any past service but was a payment ex gratia ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be regarded as a trading agreement entered into for the purpose of obtaining the stock-in-trade for the business or it can be regarded as an asset. The agreement consisted of 13 clauses but all of them were not equally important. The first clause provided for two matters : (a) it fixed a territory and (b) it defined the scope of the agreement. In the first part were mentioned the Bombay Presidency, Rajputana, Central Provinces and Berar, and in the second part "all lamps for electrical lighting purposes" of certain kinds (compendiously called "Philip lamps") were said to be covered by the agreement. Clause 2 was also divided into two parts. The first part said that the company undertook to sell and/or to deliver Philips lamps exclusively to the firm in the territory, the second part provided that should any buyer refuse to purchase from the firm, the company would make the supply direct but pay five per cent. compensation over the net amount of invoices covered in such orders to the firm. Clause 3 recited the terms accepted by the firm. This clause was also divided into two parts. The first part bond the firm to sell in the territory only such Philip lamps as were supplied to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re laid down. This letter stated the commission payable to the firm and the manner in which payments were to be made by the firm. Sufficient reference to these terms has already been made by us in an earlier part of this judgment. This annexure was to be read as a part of the agreement. It was probably kept separate to that in case of need only the annexure might be altered without the trouble of executing a fresh agreement. In determining whether this payment amounts to a return for loss of a capital asset or is income, profits or gains liable to income-tax, one must have regard to the nature and quality of the payment. If the payment was not received to compensate for a loss profits of business, the receipt in the hands of the appellant cannot properly be described as income, profits or gains as commonly understood. To constitute income, profits or gains the must be a source from which the particular receipt has arisen, and a connection must exist between the quality of the receipt and the source. If the payment is by another person it must be found out why that payment has been made. It is not the motive of the person who pays that is relevant. More relevance attaches to the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issioner of Inland Revenue (1922) 12 Tax Cas. 427 that there is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of application of that test. Here, the amount is large but there is nothing to show that it was even in adequate measure of the profits that were expected to be made during the three three years in which the amount was to paid. Even if it had been there would have been no inference in law. But in the absence of any proof that this was the likely profits it is difficult to say that the payment replaced those profits. Another way of looking at the matter is to consider whether the agreement was a trading agreement or something which was in the nature of an asset in the hands of the firm. In this connection the department relies strongly upon the case of Bush, Beach and Gent Ltd. v. Road (1939) 22 Tax Cas. 519. In that case the agreement was different. No doubt by that agreement also a territory was reserved and a monopoly was created but that agreement was to last for four years was prematurely terminated at the end of two years. Under that agreement a minimum quality ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and this amount was held to be a trading profit. It was observed by Rowlatt J. : "These contracts are not being sold. They are not being even extinguished really for his purpose. What is happening is that the profits under them are being taken; something is being taken in respect of the profits of them. That is the position. The sum represents the profits of the company of the contracts, treating them as contracts which nationally have earned or are going to earn a profit. Those profits are relating to this sum. The profits are not destroyed. It is the profits which we are concerned with, not the contract itself." On the other side there is the leading case of Van den Berghs Ltd. v. Clark ) [1935] 3 I. T. R. (Eng. Cas) 17 ; (1935) 19 Tax Cas. 390, where mutual trading agreements between two companies were rescinded and one of the companies was paid 450,000 as "damages". This was treated as a capital receipt and not an income receipt to be included in computing the profits of the trade under Schedule D, Case 1, of the Income Tax Act, 1918. Lord Macmillan described the payments as follows : "On the contrary, the cancelled agreements related to the whole structure of the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of their business. The agreement said that even on the termination of those contracts and orders no compensation was payable, It is difficult to see how this payment can be related to profits or hoe it can be called income, profits or gains even income from "Other sources". The payments can be regarded only as ad hoc payments. Even if it be not regarded as a payment for loss of capital it cannot be regarded payment for any services rendered or likely to be rendered, The services in the past were amply remunerated. The payment does not contemplate that the agreement in the past had not been sufficiently remunerative to the firm. It does not pretended to pay them for past services. The minutes do not show that any services in the future was expected from these appellants. What remained to be done was to wind up the business with regard to the agreement of 1938 itself. For this purpose, the company agreed to give all facilities to the firm in respect of easily saleable articles and to make over those which required a longer duration to sell. The only service, if services it can be called, was that the firm was to hand over to the company a list of customers and the supplies made t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or to loss of profits and it was not recompense for service past or future. It was a payment out of gratitude and must be regarded as a payment which does not bear the character of income, profits or gains which alone are taxable under the Income-tax Act. In our opinion, the High Court, with all due respect, was in error in holding that this amount was taxable. The answer to the first question must therefore be against the department. The next question is whether the receipt can be described under section 4(3)(vii) as of a casual and non-recurring nature and not by way of addition to the remuneration of an employee. The assessees were not "employees" of the company and were not in receipt of remuneration. After the termination of the agreement they were to work as regular lamp dealers if cared. There was no compulsion that they must electric lamps whether made by the company or by other manufacturers. If they did, they were to receive commission as any other regular dealer. It is thus obvious that the latter part of section 4(3)(vii) does not apply. The receipt may only be described as a receipt of a casual and non-recurring nature if it were income, profits or gains. We have a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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