TMI Blog1959 (6) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. The duration of the partnership was initially limited to a certain period but was from time to time renewed. Jehangir A. Irani dies on August 22, 1942, and in is place his son Noshir J. Irani was admitted to the partnership. In June, 1938, the three partners of Precious Electric Co., entered into an agreement with Philips Electrical Co., (India) Ltd., (which will hereafter be referred to as the Philips ). Under that agreement, the precious Electric Co., (which will be hereafter referred to as the firm ) was given the monopoly rights to sell electric bulbs manufactured by the Philips in the Bombay Presidency, Rajputana, Central India, Central Provinces and the Berar. By clause 2 of the agreement, Philips undertook to deliver lamps of their manufacture, for sale in that territory exclusively to the firm. If any buyer refused to purchase lamps firm the firm Philips had the right to supply such buyers directly allowing compensation to the firm at the rate of 5 per cent. On the net amount of invoices. By clause 3, the firm undertook only to sell lamps as were supplied to them by Philips and to sell the lamps supplied to them only in that territory and to do everything possible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll be considered as the official notice of termination of the existing agreement in accordance with clause 12 thereof, and that it was intended to substitute a new agreement to be called the New Lamp Agreement a draft whereof was appended to the letter. After this notice was received by the firm, meetings were held on the of May 28, 1954, and of May 29, 1954, between their representatives and the representatives of Philips. It was agreed at the meetings that after the of June 28, 1954--the date on which the existing agreement expired,-- there will be no substitution of a new agreement about distribution of lamps and that with effect from that date, Philips Bombay branch will take over the distribution of lamps. There were negotiations then for the period of transaction and certain terms were agreed upon, which are not material. Arrangement was also made about the disposal of the stocks held by the firm. The question of compensation was then discussed and the terms finally agreed upon to be recorded as follows: Miscellaneous: As a gesture of goodwill, Messrs. Philips are prepared to pay in quarterly instalments to each of the three partners during a period of three years, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brought into existence what may loosely be called a right of monopoly purchase. Under this agreement, Philips undertook to sell to the firm (and to no other persons) lamps for sale in the territory specified in the agreement and the firm in its turn undertook to advance the business of Philips in electric lamps and not to sell during the continuance of the agreement either directly or in directly any lamps other than Philips lamps and not to sell those lamps outside the territory assigned. The relation between Philips and the company was evidently of principal and principal and not of principal and agent. The substance of the agreement, therefore, was that Philips agreed to sell their electric lamps only through the firm in the assigned territory and the firm in its turn undertook not to sell the lamps sold to them to any one outside the territory nor to deal in any competing business in electric lamps. This agreement was determined by notice served on the of March 8, 1954. Even before the date of the agreement, the partners of the firm were carrying on business in electric lamps and other electric goods, and that business was continued after the agreement, but the firm acquired ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of its stock-in-trade on specially favorable terms which simultaneously ruled out competition in the territory assigned by the agreement, after the 29th May, 1954, the favorable terms on which the lamps were obtained ceased to be available to the firm and the firm without any obligation not to carry on any competing line of business in lamps became a regular lamp dealer. By such an agreement, we unable to hold that the profit-making apparatus of the assessee's business was destroyed. We are of the view that by the agreement which created monopoly rights a specially favorable method of acquiring took-in-trade of the firm was designed and if that method was substituted by an agreement less favorable we do not think that thereby the compensation paid could be regarded as a capital asset. Mr. Palkhivala has very strongly relied upon the judgment of their Lordships of the Supreme court in commissioner of Income-tax v. vazir sultan sons [1959] 36 I.T.R. 175. We may at once observe that we have carefully considered the facts of that case and the observations made by their Lordships of the Supreme court and we have no doubt that the principle of that case has no application to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 85 of the report, after considering cases cited at the Bar, their Lordships observed: 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 assessee's 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 trading or a revenue receipt and not a capital receipt. Applying the test set out we have no doubt that on the facts of the present case the contract of the year 1938 between the firm and Philips and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terminated by agreement in the year 1935 and the assessee company received 4,750 out of which 3,000 were attributable to the year of assessment as compensation for termination of the agreement. It was held that the cancellation of the contract did not affect the structure of the company's business of chemical merchants and that the contract was made in the ordinary course of busies and that the payment was made in consideration of the loss of profits which would have been earned under the contract. It was observed in that case that the sum paid to the assessee represented not the purchase price of the contract itself, but profits which they might have made under the contact, and that the contact was made in the ordinary course of the company's business, although in a new filed, and the exclusion of competition was an ordinary incident of such contracts. The arrangement whereby the contract was terminated being in the ordinary course of the company's business, compensation paid as consideration for agreeing to that arrangement was revenue payment. In John smith and Son v. Moore [1921] 12 Tax Cas. 266 that the question which fell to be determined was whether the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of money paid to the assessee for termination of his employment was covered by the terms of section 7(i) explanation 2 of the Income-tax Act and the court held that the amount received by the assessee as compensation for loss of employment fell within explanation 2 of section 7(i) and was not, therefore, taxable. Nor does the case of Van Den Berghs Ltd. v. Clark [1935] 19 Tax Cas. 390; 3 I.T.R. (Eng. Cas) 17 on which reliance was sought to be placed by Mr. Palkhivala affect or conclusion. That was a case in which two companies, which were competitors, entered into an arrangement for a certain number of years for pooling and sharing profits, under an elaborate scheme to promote their mutual commercial, pecuniary, and other interests. One of the companies then agreed to a premature termination of the agreement as desired by the other company on receiving a sum of 450,000 as compensation; and it was held that this sum was a capital receipt and not income. The agreement far from being one made in the ordinary course of business provided a fundamental organisation of the company's activities and affected the entire conduct of the assessee's business and, therefore, the rec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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