TMI Blog1962 (1) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... fact the agency came to an end as from April 1, 1948, on the basis of a letter written by the Scottish company to the assessee on March 11, 1947. As the arguments addressed to us focused on the text of this document it is necessary to set forth the same in extenso: Messrs. Gillanders Arbuthnot Co. P.O. Box No. 174, Calcutta, India. Agency Arrangements. Dear Sirs, We would refer to the interview which we had with your London associates in May, 1945, when it was intimated that as a matter of long term policy, our agencies in India and Ceylon would ultimately be taken over by Imperial Chemical Industries (India) Ltd. It was indicated at that time that a period of two to three years might elapse before any steps were taken as regards this transfer. We now have to advise you that the matter has been receiving further consideration and Imperial Chemical Industries (India) Ltd. desire to take over the various agencies as from the 1st April, 1948. It is with regret, therefore, that we have to intimate our intention of transferring your agency, as from the above date, to Imperial Chemical Industries (India) Ltd. and would take this opportunity of expres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no dispute that payment was received by the assessee in terms of the same. It should further be noted that the assessee never gave a formal undertaking not to accept any agency for explosives as mentioned in the penultimate paragraph of the letter nor did the principals ever submit a formal agreement to the assessee for execution. According to the statements of activities filed by the assessee before the income-tax authorities, so far as the Calcutta organisation is concerned, it carried on business as agents classified under seven heads. They are as follows: Category A-Buying and selling on own account including maintenance of own stocks of the goods dealt in, but prices and other terms regulated by agency agreements. Category B-Introducing clients to principals, submission of bills to clients and collection thereof. No stocks held or handled by the agents on own account or on behalf of principals. Category C-Managing agency. Category D-Shipping agents. Category E-Purchasing agents. Category F-Sole importers and distributors on behalf of U. K. principals having no organisation in India. Stocks held and handled by the agents on behalf, and on account, of the princ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n account of these agency agreements were clubbed together under one head and incorporated in the assessee's revenue account. It is not material that for a particular agency or a group of agencies the assessee maintained separate subsidiary account books, but in the end the total of the receipts as commission earned has been taken into account under the head 'commissions'. In the circumstances, the loss of one agency is incidental to the business and the receipt on account of such loss arose out of the business of carrying on of the agency and, as such, was income taxable under the Income-tax Act. On behalf of the assessee particular stress was laid on the character of the agency in explosives and it was argued that it differed widely from the other agencies. Reference was made to an affidavit affirmed by one G.W. Easson, the chief accountant of the assessee company, on September 5, 1956, with the enclosure thereto and the explanatory statement addressed to the Income-tax Tribunal by the assessee in October, 1956. According to the explanatory statement the department in explosives was a specialized business and an independent commercial unit. Secondly, the agency w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chemical Industries (Export) Ltd. was a separate business by itself, the closure of which resulted in the destruction of a capital asset of the assessee? 2. Whether, on the facts and in the circumstances of this case, the compensation sums received by the assessee from Imperial Chemical Industries (Export) Ltd. are income chargeable in the hands of the assessee? and 3. Whether, on the facts and in the circumstances of this case, no part of the compensation money was received by the assessee on the condition not to carry on a competitive business in the same line of activity in explosives and as such no part of the money was in the nature of capital being exempt from Indian income-tax levy? It will be noticed that the agency agreement was not for a fixed period and as such was terminable at will. There can be no justifiable complaint on the ground that it was brought to an end without any notice leading to a dislocation in the structure of the assessee's business. Indeed, as far back as 1945, the assessee was warned that the distribution agreement would at best be given effect to for two or three more years. There is no dispute in this case and in view of the auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey could have withheld payment of the balance of compensation. Beak v. Robson [1943] 11 ITR (Suppl.) 23 was a case where a manager and director engaged at a salary of 2,000 per annum for five years covenanted not to engage or be interested in the business of a coal exporter or coal merchant or hip-broker within 50 miles of Newcastle-upon-Tyne for a period of five years from April 1 1937, in case of termination of his contract of service. Such service was terminable by six months' notice in writing and in consideration of the restrictive covenant the company paid him 7,000. The question arose whether the above mentioned sum was income in his hands. In delivering the judgment of the House of Lords Viscount Simonds held that the consideration which Robson had to give under the covenant fell not during the period of his employment but after its termination and that in fact he was selling to the company for a sum of 7,000 the benefit of a covenant which would only come into effect when the service was concluded. In my view, if the undertaking asked for had been given a portion of the compensation might well have been referable to it. The fact that the manner in which t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he termination of the agency the assessee had written off the proportionate value of the goodwill in several years amounting approximately to ₹ 12,00,000 of which the amount written off in the assessment year ending on March 31, 1949, was ₹ 5,00,000. It was argued that the elimination of the agency was the cause of the reduction in the value of the goodwill and that ₹ 12,00,000 was the proper valuation put upon the goodwill on the basis of three times the yearly commission which was nearly ₹ 4,00,000. On this basis it was argued that the amount received from the Scottish company could be treated as compensation for loss of goodwill and as such in the nature of capital. This argument seems to have little merit. The Tribunal recorded that it had not been supplied with any statement regarding the basis of the valuation of the goodwill nor with any material to indicate that the writing down of the value of the goodwill was due to termination of the agency. In my opinion, the Tribunal rightly characterised the inference sought to be drawn on behalf of the assessee that the compensation paid was referable to the loss of goodwill as being without any evidence or ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'coming in' with some sort of regularity, or expected regularity from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere wind fall....It is essentially the produce of something, which is often loosely spoken of as 'capital'. His Lordship went on to examine the various sources from which taxable income under the Act were to be derived and pointed out that under section 2(4) of the Act business included any trade, commerce or manufacture or adventure or concern in the nature of trade, commerce or manufacture. It was observed that underlying each of the expressions used in the said sub-section was the fundamental idea of the continuous exercise of an activity and that under section 10 of the Act tax was to be payable by the assessee under the head 'business' in respect of the profits or gains of any business carried on by him . According to the Judicial Committee, ...the sums which the appellant seeks to charge can...only be taxable if they are the produce, or the result, of carrying on the agenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has only one agency business out of which it derives its profits termination of the business would destroy its capital structure and compensation paid therefore would be treated as a capital receipt. Again if it be the business of an assessee to deal in agencies as its stock-in-trade by securing agencies either for distribution or for sale of different kinds of commodities and transferring the rights acquired thereby to others, there can be no controversy that the transfer of a particular agency by such an assessee would be in the ordinary course of his business and any profit made thereby would be a profit arising out of his business. Normally, however, an assessee does not part with his agency in favour of another. He may give it up if he finds it unremunerative or as happens more usually the principal puts an end to the agency or alters the terms of the agency because of altered circumstances. Here again the question may arise as to whether any moneys received as a consequence of alteration of the terms of the agency are capital receipts or revenue receipts and the decision will depend upon the facts of the case and the nature of the alterations. Reference was made by counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statement of activities the main purpose of the assessee was to act as agents. No doubt its dealings in the various agencies were of diverse character. In some cases it dealt in paints of various manufacturers; it also dealt in petrol and kerosene oil, medicines and toilet preparations, carpets, cement, timber, etc. It was argued that explosives are things which cannot be handled like other commodities and that the storing and handling thereof are regulated by provisions of the Explosives Act. Taken in conjunction with the averment that it had a special class of officers dealing only with explosives the contention was raised that this activity of the assessee was different from all others and sterilisation thereof inflicted loss of a capital asset. This argument does not seem to be sound. Kerosene for instance is an inflammable substance and the handling and storing of it must be done in a way peculiar to volatile and inflammable goods. Special care has to be taken in the matter of storing and handling cement; so also in the case of timber which must be guarded from risks of fire. It cannot be suggested that a business in any of these commodities is a distinct and several capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their profits owing to the difficulties caused by the World War. In 1922 the appellant company claimed 449,042 as being the amount due to it by the Dutch company under the agreement. This liability was not admitted and a counter claim was made. The matter was referred to arbitration which proved abortive. Ultimately, a settlement was reached in 1927 whereby it was agreed that in consideration of the Dutch company paying to the appellant 450,000 as damages, the agreement would be treated as determined on December 31, 1927. The question arose as to whether the appellant company was assessable to income tax under Schedule D. Finlay J. held that the company was not assessable. The Court of Appeal took a different view but. the House of Lords concurred with the judgment of Finlay J. According to Finlay J. the payment by way of damages for the cancellation of the agreement was a payment in respect of future rights. His Lordship observed (page 413): ...the agreement, being an agreement whereby this company had a share in the profits of another company, was a capital asset. I think that the case is to be distinguished from the case where there is a cancellation of a contract made in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therwise profit might have been obtained. What is true of the whole must be equally true of part. Judged in this light there is no difficulty in appreciating Shaw Wallace's case (supra) if the only agencies which the assessee there had were of the two oil companies. In that case it will be noted the assessee had to pay considerable sums of money as compensation to members of its staff working in the said agencies. Nothing of the kind has been shown here. In my view, the case before us falls rather in line with Kelsall Parsons' case (supra) and Fleming Co.'s case (supra). In Kelsall Parsons Co.'s case (supra) the facts were as follows: The appellants commenced business in 1914 as manufacturers' agents and engineers. At all material times their business was to act as agents for the sale in Scotland for various manufacturers on a commission basis of such manufacturers' products. In 1914 they had two agencies only, one of which was for George Ellison Ltd., who manufactured electric switch gear, etc. There was an agreement between the appellants and the said George Ellison Ltd. in 1914 to subsist for a period of 12 months only. This was renewed from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinuance of the agreement beyond that date, but they had, after May, 1934, no reasonable expectation, in view of the known attitude of Ellisons, that the agreement would, in fact, be continued beyond September, 1935 ..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 year s profits. With regard to the argument 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, his Lordship said that the proposition was too vague and too wide. He referred to the case of Short Brothers (supra) and said that it could be treated as of high authority as it passed the scrutiny of the House of Lords without adverse comments in Van Den Bergh's case ( supra). According to his Lordship ... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a period of ten years from entering the explosives industry in Great Britain, Northern Ireland, etc. The company further received a sum of 800 for an agreement to assign leases of certain premises which the company occupied. A statement made by the directors of the company showed that (1) in addition to the agency for Imperial Chemical Industries Ltd., the company held during a part of the period either other agencies and during a part of the period seven other agencies, (2) that the gross commissions on agencies in each year throughout the period greatly exceeded the company's gross profits from merchanting, (3) that the commission received by the company from the agency of Imperial Chemical Industries Limited constituted from 30% to 45% of the total agency commission received by them, (4) that over the seven complete years ending December, 1947, the average commission received from Imperial Chemical Industries Limited amounted to 2,677 Per annum, and (5) that the agency of the Imperial Chemical Industries Limited was worked by all the directors of the company and no special sales-organisation or staff was employed exclusively for it and that there was no reduction in staf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... restricted to its machinery business. If that were the whole story I should have no difficulty in holding that the purchase consideration for the virtual transfer to Imperial Chemical Industries of between one-third and one-half of the company's business undertaking was a capital payment. His Lordship observed further that the facts of the case excluded the inference because against the loss of the agency was set the surprisingly large sum of 5,320 although it was an agency at will and the restricted covenant given by the directors, which must have been by far the most valuable part of the bargain, was against the consideration of 590 only. His Lordship went on to say: It is against the 5,320 alone that the challenge is directed, and taking the agreement at its face value the Inland Revenue maintain that clause 1 specifically records simply the loss by a selling agency of one agency (out of eight which they held in 1948) and that such a loss is or must be treated as a normal trading risk. I can see no satisfactory answer to this contention unless we can impart a special meaning to clause 1 by reading along with it the rest of the agreement. I am of course willing to ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n agency terminable at will: but it may reflect the long period during which the agency had continued and a desire on the part of Imperial Chemical Industries Ltd. to act generously. Also reasonable notice would have been required to terminate the agency and there might have been contentions questions as to what notice was required. Compensation in lieu of notice would in my opinion quite clearly be a revenue receipt. It is difficult to distinguish the facts of Fleming Co.'s case (supra) from the facts before us. Here too the agency was terminable at will. Three years' notice had been given that it would be put an end to. According to the letter of March 11, 1947, the compensation was going to be paid for the transfer of the agency to Imperial Chemical Industries (India) Ltd. No undertaking was given by the assessee to refrain from selling explosives or accepting any competing agency. The assessee had a large number of agencies of buying and selling or for selling alone of goods manufactured by others. The compensation must, therefore, be regarded as one for loss of profits and not for loss of a profit earning asset. It must, therefore, be treated as surrogatum for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade, profession, employment or vocation exercised within the United Kingdom. Lord Evershed found himself bound by the previous decisions and said that if the matter were res integra, I think that there is much to be said for the simple view that a sum of money received in consideration for the giving up or destruction of an agreement under which you look to earn an annual sum is capital and not income: for in such case the sum received might be described fairly as the capitalised equivalent at the present time of income prospects. But the question remains, not whether that sum in some senses or in some contexts might sensibly be called a 'capital' payment, but whether within the terms of Schedule D it is a profit or gain arising from the trade of the recipient . His Lordship went on to add that the matter was covered by the authorities and 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 par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution of films was to be utilised by the assessee first in paying itself its distribution commission and, secondly, in retaining the available balance until the entire amount of advance could be discharged and thereafter to pay to Jupiter Pictures the net realisations from the film after deducting its commission. In case the full amount of advance could not be recouped from the realisations of the film within a year and a half of the date of its first release, Jupiter Pictures was to be liable to pay to the assessee whatever balance would remain due with interest. The assessee was given liberty to appoint sub-agents and sub-distributors and a charge in its favour was created by way of security on the negative and positive copies of the film for whatever amount might be due to it on account of the advances made. If Jupiter Pictures failed to deliver the film within the time specified the assessee was given the right at its option to complete the picture at its own cost and in such event Jupiter Pictures was to be liable to the assessee for all such expenses with interest. In the accounting year ending March 31, 1946, and in the previous years the assessee had exploited its right of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere was no covenant made by the assessee with Jupiter Pictures not to enter into agreements with other producers or not to distribute films secured from other producers; (2) the cancellation of these agreements must have left the assessee free, if it so chose, to secure other films which could be distributed in the place of these films and which might have brought in better box-office collections; (3) the whole trade of the assessee did not depend upon the agreements which were cancelled and there was no loss of such a fundamental asset as was in the case in Barr, Crombie Co. Ltd. v. Commissioners of Inland Revenue [1947] 15 ITR (Supp.) 56; (1945) 26 Tax Cas. 406; (4) the termination of the agreements did not radically or at all affect or alter the structure of the assessee's business. His Lordship repelled the plea that the films were capital assets in the hands of the assessee because they were received in consideration of the financing agreements and said that these financing agreements gave it no right to distribute the films or otherwise work them for making income, profits or gains. His Lordship noted that there was no suggestion that any part of the moneys advanced by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d elapse before such facilities became available. During this period before the construction of the siding the company agreed to pay to the assessee ₹ 4,000 every month. The work of the quarry was left entirely in the hands of the assessee who undertook not to engage during the subsistence of the agreement in any other contract business for working of any quarry within an area of 20 miles from the company's quarry. The railway authorities did not agree to the construction of the siding. The parties then entered into another agreement in 1941 whereby the company agreed to pay to the assessee ₹ 2,50,000 to him as solatium besides the monthly instalments of ₹ 4,000 remaining unpaid and further covenanted to take from the assessee all the limestone required for its furnaces at Kulti for a period of 12 years on certain terms and conditions. The question arose whether the sum of ₹ 2,50,000 was a capital receipt or a revenue receipt. Delivering the judgment of the Supreme Court Venkatarama Aiyar J. noted the English decisions already mentioned and said that the question to be considered is whether the contract entered into in 1940 was in the usual course of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the company passed a resolution to the effect that the resolution of January, 1931, would be adhered to and a sum of ₹ 2,26,263 would be paid to the assessee by way of compensation. It was contended on behalf of the Income-tax Commissioner that by the reversion to the old arrangement of 1931, the profit-making apparatus of the assessee's business was not affected and that the expansion of the assessee's territory or reduction thereof was in the ordinary course of the assessee's business and was a mere accident of the business. The Supreme Court by a majority decided in favour of the assessee. Delivering the judgment of the majority of the judges Bhagwati J. observed that the definition of income in Shaw Wallace's case( supra) required further consideration and that it was not necessary that income should be of a recurring nature. He referred to the tests in South India Pictures' case (supra) and the observation of Venkatarama Aiyar J. that an agency contract was generally in the nature of a capital asset. He noted that there was no agreement between the assessee and the tobacco company the termination of which could be made the subject-matter of a legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neration for over 17 years was an advantage gained by the managed company for the benefit of its business and the immunity thus obtained could be regarded as the acquisition of an asset of enduring value by means of a capital outlay, They took care to observe that this did not lead to the conclusion that the receipt in the hands of the firm would necessarily be a capital receipt. According to the Supreme Court there was a distinct deterioration in the character and quality of the managing agency viewed as a profit-making apparatus and this deterioration was of an enduring kind. It was further observed that the sum of ₹ 7,50,000 was paid and received not to make up the difference between the higher remuneration and the reduced remuneration but was in reality paid and received as compensation for releasing the company from the onerous terms as to remuneration as it was in terms expressed to be. A review of these Supreme Court authorities shows that the principles which have been laid down in England have been adopted in India also. Comparing the facts in South India Pictures' case (supra) with the case before us it may be said that the compensation received by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t carry on business at all, the section cannot be made applicable and the compensation that he receives cannot bear the character of profits of a business. The last observation along with the definition of income in Shaw Wallace's case (supra) were relied on by learned advocate for the assessee in support of his contention that the agency having been terminated any money received in respect thereof could not be described as profits and gains of a business carried on by the assessee. I do not think that this contention is sound. If the assessee's business stops altogether then no doubt it can be urged that section 10 of the Indian Income-tax Act cannot apply but where the assessee carries on business of various kinds and loses a particular business in a particular accounting year and gets something as compensation for such loss it cannot be said that the sum is not in lieu of the profits or gains which he would have made if that particular business had not been interrupted. The last point urged on behalf of the assessee was that the business in explosives was of a different nature altogether from its other businesses and that it had no connection with the other agencie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Mills Ltd. v. Commissioner of Income-tax [1961] 41 ITR 272 ; [1961] 2 S.C.R. 488. In this case Setabganj Sugar Mills was established to take over some sugar mills run by a firm. For the first few years the company carried on the business of manufacturing and sale of sugar only. In the accounting year ending August 31, 1945, the company had some transactions in gunnies and made a profit. In the next accounting year the company made a profit in gunnies and jute. In the year ending August 31, 1947, the company made profit in business in mustard-seeds, gunnies and hessian. Thereafter the company ceased to have any business other than the manufacture and sale of sugar. In the assessment year 1948-49 the profits of the company from the sale of gunnies, mustard and jute amounted to ₹ 6,14,018. During this year the sugar business resulted in a loss of ₹ 2,09,306. This loss was set off against the profits of the other businesses and the company was assessed on the difference between the two sums. The company claimed to set off against this profit, business losses of former years in its business in sugar amounting to ₹ 13,43,069. The contention of the company was that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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