TMI Blog1969 (3) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... products at Madras. The agreement, at all material times, was understood as only by which the assessee lent the amount for interest and for the due repayment of the principal and interest borrowed by the Delhi company, it was agreed that they should execute a deed of pledge over their plant and machinery to be imported by them and erecten at Madras and also execute a regular deed of mortgage over the same as well as the immovable properties consisting of land and buildings erected by the Delhi company at the factory site in Madras. Besides, the agreement envisaged a personal guarantee by the managing director and the one other co-director of the Delhi company. The 1 per cent. commission which was also a consideration for the loan agreement was to be paid for a period of 7 years on the selling price of all wheat product and by products manufactured by the Delhi company at Madras. This commission was to be paid even in the event of the loan advanced being repaid before the stipulated period of 7 years. This financial assistance agreement, as the parties themselves termed it, could not be fully implemented though the Delhi company executed a deed of pledge and also deposited their tit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g source. The assessee ventured to invest a large sum with the Delhi company for a particular purpose. In return the assessee was to get 1 per cent. as commission on the selling price of all the products to be manufactured by the Delhi company. Such a commission was to be paid for a continuous period of 7 years and the assessee therefore secured an enduring benefit or at least was assured of the same as a result of the arrangement which was reflected in the agreement. By the cancellation of the agreement the assessee had to give up what virtually happened to be a sharing in the business of that other company which was the source of income for the assessee. The Tribunal, therefore, held that the receipt was for the destruction of a capital asset and was therefore of a capital nature. The deleted the addition of Rs. 25,000 to the business income of the assessee for the assessment year. At the instance of the Commissioner of Income-tax, an application under section 66(1) was made to the Tribunal to refer a question of law which has arisen out of its order to this court for opinion. The question referred is: " Whether, on the facts and in the circumstances of the case, the sum of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compensation received would be a capital receipt. In this case the assessee forged an apparatus in the shape of a commercial agreement dated April 25, 1959, and intended that it should give the profits as is popularly understood. Besides interest on investment, the assessee expected to earn commission at 1 per cent. for a period of 7 years on the total sales or wheat products to be manufactured by the Delhi company. This involved the assessee setting up as it were a miniature organisation which is obviously different in concept and working of a flour mill, which is the assessee's business. The enterprise envisaged in the agreement is neither directly or indirectly connected with its business. It is not even urged to be so, nor does the record disclose any such nexus. The activity which is thus totally dissociated with the business of the company cannot be characterised as one undertaken in the course of its business and much less in the ordinary course of its business. The rights and liabilities under the agreement projected a picture which is unique and fundamental by itself and had no relation to the principal business of the assessee. The aggregation of those rights reflected i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature does not decide the character the payment nor its periodicity. If the payment is not received to compensate for loss of profits of business, the receipt cannot be described as income, profits or gains as commonly understood. Again, the Supreme Court in Kettlewell Bullen Co. Ltd. v. Commissioner of Income-tax, after considering the relevant authorities, drew up a principle in these lines: " On an analysis of these cases which fall on two sides of the dividing line, a satisfactory measure of consistency in principle is disclosed. Where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue; where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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