TMI Blog2002 (10) TMI 72X X X X Extracts X X X X X X X X Extracts X X X X ..... question is answered in favour of the assessee and against the Revenue. - - - - - Dated:- 8-10-2002 - Judge(s) : R. JAYASIMHA BABU., K. RAVIRAJA PANDIAN. JUDGMENT The judgment of the court was delivered by K. RAVIRAJA PANDIAN J.-In the above two tax cases, the common question referred to us for our opinion is as follows: "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the amount received by the assessee on the termination of distributorship agreement is only a capital receipt and hence not includible in the assessee's total income?" The assessment years are 1986-87 and 1987-88, respectively. The brief facts of the case are that the assessee is a non-industrial company and has been distributing on principal to principal basis, the products of three companies, viz., (1) Tube Investments of India Limited, (2) T.I. Miller Limited, and (3) T.I. Diamond Chain Ltd., from May 1, 1964, by means of a distribution agreement entered into between them. The distribution agreement so entered into was periodically renewed and the last one was dated October 21, 1983, renewed for a period of five years from that da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee was distributing the products of the three companies, viz., Tube Investments of India Ltd., (2) T.I. Miller Ltd., and (3) T.I. Diamond Chain Ltd., under the distribution agreement from May 1, 1964, onwards till the termination of the same with effect from June 30, 1984. One of the conditions of the distribution agreement was that the assessee should maintain adequate sales organisations at various centres and offices for carrying on the said business at such places and the assessee also further covenanted with the companies that the assessees were not entitled to any charge or claim against the company any sum by way of expenses or otherwise in respect of the sales provided by the assessee through such organisations and offices established. In tune with the covenants, the assessee had established sales organisations and other establishments at different places and also developed dealership networks in different centres. At the time of the termination of the agreement in the year 1984, as found by the Tribunal, the assessee had sales organisations with 126 trained personnel. The assessee also had a dealership network of 1,200 sub-dealers, 1,200 industrial chain dealers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing with June 30, 1985, has reduced to Rs. 7,17,84,514. For the subsequent years also the turnover has reduced considerably. It is well settled that to constitute income, profits or gains, there must be a source, from which the particular receipt has arisen and there must be a nexus between the receipt and source. The source is the profit-earning apparatus and if the amount received is from the profit-earning apparatus then the amount so received would necessarily amount to an income, profit or gain. When the entire source of the income earning apparatus of the assessee has been transferred to the companies, pursuant to the termination agreement, the amount received for such transfer would be in the nature of a capital receipt only. If the amount accrued is to compensate the assessee for cancellation of the distributors agreements, which does not affect or impair the trading structure of the assessee's business or does not deprive the assessee of the very source of income, then the termination of the contract being an incident of business and leaves the assessee to carry on his trade, then the receipt would be regarded as a revenue receipt. When the termination of the distributio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e SA the assessee was entitled to a remuneration of Rs. 20,000 per annum from January 1, 1965, to the date of commencement of the production by SA and Rs. 30,000 thereafter. The agreement also provided that in the event of termination of the agreement by SA for any reason whatsoever, the assessee was to be paid a remuneration for the unexpired portion of the ten years contracted for. As SA felt that the consultancy service agreement of the assessee was no longer required, as such there was a mutual agreement and ultimately it was decided that SA was to pay a sum of Rs. 60,000 in lieu of Rs. 1,42,500, which would have been otherwise payable by the said company to the assessee as per the agreement entered into on January 1, 1965. The Income-tax Officer proceeded on the basis that it was a capital receipt, but he held that the amount of all compensation received was taxable under the provisions of section 28(ii)(c). The Tribunal held that the compensation amount paid for the termination of the agreement was a capital receipt and that the amount was not taxable even under the provisions of section 28(ii)(c). On a reference the High Court held that in view of the factual finding recorde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en transferred to the companies thereby the assessee was deprived of its source of income and profit-earning apparatus. Further the assessee is also impaired from doing any distribution business as done earlier because of the prohibitive covenant in the termination agreement. All these factors would clearly indicate that by virtue of the termination agreement, the structure of the assessee's profit-making apparatus has been considerably crippled. The reasoning of the authorities below the Tribunal that the compensation has been quantified on three counts, i.e., the cost of trained man-power, compensation for cost of dealers and compensation for loss of profits and thus the payment received by the assessee was only reimbursement of such cost factors is not correct. That was only a method to quantify the lumpsum to be paid. Such method adopted cannot be stretched to the extent of concluding that the assessee had only recouped or reimbursed the expenses incurred in the past nor can it be said that the assessee had been reimbursed the profit that was not available to it, as a result of the termination of the agreement. For the forgoing reasons stated above, we are of the view that th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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