TMI Blog1977 (9) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... Product (P) Ltd. (hereinafter referred to as " the company "). Under an agreement dated August 11, 1962, entered into between the assessee and the company, in addition to some salary, the assessee was entitled to receive royalty on certain percentage basis on the total sales of certain items of drugs of which he had special knowledge. According to the terms of this agreement, subject to a maximum period of ten years, so long as the company manufactures the said products, whether the assessee remains in the service of the company or not, he shall be paid by the company the royalty. Later when certain disputes had arisen between the assessee and the company, he left the services of the company in April, 1963, and started an industry of his own in Sanathnagar with the financial assistance of the Government and using his own process started manufacturing the Anti-T.B. drug, INH. Thereupon, the company stopped all payments due to the assessee under the agreement dated August 11, 1962. After some correspondence and negotiations, the disputes were settled resulting in entering into between them another agreement dated October 3, 1963, in substitution and supersession of the earlier agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment of royalty to the assessee, on a percentage basis on the total value of the sales of the drugs in question, for his contribution towards their manufacture. It is the case of the company that according to the terms of both the agreements dated August 11, 1962, and October 3, 1963, the assessee was not entitled to manufacture those drugs himself or assist, directly Or indirectly, any other party to manufacture the same, by giving the know-how or supplying the blue prints, etc., or in any other manner. After the assessee left the services of the company and the second agreement dated October 3, 1963, was entered into, the assessee started manufacturing the anti-T.B, drug, INH. When the company: issued a legal notice to the assessee requiring him to stop manufacturing, INH and Dapsone alleging that his activity in manufacturing them was in breach of the terms of the agreement dated October 3, 1963, the assessee filed the suit, O. S. No. 27 of 1964, to assert his legal rights to manufacture those drugs and to put an end to the interference by the company. The main prayer of the assessee, in that suit, was to restrain the company from interfering with or obstructing in any manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. No doubt in the compromise agreement, the agreements entered into between the assessee and the company originally and their annulment and abrogation were also mentioned. That must have been only incidental, because in the suit filed, the assessee was only claiming his right for using and utilising the technical knowledge and know-how of the process of manufacture of INA and not any rights under the two agreements. Therefore, it must be taken that it is mainly on account of the assessee giving up his right to carry on his business by using and utilising the technical knowledge and know-how, the company agreed to pay the assessee the amount of Rs. 50,000. Sri Rama Rao, learned counsel for the Revenue, has contended that the amounts received by the assessee must be taken as in lieu of salary or by way of profits of business. The amount received by the assessee cannot be said to be by way of " salary ". The assessee ceased to be the employee of the company at the relevant time. There was no claim on behalf of the assessee for any payment on account of his past services to the company. It is also not an amount received by the assessee by way of compensation from the company, bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arded as 'capital receipt'. A sum received for sterilising as it were a capital asset, the consequence of which would be that it becomes unproductive of profit, cannot be regarded as income for purposes of taxation." In the case before us, it cannot be said that the assessee received the amounts in the course of business. What happened was, the assessee has surrendered to the company, his technical knowledge and know-how for manufacturing the drugs in question. Thus, making his own knowledge and technical know-how, which is a capital asset, unproductive of profit. In CIT v. Prabhu Dayal [1971] 82 ITR 804, decided by the Supreme Court, the facts are: that the assessee discovered by chance the existence of kankar in the Jind State and brought about an agreement between the State of Jind and one Shanti Prasad Jain for the acquisition of sole and exclusive monopoly rights for manufacturing cement. Subsequently, the rights under the agreement were transferred to a company of which the assessee was one of the promoters. For the services rendered by the assessee, the company agreed to pay him a commission of 1 per cent. on the yearly net profits earned by the company. The agreement wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent case, even assuming that the amount paid to the assessee was also by way of compensation abrogating and annulling the agreements entered into between the company and the assessee earlier, still under the terms of the compromise, the assessee was deprived of what, in substance, is his source of income. We do not think the said annulling and abrogation of the agreements can be said to be a normal incident of the business which leaves the assessee free to carry on his trade. Sri Rama Rao has relied on some decisions, which are discussed below in support of his contention that the amount of Rs. 50,000 received by the assessee should be taken as income liable to be taxed. In Travancore Sugars and Chemicals Ltd. v. CIT [1966] 62 ITR 566 (SC), the facts are that as per the terms of sale transaction with regard to the assets of an undertaking some percentage of annual profit was agreed to be paid by the purchaser in addition to a specified cash consideration. The question that had arisen before the Supreme Court for decision was whether the commission paid on the annual profits was capital expenditure or revenue expenditure. On the ground that the payment was related to the annual p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween capital expenditure and revenue expenditure and not between a capital receipt and a revenue receipt. Nothing said in that case also would be of any help to the Revenue here. The other cases relied on by Sri Rama Rao also would not help the Revenue much for the purpose of this case. In CIT v. Gangadhar Baijnath [1972] 86 ITR 19 (SC), the question that arose for the consideration of the Supreme Court was whether the compensation paid for a relinquishment of interest in a partnership would be a capital receipt or business income. The Supreme Court said that a partnership was terminable at will and any of the partners of the firm could have brought the partnership to an end. Consequently, the possibility of the termination of a partnership of the type in question was inherent in the very course of business. Such being the case, it was not possible to hold that the compensation paid for a termination of the contract was a capital receipt. In this connection, the Supreme Court also referred to its earlier decision in Jairam Valji's case [1959] 35 ITR 148 (SC), where the Supreme Court has observed: " When once it is found that a contract was entered into in the ordinary course o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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