TMI Blog1974 (7) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... om time to time be determined by the partners. The assessee-firm entered into two finance agreements with the Western India Oil Distributing Co. Ltd. (hereinafter referred to as " the company "), one dated 29th August, 1953, and the other dated 11th January, 1955. The former finance agreement related to the finance that was to be made available by the assessee-firm to the company in respect of the business of the company in imports of petrol, kerosene oil and other petroleum products in Bombay, while the latter agreement related to the finance that was to be made available by the assessee-firm at Bombay in respect of the company's business of importing petrol, kerosene oil and other petroleum products in Madras. Under these two agreements, the assessee-firm agreed to finance the company such sum or sums of money as the company from time to time required for importing the aforesaid commodities either in Bombay or in Madras on certain terms and conditions set out in the aforesaid respective agreements. On 12th January, 1955, the first agreement dated 29th August, 1953, was varied to certain extent and the altered terms under which finance was agreed to be made available by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of the Bombay Money-lenders Act and Usurious Loans Act and it would be prepared to pay only interest at the rate of 9% per annum being the maximum rate of interest as provided under the Moneylenders Act, on the amount advanced by the assessee-firm from time to time. The assessee did not accept the suggestions of the company and, therefore, the company filed a suit in this court, being Suit No. 87 of 1956, for certain reliefs. The assessee-firm filed a written statement in the suit and a counter-claim against the company. Ultimately, a consent decree dated 21st of June, 1956, came to be passed whereunder the company agreed to pay to the assessee-firm as and by way of compensation and/or damages for termination of the agreements, a sum of Rs. 3,00,000 by five equal instalments of Rs.60,000 each ; the first of such instalments was paid on 31st of December, 1956, and the subsequent instalments on 31st of December of each succeeding year and it is with reference to this amount of Rs. 3,00,000, which was receivable by the assessee-firm from the company, that the question arose in assessment proceedings before the taxing authorities as well as before the Tribunal, as to wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt if at all should have been charged to tax. On behalf of the department, the views taken by the ITO and the AAC were sought to be sustained before the Tribunal. After considering the nature of the agreement and particularly the several terms and conditions contained in the three agreements, the Tribunal took the view that the arrangement evidenced by the three agreements conferred certain rights on the assessee-firm as against the company which secured to the assessee-firm a benefit of investment of its funds and a steady source of interest, a steady source of commission on the profits earned by the company for 10 years and a steady source of commission on a smaller scale even after expiration of the period of 10 years till such time as the company carried on its said business in petroleum products in Bombay and Madras and since it was on cancellation of such arrangement that compensation or damages had become payable to the assessee-firm by the company under the consent decree dated 21st of June, 1956, the said sum was as and by way of compensation for the injury and in fact destruction of its source of income and, therefore, in the nature of capital receipt. The Tribunal, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he arrangement between the assessee-firm and the company would be in the nature of a breach of an ordinary trade contract entered into by the assessee-firm in the course of carrying on its day-to-day business and the amount receivable was, therefore, by way of a trading receipt. In support of his contention, Mr. Joshi placed strong reliance upon the two decisions of the Supreme Court, one in the case of CIT v. South India Pictures Ltd. [1956] 29 ITR 910 and the other in the case of CIT v. Rai Bahadur Jairam Valji [1959] 35 ITR 148. He also relied upon certain views of Lord President Cooper in the case of IRC v. Fleming Co. (Machinery) Ltd. [1951) 33 TC 57, which has been quoted with approval by the Supreme Court in [1964] 53 ITR 261 (Kettlewell Bullen Co. Ltd. v. CIT) at p. 275 of the report. In regard to cases relating to determination of agencies Lord President Cooper expressed the view that, broadly speaking, such cases fell on two sides of the line drawn in the light of the varying circumstances, viz : " (a) the cancellation of a contract which affects the profit-making structure of the recipient of compensation and involves the loss by him of an enduring trading asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enunciated as furnishing a key to the solution of the question, but as often observed by the highest authorities, it is not possible to lay down any single test as infallible or any single criterion as decisive in the determination of the question, which must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. Vide Van den Berghs Ltd. v. Clark [1935) 3 ITR (Eng Cas) 17 (HL). That, however, is not to say that the question is one of fact, for, as observed in Davies (H.M. Inspector of Taxes) v. Shell Company of China Ltd. [1952] 22 ITR (Supp) 1, ' these questions between capital and income, trading profit or no trading profit, are questions which, though they may depend no doubt to a very great extent on the particular facts of each case, do involve a conclusion of law to be drawn from those facts '. " After pointing out that there was a difference between a payment made as compensation for termination of an agency contract and an amount paid as solatium for the cancellation of a contract entered into by a businessman in the ordinary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion for injury inflicted on a capital asset or on a stock-in-trade. " These observations of the Supreme Court make the position quite clear that the question whether a particular receipt is a capital receipt or income ultimately depends upon the facts of the particular case and the authorities bearing on the question are valuable only as indicating materials that they had taken into account in reaching the decision. The observations also indicate that, though normally a payment made as compensation for payment of an agency contract may be regarded as a capital receipt, even then the question has to be considered as to whether the agency was in the nature of a capital asset in the hands of the agent or whether it was only a part of his stock-in-trade. In other words, it is not as if that simply because an agency contract is terminated any compensation that might be received for such termination would necessarily amount to a capital receipt because, as has been pointed out by the Supreme Court, an agency contract, which has the character of a capital asset in the hands of one person may assume the character of a trading receipt in the bands of another as, for instance, when the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ership business, but it is another thing to say that such a new venture, which it may undertake, is a venture undertaken by it in the ordinary course of its business. It is not disputed in this case that the original business carried on by the assessee-firm was that of export of cloth on commission. It is further not in dispute that the three finance agreements that were entered into by the assessee-firm with the company were the first of their kind entered into by the assessee-firm in 1953 and 1955 and presumably these were the last of their kind which it had undertaken. In other words, financing agreements or arrangements evidenced by the three agreements was not a venture in the ordinary course of its business. Apart from this aspect of the matter, it will be necessary to deal with the relevant provisions of the three agreements evidencing the arrangement between the assessee-firm on the one hand and the company on the other, for, much will turn on the nature of the terms and conditions as that would really reflect on the question as to whether the arrangement under the three agreements had really created a profit-making apparatus for the assessee-firm or had given it a stead ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the company in Bombay during the continuance of these presents whether the company shall or shall not take any finance from the financiers for such imports as and by way of commission either : (a) in case of liquid oil six pies per gallon ; (b) in case of asphalt five per cent. of the c.i.f. value thereof ; or thirty per cent. of the net profits of the company calculated as provided in the Schedule hereto annexed whichever may be greater... " Under cl. 19, it was provided that the agreement shall operate as continuing security for all the moneys, indebtedness and liabilities of the company to the financiers under the agreement or any other account notwithstanding the existence at any time of any credit balance in favour of the company or any partial payments or fluctuations of account and that the security thereby created was to operate as a security for the ultimate amount that would be found due and payable by the company to the financiers. Clause 22 provided for the period of the agreement and, according to that clause, the agreement was to be in force for a period of 10 years from the date thereof and if any shipments were outstanding on the expiration of the per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee-firm whether the company took or did not take any finance from the financiers for the imports that were to be made by the company. The other agreement pertaining to the imports of petrol and petroleum products by the company in Madras was dated 11th January, 1955, and under this agreement also the assessee-firm agreed to finance such sum or sums or moneys as the company might from time to time require for importing petrol and/or kerosene or petroleum products in Madras not exceeding in the aggregate a sum of Rs. 10 lakhs. Similar provisions with regard to the payment of interest as well as commission and security of the goods imported, which were to remain under pledge with the assessee-firm, are to be found in this agreement dated 11th January, 1955. The benefit of the commission, which the assessee-firm was to receive at a lesser rate on goods imported by the company in Madras even after the expiration of the period of the agreement, also finds place in this agreement (vide cl. 26). Having regard to these material terms and conditions of the three agreements, three or four salient features of the arrangement become very clear. In the first place, the financing ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m was to receive commission, though at a lesser rate, as specified in the said clauses. Having regard to these provisions, which are to be found in the three agreements, it seems to us clear that the assessee-firm could be said to have struck a most beneficial arrangement from its point of view with the company which secured to it certain rights of earning interest as well as earning commission irrespective of whether it actually advanced finances or not, and, therefore, the arrangement as evidenced by the three agreements will have to be regarded as a very peculiar one, which really gave the assessee-firm avenues for the investment of its funds, a steady source of interest and a steady source of commission on profits earned by the company for 10 years and a further steady source of commission, though on a smaller scale, even after the expiration of the period of the arrangement and till such time as the company carried on its business of importing petrol and petroleum products in Bombay and Madras. In these circumstances, it is difficult to accept Mr. Joshi's contention that the arrangement evidenced by the three agreements was in the nature of a routine trade contract which th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1956, whereunder a sum of Rs. 3 lakhs became payable by the company to the assessee-firm. Having regard to the nature of the agreements, we have no hesitation in coming to the conclusion that the amount of Rs. 3,00,000 which was receivable by the assessee-firm was by way of compensation for the injury --injury or destruction of the source of income itself-and in this view of the matter we feel that the Tribunal was right in coming to the conclusion that the sum of Rs. 3,00,000 represented a capital receipt and not a revenue receipt. Mr. Joshi for the revenue has relied upon two decisions of the Supreme Court to which we will now refer. First, reliance was placed by him on the decision of the Supreme Court in CIT v. South India Pictures Ltd. [1956] 29 ITR 910. In that case, the assessee carried on the business of distribution of films. In some cases, the assessee used to produce or purchase films and then distribute the same for exhibition in different cinema halls and in other cases the assessee used to advance moneys to producers of films and secure the right of distribution of the films produced with the help of the monies so advanced by the assessee. In the course of such busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee carried it on in two ways ; in some cases the assessee used to produce or purchase films and then distribute the same in different cinema halls, while in some cases the assessee-company used to advance monies to producers of films and secure the right of distribution of the films produced with the help of the monies so advanced by it and it was in the course of the latter type of business that the assessee bad entered into agreements with Jupiter Pictures in that case. Moreover, as the Supreme Court has observed in that case, the sum that was paid to the assessee was not compensation for not carrying on its business, but was a sum paid in the ordinary course of its business to adjust the relation between the assessee and the producers and that the termination of the agreements did not radically or at all affect or alter the structure of the assessee's business. The Supreme Court also found that, in fact, the amount was received by the assessee " towards commission ", ie., as compensation for the loss of the commission which it would have earned had the agreements not been terminated. The court also held that the amount was not received by the assessee as the price of any cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and to supply the limestone quarried therefrom to the company according to its requirements. Certain difficulties arose in working out this agreement as the railway authorities did not agree to the construction of a siding and a loopline to the quarry with the result that the agreement could not be carried out any further. On August 2, 1941, a fresh agreement was entered into whereby the company agreed, (i) to pay a sum of Rs. 2,50,000 to the respondent as solatium besides the monthly instalments of Rs. 4,000 remaining unpaid under the contract of 1940, (ii) to take the limestone required for its furnaces at K from the respondent for a period of 12 years on specified terms, and (iii) to appoint the respondent as loading contractor for loading all iron ore of the company at M for a period of 12 years. Pursuant to this agreement, the respondent was paid Rs. 2,50,000 as well as the balance due towards the monthly instalment of Rs. 4,000 and the question was whether the sum of Rs. 2,50,000 received by the respondent was capital or revenue in his hands and the court held that the sum of Rs.2,50,000 was not paid to the respondent as compensation, that the agreements of 1940 and 1941 were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een placed by Mr. Joshi. The observations relied upon by him have been set out in [1964] 53 ITR 261 (SC) (Kettlewell Bullen Co. v. CIT) at p. 275. With respect, there is no dispute or quarrel about the observations on which reliance has been placed by Mr. Joshi, for, after all, those observations merely indicate that cases relating to determination of agencies broadly fall on two sides of the line, which have been indicated therein, drawn in the light of the varying circumstances and that if the cancellation of a contract affects the profit-making structure of the recipient of compensation and involves loss by him of an enduring trading asset, then the compensation received by the recipient will have to be classified as a capital receipt, while, if the cancellation of a contract does not affect the recipient's trading structure, nor does deprive him of any enduring trading asset, but leaves him free to devote his energies and organisation released by the cancellation of the contract to replacing the contract which has been lost by other like contracts, then the compensation received for such cancellation will have to be regarded as a revenue receipt and the question in every case ..... 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