TMI Blog1965 (11) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... ) : K. SUBBA RAO., J. C. SHAH., S. M. SIKRI JUDGMENT The judgment of the court was delivered by SUBBA RAO J.--- Messrs. Best Co. Ltd., Madras, the respondent herein, hereinafter called " the agency company," is a private limited company carrying on business in innumerable lines. It is doing the business of importers, exporters, agents and sub-agents of various shipping, insurance, and manufacturing companies, in the course of which it acquired numerous agencies from manufacturers both in India and outside for sale in India, of textiles, dairy products, engineering equipments, soaps, paints, toilet goods, etc. One of such agencies was from the Imperial Chemical Industries (Exports) Limited, Glasgow, hereinafter called the " principal ", for distribution and marketing in certain territories in South India of its ammunition, blasting explosives and accessories. The said agency came into existence in 1900. The terms of the agency were not reduced to writing. The rates of commission were paid on terms agreed upon from time to time. The agency was terminable at will ; but, because of their mutual confidence, it continued without break till the year 1947 when the principal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1951-52 and 1952-53 ? " A Division Bench of the said High Court, having regard to the circumstances of the case, came to the conclusion that by the termination of the agency the assessee lost an earning asset and the compensation paid for the destruction of such an asset was a capital receipt and, therefore, not liable to tax. The revenue, on obtaining the necessary certificate from the High Court, has preferred the present two appeals to this court. Mr. A. V. Viswanatha Sastri, learned counsel for the revenue, contended that the assessee had innumerable agencies, that it was a normal incident in the course of its business to give up agencies and acquire new ones, that the termination of the agency in question was a normal occurrence in the course of its business, that it had no impact on the earning assets or the structure of the business, that the alleged restrictive covenant was only an act of grace on the part of the principal in view of the longstanding relationship between the parties and that it did not enter into the calculation of the compensation paid to the assessee. In short, his argument was that the said compensation only represented the taxable income of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paired, 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 cancellation of the agency agreement is normally a capital receipt. " But the difficulty still remains in the application of the said principle to the facts of each case. In Gillanders Arbuthnot and Co. Ltd. v. Commissioner of Income-tax this court applied the said rules to the facts of that case, which, by and large, are similar to the facts in the present case. It would, therefore, be useful to notice briefly the facts of that case. There, the appellant-company carried on business in diverse lines : acting as managing agents, shipping agents, purchasing agents and secretaries, the company also acted as importers and distributors on behalf of foreign principals and bought and sold on its own account. Under an unwritten agreement, which was terminable at will, the appellant acted as sole agents and distributors of explosives manufactured by the Imperial Chemical Industries (Exports) Ltd. That agency was terminated and, by way of compensation, the Imperial Chemical Industries (Exports) Ltd. paid for the first three years after the termina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances which brought the case of the respondent within the exception must be clearly established." As we have observed earlier, in view of the judgments of the court, no further citation is called for. Whether the compensation received by an assessee for the loss of agency is a capital receipt or a revenue receipt depends upon the circumstances of each case. Before coming to a conclusion one way or other, many questions have to be asked and answered : what was the scope of the earning apparatus or structure, from physical, financial, commercial and administrative standpoints ? If it was a business of taking agencies, how many agencies it had, what was their nature and variety ? How were they acquired, how one or some of them were lost and what was the total income they were yielding ? If one of them was given up, what was the average income of the agency lost ? What was its proportion in relation to the total income of the company ? What was the impact of giving it up on the structure of the entire business ? Did it amount to a loss of an enduring asset causing an unabsorbed shock dislocating the entire or a part of the earning apparatus or structure ? Or was it a loss du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve stated earlier, the assessee is a well established and long-standing company in South India. It has taken innumerable agencies in different lines. One of such agencies was the agency it had taken from the Imperial Chemical Industries (Exports) Limited, Glasgow. Though the said agency had been with the assessee for over 47 years, it was an agency terminable at will. The assessee did not place any material before the department to establish the relative importance of the said agency in the framework of the earning apparatus of its business ; it did not adduce any evidence to prove that the said agency was a pivot of its structure and that it had closed any branch or part of the establishment in consequence of the said loss. It could have placed material before the department to show that the average income from the said agency compared with the total income from all the agencies was so large that by this loss the entire business was dislocated. But it did not do so. The only evidence on which the High Court relied and on which the learned counsel for the assessee laid emphasis was the fact that the income returned by the assessee for the year 1952-53 was very nearly the same as th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in lieu of a restrictive covenant and, therefore, it was a capital receipt. To appreciate this contention, it is necessary to read the relevant correspondence. On March 11, 1947, the principal wrote a letter to the assessee. As the argument mainly turned upon the contents of this letter, it is necessary to extract it in full. It reads : IMPERIAL CHEMICAL INDUSTRIES (EXPORT) LIMITED. Explosives Branch, Nobel House, 25, Bothwell Street, Glasgow, C-2. 11th March 1947. Our Ref. : Export Sales Section GHL/NR. Messrs. Best and Company Limited. P. O. Box 63, Madras, India. Dear Sirs, Agency arrangements. We refer to the interview which Mr. J. W. Donaldon had with your Mr. Ruddle in May, 1945, when it was intimated that as a matter of longterm policy, our agencies in India and Ceylon would ultimately be taken over by Imperial Chemical Industries (India) Limited. 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) Limited desire to take over the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e paid was wholly as compensation for the assessee agreeing to refrain from selling or accepting any agency for selling explosives. That conclusion was sought to be arrived at on the ground that the said restrictive covenant was a condition for the payment of compensation. We find it difficult to accept this construction of the document. The scope of this document cannot be appreciated ignoring the circumstances under which it came into existence. As we have stated earlier, the agency, which is the subject-matter of this agreement, was only one of many other agencies the assessee had. We cannot agree with the learned counsel that the compensation was given wholly for the restrictive covenant. Indeed, the compensation was given expressly for giving up the agency. In the last paragraph of the letter a request was made to the assessee to agree to a restrictive covenant as a condition for paying compensation. The letter dated April 8, 1947, written by the principal to the agency company makes the position clear. Therein it was stated : "With regard to the point you raise concerning the period during which you would undertake not to take any competitive agency, we would like you to u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venant was an independent obligation undertaken by the assessee not to compete with the new agents in the same field for a specified period. It came into operation only after the agency was terminated. It was wholly unconnected with the assessee's agency termination. We, therefore, hold that that part of the compensation attributable to the restrictive covenant was a capital receipt and hence not assessable to tax. The next question is whether the compensation paid is severable. If the compensation paid was in respect of two distinct matters, one taking the character of a capital receipt and the other of a revenue receipt, we do not see any principle which prevents the apportionment of the income between the two matters. The difficulty in apportionment cannot be a ground for rejecting the claim either of the revenue or of the assessee. Such an apportionment was sanctioned by courts in Wales v. Tilley, Carter v. Wadman and T. Sadasivam v. Commissioner of Income-tax. In the present case apportionment of the compensation has to be made on a reasonable basis between the loss of the agency in the usual course of business and the restrictive covenant. The manner of such apportionment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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