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TMI Blog1964 (5) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... Scotland, hereinafter called " the principal company ". There was no written agreement between the principal company and M/s. Gillanders Arbuthnot and Co., incorporating the terms of the agency agreement. It is however common ground that the agency agreement was terminable at the option of the principal company. The appellant was incorporated for taking over the business of M/s. Gillanders Arbuthnot and Co., and since it took over the distributing agency the appellant acted as the sole agent and distributor of explosives manufactured by the principal company, but without a written agreement. In May, 1945, the principal company desired to set up its own organisation for distributing its products, and intimated the appellant that the agency of the appellant may be cancelled after two or three years. By letter dated March 11, 1947, the principal company informed the appellant that the agency will stand terminated from April 1, 1948, and that it desired to compensate the appellant for termination of the agency on the following basis : (1) " 'For the first three post-transfer years' the principal company shall pay to the appellant two-fifths of the commission accrued on actual sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the agency, being receipts of a capital nature, and were not liable to be included in the total income of the appellant. The Income-tax Officer, Companies District IV, Calcutta, rejected the contention of the appellant, holding that cancellation of a single contract of agency out of a number of selling agencies held by the appellant was in the ordinary course of business and the sums received by the appellant as compensation for cancellation were revenue, taxable under the Indian Income-tax Act, 1922. The Income-tax Officer also assessed the relevant amount of compensation to business profits tax for the chargeable accounting period ending March 31, 1949. In appeal to the Appellate Assistant Commissioner, the contention of the appellant was accepted principally on the ground that the amounts received by the appellant were compensation for termination of the agency with the principal company and as consideration for agreeing to refrain from carrying on in future competitive business in explosives. The Appellate Tribunal held that the compensation received by the appellant was merely incidental to the carrying on of the business. The Tribunal negatived the contention of the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business in explosives and consequently no part thereof was exempt from Indian income-tax levy." With certificate of fitness granted by the High Court, these appeals have been preferred by the appellant. The principal question in dispute is whether the amounts received by the appellant as compensation for loss of agency are of the nature of capital or revenue. It is necessary in the first instance to eliminate two subsidiary contentions raised by the appellant. It was urged that the amounts received by the appellant were in lieu of compensation for cancellation of the agency by the principal company, for loss of goodwill of the appellant's business, and also in consideration of the appellant's agreeing not to carry on any competitive business in explosives or other commodities in which business was carried on by the appellant under the agency agreement. It cannot seriously be disputed that compensation paid for agreeing to refrain from carrying on competitive business in the commodities in respect of which the agency was terminated, or for loss of goodwill would, prima facie, be of the nature of a capital receipt. But there is no evidence that compensation was paid to the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid in that behalf must be regarded as capital. But this question also was never raised before the revenue authorities, nor even before the Tribunal. The Tribunal observed that it had not been supplied with any material regarding the basis of the value of the goodwill, " nor anything to indicate as to what the written down value of the goodwill was, due to the termination of the agency ". It therefore held that the inference sought to be drawn by the appellant that compensation was referable to the loss of goodwill was based on no evidence and the High Court agreed with that conclusion. We are unable to hold that the High Court was, in so holding, in error. If it was the case of the appellant that a part of the compensation was in fact paid for loss of goodwill of the business, the appellant could have led evidence to establish that it was the intention of the parties that the loss of goodwill was to be compensated by payment of an amount which was included in the compensation ultimately paid by the principal company to the appellant. The business of agency had undoubtedly continued for more than sixty years, but there is no evidence about the terms of the agency agreement. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the appellant was to be paid " for the first three post-transfer years " two-fifths of the commission accrued on actual sales in the territory of the appellant's agency taken over by the Imperial Chemical Industries (India) Ltd., such commission to be computed at the rates of commission formerly paid to the appellant, and that in " the third post-transfer year " the principal company was to pay the appellant in addition a sum equivalent to full commission on the sales for that year effected by the Imperial Chemical Industries (India) Ltd. in the appellant's territory calculated at the same rates. The appellant was conducting business as selling or distributory agent of numerous principals. The agency which was terminated was one of many such agencies in which the appellant functioned as distributing agent of a foreign principal. There is not even a suggestion, that by the determination of the agency held by the appellant in explosives from the principal company, the trading structure of the assessee's business was impaired. It is manifest that the agencies of the companies conducted by the appellant must have been obtained at different times. There is no evidence that these age ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and even temporary dislocation in the organisation of the business thereby may be assumed. There is no evidence, however, that the appellant could not in the ordinary course of business repair the dislocation. There is no evidence that it could not obtain an agency from another manufacturer of explosives. Even assuming that such an agency in explosives may not be replaced, that circumstance by itself may not justify the inference that the agency was independent of the other lines of business conducted by the appellant, or that by the cancellation of the agency an enduring asset was lost to the appellant. The circumstance that the agency was determinable at the will of the principal company which maintained a large staff at their expense justifies the inference that upon cancellation of that agency the appellant's business organization was not substantially impaired. The cancellation, it may be held, was an incident of the trading operations of the appellant in the normal course of business. The payment received by the appellant could not, therefore, be regarded truly as compensation for not carrying on the business : it was a sum which was worked out in terms of profits which the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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