TMI Blog1959 (3) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... hortly stated : The assessee is a registered firm consisting of five brothers and the wife of a deceased brother having equal shares in the profit and loss of the partnership. The firm was appointed the sole selling agents and sole distributors for the Hyderabad State for the cigarettes manufactured by M/s. Vazir Sultan Tobacco Co., Ltd., under the terms of a resolution of the board of directors dated January 6, 1931 : " Mr. Baker reported that an arrangement had been come to for the time being whereby the firm of Vazir Sultan Sons, were given the distributorship of Charminar Cigarettes within the H.E.H. the Nizam's Dominions and that they were allowed a discount of 2% on the gross selling price." No written agreement was entered into between the company and the assessee in respect of the above mentioned arrangement nor was there any correspondence exchanged between them in this behalf. In 1939 another arrangement was arrived at between the assessee and the company whereby the assessee was given a discount of 2% not only on the goods sold in the Hyderabad State but on all the goods sold in the Hyderabad State and outside Hyderabad State. It does not appear that the board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the High Court for a certificate of fitness which was granted by the High Court on February 21, 1955, and hence this appeal. The question that falls to be determined is whether the sum which was in express terms of the resolution mentioned by way of "compensation" for the loss of the agency was a revenue receipt (trading receipt or an income receipt) as contended by the Revenue or a capital receipt as contended by the assessee. It was urged on behalf of the appellant that the sole selling agency which was granted by the company to the assessee in the year 1931 was merely expanded as regards territory in 1939 and what was done in 1951 was to revert to the old arrangement, and the structure or the profit-making apparatus of the assessee's business was not affected thereby. The expansion as well as the restriction of the assessee's territory were in the ordinary course of the assessee's business and were mere accidents of the business which the assessee carried on and the sum of Rs. 2,19,343 received by the assessee as and by way of compensation for the restriction of the territory was a trading or an income receipt and was therefore liable to tax. It was, on the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following statement of Lord Macmillan in Van Den Berghs Ltd. v. Clark : " That though in general the distinction between an income and a capital receipt was well recognized and easily applied, cases did arise where the item lay on the border line and the problem had to be solved on the particular facts of each case. No infallible criterion or test can be or has been laid down and the decided cases are only helpful in that they indicate the kind of consideration which may relevantly be borne in mind in approaching the problem. The character of the payment received may vary according to the circumstances. Thus the amount received as consideration for the sale of a plot of land may ordinarily be a capital receipt but if the business of the recipient is to buy and sell lands, it may well be his income." While considering the case law it is necessary to bear in mind that the Indian Income-tax Act is not in pari materia with the British income-tax statutes, it is less elaborate in many ways, subject to fewer refinements and in arrangement and language it differs greatly from the provisions with which the courts in England have had to deal. Little help can therefore be gained by at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the opinion of the Board observed at page 192 that it was not in their Lordships' opinion correct to regard as an essential element in any of these or like definitions a reference to the analogy of fruit or increase or sowing or reaping or periodical harvests and that such picturesque similies cannot be used to limit the true character of income in general. Lord Wright further observed at page 194 : --- " Its applicability may, in particular cases, differ because the circumstances, though similar in some respects, may be different in others. Thus the profit realised on a sale of shares may be capital if the seller is an ordinary investor changing his securities, but in some instances at any rate it may be income if the seller of the shares is an investment or an insurance company. Income is not necessarily the recurrent return from a definite source, though it is generally of that character. Income again, may consist of a series of separate receipts, as it generally does in the case of professional earnings. The multiplicity of forms which 'income' may assume is beyond enumeration. Generally, however, the mere fact that the income flows from some capital assets, of which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was a capital expenditure or a revenue expenditure. We need not therefore discuss that problem any further. As to whether a particular receipt in the hands of an assessee is a capital receipt or a revenue receipt, we had occasion to consider the same in Commissioner of Income-tax v. South India Pictures Ltd. The assessee there carried on the business of distribution of films. In some instances the assessee used to produce or purchase films and then distribute the same for exhibition in different cinema halls and in other cases used to advance monies to producers of films produced with the help of monies so advanced. In the course of such business it advanced monies to the Jupiter Pictures for the production of these films and acquired the rights of distribution of the three films under three agreements in writing dated September, 1941, July, 1942, and May, 1943. In the accounting year ending March 31, 1946, and in the previous years the assessee had exploited its rights of distribution of the three pictures. On October 31, 1945, the assessee and the Jupiter Pictures entered into an agreement cancelling the three agreements relating to the distribution rights in respect of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed May 9, 1940, was one entered into by the assessee in the ordinary course of his business, that the sum of Rs. 2,50,000 was paid admittedly as solatium for the cancellation of that contract, and that it was therefore a revenue receipt. The assessee on the other hand contended that the contract dated May 9, 1940, was for a period of 25 years of which more than 23 years had still to run at the time of the settlement, and it was therefore capital in character. Moreover, the true character of the agreement was that it brought into existence an arrangement which would enable him to carry on a business and was not itself any business and any payment made for the termination of such an agreement was a capital receipt. This court on the facts and circumstances of the case came to the conclusion that the contract in question was entered into by the assessee in the ordinary course of business and was one entered into in the carrying on of that business. The arrangement ultimately entered into between the parties in regard to the payment of the said sum of Rs. 2,50,000 was accordingly treated as an adjustment made in the ordinary course of business and the receipt was therefore held to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th India Pictures Ltd. The fact is that 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 hands of another, as, for example, when the agent is found to make a trade of acquiring agencies and dealing with them. The principle was thus stated by Romer, L. J., in Golden Horse Shoe (New) Ltd. v. Thurgood : 'The determining factor must be the nature of the trade in which the asset is employed. The land upon which a manufacturer carries on his business is part of his fixed capital. The land with which a dealer in real estate carries on his business is part of his circulating capital. The machinery with which a manufacturer makes the articles that he sells is part of his fixed capital. The machinery that a dealer in machinery buys and sells is part of his circulating capital, as is the coal that a coal merchant buys and sells in the course of his trade. So, too, is the coal that a manufacturer of gas buys and from which he extracts his gas.' Therefore, when a question arises whether a payment of compensation for termination of an agency is a capital or a revenue receipt, it would have to be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide Commissioner of Inland Revenue v. Newcastle Breweries Ltd. "). It is no doubt true that this court was not concerned with any agency agreement in the last mentioned case and the observations made by this court there were by way of obiter dicta. The obiter dicta of this court, however, are entitled to considerable weight and we on our part fully endorse the same. The earlier case of Commissioner of Income-tax v. South India Pictures Ltd. was indeed a case where the assessee had entered into agency agreements for the exploitation of the three films in question, but in that case the conclusion was reached that entering into such agency agreements for acquiring the films was a part of the assessee's business and the agreements in question having been entered into by the assessee in the ordinary course of business the Cancellation of those agreements was also a part of the assessee's business and was resorted to in order to adjust the relation between the assessee and the producer of those films. It would not be profitable to review the various English decisions bearing on this question as they have been exhaustively reviewed in the above decisions of this court. The position ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds you back again, looking, for that purpose, to the point of view of the payer ; not from the point of view of compellability or liability, but from the point of view of a person inquiring what is this payment for ; and you have to see whether the maker of the payment makes it for the services and the receiver receives it for the services. " The learned Judge further observed at page 61 : " But at any rate it does seem to me that compensation for loss of an employment which need not continue, but which was likely to continue, is not an annual profit within the scope of the income-tax at all." (See also W. A. Guff v. Commissioner of Income-tax where the question whether the amount paid was compensation for which the employer was liable or was a payment made ex gratia was considered immaterial for the purpose of the decision in that case). It was also urged that the agency in question before us was not an enduring asset of the assessee's business as in its very nature it was terminable at will, there being no agreement or arrangement for a fixed term between the assessee and the company. On the analogy of the test laid down by this court in Assam Bengal Cement Co., Ltd. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at he makes profit of by parting with it and letting it change masters. The latter capital circulates in this sense. My Lords, in the case before us the Appellant, of course, made profit with circulating capital, by buying coal under the contracts he had acquired from his father's estate at the stipulated price of fourteen shillings and reselling it for more, but he was able to do this simply because he had acquired, among other assets of his business, including the goodwill, the contracts in question. It was not by selling these contracts, of limited duration though they were, it was not by parting with them to other masters, but by retaining them, that he was able to employ his circulating capital in buying under them. I am accordingly of opinion that though they may have been of short duration, they were none the less part of his fixed capital." In the case before us the agency agreement in respect of territory outside the Hyderabad State was as much an asset of the assessee's business as the agency agreement within the Hyderabad State and though expansion of the territory of the agency in 1939 and the restriction thereof in 1950 could very well be treated as grant of additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the territory within the Hyderabad State and the other for the territory outside Hyderabad State, had been terminated or cancelled on payment of compensation, the whole profit-making structure of the assessee's business would have been destroyed. Even if one of these agency agreements was thus terminated, it would result in the destruction of the profit-making apparatus or sterilisation of the capital asset pro tanto and if in the former case the receipt in the hands of the assessee would only be a capital receipt, equally would it be a capital receipt if compensation was obtained by the assessee for the termination or cancellation of one of these agency agreements which formed a capital asset of the assessee's business. The facts of the present case are closely similar to those which obtained in the Commissioner of Income-tax v. Shaw Wallace Co. In that case also the assessees had for a number of years prior to 1928 acted as distributing agents in India of the Burma Oil Company and the Anglo-Persian Oil Company, but had no formal agreement with either company. In or about the year 1927 the two companies combined and decided to make other arrangements for the distribution of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pointed distributing agents for Hyderabad State only and for the rest of India in 1939, the agency commission in each case being a discount of 2% on the gross selling price. The agency of 1939 was terminated by a resolution dated June 16, 1950, on payment of the compensation amount already mentioned but the assessees continued to be distributors for Hyderabad State. It must here be mentioned that the agency in question was terminable at will, and that any compensation paid for it would prima facie be revenue. During the accounting year the amount of income profits and gains of the assessees from the cigarette distribution business and from another source, i.e., Acid Factory within the State of Hyderabad, was Rs. 4,53,159. The order of the Income-tax Officer or the Appellate Tribunal does not show how much of this sum was attributable to the cigarette distribution business and how much to the other source. There is no finding as to how and to what extent, if any, the business of the assessees was affected by the cesser of distribution business outside that State. The question now arises did the assessees receive the compensation in lieu of the commission they otherwise might o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of the profits or gains of any business carried on by him", i.e., it is to be the profit earned by a process of production. The test of income was its periodicity because it connotes a periodical monetary return. This test of periodicity was not accepted by the Privy Council itself in Raja Bahadur Kamakshya Narain Singh's case. Lord Wright there said " income is not necessarily the recurrent return from a definite source, though it is generally so". The test of periodicity was rejected by this court in Raghuvanshi Mills Ltd. v. Commissioner of Income-tax where Bose, J., said that the remarks of periodical monetary return must be confined to the facts of that case and it was held that money received from an insurance company for insurance against losses was income representing loss of profits as opposed to loss of capital. In a later case, Commissioner of Income-tax v. South India Pictures Ltd., it was said that if Shaw Wallace Co. had other agencies similar to those of the two oil companies it would be difficult to reconcile the decision in that case with the later decisions in Kelsall Parsons Co. v. Commissioners of Inland Revenue and other cases (per Das, C. J.). In view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding to Lord Macmillan if the agreements formed the fixed framework within which the circulating capital operated, then they are not incidental to the working of its profit-making machine but were essential parts of the mechanism itself and therefore they would result in a capital receipt and not revenue receipt. Thus the agreements were designed to ensure that the business was carried on to the best advantage but they did not themselves form part of the business. They were not agreements which must be regarded as pertinent to trading activities which yielded profits. As such the totality of payments on account of those agreements were held to be a capital receipt. The various decided cases demarcate the areas on the two sides of the line in which a receipt may lie and in every case it has to be determined as to whether it falls on one side or the other. The simplest case is of income from property or business as distinct from something received in lieu of property or business itself. One illustration of this is insurance against fire, destruction or damage and insurance against loss of profit. The former would bring in compensation in the nature of a capital. Another instance i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of an agency would be for the loss of a capital asset if the termination of the agency was a damage to the recipient's business structure such as to destroy or materially cripple the whole structure involving serious dislocation of the normal commercial organisation but if it was merely compensation for the loss of trading profit, i.e., in respect of commissions, or it took the place of commission that would have been earned if the engagement had continued then it is revenue (Wiseburgh v. Domville). So that the decision as to whether compensation was capital or revenue would depend upon whether the cessation of the agency destroys or materially cripples the whole structure of the recipient's profit-making apparatus or whether the loss is of the whole or part of the framework of business. If we apply these tests to the agreement which has been terminated in the present case, it does not fall in any of the class of cases of destruction of a capital asset. For the appellant reliance was placed on the observations of Venkatarama Aiyar, J., in Commissioner of Income-tax v. Rai Bahadur Jairam Valji where it was pointed out that in an agency contract the actual business consists ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held to be revenue. As a matter of fact there are three kinds of cases of agencies shown by the decided cases : (1) Kelsall Parsons' case where the recipient was carrying on several agencies and the test laid down was whether the business structure could absorb a shock of the termination of one. (2) The other is where the compensation is for a temporary and variable element of assessee's profit making apparatus MacDonald' case. The third class of cases is represented by Fleming Co.'s case where the rights and advantages surrendered were such as to destroy or materially cripple the whole structure of the profit making apparatus. The agencies themselves are of different kinds : (1) where the agent himself carries on the business and sells the product of the principal and gets commission for it ; (2) where the agent's function is confined to bringing the principal and the customer together and he gets agency commission for the performance of only that service ; (3) where the agent, is a distributor and distributes the products of the principal through his sub-agents and charges commission for the distribution work. Cases (1) and (3) would not strictly fall within the scope of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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