1965 (11) TMI 23 - SC - Income Tax

Whether the sums of ₹ 66,790 and ₹ 3,35,371 are assessable under section 10 for the assessment years 1951-52 and 1952-53 ? Held that - In the present case, the covenant 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 answer to the question referred to the High Court is that only such part of the sums of ₹ 66,790 and ₹ 3,35,371 as is attributable to the loss of the agency is assessable under section 10 of the Act for the assessment years 1951-52 and 1952-53. We accordingly modify the answer given by the High Court in that regard. Appeal allowed in part.

Issues Involved:
1. Whether the sums of Rs. 66,790 and Rs. 3,35,371 are assessable under section 10 for the assessment years 1951-52 and 1952-53.
2. Whether the compensation received for the termination of the agency is a capital receipt or a revenue receipt.
3. Whether the compensation attributable to the restrictive covenant is a capital receipt or a revenue receipt.
4. Whether the compensation paid is severable between loss of agency and restrictive covenant.

Detailed Analysis:

1. Assessability under Section 10:
The primary issue was whether the sums of Rs. 66,790 and Rs. 3,35,371 received by the agency company are assessable under section 10 of the Indian Income-tax Act, 1922, for the assessment years 1951-52 and 1952-53. The High Court concluded that the compensation paid for the destruction of an earning asset was a capital receipt and not liable to tax. The revenue contended that the termination of the agency was a normal incident in the course of business and that the compensation represented taxable income.

2. Capital Receipt vs. Revenue Receipt:
The court examined whether the compensation received for the termination of the agency was a capital receipt or a revenue receipt. The principles laid down in previous cases, such as Kettlewell Bullen and Co. Ltd. v. Commissioner of Income-tax and Gillanders Arbuthnot and Co. Ltd. v. Commissioner of Income-tax, were considered. It was established that if the termination of the agency did not affect the trading structure of the business or deprive the assessee of its source of income, the compensation would be a revenue receipt. Conversely, if the termination impaired the trading structure or resulted in the loss of a source of income, the compensation would be a capital receipt.

In the present case, the assessee had numerous agencies, and the termination of one did not significantly impact the overall business structure. The court concluded that the loss of the said agency was a normal trading loss and the income received was a revenue receipt.

3. Restrictive Covenant:
The court also addressed whether the compensation attributable to the restrictive covenant was a capital receipt or a revenue receipt. The correspondence between the parties indicated that the compensation was not solely for giving up the agency but also for the assessee agreeing to a restrictive covenant not to compete in the same field for a specified period. The court referred to the principle established in Beak v. Robson and Gillanders Arbuthnot and Co. Ltd. v. Commissioner of Income-tax, which held that compensation for agreeing to refrain from carrying on competitive business is of the nature of a capital receipt. Consequently, the court held that the part of the compensation attributable to the restrictive covenant was a capital receipt and hence not assessable to tax.

4. Severability of Compensation:
The final issue was whether the compensation paid could be severable between the loss of the agency and the restrictive covenant. The court affirmed that if the compensation paid was in respect of two distinct matters, one being a capital receipt and the other a revenue receipt, apportionment should be made. The court cited cases such as Wales v. Tilley and Carter v. Wadman to support the principle of apportionment. The court directed that the apportionment of the compensation be made on a reasonable basis by the assessing authorities.

Conclusion:
The court modified the High Court's answer, stating that only the part of the sums of Rs. 66,790 and Rs. 3,35,371 attributable to the loss of the agency is assessable under section 10 of the Act for the assessment years 1951-52 and 1952-53. The appeals were partly allowed, with both parties bearing their respective costs.

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