1971 (1) TMI 13 - SC - Income Tax

Compensation received for termination of one of the several managing agencies - compensation for loss of office is capital receipt but there is an exception that the payment receipt even for termination of an agency agreement could be revenue if the agency was one of many which the assessee held and its termination did not impair the profit-making structure of the assessee - Assessee s appeal is allowed

Summary

Issues:
Interpretation of whether a payment received by a company for termination of managing agency is a revenue or capital receipt.

Analysis:
The case involved an appeal by an assessee regarding the assessment year 1952-53, focusing on a payment of Rs. 18 lakhs received by the company for the termination of its managing agency. The Income-tax Officer initially treated the payment as advance remuneration, but the Appellate Assistant Commissioner considered it as compensation for termination. The Tribunal then held that the payment was a capital receipt, as the termination of the managing agency represented the destruction of a source of income for the company. The High Court, however, reversed the Tribunal's findings, deeming the transactions as not genuine and considering the payment a revenue receipt due to the company's managing agencies being its stock-in-trade.

The Supreme Court emphasized that the High Court overstepped its jurisdiction by re-examining the Tribunal's factual findings, as the Tribunal was the final fact-finding authority. The Court reiterated the principle that compensation for loss of office or agency is generally a capital receipt, but exceptions exist, such as when the termination is within the normal business framework and does not impair the profit-making structure. In this case, the Tribunal found that the termination of the agency led to the destruction of a source of income for the company, justifying the classification of the payment as a capital receipt.

The Court highlighted that determining whether a receipt is capital or income depends on the specific facts of each case and involves a conclusion of law drawn from those facts. Various guidelines and rules have been developed to assist in making this determination. Applying these guidelines to the case at hand, the Court concluded that the payment for termination of the managing agency should be considered a capital receipt due to its impact on the company's income source.

In conclusion, the Court allowed the appeal, discharged the High Court's answer, and ruled in favor of the assessee, considering the payment as a capital receipt. The department was directed to bear the costs of the appellant in both the Supreme Court and the High Court.