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TMI Blog1983 (9) TMI 129X X X X Extracts X X X X X X X X Extracts X X X X ..... nufactured by it and of other product in the territories specified in the northern region ofIndiaandDelhi. (ii) The products were to be purchased outright by GEC for subsequent sale in the territory allotted to it, and the discount which was to be allowed by MICO to GEC was not to exceed 45 per cent of the list price. MICO, however, reserved the right to itself to fix the selling price of the products. (iii) GEC was not to deal in competing products, nor extend its sale and service beyond the territory allotted to it. (iv) GEC was not to act as agent of MICO nor represent itself to others to be so and was given no power to bind MICO in any manner. (v) The agreement was valid for five years from10-2-1967, unless terminated earlier after the expiry of the prescribed notice given by either side. MICO was also given option to terminate the agreement unilaterally by notice with immediate effect or without notice on the happening of certain events (which are not relevant to the enquiry here). (vi) GEC was prohibited from assigning or transferring to any other person any of the rights or liabilities arising from the said agreement. " 3. This agreement was for a period of five ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28(ii)(c) of the Income-tax Act, 1961 ('the Act') as GEC was not an agent of MICO. It was further contended that it was not chargeable to capital gain because there was no transfer of capital assets. The claim of the assessee that the amount of compensation was not taxable was not accepted by the IAC who held that the compensation was paid for the loss of profits and, therefore, it was a revenue receipt in the hands of the assessee. According to the IAC, GEC acted as the agent of MICO in the given territories. In this connection, a reference was made to the provisions of section 28(ii)(c). It was also held in the alternative that if the amount in question was not taxable as business income, the same was taxable to capital gains tax as there was a transfer of capital asset. 7. When the matter came before the Commissioner (Appeals), he considered the general legal position regarding taxability of compensation specially having regard to the ratio of the decision of the Privy Council in the case of CIT v. Shaw Wallace Co. 6 ITC 178 and the decision of the Supreme Court in the case of CIT v. Vazir Sultan Sons [1959] 36 ITR 175 and also in the case of P.H. Divecha v. CIT [1963] 48 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le distributors were considered as sole selling agent. Before the Commissioner (Appeals), reliance has been placed on the decision of the Bombay High Court in the case of Daruvala Bros. (P.) Ltd. v. CIT [1971] 80 ITR 213. The question for consideration before the High Court was regarding the taxability of compensation received on termination of sole distributorship. On considering the terms of agreement in that case, it was held that the sole distributor could not be considered to be the agent, and the provisions under section 10(5A)(d) of the Indian Income-tax Act, 1922 ('the 1922 Act') corresponding to the provisions under section 28(ii)(c) were not applicable. In the agreement of March 1972 there was a specific clause stating that the assessee-company was not to act as an agent of MICO. The Commissioner (Appeals), therefore, held that the above decision of the Bombay High Court was wholly applicable to the facts of the present case. He, therefore, came to the conclusion that the provisions of section 28(ii)(c) could not be invoked to tax the compensation received by the assessee-company from the MICO. 9. The Commissioner (Appeals) further considered the question whether the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses of the various agreements which have been entered into in 1967 and then in 1972. He drew our attention to the letter dated28-1-1972, written by the MICO to the assessee-company. This letter informed the assessee that the agreement for sole distributorship of MICO products with the assessee was expiring on19-2-1972and MICO had decided as a matter of policy to establish their own sales house inDelhion the pattern of similar existing sales houses in other parts of the country. It was contemplated to completely take over the distribution of business by February 1982, in three phases. Till the finalisation of a fresh agreement, the present working arrangement was to continue. It was also clarified that MICO's right to accelerate the process of take over and complete phase programme earlier were reserved. It was further clarified that the contents of the letter was subject to any law on this matter. After this letter and after expiry of the agreement on9-2-1972another agreement was entered into between the parties for a further period of five years. Referring to the terms of this agreement, it was submitted that the activity of the assessee was under the strict control of the MICO wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... representative then took us to the agreement made on9-2-1977. It was forcefully submitted by the departmental representative that the terms of this agreement do not bring out the correct facts and sometime go contrary to the earlier arrangement or agreement between the parties. In this agreement, it was stated that MICO had decided not to wait till February 1982, for complete take over of the distribution of its products in the specified areas. The specific clauses to which our attention was drawn were clauses 6, 7, 8 and 9 in the preamble to the agreement and they are as follows : " 6. GEC for the purposes and in the course of acting as such sole distributor of MICO Bosch products over the last many years established both directly and through other distributors, dealers and stockists a net work of distribution and service points throughout the territories assigned to it as aforesaid and also established and developed at considerable expenses and efforts its main distribution centre in New Delhi and has been deriving reasonable substantial profits from the business carried on by it as such sole distributor. 7. MICO for its own reasons and benefit recently expressed a desire to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the MICO and some dealer could not be appointed without permission of MICO. According to the learned departmental representative, the words 'agent' and agency' were different words with different imports. According to his submission, the assessee was exercising the rights of agency for a part of MICO's business activities. In this connection, it was contended that the reliance of the learned Commissioner (Appeals) on the provision of the Indian Contract Act was not correct and the more relevant provision for this purpose was the Companies Act. 14. Relying on the decision of the Calcutta High Court in Shalagram Jhajharia v. National Co. Ltd. [1965] 35 Comp. Cas. 706 where it has been held that the agency includes selling agents, it was contended that the nomenclature given in the agreement was not important and the assessee was exercising the exclusive right to sell the product of MICO in the specified area. 15. The learned departmental representative farther submitted that there were overriding considerations for not following the decision of the Bombay High Court relied upon by the assessee in Daruvala Bros. (P.) Ltd.'s case. 16. The other leg of the arguments advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rties had taken note of the end of the sole distributorship agreement between the parties and provided that for an interim period of two years, GEC were to act as market consultant of MICO and had to render certain services in this connection. In consideration of these services to be rendered by GEC, MICO had to pay Rs. 5.50 lakhs per annum to GEC. A part from the above additional services were also to be provided by GEC to MICO and these included making available the office and certain specified numbers of staff belonging to the assessee to work on behalf of MICO. For such services, an amount of Rs. 60,000 per year was to be paid. There was further an agreement for the purchase of certain materials by MICO from GEC on certain payments. GEC were to exercise their good offices in assisting MICO in obtaining a lease from the connected parties in favour of MICO in respect of the premises where the business was being carried on. 18. According to the departmental representative, both the agreements were simultaneous and should be read together. He contended that new agreement clearly showed that there was no end to the assessee's business and only its form was changed. It was pointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these agreements constituted framework of the assessee's business. According to his submission, this framework itself was taken away when the business as a sole distributor came to an end. He argued that the compensation had been worked out on the basis of loss of profit but it was only a measure to find out the quantum of compensation. He referred to the commentary on Law and Practice of Income-tax of Kanga and Palkhivala, Vol. 1, page 138 where it has been stated that all the cases which did not fall within section 28(ii) would continue to be governed by general principles and the compensation in such cases would be on capital account. According to his submission, the whole framework of the assessee's business of sole distributorship had come to an end and the assessee was being compensated for the loss of this framework. In this connection, he strongly relied on the decision of the Bombay High Court in the case of Daruvala Bros. (P.) Ltd.. In that case also there was a receipt of compensation and under section 10(5A) of the 1922 Act, the revenue tried to assess it. It was held that the agreement of sole distributorship was not one of agents and both the parties were dealing with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to do any act for another or to represent another in dealing with third person. It was pointed out that in the present case, the assessee was not acting on behalf of the MICO and was not representing the MICO vis-a-vis other parties. 21. Submitting further it was stated that such a receipt was not of the revenue nature under the ordinary law. He submitted that the compensation was paid for the loss of the source of income and not to compensate for profit of an earning business. According to the submission of the learned counsel for the assessee, the compensation was worked out on the basis of loss of profit but was a compensation for the loss of the framework of business. He submitted that the agreement was coming to an end and, therefore, there was no question of making payment for premature termination. It was only a compensation for non-renewal of the agreement. According to the understanding between the parties, the long standing source of income belonging to the assessee dried up, though the assessee had no legal right to receive any compensation, MICO decided to pay to them for non-renewal of contract resulting in a loss of expected income. 22. Referring to the reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal representative that the capital gains is chargeable, the learned counsel for the assessee submitted that the Assessing Officer had not made out any such case. He also submitted that the agreement which came to an end could not be considered to be a capital asset as it did not cost anything to the assessee. According to the learned counsel for the assessee, the cost of establishment would not be considered as cost of the agreement. In this connection, he referred to the example of tenancy right which does not cost the assessee anything. Reliance was placed on the decision of the Supreme Court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294. 26. In reply, the departmental representative submitted that the framework of the assessee's business had not been destroyed and it continued even after9-2-1977. There was no stipulation for renewal of agreement and, thus, it had to expire on the specified date. He reiterated that two agreements must be read together and such a large payment would not be in consideration of restraint of trade. He further pointed out that the assessee has been paid separately for the framework of the business in the second agreement. It was contended by h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with reference to the provisions of the Indian Contract Act. It is in this Act that there is a full chapter on 'agency' and the various legal requirements have been provided for in this chapter of the Indian Contract Act. As already noted above, an agent is a person employed to do any act for another or to represent another in dealings with third party. The essential point about an agent's position is his power of making the principals answerable to third persons. If a person is mentioned as an agent in an agreement, that alone does not create agency and if any other name is used, it does not mean that the person cannot be considered to be an agent. The true nature of the contract has to be gathered from its terms and conditions. A principal does not sell to his agent. There is a distinction between a contract of sale and contract of agency for sale. The essence of agency to sell is the delivery of goods to a person who is to sell them not as his own property but as that of the principal who remains the owner of the goods and the agent is, therefore, liable to account for the proceeds. When a dealer sells goods of a manufacturer for his own profit he is not an agent of the manufact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the agreement was not of sole selling agent but that was a vendor or a buyer of principal to principal basis. It was also stated that the assessee could be treated as favoured buyer and not an agent. A study of the above provision clearly shows that the assessee was not an agent of MICO, and, therefore, the provisions of section 28(ii)(c) do not apply to this case. 31. In the case of P.H. Divecha, the question arose whether a similar agreement of distributorship created agency and it was held by the Supreme Court that the agreement was not an agreement of agency. The above decision was applied by the Bombay High Court in the case of Daruvala Bros. (P.) Ltd.. In this case, the question arose regarding the assessability of compensation for termination of distributorship under section 10(5A) of the 1922 Act. It may be mentioned that this provision was exactly the same as the provision of section 28(ii)(c) of the Act. Daruvala Bros. (P.) Ltd. were the distributors of Ciba Pharma Ltd. Their territories extended to Western andCentral IndiaandHyderabadState. Following the reorganisation of the States, the company accepted the partial relinquishing of the territories ofBombayandHyd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to sole selling agencies. However, we are interpreting the provisions of section 28(ii)(c) and we have to give it a meaning which will apply to all the situations which may arise in respect of an agency. This plea of the learned departmental representative has, therefore, to be rejected. 34. Having come to the conclusion that the amount in question was not taxable under section 28(ii)(c), we may now turn to consider whether the amount could be taxed under the general provision of taxation law. For deciding this one has to look to the purpose for which the compensation is paid if the purpose is to compensate an assessee for the loss of his profit in the course of his carrying on business, such compensation would be chargeable to tax. However, where the compensation is for the end of the source of income and for complete winding up of the framework of the business, such compensation would be capital in the hands of the recipient. As already stated above, the arrangement between MICO and the assessee-company existed for the last several years and written agreements were executed in 1967 and in 1972. Each of these agreements were for a period of 5 years and so far as the language of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the agreements MICO could insist for not paying anything for compensation. The assessee-company relied more on the understanding communicated by letter dated28-1-1972. There may be certain inaccuracy in the language of the agreement executed on9-2-1977under which the compensation under dispute was fixed. Clauses 7, 8 and 9 of this agreement has already been mentioned in para 12 of this order supra and a perusal of this agreement would show that this payment was made in consideration of the premature termination of the arrangement stipulated in the letter dated 28-1-1972 which has been repeated in some other letters though there was no premature termination of the agreement which had been entered into in February 1972. Clauses 3, 4 and 5 of this agreement provides as under : " 3. GEC shall on close of the business on the 9-2-1977, cease to be the sole distributor of MICO Bosch products in the territories assigned to it and in which it was acting up to the said date in pursuance of the aforesaid agreement/arrangements and thereupon MICO shall acquire the right to carry on the entire distribution and servicing of MICO Bosch products in the sole territories through its own Delhi sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this area. The agreements have to be read as they stand and they were executed to serve two different purposes. 36. The amount of Rs. 99,00,000 was determined on the basis of Rs. 33,00,000 per annum but that was merely a measure to pay off the assessee-company for the end of their sole distributorship business. As the whole business structure as sole distributors had suffered injury by non-renewal of the contract in 1977, the payment in question was in respect of the capital framework of the business. This payment was not to compensate the assessee for his trading loss as after this date the business as a sole distributor came to an end. Whatever income was being earned after this period was in another capacity and for other services to be rendered. It has, therefore, to be held that the amount of compensation was to pay for the end of the capital framework of the assessee's business and, therefore, this amount could not be assessed as income under the general principle of tax. It was only for this reason that the provisions were inserted in section 10 of the 1922 Act and section 28 of the Act. However, as we have seen, those specific provisions do not apply in the present ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or any specific provisions of the Income-tax Act, 1961. With this finding the addition made by the IAC of Rs. 99,00,000 in the impugned assessment is knocked off. " 39. After hearing the departmental representative and the learned counsel for the assessee, we are inclined to agree with the departmental representative that this question is included in the ground of appeal taken by the department and the question of assessability of the amount of compensation or any part of it has to be considered and adjudicated. We have already held above that the payment in question was a capital receipt in the hands of the assessee. The further question whether all the requirements of section 45 are satisfied has not been gone into either by the IAC who made the assessment or by the Commissioner (Appeals). We do not want, therefore, to deal with this question unless the authorities below applied their mind both on questions of facts and of law and determine a particular position for the purposes of assessment. The Assessing Officer could not have computed the capital gain while he was including the amount as business income. However, as he indicated his alternative preference, we would conside ..... X X X X Extracts X X X X X X X X Extracts X X X X
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