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TMI Blog2005 (11) TMI 496X X X X Extracts X X X X X X X X Extracts X X X X ..... year. The loss because of loss of agency commission was a loss due to ordinary incident in the course of business (Eillanders Arbuthnot Co. Ltd. v. CIT 53 ITR 283 and also Kattlewell Bullen Co. Ltd. v. CIT - 53 ITR 261). 3. On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer to delete disallowance of ₹ 1,14,117 without appreciating the fact that expenses on travelling are to be allowed as per limits of rule 6D. 4.On the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the disallowance of ₹ 2,65,002 being expenses on guest house without appreciating the fact that expenses on guest house are allowable as per provisions of section 37 of Income-tax Act, 1961. 5. On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer to treat ₹ 80,288 received from M/s. Digital Equipment Corporation as capital receipt was because of realignment of business of interest of assessee-company and foreign company. The receipt was in ordinary incidence of business and as such a revenue receipt. 2. The first ground is about d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 14.00 lacs from HTIPL. The assessee treated this sum as a consideration for transfer of goodwill and offered for taxation as long-term capital gains and in view of CIT v. B.C. Srinivasa Shetty [1981] 128 ITR 2941 (SC), it being capital receipts, and there being no cost of acquisition, it would not be liable to tax at all. 4. On the other hand, the Assessing Officer found that (i) the assessee had income from service contracts and commission from various parties; (ii) it is a compensation received on termination of managing agency and following the decision of Hon ble Calcutta High Court in CIT v. Karamchand Thapar Bros. (P.) Ltd. [1968] 67 ITR 705 held that the assessee was carrying on several managing agencies, it gave up only one and continued with other; the business structure of the assessee did not suffer; he was free to carry on the trade with other agencies; the cancellation and compensation therefore was merely a normal incidence of business; (iii) income of the assessee had increased in subsequent years, despite losing the agency of M/s Textronics Inc. USA. He, thus, held that the sum of ₹ 14.00 lacs is a revenue receipt and taxable accordingly. 5. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tual property. The personnel cannot also be considered as property of the assessee (iii) there is no transfer within the meaning of section 2(47) as this asset can remain with the assessee also. There is no exchange, relinquishment or extinguishments of any right (iv) what is given to HTIPL is also not goodwill because it is not shown in the balance sheet; there is no evaluation as to what is the value of good- will of the assessee and how much of it has been transferred (v) since there is no goodwill in the balance-sheet, there is no evaluation, no determination as to what portion thereof, if any, was transferred. Hence, there is no transfer within meaning of section 2(47) of Income-tax Act, 1961 (vi) what the assessee has surrendered is only one of many agencies/distributorships. There was no stoppage of business. It continued yielding higher income in subsequent yeaRs.Loss of agency has not affected the trading structure, administratively, financially and physically. There was only a gradual transfer of the personnel (vii) para 7 of the agreement says that payment of ₹ 14.00 lakh is for termination of agency (viii) what is the assessee is providing to the joint venture i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 956, and having its registered office at 69/AL Jagmohandas Marg, Bombay 400 006 (HSPL). Whereas : (A)Tektronix, Inc., a Company incorporated in the State of Oregon, USA, (Tektronix) manufactures oscilloscopes and other instruments in the USA and other countries. (B)Tektronix has entered into a technical collaboration agreement with HTIPL for manufacture of certain Tektronix products. (C)For the last 22 years, HSPL has been the distributor of Tektronix for the sale of Tektronix products in India. (D)HSPL, as the distributor of Tektronix, has developed invaluable contacts with a large number of customers in the public and private sector, has a trained sales force, and has offices in different cities in India. (E)HSPL has agreed with Tektronix that it will cease to function as the distributor of Tektronix in India as of the date specified in a written notice to HSPL from Tektronix (such date is hereinafter referred to as the Termination date and has agreed to transfer to HTIPL certain aspects its business that relate to its Tektronix distributorship. Therefore, the parties agree as follows: (1) unless otherwise specified, each of the obligations contained in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d about 30 per cent to 40 per cent of the total commission income. (3) Acting as distributor, selling agent and maintenance agent for 15 other foreign companies in India which constituted 60-70 per cent of commission income. 10. From the combined and careful reading of the two, we find that :- (i)the assessee-company was acting as distributor/selling agent/ sales representative for about 16 foreign companies including M/s. Tektronix inc., USA. (ii)Tektronix, USA did not terminate its agency with the assessee for sales and distributorship of the Tektronix products in India and did not make any payment to the assessee. (iii)HSPL (assessee) had agreed with Textronics, that after specified dates, it will transfer certain aspects of its business that relates to its Textronics distributorship. (iv)The aspects which will be transferred to HTIPL are:- (a)Personnel/staff dealing with Tektronics products; such transfer will be complete within one year from termination date: payment of all dues/money of such staff to be done by HSPL; indemnify HTIPL against claims/demands/losses arising from breach of clause 2(b); (b)Detailed list of customers of Textronics products; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment year 1977-78, the assessee was engaged in manufacture of air-conditioning products and was undertaking job contracts in air-conditioning, the assessee was also trading in electronics and engineering goods and was also exporting its products. On June 10, 1973, the assessee entered into an agreement with a foreign trade enterprise, BME, under which the assessee was appointed as the agent of BME for marketing and selling their products in India. The said agreement stated that it was, in the first instance, valid up to December 31, 1976, and thereafter it was to be considered as automatically renewed for one calendar year at a time unless one or the other party thereto gave notice of its wish to terminate the same. By a letter dated June 4, 1976, BME intimated to the assessee that BME was agreeable to extension of the agree- ment for a further period of one year and accordingly the said agreement stood renewed up to June 10, 1977. But, in the meanwhile, the Government of India sponsored a company C and on October 6, 1976, BME wrote a letter to the assessee stating that since a lot of technical know-how and organisation potentialities were needed to handle the data process ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f section 10(5A) of the Indian Income-tax Act did not impliedly indicate that the sum was a capital receipt. That sub-section was obviously introduced to prevent the abuse of managing agency agreements being terminated on payment of huge compensation and to nullify the application of the decision in Shaw Wallace s case [1932] (L.R. 59 I.A. 206) to such cases. That sub-section did not necessarily imply that if that sub-section were not there the kind of payment referred to therein would have to be treated as capital receipt in all cases. Per Bhagwati J. (dissenting). The films constituted capital assets of the assessee and the payment was one for cancellation of the assessee s rights under the agreements and was a capital receipt. (iii) Vazir Sultan Sons case (supra) In this case, the assessee has got right to sale goods in Hyderabad State as well as outside Hyderabad State. However, the appellant-company took over the right to sale all goods outside Hyderabad State and paid a sum of ₹ 2,19,343 by way of compensation for the loss of agency for the territory outside the Hyderabad State. On the question whether the sum of money so received by the assessee was revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If it was the former compensation received would be a capital receipt; if the agency was entered into by the assessee in the ordinary course of his business and for the purpose of carrying on that business it would fall into the latter category and the compensation received would be a revenue receipt. (iv) Gillanders Arbuthnot Co. Ltd. (supra) The assessee was the sole-selling agent in distribution of explosives. The agency was terminated and compensation was paid, which was equal to 2/5th of the commission accrued on its sales to be paid for the first three yeaRs.The question was whether the amount received by the assessee for those three years was of capital or revenue nature. On this, the Hon ble Supreme Court held as under :- Held, that, having regard to the vast array of business done by the appellant as agents, the acquisition of agencies was in the normal course of business and determination of individual agencies a normal incident not affecting or impairing its trading structure. The amounts received by the appellant for the cancellation of the explosives agency therefore did not represent the price paid for the loss of a capital asset : they were of the nature o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for cancellation of licence and for termination by mutual consent of the licence granted by the foreign company to the assessee, PAL, with whom agreement was made, agreed to pay a sum of ₹ 24.00 lakh. The assessee had in the process given up the diesel engine manufacturing business, though it continued to carry on other businesses without affecting the structure of the business of the company. On these facts, the Hon ble Supreme Court held as under :- Held, (i) that in the agreement between the assessee-company and PAL, there was an express provision that for the remaining period of the licence granted by the foreign company to the assessee-company under the agreement dated 16-3-1956, the assessee-company shall not engage themselves in the manufacture, assembling or selling of automotive diesel engines or industrial diesel engines or both of a horse power approximating to the horse power of Meadows engines which were to be manufactured by PAL. (ii) that the termination of the activity was not a necessary incident of the business of the assessee and that the extinction and surrender of the industrial licence and the collaboration agreement impaired the profit-making stru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt to distinguish whether an agreement is for payment of a debt by instalments or for making annual payments in the nature of income. The court has, on an appraisal of all the facts, to assess whether a transaction is commercial in character yielding income or is one in consideration of parting with property for repayment of capital in instalments. No single test of universal application can be discovered for solution of the problem. The name which the parties may give to the transaction which is the source of the receipt and the characterization of the receipt by them are of little moment, and the true nature and character of the transaction have to be ascertained from the covenants of the contract in the light of the surrounding circumstances. The decision of the question is, however, not left to the application of any arbitrary standards. There are certain broad principles which guide the determination of the character of the receipt. The distinction between a capital receipt and a revenue receipt, though fine, is real. Where capital is repaid in instalments, it is not liable to income-tax; for instance when a person sells his property and agrees to receive the price stipulat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e had already obtained licences to work mines in Madhya Pradesh, Andhra Pradesh, Karnataka and Tamil Nadu and the parting with possession of Survey No. 30 by the assessee did not in any manner affect the trading structure of the assessee. There was no loss of any enduring capital asset. The assessee had furnished the Corporation with the prospecting report. The report was only in the nature of a preliminary prospecting report submitted to the Government, pursuant to the prospecting licence, for the purpose of enabling the assessee and the Government to ascertain the availability of minerals in the area and could not form the basis of actual business activities of exploitation of minerals either by the Corpora-tion or even by the assessee. Only after undertaking drilling and pitting operations and completing them, a complete and comprehensive idea could be gathered regarding the mineral potentiality of the tract and, therefore, the report could not be considered to be either a plant or a tool. The preliminary report was neither complete nor comprehensive and could not be regarded as technical know-how. The prospecting report was not a capital asset which had been given up. The amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortionment between the two matteRs.Difficulty in apportionment was not a ground for rejecting the claim either of the revenue or of the assessee. Therefore, apportionment had to be made of the compensation in this case on a reasonable basis between the loss of the agency in the usual course of business and the restrictive covenant. Whether compensation received by an assessee for loss of agency is a capital or a revenue receipt depends upon the circumstances of each case. But before coming to the conclusion one way or the other, many questions have to be asked and answered: What was the scope of the earning apparatus or structure, from physical, financial, commercial and administrative standpoints? If it was a business of taking agencies, how many agencies had it, what was their nature and variety, how were they acquired, how were one or some of them lost and what was the total income they were yielding? If one of them was given up, what was the average income of the agency lost? What was its proportion in relation to the total income of the company? What was the impact of giving it up on the structure of the entire business? Did it amount to a loss of an enduring asset causing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be a revenue receipt, irrespective of whether its performance was to consist of a single act or a series of acts spread over a period. There is a difference between a payment made as compensation for the termination of an agency contract and an amount paid as solatium for the cancellation of a contract entered into by a businessman in the ordinary course of business. In an agency contract, the actual business consists in the dealings between the principal and his customers, and the work of the agent is only to bring about that business. What he does is not the business itself but something which is intimately and directly linked up with it. The agency may, therefore, be viewed as the apparatus which leads to the business rather than the business itself. Considered in this light the agency right can be held to be of the nature of a capital asset invested in business. But this cannot be said of a contract entered into in the ordinary course of business. Such a contract is part of the business itself, not anything outside it as is the agency, and any receipt on account of such a contract can only be a trading receipt. Because compensation paid on the cancellation of a trading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utable principle that compensation received on cancellation of an agency must always be regarded as capital. 6.Compensation paid for agreeing to refrain from carrying on business in the commodities in respect of the agency terminated for loss of goodwill is prima facie, of the nature of capital receipt. 7.Manner of payment of compensation is not material. Whether capital is repaid in instalments or is paid in lump sum, it will not affect the basic nature of receipt in the hands of the recipient. 8.When assessee is not disposed of any asset, then amount received cannot be regarded as compensation in respect of loss of an enduring asset. 9.Payment made in settlement of trading rights under a trading contract are trading receipts, but where a person is prevented from doing business and injury is inflicted on capital asset, then the compensation will be capital and if injury is to stock-in-trade, then the compensation so received will be revenue in nature. 12. Now considering the facts of the present case, and principles laid down by different Courts including Hon ble Supreme Court and Hon ble Bombay High Court as referred above, we are of the considered view that the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is only a more suitable and convenient trade arrangement. Hence, transfer of employees and staff is not helpful to support the argument that there was a transfer of asset and hence the compensation so received was capital in nature. (iv) In fact HTIPL only received certain benefits in terms of resource transfer which would help the joint venture in running the business. 13. These resources (employees and customer database) are not the part of balance sheet. They are also not a part of definition of asset as given in section 2(14), property of any kind held by an assessee. 14. As held in CIT v. National Insurance Co. Ltd. [1978] 113 ITR 37 (Cal.), a property is a bundle of rights, which the owner can lawfully exercise to the exclusion of all otheRs.He is entitled to use and enjoy it as he wishes. The property can be either corporeal or incorporeal. Though it does not always mean physical property but it does mean the right, title, interest in a property. Property also includes rights such as trade marks, copyrights, patents and even intellectual rights capable of transfer or transmission. They also include beneficial rights to a thing considered as having money value es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the business. It has been described in terms of a magnet as the attracting force . In terms of comparative dynamics, goodwill has been described as the differential return of profit . Philosophically it has been held to be intangible. Though immaterial, it is materially valued. Physically and psychologically, it is a habit and sociologically it is a custom . Biologically, it has been described by Lord Macnaghten in Trego v. Hunt [1896] AC 7, as the sap and life of the business. Architecturally, it has been described as the cement binding together the business and its assets as a whole and a going and developing concern. It has been zoologically explained by Rich J. in Federal Commissioner of Taxation v. Williamson [1943] 7 ATD 272, quoted at pages 39-40 of the 4th Edn. of The Valuation of Company Shares and Business by Adamsan and Coorey in these terms: In Whiteman Smith Motor Company v. Chaplin [1934] 2 KB 35, the types were zoologically classified into cats, dogs, rats and rabbits. The cat prefers the old home to the person who keeps it, and stays in the old home although the person who has kept the home leaves, and so it represents the customer who goes to the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business in the same line i.e. the distributorship of 15 other foreign companies. The business was continued in the same name at the same location by the same people with the same old foreign companies except Tektronix with which business was re-organised as joint venture. Therefore, the assessee, in our considered view, continued to enjoy the same goodwill as it had before formation of joint venture. It is not specifically possible to say whether, after formation of joint venture the goodwill of the assessee was enhanced or eroded, but in our considered view, by entering into joint venture to produce the Textronics produces, the goodwill of the assessee, in general was enhanced, rather than eroded. In any case, the goodwill prior to joint venture and subsequent to formation thereof, has not been evaluated so as to show that there was an erosion in the goodwill as claimed. But such erosion, if any, is normal incidence of business, due to various factors as described by the Hon ble Supreme Court in B.C. Srinivasa Setty s case (supra). The root point is that assessee s goodwill has not come to an end so as to infer that it has been transferred to HTIPL. The goodwill is not divisible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st houses. In other words, travelling to guest houses will not be treated as recovery for staying in guest houses. Thus, the rent recovered in respect of guest house or expenditure incurred while staying in guest houses will be excluded while making disallowance out of ₹ 2,65,002. This ground of revenue is set aside to the assessing officer. It is treated as partly allowed. 23. The fifth ground is about a sum of ₹ 80,288 received by the assessee from Digital Equipment Ltd. USA (for short DEL) as capital receipt. The CIT(A) analysed the agreement execu- ted by DEL and assessee. As per this agreement, the assessee was required to desist from dealing or selling in products manufactured by DEL in India. The assessee was a distributor for some digital products. With a view to avoid any competition, the DEL had entered into this agreement with assessee to prevent it from manufacturing, selling, servicing in product manufactured by DEL. Thus, it was a non-competition agreement, whereby the assessee was prevented from competing with the sister concern of DEL for dealing in the same product. 24. The learned DR submitted that the issue is similar to the issue raised in grou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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