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TMI Blog1994 (12) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Act, 1961, on Rs. 20,607 being the expenditure in respect of insurance, freight and inspection ? " Learned counsel appearing for the parties state that controversy in question No. 2 as well as in question No. 3 above is covered by judgments of this court. Learned counsel further state that the controversy in question No. 2 is covered by the judgment of this court in the case of Lubrizol India Ltd. v. CIT [1991] 187 ITR 25 and the controversy in question No. 3 is covered by two judgments of this court one in the case of Forbes Forbes Campbell and Co. Ltd. v. CIT [1994] 206 ITR 495 and the other in the case of M. H. Daryani v. CIT [1993] 202 ITR 731. In view thereof, the second question as well as the third question are answered in the affirmative, that is, in favour of the Revenue and against the assessee. We shall now deal with the controversy involved in question No. 1 above and narrate only such of the facts as are relevant to consider the said controversy. The assessee is a limited company duly incorporated and registered under the provisions of the Companies Act, 1956. The relevant assessment year is 1977-78, having corresponding previous year ended on December 31, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the facts narrated above, a dispute arose as to whether the payment of the said sum of Rs. 5 lakhs by BME to the assessee was a " capital receipt " or a " revenue receipt " in the hands of the assessee. The assessee had shown the said amount in its return under the head " Other income " but claimed that it was not taxable being a capital receipt. The claim of the assessee was rejected by the Income-tax Officer who held that the arrangement between BME and the assessee borne out by the said agreement did not create any income apparatus and that the assessee had only a service contract with BME. It was further held by the Income-tax Officer that there was no destruction of any income apparatus and that the amount received was not in respect of any loss of source of income but was only in respect of the actual loss of income itself for a period of one year. The Commissioner of Income-tax (Appeals), on appeal, decided the issue in favour of the assessee and held that the receipt of the said amount of Rs. 5 lakhs in the hands of the assessee was a " capital receipt " and was not taxable. The Department, thereupon, filed an appeal before the Income-tax Appellate Tribunal. The Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cture of the recipient's business nor deprive the recipient of what in substance is the source of income, termination of contract being a normal incident of the business, and such cancellation leaves the recipient of the amount free to carry on his trade, the receipt is " revenue ". However, where by cancellation of agency the trading structure of the assessee is impaired or such cancellation results in the loss of what may be regarded as the source of the assessee's income, payment made to compensate for such cancellation of agency agreement is normally a " capital receipt ". In the facts of the case, we are required to consider as to whether the sum of Rs. 5 lakhs received by the assessee was received to compensate the assessee for cancellation of the said agreement with BME which did not affect the trading structure of the assessee nor deprive the assessee of what in substance was its source of income or by cancellation of the said agreement, the trading structure of the assessee was impaired or such cancellation resulted in loss of source of the assessee's income. Considering the nature of the said agreement and perusing the various clauses contained therein in our view, the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r appointment as managing agents and released their managing agency rights in consideration of the payment of a lump sum as compensation. In the facts of the case, it was held by this court that there was surrender of a capital asset and that the amount received by the managing agents as solatium for the termination of the managing agency could not be profits arising out of their business but constituted only a capital receipt. In the case of Vazir Sultan and Sons [1959] 36 ITR 175 (SC), the assessees therein were appointed the sole selling agents and sole distributors of a cigarette manufacturing company for the then Hyderabad State for cigarettes manufactured and were allowed a discount of two per cent. on the gross sale price. After about eight years of the appointment another arrangement was arrived at between the assessees and the company whereby the assessees were given a discount of two per cent. not only on the goods sold in the then Hyderabad State, but on all the goods sold in and outside the Hyderabad State. Eleven years thereafter, the assessees were reverted to the original arrangement confining the sole agency of the assessees to the then Hyderabad State and the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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