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TMI Blog1965 (11) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... 1900. The terms of the agency were not reduced to writing. The rates of commission were paid on terms agreed upon from time to time. The agency was terminable at will ; but, because of their mutual confidence, it continued without break till the year 1947 when the principal decided to transfer all its agencies in India and Ceylon to Imperial Chemical Industries (India) Limited. By its letter dated March 11, 1947, the principal gave notice to the agency company terminating its agency from April 1, 1948. After some correspondence, the agency was terminated on March 31, 1948, and the principal paid certain amounts in three instalments calculated on the basis of the income earned by the Imperial Chemical Industries (India) Limited, which took over the business from that date. Pursuant to that agreement, the principal paid on September 30, 1949, a sum of Rs. 34,100 as commission on sales during the year ended March 31, 1949, on September 30, 1950, a commission of Rs. 66,790 on sales during the year ended March 31, 1950, and on September 30, 1951, a commission of Rs. 3,35,371 on sales during the year ended March 31, 1951. During the assessment year 1950-51, the first amount was brought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the principal in view of the longstanding relationship between the parties and that it did not enter into the calculation of the compensation paid to the assessee. In short, his argument was that the said compensation only represented the taxable income of the assessee. Should the court hold that the compensation was in part capital and in part revenue income, the argument proceeded, the said compensation would have to be apportioned reasonably between the said parts. Mr. Rajagopal Sastri, learned counsel for the assessee, advanced the argument that, on a true construction of the agreement disclosed by the correspondence, it should be held that the amount received by the assessee was wholly as a consideration for the restrictive covenant and, therefore, was of a capital nature. Alternatively, he contended that even if the amount was wholly paid as compensation for the loss of the agency, it was a capital receipt, as the assessee lost a substantial source of income in relation to the totality of its business. On the assumption that the payment partook a composite character, the learned counsel would say that an apportionment should be made in proportion of the value to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acted as sole agents and distributors of explosives manufactured by the Imperial Chemical Industries (Exports) Ltd. That agency was terminated and, by way of compensation, the Imperial Chemical Industries (Exports) Ltd. paid for the first three years after the termination of the agency two-fifths of the commission accrued on its sales in the territory of the appellant's agency computed at the rates at which the appellant had formerly been paid and in addition in the third, year full commission for the sales effected in that year at the same rates. The Imperial Chemical Industries (Exports) Ltd. had intended to take a formal undertaking from the appellant to refrain from selling or accepting any agency for explosives or other competitive commodities, but no such agreement in writing was taken or insisted upon. The question was whether the amounts received by the appellant for those three years were of the nature of capital or revenue. This court held that the amounts paid were of the nature of income and, therefore, assessable to tax. The reason given for that conclusion was that, having regard to the vast array of business done by the appellant as agents, the acquisition of agencie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come 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 an unabsorbed shock dislocating the entire or a part of the earning apparatus or structure ? Or was it a loss due to an ordinary incident in the course of the business ? The answers to these questions would enable one to come to a conclusion whether the loss of a particular agency was incidental to the business or whether it amounted to a loss of an enduring asset. If it was the former, the compensation paid would be a revenue receipt ; if it was the latter, it would be a capital receipt. But these questions can only be answered satisfactorily if the relevant material is available to the income-tax authorities. The evidence of witnesses in charge of the business, the relevant accounts and balance-sheets of the assessee before and after the loss, other evidence disclosing the previous history of the total business and the relative importance of the agency lost and the present position of the business after the loss of the said agency have to be scrutinized by the department. At this stage the question of burden of proof raised at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness was dislocated. But it did not do so. The only evidence on which the High Court relied and on which the learned counsel for the assessee laid emphasis was the fact that the income returned by the assessee for the year 1952-53 was very nearly the same as that it received by way of compensation from the principal during the accounting year corresponding to the said assessment year. On that basis the High Court held that the income from the source which had been taken away from them assessee by reason of the termination of the agency would be very nearly half of its total income and, therefore, it lost an enduring asset. This reasoning does not appeal to us. Firstly, the compensation paid for the third year did not represent only the commission on the sales effected in respect of that agency during that year, but it represented not only the commission on the said sales but also in addition two-fifths of that commission ; secondly, the figures for the earlier two years show that during the year ending March 31, 1949, if the whole commission had been paid, the figures would have been Rs. 85,250 for the first year and Rs. 1,66,975 for the second year. The second year's figure was ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of two to three years might elapse before any steps were taken as regards this transfer. We now have to advise you that the matter has been receiving further consideration, and Imperial Chemical Industries (India) Limited desire to take over the various agencies as from the first April, 1948. It is with regret, therefore, that we have to intimate our intention of transferring your agency, as from the above date, to Imperial Chemical Industries (India) Limited, and would take this opportunity of expressing to you our sincere appreciation of the valuable services you have rendered to us over a period of many years. As a result of the transfer of your agency to Imperial Chemical Industries (India) Limited, we propose that compensation should be paid to you on the following basis : (1) For the first three post-transfer years, we shall pay you two-fifths of the commission accruing on annual sales in the territory of your agency taken over by Imperial Chemical Industries (India) Limited, such commission to be computed at the commission rates formally paid to you. (2) In the third post-transfer year we shall pay you, in addition, a sum equivalent to the full commission on sales fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principal to the agency company makes the position clear. Therein it was stated : "With regard to the point you raise concerning the period during which you would undertake not to take any competitive agency, we would like you to understand that it was never our intention that you should be tied down on this point for all time. We had felt that the limiting period should be one of five years and we are pleased to note from your letter that this apparently is in accordance with your own ideas. It is suggested that the five years should date from the termination of the agency, namely, 1st April, 1948." The letter written by the assessee to the principal is not on the file. But it is clear from this letter that the restrictive covenant was one of the terms of the agreement relating to consideration. It was a part of the consideration that passed from the assessee for receiving the compensation. We cannot also agree with Mr. Viswanatha Sastri, who went to the other extreme and contended that the restrictive covenant was only an act of grace on the part of the agent and that it did not enter into the bargain. We, therefore, hold that the compensation agreed to be paid was not only i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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