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TMI Blog1964 (5) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... d by SHAH J.--The appellant is a public limited company, and has its registered office at Calcutta. By an agreement dated May 1, 1925, the Fort William Jute Company Ltd. appointed the appellant its managing agent upon certain terms and conditions set out therein. Under the agreement the appellant was to receive as managing agent remuneration at the rate of Rs. 3,000 per month, commission at the rate of ten per cent. on the profits of the company's working, additional commission at three per cent. on the cost price of all new machinery and stores purchased by the managing agent outside India on account of the company, and interest on all advances made by the managing agent to the company on the security of the company's stocks, raw materials and manufactured goods. The appellant and its successors in business, Whether under the same or any other style or firm, unless they resigned their office were entitled to continue as managing agent until they ceased to hold shares in the capital of the company of the aggregate nominal value of Rs. 1,00,000 and were on that account removed by a special resolution of the company passed at an extraordinary meeting of the company, or until the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1952, of all loans made by the appellant to the principal company ; (iii) M/s. Mugneeram Bangur and Co., to procure that the principal company will compensate the appellant for loss of office in the sum of Rs. 3,50,000, such sum being payable to the appellant after it submitted its resignation as managing agent ; and (iv) M/s. Mugneeram Bangur and Co., to reimburse the company the amount payable to the appellant. The reasons for which the appellant agreed to relinquish the managing agency were set out in a letter dated May 28, 1952, addressed by the appellant to the members of the company intimating that M/s. Mugneeram Bangur and Co. were willing to purchase the shares at the same rates at which they had agreed to purchase the shareholding of the appellant. It was recited in the letter that the installation of modern machinery in the company's factory entailed heavy capital expenditure and it was necessary to obtain a loan secured by debentures charged on the company's property ; that large sums were required for renewals and replacements of machinery and it was not possible to obtain additional bank accommodation ; that the appellant had made large advances to the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to income-tax as a revenue receipt. At the instance of the Commissioner of Income-tax, the Tribunal referred under section 66(1) of the Income-tax Act, 1922, the following question to the High Court of Judicature at Calcutta : " Whether on the facts and in the circumstances of the case the sum of Rs. 3,50,000 received by the assessee to relinquish the managing agency was a revenue receipt assessable under the Indian Income-tax Act ? " The High Court, for reasons which we will presently set out, answered the question in the affirmative. With certificate granted by the High Court, this appeal is preferred by the appellant. This case raises once again the question whether compensation received by an agent for premature determination of the contract of agency is a capital or a revenue receipt. The question is not capable of solution by the application of any single test : its solution must depend on a correct appraisal in their true perspective of all the relevant facts. As observed in Commissioner of Income-tax v. Rai Bahadur Jairam Valji by Venkatarama Aiyar J. : " The question whether a receipt is capital or income has frequently come up for determination before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt parting with its shareholding and submitting resignation of the managing agency so as to facilitate the appointment of M/s. Mugneeram Bangur and Co. as managing agent, the latter purchased the shareholding of the appellant, undertook to make available Rs. 3,50,000 for payment to the appellant and to discharge the debt due by the company to the appellant. Payment of Rs. 3,50,000, was therefore an integral part of an arrangement for transfer of managing agency. A managing agency of a company is in the nature of a capital asset ; that is not denied. It is true that it is not like an ordinary asset capable of being transferred from one person to another. Theoretically, the power to appoint or dismiss the managing agent may lie with the directors of the company, but in practice the power lies with the person or persons having a controlling interest in the shareholding of the company. M/s. Mugneeram Bangur and Co. were anxious to be appointed managing agents of the principal company ; and for that purpose the appellant had to be persuaded to agree to a premature termination of its agency. This was secured for a triple consideration : sale of shares held by the appellant at an agreed p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to agree with the High Court that the managing agency of the Fort William Jute Co. Ltd. was an asset of the character of stock-in-trade of the company. The appellant was formed with the object, among others, of acquiring managing agencies of companies and to carry on the business and to take part in the management, supervision or control of the business or operations of any other company, association, firm or person and to make profit out of it. That only authorised the appellant to acquire as a fixed asset, if a managing agency may be so described, and to exploit it for the purpose of profit. But there is no evidence that the company was formed for the purpose of acquiring and selling managing agencies and making profit by those transactions of sale and purchase. A managing agency is not an asset for which there is a market, for it depends upon the personal qualifications of the agent. Counsel appearing on behalf of the Commissioner conceded that the case that the managing agency was of the nature of stock-in-trade was not set up before the Tribunal, and he does not rely upon this part of the reasoning of the High Court in support of the plea that the compensation received by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffected. It would be difficult to regard such a transaction relating to a managing agency as a trading transaction. Counsel for the assessee contended that even assuming that the form of the transaction under which for loss of the managing agency the appellant received compensation from the principal company is decisive, or has even a dominant impact, and the ultimate source from which the compensation was provided is to be ignored, the compensation received for loss of agency by the agent must always be regarded under the Indian Income-tax Act as capital receipt. In support of that contention counsel placed strong reliance upon the judgment of the Judicial Committee in Commissioner of Income-tax v. Shaw Wallace and Co. In the alternative, counsel pleaded that even if the extreme proposition was not found acceptable, the right of the assessee in the managing agency of the principal company was to enure for another five years and which in the normal course would have continued for another twenty years was an enduring asset and consideration received by the appellant for extinction of that asset was a capital receipt. On behalf of the income-tax department it was contended that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urrendering the managing agency may be regarded as capital or as revenue. In the absence of a statutory rule, payment made by an employer in consideration of the employee releasing him from his obligations under a service or agency agreement or a payment made voluntarily as compensation for determination of right to office arises not out of employment, but from cessation of employment and may not generally constitute income chargeable under sections 10 and 12. It may be mentioned that this rule has been altered by the legislature by the enactment of section 10(5A) by the Finance Act of 1955, which provides that compensation or other payment due to or received by a managing agent of an Indian company at or in connection with the termination or modification of his managing agency agreement with the company, or by a manager of an Indian company at or in connection with the termination of his office or modification of the terms and conditions relating thereto, or by any person managing the whole or substantially the whole affairs of any other company in the taxable territories at or in connection with the termination of his office or the modification of the terms and conditions relatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioners of Inland Revenue money received by a shipowner from a firm of ship-builders to compensate for loss resulting from the failure by the latter to complete repairs to ship within the stipulated period was regarded as revenue. These cases illustrate the principle that compensation for injury to trading operations, arising from breach of contract or in consequence of exercise of sovereign rights, is revenue. These cases must, however, be distinguished from another class of cases where compensation is paid as a solatium for loss of office. Such compensation may be regarded as capital or revenue : it would be regarded as capital, if it is for loss of an asset of enduring value to the assessee, but not where payment is received in settlement of loss in a trading transaction. In Chibbett v. Joseph Robinson and Sons the assessees, who were shipmanagers employed by a steamship company under a contract which provided that they should be paid a percentage of the company's income, were paid compensation for loss of office in anticipation of liquidation of the steamship company. It was held that payment to make up for loss resulting from cessation of profits from employment w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a period upwards of sixteen years only two per cent. of the appellant company's income was derived from other managements, and on the liquidation of the shipping company the appellant company lost its entire business except for some abnormal and temporary business. It was held by the Court of Session in Scotland that the sum in question was not a trading receipt of the appellant company. Lord President Normand observed (page 411) : " In the present case virtually the whole assets of the appellant company consisted in this agreement. When the agreement was surrendered or abandoned practically nothing remained of the company's business. It was forced to reduce its staff and to transfer into other premises, and it really started a new trading life. Its trading existence as practised up to that time had ceased with the liquidation of the shipping company. " These cases establish the distinction between compensation for loss of a trading contract and solatium for loss of the source of income of the assessee. But payment of compensation for loss of office is not always regarded as capital receipt. Where compensation is payable under the terms of the contract which is determined, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r cancellation of the appellant company's future rights under the agreements, which constituted a capital asset of the company, and that it was a capital receipt. Lord Macmillan observed at page 25 : " Now what were the appellants giving up ? They gave up their whole rights under the agreements for thirteen years ahead. These agreements are called in the Stated Case 'pooling agreements' but that is a very inadequate description of them, for they did much more than merely embody a system of pooling and sharing profits. If the appellants were merely receiving in one sum down the aggregate of profits which they would otherwise have received over a series of years, the lump sum might be regarded as of the same nature as the ingredients of which it was composed. But even if a payment is measured by annual receipts, it is not necessarily itself an item of income. " Cases which have lately arisen before the courts in the United Kingdom have elaborated this distinction. In Commissioners of Inland Revenue v. Fleming and Co., the Court of Session held, following Kelsall Parsons and Co.'s case, that compensation paid to the assessee who carried on business as manufacturers' agent and ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Close Bros. Ltd. the respondent company carried on business of merchant bankers and of a finance and issuing house and derived income in the form of allowances for performing managerial and secretarial services. Following a dispute with one " S " for which the respondent company had agreed to provide secretarial services for three years at a remuneration of pound 8,000 per annum, the agreement was terminated within about 2 1/2 months from the date of its commencement. Pound 15,000 received by the respondent company as compensation for termination of the agreement was, held to be a trading receipt. Pennycuick J. held that the contract was one of a number of ordinary commercial contracts for rendering services by the assessee in the course of carrying on its trade, and, therefore, the sum received on the cancellation of the agreement was a receipt of a revenue nature. It is manifest that the principle, broadly stated in the earlier cases, that compensation for loss of office, or agency, must be regarded as a capital receipt has not been approved in later cases. An exception has been engrafted upon that principle that, where payment even if received for termination of an agency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hey acted as distributing agents in India for the Burma Oil Company and the Anglo-Persian Oil Company, but without a formal agreement with either company. The two oil companies having combined decided to make other arrangements for distributing their products. Each company terminated its contract with Shaw Wallace and Company and paid compensation to it, which aggregated to Rs. 15,25,000. This amount, subject to certain allowances, was sought to be assessed to income-tax under sections 10 and 12. The High Court of Calcutta held that the compensation received by the assessee was a capital receipt. In appeal to his Majesty-in-Council the decision of the High Court was affirmed. The Judicial Committee declined to seek inspiration from the English decisions cited at the Bar. The Board observed that the expression " income " which is not defined in the Act connotes a periodical monetary return coming in with some sort of regularity, or expected regularity, from definite sources : the source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business of the recipient, or involve loss of an enduring asset, leaving the taxpayer free to carry on his trade released from the contract which is cancelled, the receipt will be a trading receipt : where the cancellation of a contract of agency impairs the trading structure, or involves loss of an enduring asset, the amount paid for compensating the loss is capital. The view expressed by the Judicial Committee has not met with unqualified approval in later cases. Lord Wright in Raja Bahadur Kamakshya Narain Singh of Ramgarh v. Commissioner of Income-tax observed that it is incorrect to limit the true character of income, by such picturesque similies like " fruit of a different tree, or crop of a different field ". Again it cannot be said generally that compensation for every transfer or determination of a contract of agency is capital receipt : Kelsall Parsons and Co. v. Commissioners of Inland Revenue, Commissioners of Inland Revenue v. Fleming and Co., Wiseburgh v. Domville and Commissioner of Income-tax and Excess Profits Tax v. South India Pictures Ltd. Nor is it true to say that where an assessee holds several agency contracts each agency contract cannot without more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quarry, of a capital nature and could not be held to be a capital receipt on that account, the agreements were merely adjustments made in the ordinary course of business. There was in the view of the court no profit-making apparatus set up by the agreement of 1941, apart from the business which was to be carried on under it and there was at no time any agreement which operated as a bar to the carrying on of the business of the respondent and therefore the receipt of Rs. 2,50,000 was chargeable to tax. Venkatarama Aiyar J. observed, in an agency contract the actual business consists of dealings between the principal and his customers, and the work of the agent is only to bring about the 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 something outside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt received was a trading receipt. In South India Pictures Ltd.'s case, Rai Bahadur Jairam Valji's case and Peirce Leslie Co.'s case it was held that the receipt of compensation for loss of agency was in the nature of revenue. In the South India Pictures Ltd.'s case the amount received was not compensation for not carrying on its business, but was a sum paid in the ordinary course of business to adjust the relations between the assessee and the producers : the termination of the agreements did not radically or at all affect or alter the structure of the assessee's business, and the amount received by the assessee was only so received towards commission, i.e., as compensation for the loss of commission which it would have earned, had the agreements not been terminated. Therefore, the amount was not received by the assessee as the price of any capital assets sold or surrendered or destroyed, but the amount was simple received by the assessee in the course of its doing distributing agency business and therefore it was an income receipt. In that case the majority of the court held on three distinct grounds, viz : (i) that the assessee did not part with any capital asset ; (ii) that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the release of its rights to get higher remuneration and, therefore, a capital receipt. On an analysis of these cases which fall on two sides of the dividing line, a satisfactory measure of consistency in principle is disclosed. Where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue : Where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt. In the present case, on a review of all the circumstances, we have no doubt that what the assessee was paid was to compensate him for loss of a capital asset. It matters little whether the assessee did continue after the determination ..... 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