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TMI Blog1964 (5) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... elhi and Kanpur. The appellant carried on business in diverse lines, which may broadly be classified as : (1) buying and selling on its own account, (2) introducing customers to principals, (3) acting as managing agents, (4) acting as shipping agents, (5) acting as purchasing agents, (6) acting as sole importers and distributors on behalf of United Kingdom principals having no organisation in India and (7) acting as secretaries. Since January 21, 1886, M/s. Gillanders Arbuthnot and Co., predecessors-in-interest of the appellant, were the sole agents and distributors in India of explosives manufactured by the Imperial Chemical Industries (Export) Ltd., Glasgow, Scotland, hereinafter called " the principal company ". There was no written agreement between the principal company and M/s. Gillanders Arbuthnot and Co., incorporating the terms of the agency agreement. It is however common ground that the agency agreement was terminable at the option of the principal company. The appellant was incorporated for taking over the business of M/s. Gillanders Arbuthnot and Co., and since it took over the distributing agency the appellant acted as the sole agent and distributor of explosives m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he following amounts from the principal company : For the previous year corresponding to the assessment year ending 31st March, 1949. ......... Rs. 1,53,471-11-0 For the previous year corresponding to the assessment year ending 31st March, 1950. ......... Rs. 1,59,271 -4-0 For the previous year corresponding to the assessment year ending 31st March, 1951. ......... Rs. 6,20,131 -2-0 These amounts were included in its profit and loss account by the appellant as commission received by it. But in the course of the proceedings for assessment to income-tax and business profits tax, the appellant claimed that the amounts were compensation received on determination of the agency, being receipts of a capital nature, and were not liable to be included in the total income of the appellant. The Income-tax Officer, Companies District IV, Calcutta, rejected the contention of the appellant, holding that cancellation of a single contract of agency out of a number of selling agencies held by the appellant was in the ordinary course of business and the sums received by the appellant as compensation for cancellation were revenue, taxable under the Indian Income-tax Act, 1922. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and as such no part of the money was in the nature of capital being exempt from Indian income-tax levy ? " The High Court recorded answers to the questions as follows : " Question 1.--The assessee's agency of the Imperial Chemical Industries (Export) Ltd. was not a separate business by itself and the closure of this business did not result in the destruction of a capital asset of the assessee. Question 2.--The amounts of compensation received by the assessee from the Imperial Chemical Industries (Export) Ltd. were income chargeable in the hands of the assessee. Question 3.--No part of the compensation money was received by the assessee on condition not to carry on a competitive business in explosives and consequently no part thereof was exempt from Indian income-tax levy." With certificate of fitness granted by the High Court, these appeals have been preferred by the appellant. The principal question in dispute is whether the amounts received by the appellant as compensation for loss of agency are of the nature of capital or revenue. It is necessary in the first instance to eliminate two subsidiary contentions raised by the appellant. It was urged that the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings before the revenue authorities, it would be reasonable to hold that the appellant did not place any reliance upon the case that part of the compensation was attributable to an undertaking not to engage in competitive business. No part of the compensation may be attributed to loss of goodwill suffered by the appellant. It is true that the agency had continued in the hands of the predecessors of the appellant and thereafter with the appellant for upwards of sixty years. It was urged that an extensive market had been built up in India and the goodwill of that business was on termination of the appellant's agency taken over by the new agents of the principal company and compensation paid in that behalf must be regarded as capital. But this question also was never raised before the revenue authorities, nor even before the Tribunal. The Tribunal observed that it had not been supplied with any material regarding the basis of the value of the goodwill, " nor anything to indicate as to what the written down value of the goodwill was, due to the termination of the agency ". It therefore held that the inference sought to be drawn by the appellant that compensation was referable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 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." Examining the circumstances of the present case in the light of that principle, we agree with the High Court that what was received by the appellant was income and not capital. Compensation received by the appellant was for cancellation of the agency which was terminable at will. The appellant was to be paid an amount which was to be computed on the basis of the profits of the business. Under the letter dated March 11, 1947, the appellant was to be paid " for the first three post-transfer years " two-fifths of the commission accrued on actual sales in the territory of the appellant's agency taken over by the Imperial Chemical Industries (India) Ltd., such commission to be computed at the rates of commission formerly paid to the appellant, and that in " the third post-transfer year " the principal company was to pay the appellant in addition a sum equivalent to full commission on the sales for that year effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eum, kerosene oil, timber and similar other commodities. It is true that explosives would require great care in handling. It appears, however, that eighty per cent. of the staff attached to the magazine section was maintained not at the expense of the appellant, but at the expense of the principal company. Out of the officers who were attached to the explosives business, services of five officers were taken over by the principal company and six others were retained by the appellant and absorbed in other branches. It cannot, therefore, be said that termination of the agency resulted in impairment of the trading organization of the appellant. One of the agencies was undoubtedly lost to the appellant, and even temporary dislocation in the organisation of the business thereby may be assumed. There is no evidence, however, that the appellant could not in the ordinary course of business repair the dislocation. There is no evidence that it could not obtain an agency from another manufacturer of explosives. Even assuming that such an agency in explosives may not be replaced, that circumstance by itself may not justify the inference that the agency was independent of the other lines of busi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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