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TMI Blog1989 (8) TMI 100X X X X Extracts X X X X X X X X Extracts X X X X ..... 1967 which was to run for a period of five years. 11. The agreement of 1967 was to end on 9-2-1972. Before that, MICO had taken a policy decision to establish its own sales house in Delhi on pattern similar to that existed in Southern region. For reasons MICO did not desire to take over the territories formerly operated through GEC overnight. The take over was to be completed in a phased manner. On January 28, 1972, MICO addressed a letter to GEC specifying the pattern of take over. 12. As per protocol dated 28-1-1972, the Northern region for which GEC was the sole distributor comprised of Delhi, parts of Uttar Pradesh, Madhya Pradesh, Rajasthan, Punjab Haryana. They were divided into three parts. The 1st part was to be taken over for direct sales operation from February, 1972 as first phase. Under phase 2, few other parts of Northern region would be taken over by MICO from February, 1977. Under the 3rd phase, all the remaining parts of Northern region would come under MICO's direct sales control thereby ending the distribution system through GEC. A map specifying the areas to be taken over under the three stages was furnished. Delhi, Ghaziabad and other places were in the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effect was passed accepting the proposal made by the executive members. As per the Board's decision, the first payment had been made in 1977 and for the balance a provision was made on the basis of accrued liability arising out of the contract. MICO treated in its accounts Rs. 99 lakhs as a revenue payment. 15. The main reason for the assessing officer to challenge the propriety of treating the payment as a charge on revenue was that the payment was voluntary or exgratia, not motivated by business consideration. He also held that the payment, even if it was in pursuance of a legal obligation, should be on capital account. The Commissioner of Income-tax (Appeals) held that MICO was not obliged to renew the agreement after 9-2-1972 as per protocol dated 28-1-1972 inasmuch as it had been rendered ineffective in view of clause 13 of the agreement dated 10-2-1972. He held that GEC had no right against MICO and that the payment of Rs. 99 lakhs agreed to be made was ex-gratia and he agreed with the assessing officer that the payment was voluntary and motivated by considerations other than business. He also upheld the alternative ground of disallowance on the premise that the expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e surrounding circumstances. A certain situation had come to exist by the letter dated 28-1-1972 addressed by MICO to GEC which the latter had accepted. If the parties really intended to follow the policy set out in this protocol, then that contract is not to be thwarted by placing a narrow interpretation on clause 13 of the agreement dated 20-2-1972. Where there remains a doubt as to the true reading of a clause in a document, extrinsic evidence is certainly permitted to ascertain the real effect. Even evidence of acts done under that is a guide to the intention of the parties -- See Abdulla Ahmed v. Animendra Kissen Mitter AIR 1950 SC 15 and Union of India v. D.N. Revri Co. AIR 1976 SC 2257. The Commissioner (Appeals), we are convinced, was in error in restricting his vision to reading of clause 13 only. 18. The earlier agreement of 1967 was to come to an end on 9-2-1972. Before that, MICO was seriously engaged in the matter of taking over the distributive side of business from GEC as a policy measure. It is only in that context MICO addressed GEC on 28-1-1972, whereby the scheme of take over was proposed. The steps of taking over were clearly set out. From the very nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... newal of the dealership. The immediate conduct of the parties after 9-2-1972 gives a true indication that each side expected the other to respect the protocol dated 28-1-1972. We shall advert to certain circumstances which sheds certain light. 20. MICO had to obtain a loan from financial institutions and a copy of the agreement pertaining to dealership had to be furnished to them. In the loan agreement to be made, an incorporation referring to dealership agreement with GEC was necessary. The relevant adoption was intimated to GEC by addressing a letter to its Managing Director on 7-12-1972. In this letter (copy of it is at page 47 of the compilation), MICO affirms that it would try to do its utmost to abide by the indications given in their letter dated 28-1-1972. 21. GEC, in its letter dated August 25, 1973, refers to the obligation on the part of MICO under the protocol dated 28-1-1972. Again, on 1-9-1973, MICO in its letter addressed to GEC, says that the former had no intention whatsoever from deviating from the commitment made by it in the letter dated 28-1-1972. MICO affirms that the original policy of take over is not disturbed notwithstanding its relationship with the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties after the agreement which may more eloquently speak on the disputed question. This is precisely the principle explained by the Supreme Court in Abdulla Ahmed's case and D.N. Revri Co.'s case. 23. The parties had to mould the agreement to accord with the requirement of law. Notwithstanding such indentures, the parties had always the clear understanding to respect the terms set out in the protocol dated 28-1-1972. GEC had emphasised this position in its letter to MICO dated June 11, 1976. This fact is also clear from the several telex messages exchanged between the parties in 1976. 24. The need to take over the entire Northern region in 1977 itself, instead of going through the stages covering phases 2 3 as per protocol dated 28-1-1972, emerged pressingly. Territorial restrictions could not be applied to sole selling agents like GEC in view of the provisions of MRTP Act. GEC was in a way free to sell anywhere in India the products of MICO. With the sales-tax concession available in Delhi, the distributor in Delhi had an edge over those in the adjoining States and the advantage GEC had in its business operation in Delhi was such that there was a tremendous increase in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge 67 of the compilation). So, the commercial expediency was to pay some compensation at least in recognition of a possible right which GEC might have tried to enforce against MICO. In the face of several correspondence between the parties after 10-2-1972, it is not easy to say that MICO had an absolute right in the matter of granting or not granting dealership rights to GEC in regard to Delhi and other places. This is a clear pointer indicative of commercial expediency in the matter of paying compensation to GEC for ending their distribution agency instead of in phased programme as per protocol dated 28-1-1972. 26. We have, been referred to number of authorities by Shri Dastur. In the case of CIT v. Ashok Leyland Ltd. [1972] 86 ITR 549 (SC), compensation paid for termination of managing agency was held to be an allowable deduction in computing the profits by the Supreme Court. So, too, in the case of J.K. Cotton Mfrs. Ltd. v. CIT [1975] 101 ITR 221 (SC). An amount paid for termination of agency, intended to ensure smooth transition without interference by agents, was considered to be in the business interest of the assessee by the Bombay High Court in the case of CIT v. Glaxo La ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to which both sides had agreed. This agreement of 1972 was only in regard to distribution in regard to phase 2 particularly in the context of section 294 of the Companies Act, and the parties did have in their mind that phase 3 was still to be gone through after 1977 to make the take over hundred per cent. In this setting, the Board of Directors were of the view that accelerating the take over by five years was commercially a good proposition and beneficial to the company to its greatest advantage since distributors in Delhi enjoyed sales-tax advantage as much as 17% compared to others in the neighbouring States and the distributors in Delhi were in a position to compete at a tremendous advantage over the distributors in the neighbouring States. This problem was first realised in 1976 or thereabouts. At the same time, MICO, because of the long association it had with GEC, wanted to ensure peace and avoid litigation at all costs and desired the change over to be a smooth affair. We have already noticed how MICO also needed certain assistance or help from GEC, when the former was to set up its own sales house in Delhi. The compensation paid to GEC in such circumstances to facilitate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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