Revenue versus capital treatment: payment for relinquishing a managing agency treated as a trading receipt and taxable.

Payment received on relinquishing a managing agency was characterised as a revenue (trading) receipt because the managing agency rights were acquired, held and dealt with in the ordinary course of the assessee's business. The HC applied tests from Indian and English authorities: whether the contract/right was part of the taxpayer's trading assets and whether the payment merely sterilised a capital profit-making apparatus. Finding the payment formed part of an integrated commercial transaction involving sale of shareholdings, loan repayments and resignations, and did not materially impair the profit-making apparatus, the amount was held assessable as a revenue receipt under the Income-tax Act.

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Issues: Whether the sum of Rs. 3,50,000 received by the assessee on relinquishing a managing agency was a revenue receipt assessable under the Income-tax Act.

Analysis: The Court examined the character of the transaction on its facts, noting that the assessee's principal and declared business was carrying on managing agencies and that it held multiple managing agencies. The managing agency agreement and the agreement of sale showed the payment was part of an integrated commercial scheme involving sale of shareholdings, repayment of large loans and procurement of resignation to effect the transfer. The Court applied established tests from Indian and English authorities: whether the contract or right was acquired or held as part of the ordinary course of the taxpayer's business so that compensation for its termination is a trading receipt, and whether the payment amounted to price for sterilising or destroying a capital profit-making apparatus. On the facts the managing agency was dealt with in the ordinary course of the assessee's business (a trade of acquiring and dealing in managing agencies), the receipt formed part of that commercial transaction and did not materially impair the assessee's profit-making apparatus. The Court therefore treated the amount as a revenue/trading receipt assessable under the Income-tax Act.

Conclusion: The sum of Rs. 3,50,000 was a revenue receipt assessable to tax; decision is in favour of the Revenue.

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