Agency termination compensation: revenue and capital components may be separately apportioned, with restrictive covenant consideration treated as capital.

SC held that compensation for termination of an agency is revenue in nature where the cancellation does not impair the assessee's trading structure or destroy a source of income, but is only an ordinary incident of a multi-agency business; that component was therefore taxable. It further held that consideration attributable to a post-termination restrictive covenant, operating independently of the business and preventing competition for a specified period, is a capital receipt and not taxable. Where one composite payment covers both elements, the amount may be severed and reasonably apportioned even without exact arithmetical segregation, so only the agency-loss component is brought to tax.

---

---

Issues: (i) Whether the compensation received on termination of the agency was a revenue receipt or a capital receipt. (ii) Whether the amount attributable to the restrictive covenant was a capital receipt not liable to tax. (iii) Whether the composite compensation was severable and apportionable between the two heads.

Issue (i): Whether the compensation received on termination of the agency was a revenue receipt or a capital receipt.

Analysis: The governing test is whether cancellation of the agency impaired the trading structure of the assessee or destroyed a source of income, or whether it was only a normal incident in the course of a multi-agency business. On the facts, the assessee carried on business in numerous lines and had taken many agencies; it did not establish that the terminated agency was a pivot of its profit-making apparatus or that the loss dislocated the business structure. The termination therefore fell within the ordinary commercial incidents of the business.

Conclusion: The compensation attributable to loss of the agency was a revenue receipt and assessable to tax.

Issue (ii): Whether the amount attributable to the restrictive covenant was a capital receipt not liable to tax.

Analysis: A restrictive covenant operating only after termination of the agency and being independent of the carrying on of the business is treated as consideration for surrender of a distinct right, not as trading income. The covenant here was an independent post-termination obligation not to compete in the same field for a specified period.

Conclusion: The amount attributable to the restrictive covenant was a capital receipt and not assessable to tax.

Issue (iii): Whether the composite compensation was severable and apportionable between the two heads.

Analysis: Where a single payment is referable to distinct matters, one revenue and the other capital, there is no principle barring reasonable apportionment. The absence of exact arithmetical segregation does not defeat the claim; the assessing authority may make a reasonable allocation on the material available.

Conclusion: The compensation was severable and had to be apportioned on a reasonable basis between the taxable agency-loss component and the non-taxable restrictive-covenant component.

Final Conclusion: Only the part of the compensation attributable to loss of the agency was taxable, while the part referable to the restrictive covenant was capital in nature; the assessment was therefore sustained only to that extent.

Ratio Decidendi: Compensation for termination of an agency is revenue if the agency loss does not impair the trading structure or source of income, but any distinct consideration for a post-termination restrictive covenant is capital, and a composite payment referring to both may be reasonably apportioned.

---