Compensation for curtailment of agency treated as capital receipt when it sterilises fixed capital, not future commission.

Compensation received for curtailment or cancellation of an agency was treated as a capital receipt where the agency formed part of the assessee's fixed capital or profit-making apparatus. The majority held that the payment was made for sterilisation of that capital asset, not as a substitute for future commission or trading profits, and that the receipt's character depended on the nature of the asset affected rather than the terminable nature of the arrangement. The fact that the assessee retained the agency in the remaining territory did not change the capital character of the compensation. The dissent viewed the reduction as only affecting the area of distribution and therefore as revenue.

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Issues: Whether the amount received as compensation on restriction or termination of the agency outside Hyderabad State was a capital receipt or a revenue receipt.

Analysis: The agency right was treated by the majority as part of the assessee's fixed capital and profit-making apparatus, not as stock-in-trade or a trading contract entered into in the ordinary course of business. The compensation was paid for the sterilisation pro tanto of that capital asset when the distributorship territory was reduced, and not merely as a substitute for future commission. Applying the distinction between fixed capital and circulating capital, the majority held that the true character of the receipt depended on the nature of the asset affected and not on whether the arrangement was terminable at will. The fact that the assessee retained the agency within Hyderabad did not alter the capital character of the receipt for the territorial curtailment.

Conclusion: The amount was a capital receipt and not taxable as income; the answer was in favour of the assessee.

Dissenting Opinion: Kapur, J. held that the termination only reduced the area of distribution and did not destroy or materially cripple the assessee's profit-making structure. On that view, the compensation was merely a surrogate for future commission and was a revenue receipt.

Ratio Decidendi: Compensation received for the cancellation or curtailment of an agency is a capital receipt where the agency forms part of the assessee's fixed capital or profit-making apparatus and the payment is for sterilisation of that asset, rather than for loss of trading profits or commission.

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