Colourable termination of agency treated as revenue receipt where business activity continued in substance.

Compensation received on a purported termination of managing agency was held to be a revenue receipt where the arrangement was found to be collusive and colourable. Because the controlling interests continued through a newly formed company, there was no real destruction or sterilisation of the profit-making apparatus and no genuine loss of office. The authorities were entitled to look beyond legal form to the substance of the transaction, especially where the structure was designed to evade tax. The amount was therefore taxable as business income, and the assessment was sustained.

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Issues: Whether the sum of Rs. 2,00,000 received on termination of the managing agency was a revenue receipt taxable as business income, or a capital receipt on loss of office.

Analysis: The receipt arose out of a collusive and colourable arrangement by which the managing agency was purportedly terminated while the same controlling interests continued to benefit through a newly formed company. The finding was that there was no real destruction or sterilisation of the profit-making apparatus and no genuine loss of office. In such circumstances, the tax authorities and the Court were entitled to look beyond the legal form and examine the real substance of the transaction, especially where the arrangement was designed to evade tax.

Conclusion: The amount was correctly treated as a revenue receipt and was taxable in the assessee's hands.

Final Conclusion: The appeals failed, and the assessment treating the compensation as taxable business income was sustained.

Ratio Decidendi: Where a purported termination of an agency is found to be a sham or colourable device and the underlying profit-making activity is effectively continued, compensation received on such termination is a revenue receipt taxable as business income, and the corporate form may be disregarded to ascertain the real transaction.

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