Capital receipt on agency termination where cancellation destroys a source of income and impairs the business structure.

Compensation received on cancellation of a managing agency is capital receipt where the termination destroys a source of income or impairs the profit-making apparatus; it is revenue only if the termination is a normal incident of trading and leaves the business structure intact. The Court applied the Tribunal's factual findings, which were not open to reappreciation, and treated the agency as a genuine source of income for the assessee. On those findings, the receipt arose from loss of a source of income, so it was not assessable as revenue income and was treated as a capital receipt.

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Issues: Whether the sum received on termination of the managing agency was a capital receipt or a revenue receipt liable to tax.

Analysis: The reference had to be answered on the facts found by the Tribunal, which were not open to reappreciation by the High Court. On those findings, the agency termination was a genuine business transaction and the managing agency constituted a source of income for the assessee. The governing principle is that compensation for cancellation of an agency is revenue where the termination does not impair the trading structure or destroy the source of income, but is capital where the cancellation results in destruction of a source of income or impairment of the profit-making apparatus. Applying that test, the receipt arose from loss of a source of income and not from a mere incident of trading.

Conclusion: The receipt was a capital receipt and not assessable as revenue income, in favour of the assessee.

Ratio Decidendi: Compensation for cancellation of an agency is a capital receipt when the termination destroys a source of income or impairs the trading structure of the business; it is revenue only where the termination is a normal incident of the business and leaves the profit-making apparatus intact.

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