Compensation for cancellation of managing agency treated as revenue receipt where business source remained intact.

Compensation received for premature cancellation of a profitable managing agency was treated as a revenue receipt where the assessee's business consisted largely of managing agencies and the termination did not impair its trading structure or destroy its source of income. The payment was calculated by reference to expected profits and operated as a substitute for future earnings, so the cancellation was regarded as a normal incident of the business rather than sterilisation of a capital asset. The amount was therefore assessable to income-tax as revenue income.

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Issues: Whether the sum of Rs. 18 lakhs received on termination of the managing agency was a revenue receipt assessable to income-tax, or a capital receipt not liable to tax.

Analysis: The receipt arose from premature cancellation of a profitable managing agency held by the assessee, whose business consisted largely of carrying on managing agencies and who had several other agencies. The managing agency termination did not impair the assessee's trading structure or destroy its source of income. The payment was calculated with reference to expected profits and functioned as a substitute for future earnings. On the facts, the cancellation was treated as a normal incident of the assessee's business and not as a sterilisation of a capital asset.

Conclusion: The sum of Rs. 18 lakhs was held to be a revenue receipt and assessable to income-tax.

Ratio Decidendi: Compensation for cancellation of an agency is revenue if, on the facts, the cancellation does not destroy the assessee's source of income or impair its trading structure and the payment is in substance a substitute for future profits.

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