TaxTMI 
TaxTMI 
1962 (12) TMI 57
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....emarcated a territory for the firm, undertaking to sell and deliver electric bulbs therein exclusively to the firm. By a letter which formed an annexure to the agreement the company agreed to sell electric bulbs to the firm at ex-warehouse prices subject to a commission of 12 1/2% on the gross invoice amount and the firm was allowed a further discount of 2% on the net invoice prices to cover breakage or fault in manufacture. It was further agreed that if the company sold any goods directly to the buyers in the territory the company would pay to the firm compensation amounting to 5% of the net amount of invoices covering such sales. The firm on its part undertook to sell only Philips bulbs in the territory and to prevent re-exportation of the bulbs by third parties. In addition to other conditions to which we need not refer at this stage there was a clause for termination of the agreement. The clause provided that the agreement would be deemed to have been made as from July 1, 1938, and would continue unless determined by either party by giving to the other party three months prior notice by registered letter of such party's intention to determine the agreement on the 30th of June, ....
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....oon as possible in order to avoid that Messrs. Precious' capital might unnecessarily be tied up. In order to achieve this, the available goods will be classified in three categories, viz : (i) Easily saleable goods. (ii) Goods which require some sales efforts, which means that they might be disposed of in a period of four to six weeks. (iii) Slow moving items which will be taken over by Bombay branch. The goods mentioned under (iii) above will be taken over by Messrs. Philips at the original invoice price if not otherwise decided due to deterioration of the goods whilst a deduction is valid for cost incurred for transfer." The following minutes, headed "Miscellaneous", were at the end and read : MISCELLANEOUS :As a gesture of good will, Messrs. Philips are prepared to pay in quarterly instalments to each of the three partners during a period of three years, Rs. 40,000 per annum from the date of the expiry of the existing contract. The three partners referred to above as far as Messrs. Philips Electrical Co. understand are : 1. Mr. Pirojsha H. Divecha. 2. Mr. Khurshedj A. Irani. 3. Mr. Noshir J. Irani. Finally, Mr. Van Rhijn stated that Messrs. Philips are quite willing to....
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....xable receipt, being receipt arising from business, section 4(3)(iii) does not exempt it from liability to tax. We are in the view we have taken not called upon consider whether even if the receipt of Rs. 20,000 is a capital receipt, by operation of section 10(5A)(d) the amount can be regarded as a revenue receipt. We answer the second question as follows : It is liable to be included in the total income notwithstanding section 4 because it arose from because." The third question was left unanswered. The High Court certified the case fit for appeal and hence this appeal. The High Court in reaching its conclusion examined the agreement of 1938 and came to the conclusion that thought it involved a "monopoly purchase" and gave to the firm an exclusive right to sell Philips bulbs in the assigned territory, it was no more than a trading agreement which did not constitute a trading asset. By the loss of this monopoly right, the High Court went on to say , the business of the firm was not destroyed because even after the termination of the agreement the firm was entitled to carry on the business of selling electric bulbs as a "regular lamp dealer". According to the High Court the agree....
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....rminated, he continued, it was not a premature termination but the expectancy was that it was to run unless terminated and the compensation which was paid though described as remuneration was, in a business sense, merely compensation for the loss of those rights which the firm had enjoyed and which it excepted to enjoy in the feature of the agreement was not terminated. In the alternative, Mr. Viswanatha Sastri contends that even if the amount could not be referable to a loss of a capital asset it was not referable to any future services to be rendered by the assesses who had by the termination of the agreement become ordinary dealers in bulbs like any other dealer in the same territory. Nor was it referable to any past service but was a payment ex gratia out of appreciation of the personal qualities of the partners whose services in the past were fully remunerated. In other words, this was an ad hoc payment in the nature of a "testimonial" as it is sometimes described or as a "solatium", by which term the Privy Counsel described the payment in Commissioner of Income-tax v. Shaw Wallace & Co. (1932) l. R. 59 I. A. 206 ; [1932] 2 Comp. Cas. 276 Mr. K. N. Rajagopal Sastri on behalf....
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....es and Berar, and in the second part "all lamps for electrical lighting purposes" of certain kinds (compendiously called "Philip lamps") were said to be covered by the agreement. Clause 2 was also divided into two parts. The first part said that the company undertook to sell and/or to deliver Philips lamps exclusively to the firm in the territory, the second part provided that should any buyer refuse to purchase from the firm, the company would make the supply direct but pay five per cent. compensation over the net amount of invoices covered in such orders to the firm. Clause 3 recited the terms accepted by the firm. This clause was also divided into two parts. The first part bond the firm to sell in the territory only such Philip lamps as were supplied to it by the company. The second part bound it to prevent re-export of the lamps by third parties as far as possible. By clause 4 the firm bound itself to observe clause 3 in respect of such lamps as might remain undisposed of with the firm after the termination of the agreement. Clause 5 reserved to the company the right to alter the prices, rate of discount and conditions of sale without notice to the firm even in respect of unexe....
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....etermining whether this payment amounts to a return for loss of a capital asset or is income, profits or gains liable to income-tax, one must have regard to the nature and quality of the payment. If the payment was not received to compensate for a loss profits of business, the receipt in the hands of the appellant cannot properly be described as income, profits or gains as commonly understood. To constitute income, profits or gains the must be a source from which the particular receipt has arisen, and a connection must exist between the quality of the receipt and the source. If the payment is by another person it must be found out why that payment has been made. It is not the motive of the person who pays that is relevant. More relevance attaches to the nature of the receipt in the hands of the person who receives it though in trying to find out the quality of the receipt one may have to examine the motive out of which the payment was made. It may also be stated as a general rule that the fact that the amount involved was large or that it was periodic in character have no decisive bearing upon the matter. A payment may even be described as "pay", "remuneration", etc., but that does....
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.... to paid. Even if it had been there would have been no inference in law. But in the absence of any proof that this was the likely profits it is difficult to say that the payment replaced those profits. Another way of looking at the matter is to consider whether the agreement was a trading agreement or something which was in the nature of an asset in the hands of the firm. In this connection the department relies strongly upon the case of Bush, Beach and Gent Ltd. v. Road (1939) 22 Tax Cas. 519. In that case the agreement was different. No doubt by that agreement also a territory was reserved and a monopoly was created but that agreement was to last for four years was prematurely terminated at the end of two years. Under that agreement a minimum quality of chemicals had to be bought and if the buyers failed to exercise their option to take up the minimum quality in any one year, the contract itself was to be considered as terminated without any further option. The assessees in that case were industrial chemists till 1933 and by the agreement had offered to buy agricultural chemicals and had set up, as a result of the agreement, a special organisation for selling agricultural chemis....
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....ly have earned or are going to earn a profit. Those profits are relating to this sum. The profits are not destroyed. It is the profits which we are concerned with, not the contract itself." On the other side there is the leading case of Van den Berghs Ltd. v. Clark ) [1935] 3 I. T. R. (Eng. Cas) 17 ; (1935) 19 Tax Cas. 390, where mutual trading agreements between two companies were rescinded and one of the companies was paid GBP 450,000 as "damages". This was treated as a capital receipt and not an income receipt to be included in computing the profits of the trade under Schedule D, Case 1, of the Income Tax Act, 1918. Lord Macmillan described the payments as follows : "On the contrary, the cancelled agreements related to the whole structure of the appellants profit-making apparatus. They regulated the appellants' activities, defined what they might and what might not do, and affected the whole conduct of their business. I have difficulty is seeing how money laid out to secure, or money received for the cancellation of, so fundamental an organisation of a trader's activities can be regarded as an income distributed or an income receipt." The agreement in our case was not an agre....
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....ces rendered or likely to be rendered, The services in the past were amply remunerated. The payment does not contemplate that the agreement in the past had not been sufficiently remunerative to the firm. It does not pretended to pay them for past services. The minutes do not show that any services in the future was expected from these appellants. What remained to be done was to wind up the business with regard to the agreement of 1938 itself. For this purpose, the company agreed to give all facilities to the firm in respect of easily saleable articles and to make over those which required a longer duration to sell. The only service, if services it can be called, was that the firm was to hand over to the company a list of customers and the supplies made to them during the past six months. It cannot be said that for this service the payment was made. The payment was thus not related to any services in the past or in the future. Both side have relied upon cases in which certain payments were held to be taxable or not taxable according as the facts in those cases suggested that the payment was for some services in the past or future or was entirely gratuitous. No useful purpose will be....