TaxTMI 
TaxTMI 
1972 (3) TMI 23
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....o. Ltd. transferred their business from the assessee to M/s. Duncan Bros. Ltd. The assessee filed a suit in the Calcutta High Court against M/s. Duncan Bros. Ltd. and Mr. Gardner (being Suit No. 1687 of 1953), claiming a sum of Rs. 6 lakhs as damgaes under the following heads : Rs. (1) Damages for loss of service of Mr. Gardner 51,000 (2) Expenses incurred by the assessee for Mr. Gardner 49,000 (3) General damages arising from loss of business 1,50,000 (4) Special damages resulting from the transfer of business from Messrs. Joseph Tetley & Co. Ltd. 3,50,000 ------------------------------ Rs. 6,00,000 ------------------------------ On the 28th of February, 1955, a consent decree was passed and the material portion of the decree provides: " It is ordered and decreed that the defendants (i.e., Robert, Tomson Turner and Duncan Bros. & Co. Ltd.) do pay to the plaintiff (i.e., the assessee) a sum of Rs. 50,000 in full satisfaction of its claim and costs of this suit and it is further ordered and decreed that the plaintiff-company do retain the sum of Rs. 5,000 or any other sum already paid or held by the attorneys for the defendants. And it is further ordered and decreed that....
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....ade less profit than if a man of his qualification and experience were functioning in the administration of the assessee. The case can be compared to the receipt of insurance moneys by a business man for loss of profits insurance or insurance moneys received to cover the employer against revenue loss which he suffered by being deprived of the services of the experienced and valuable employees. The sum of Rs. 50,000 is, therefore, added to the profit shown by the assessee in his return." It may be noted that at the time of passing of the consent decree no judgment was delivered and the judgment referred to by the Income-tax Officer is the judgment of the Hon'ble Mr. Justice P. B. Mukharji on an interlocutory application for injunction. The said judgment does not form a part of the records. Against the order of the Income-tax Officer the assessee preferred an appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the amount of Rs. 50,000 was taxable under section 10(5A) of the Indian Income-tax Act, 1922, as the assessee described itself as the sole buying agent of M/s. Joseph Tetley & Co. Ltd. of London and in the opinion of the Appellate Ass....
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....llant to the Income-tax Officer which reads as follows: 'We do business with M/s. Joseph Tetley & CO. Ltd., London, as sole buying agent of tea on commission'. On the strength of this letter my predecessor held that the appellant were the buying agents of M/s. J. T. & Co. from whom the commission was being earned by them and for loss of their agency they received a compensation of Rs. 50,000. The fallacy in this conclusion lies in the fact that the amount of Rs. 50,000 was not received by the appellant from M/s. Joseph Tetley & Co. Ltd. If it was only receipt from that company then only it could be said that it was compensation for the loss of agency. The amount was admittedly received from M/s. Duncan Bros. for certain damages discussed later in this order and, therefore, the amount cannot be made taxable under section 10(5A) of the Act." The Appellate Assistant Commissioner, however, negatived the contention of the assessee that the said amount was not a trading receipt of the assessee and could not be included in its profits. For reasons stated in his order the Appellate Assistant Commissioner held that the said sum of Rs. 50,000 was a trading receipt of the company and was rig....
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.... the assessee's business and even if the amount of Rs. 50,000 was considered to be a receipt for the loss of such business it would not affect the capital structure of the assessee-company and would, therefore, go towards its trading receipts. On behalf of the assessee it was contended before the Tribunal that when Mr. Gardner left the service of the assessee and joined M/s . Duncan Bros. Ltd. he could influence M/s. Joseph Tetley & Co. Ltd. and transfer the customer to M/s. Duncan Bros. and the action was brought against Duncan Bros. for damages for seducing Mr. Gardner from the assessee's employment and inducing M/s. Joseph Tetley & Co. Ltd. to sever the business connection with the assessee; and the assessee's claim was two-fold-(i) loss for the wrongful deprivation of the service of Mr. Gardner, and (ii) loss for the deprivation of the business of M/s. Joseph Tetley & Co. Ltd. The assessee had urged before the Tribunal that the amount received in satisfaction of the assessee's claim could not be held to be trading receipt of the assessee as the payment was in relation to the damages caused to the assessee's business structure and not to any apprehended loss or the carrying on o....
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..... Ltd. was a capital receipt and was not assessable as the assessee's business profits either under section 10 or under section 10(5A)(d) of the Indian Income-tax Act, 1922 ?" Mr. B. L. Pal, learned counsel for the revenue, has submitted that in the facts of the instant case, the provisions of section 10(5A)(d) apply. The material provisions of section 10(5A)(d) are : " Any compensation or other payment due to or received by any person, by whatever name called, holding an agency in the taxable territories for any part of the activities relating to the business of any other person at or in connection with the termination of its agency or the modification of the terms and conditions relating thereto, shall be deemed to be profits and gains of a business carried on by such person and shall be liable to tax accordingly." Mr. Pal has argued that the assessee acted as the sole buying agent of Joseph Tetley & Co. Ltd. and the said agency of the assessee had terminated inasmuch as the business had been transferred from the assessee to M/s. Duncan Bros. Ltd. and the amount that the assessee recovered by way of damages in the suit on the basis of consent decree is nothing but compensation....
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....ny wrongful breach of contract of agency or did not implead the said party in the suit filed by the assessee against Mr. Gardner and M/s. Duncan Bros. Ltd. and had not also made any claim for damages for any wrongful termination of the assessee's agency, to my mind, goes to indicate that the assessee was not holding any agency. It is to be noted that the basis of the suit filed by the assessee was not any claim for damages for wrongful termination of any agency but for damages for loss of service of Mr. Gardner and for wrongful seduction of the assessee's custom of M/s. Joseph Tetley & Co. Ltd. to Duncan Bros. Ltd. As the basic requirement of holding an agency is not established, the provisions of section 10(5A)(d) cannot have any application. Further, the nature of the claim made in the suit and the payment received by the assessee on the basis of the consent decree in the said suit do not establish that the said payment was received by the assessee at or in connection with the termination of any agency, even if it could be held that the assessee was holding any agency of M/s. Joseph Tetley & Co. Ltd. The amount received by the assessee cannot, therefore, be considered to be profi....
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....idered, in the facts of the instant case, to be a capital receipt of the assessee. It is the contention of Mr. Pal that the facts found by the Tribunal clearly show that the assessee was acting as tea brokers and buying agents of tea for foreign buyers and one of such foreign buyers was M/s. Joseph Tetley & Co. Ltd. Mr. Pal submits that in view of the above fact, it cannot be said that the injury which the assessee suffered for loss of custom of Joseph Tetley & Co. Ltd. who happened to be only one of its many foreign customers, affected the capital structure of the company and was inflicted on the capital assets of the trade of the company making a hole in them. Mr. Pal, in this connection, has referred to the decision of the Supreme Court in the case of Gillanders Arbuthnot & Co, Ltd. v. Commissioner of Income-tax. In the instant case the claim of the assessee in the suit filed by it against Mr. Gardner and M/s. Duncan Bros. Ltd. was for damages for wrongful act done by them in consequence whereof the assessee suffered loss, including the loss of custom as of M/s. Joseph Tetley & Co. Ltd. In the suit the assessee has based its claim under 4 heads, viz.: (1) damages for loss of s....
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....e earlier, the facts of the present case do not establish that the assessee was holding any agency of M/s. Joseph Tetley & Co. Ltd. and that the sum paid to the assessee on the basis of the consent decree was a payment for termination of any such agency. The assessee undoubtedly lost the custom of Joseph Tetley & Co. Ltd. which happened to be one of its many foreign customers. Even if the said sum of Rs.50,000 could be said to have been received by the assessee in its entirety as compensation for loss of such custom, the question will still remain whether the loss of custom by the assessee of Joseph Tetley & Co. Ltd. affects any capital asset or the capital structure of the assessee. In the case of Gillanders Arbuthnot & Co. Ltd. v. Commissioner of Income-tax, the Supreme Court observed, in dealing with the question of receipt of compensation for cancellation of an agency, held that there was no immutable principle that compensation received on cancellation of an agency must always be regarded as capital. The Supreme Court observed at pages 289-290: "The appellant was conducting business as selling or distributory agent of numerous principals. The agency which was terminated was ....