AI Drafter 
TaxTMI 
TaxTMI 
2004 (3) TMI 37
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.... items of food products, namely, "Horlicks", "Boost" and "Mother's Special" and also toiletries. The selling agency/distributorship agreements relating to "Horlicks" and "Boost" were due to expire on July 31, 1985, that relating to "Mother's Special" on September 30, 1985, and that relating to the said toiletries on December 31,1988. HMM Limited took a decision that it would be in the interests of its business to itself ultimately take over the distribution and sale of the food products and the toiletries, and hence, the agreement should be reviewed. But, at the same time, it did not want to take over immediately as the sudden disassociation of the assessee with the sale/distribution of the said food products would seriously dislocate its s....
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....of Rs. 15,00,000 (rupees fifteen lakhs only) on June 30,1988. 2. The covenants of the second party referred to in clause 1 above are as under: The second party doth hereby irrevocably and unconditionally undertake and oblige itself that up to June 30, 1988, the second party shall- (a) maintain and keep secret, all sales, advertising and marketing strategies and plans relating to the said food products and the said toiletries which may have been disclosed to the second party by the first party; (b) maintain and keep secret all technical know-how, formulae and details of manufacturing processes, if any, relating to the said food products and the said toiletries which may have come to the knowledge of the second party and not divul....
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....vided, however, that such earlier termination will not affect or prejudice the first party's right to claim damages from, or to take any proceedings against, the second party for the breach of its obligations and/or covenants, discharge its obligations hereunder." Pursuant to the agreement, a sum of Rs. 25,00,000 was received during the assessment year 1988-89 and Rs. 15,00,000 during the year 1989-90. The respective Assessing Officers, who passed the assessment orders, treated the said amounts received by the assessee-company as revenue receipt and hence, taxable. The assessee, being aggrieved by the said orders, filed appeals before the Commissioner of Income-tax, who confirmed the orders of the Assessing Officers. The assessee, the....
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....d represent capital receipt or revenue receipt. A reading of the agreement dated June 2, 1986, would show that HMM Limited agreed to pay to the assessee a sum of Rs. 40,00,000 in two instalments, (i) in consideration of the premature termination of the selling agency/ distributorship relating to the said food products and the toiletries, and (ii) in consideration of the covenants as contained in clause 2. The sum received by the assessee was in consideration of the premature termination of the selling agency and also of the restrictive covenants as per clause 2. In the case of CIT v. Best and Co. P. Ltd. [1966] 60 ITR 11 (SC), as compensation for transfer of the agency, the assessee was paid certain amounts calculated on the basis of ....
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.... 435 (Mad). In the present case apportionment of the compensation has to be made on a reasonable basis between the loss of the agency in the usual course of business and the restrictive covenant." The Income-tax Appellate Tribunal took note of the fact that the assessee had been functioning as one of the selling agents for HMM Limited for many years, from the time their food products were introduced in the market and since 1979 for their toiletries and when the compensation was determined by the parties concerned must have definitely considered the very old agency which the assessee had lost, and came to the conclusion that a substantial portion of the compensation became payable on account of the loss to the assessee of a lucrative agen....