TaxTMI 
TaxTMI 
2002 (10) TMI 72
X X X X Extracts X X X X
X X X X Extracts X X X X
.... entered into was periodically renewed and the last one was dated October 21, 1983, renewed for a period of five years from that date. The said distribution agreements were terminated by an agreement called termination of distribution agreement dated June 29, 1984, with effect from June 30, 1984. Consequent to the termination of the distribution agreement, the assessee agreed to receive a lumpsum amount of Rs. 42 lakhs and the same was agreed to be paid in ten equal quarterly instalments commencing from the quarter ending September 30, 1984. The said amount of Rs. 42 lakhs has to be paid by the three companies as follows: Rs. (1) Tube Investments of India Ltd. 40.00 lakhs (2) T. I. Miller Ltd. (since amalgamated with Tube Investments of India Ltd.) 0.50 lakhs (3) T I. Diamond Chain Ltd. 1.50 lakhs The Assessing Officer was of the view that the compensation so accrued to the assessee consisted of three elements, i.e., (1) compensation for the cost of trained manpower transferred (162 nos.) computed on the basis of salary and travelling expenses incurred by the assessee during the training period in a sum of Rs. 11 lakhs. (2) The compensation for the cost of dealers/....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... dealership network of 1,200 sub-dealers, 1,200 industrial chain dealers and as many as 3,300 engineering division customers. The above said network has been established and built up by the assessee for the past 20 years, during which the assessee was in the field of distribution of the products of the above companies. As per the termination agreement dated June 29, 1984, which came into force with effect from June 30, 1984, the assessee had to arrange with their employees directly connected with the marketing and selling and other supporting staff to become the employees of the company on and from July 1, 1984. Further the assessee also had to place all the dealers appointed by them for marketing the companies' products at the disposal of the company on the same terms and conditions, which the assessee had with the dealers and sub-dealers. Further the assessee also was prohibited for a period of three years from the date of termination from acting as distributor, stockist, dealer or agent of any other manufacturer or dealer of products similar to or competing with the companies products. Thus it is evident from the termination agreement that the assessee was paid a lump sum of R....
X X X X Extracts X X X X
X X X X Extracts X X X X
....garded as a revenue receipt. When the termination of the distribution agreement impaired the trading apparatus or trading structure of the assessee and the prohibitory clause contained in the termination agreement totally sterilised the assessee from gaining any income then the payment received by the assessee for such impairment and sterilisation would be characterised only as capital receipt. In P.H. Divecha v. CIT [1963] 48 ITR 222 (SC), the Supreme Court held as follows: "In determining whether a 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 of profits of business the receipt in the hands of the recipient cannot properly be described as income, profits or gains as commonly understood. To constitute income, profits or gains, there 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 p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e the High Court held that in view of the factual finding recorded by the Tribunal that the termination of contract affected the business structure of the assessee and considering the unexpired period, which was quite a long period the amount received towards the compensation was a capital receipt and this court further held that the prerequisite for the applicability of the section 28(ii)(c) is that there must be an agency agreement. The agreement of the assessee with SA envisaged assistance in securing foreign collaborations, technical assistance in its productions, assistance in discussion with the Government, etc., and in the context of the said agreement, this court concurred with the finding of the Tribunal that there was no principal and agent relationship between the parties and hence the compensation received by the assessee on termination of agreement was not taxable even under the provisions of section 28(ii)(c). Section 28(ii)(c) provides that if any compensation or other payment was received by any person, by whatever name called, holding an agency in India, for any part of the activities relating to the business of any other person at or in connection with the termin....