TaxTMI 
TaxTMI 
1964 (5) TMI 4
X X X X Extracts X X X X
X X X X Extracts X X X X
....Whether under the same or any other style or firm, unless they resigned their office were entitled to continue as managing agent until they ceased to hold shares in the capital of the company of the aggregate nominal value of Rs. 1,00,000 and were on that account removed by a special resolution of the company passed at an extraordinary meeting of the company, or until the managing agent's tenure was determined by the winding-up of the company. In the event of termination of agency in the contingencies specified, the managing agent was to receive such reasonable compensation for deprivation of office, as may be agreed upon between the managing agent and the company and in case of dispute, as may be determined by two arbitrators. By clause 8, the managing agent was at liberty at any time to resign the office of managing agent by leaving at the registered office of the company previous notice in writing of its intention in that behalf. The agreement did not specify any period for which the managing agency was to enure. Since the successors of the appellant were also to continue as agents, unless they resigned or became disqualified, the duration was in a sense unlimited. But by virtue....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f modern machinery in the company's factory entailed heavy capital expenditure and it was necessary to obtain a loan secured by debentures charged on the company's property ; that large sums were required for renewals and replacements of machinery and it was not possible to obtain additional bank accommodation ; that the appellant had made large advances to the company exceeding Rs. 12,50,000 and, having regard to its other commitments, it was doubtful if it would be able to make available to the company additional finance; that the arrangement with M/s. Mugneeram Bangur and Co., by acceptance of the terms offered by them, was the most satisfactory method of solving the company's difficulties ; that it was in the best interest of the shareholders to terminate the appointment of the appellant which in the normal course would not fall due for renewal until January 14, 1957 ; that M/s. Mugneeram Bangur and Co. had agreed to procure that the Fort William Jute Co. Ltd. will pay to the appellant Rs. 3,50,000 and that M/s. Mugneeram Bangur and Co. will reimburse the company for the payment, it being anticipated that they will in due course be appointed managing agents of the company. Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t capable of solution by the application of any single test : its solution must depend on a correct appraisal in their true perspective of all the relevant facts. As observed in Commissioner of Income-tax v. Rai Bahadur Jairam Valji by Venkatarama Aiyar J. : " The question whether a receipt is capital or income has frequently come up for determination before the courts. Various rules have been enunciated as furnishing a key to the solution of the question, but as often observed by the highest authorities, it is not possible to lay down any single test as infallible or any single criterion as decisive in the determination of the question, which must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision : vide Van den Berghs Ltd. v. Clark. That, however, is not to say that the question is one of fact, for, as observed in Davies v. Shell Company of China Ltd. 'these questions between capital and income, trading profit or no trading profit, are questions which, though they may depend no doubt to a very great extent on the particular facts ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... controlling interest in the shareholding of the company. M/s. Mugneeram Bangur and Co. were anxious to be appointed managing agents of the principal company ; and for that purpose the appellant had to be persuaded to agree to a premature termination of its agency. This was secured for a triple consideration : sale of shares held by the appellant at an agreed price, stipulation to discharge the liability of the company to repay the loans due by the company, and payment of Rs. 3,50,000 as compensation for termination of the appellant's agency. The High Court summarised the effect of the agreement between the appellant and M/s. Mugneeram Bangur and Co., as follows : The sum of Rs. 3,50,000 described as compensation for loss of office of the managing agent was part of the whole scheme incorporated in the agreement. Each clause of the agreement was a consideration of the other clauses and payment of compensation for the alleged loss of office did not, being part of the total scheme, stand by itself. Determination of the managing agency of the appellant was not compulsory cessation of business : it was a voluntary resignation for which under the agency agreement the appellant was not ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... it depends upon the personal qualifications of the agent. Counsel appearing on behalf of the Commissioner conceded that the case that the managing agency was of the nature of stock-in-trade was not set up before the Tribunal, and he does not rely upon this part of the reasoning of the High Court in support of the plea that the compensation received by the appellant is a revenue receipt. He relies upon the alternative ground, and contends that the managing agency of the Fort William Jute Co. Ltd. was a part of the framework of the business of earning profit by working as managing agent of different companies, and in the normal course, termination of employment by the principal companies of the appellant as managing agent being a normal incident of such business, compensation received by the appellant is not for loss of capital but must be regarded as a trading receipt, especially when the termination of the agency does not impair the structure of the business of the appellant. In the present case there is a special circumstance which must first be noticed. In truth the amount of Rs. 3,50,000 was received by the appellant from M/s. Mugneeram Bangur and Co., in consideration of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the assessee in the managing agency of the principal company was to enure for another five years and which in the normal course would have continued for another twenty years was an enduring asset and consideration received by the appellant for extinction of that asset was a capital receipt. On behalf of the income-tax department it was contended that Shaw Wallace and Co. case does not lay down any proposition of general application to compensation paid for determination of all agency contracts. It was further submitted that, having regard to the nature of the agreement and the voluntary resignation submitted by the assessee, no enduring asset remained vested in the assessee, and none was attempted to be transferred : the compensation directly paid by the principal company (which compensation was under the terms of the contract not payable) was only a " measure of profit " which the appellant would, but for the resignation, have earned, and was therefore in the nature of revenue. It was also urged that compensation was not payable to the assessee when resignation of the managing agency was tendered under clause 8 of the agreement and therefore the amount sought to be brought to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... company at or in connection with the termination of his office or modification of the terms and conditions relating thereto, or by any person managing the whole or substantially the whole affairs of any other company in the taxable territories at or in connection with the termination of his office or the modification of the terms and conditions relating thereto, or by any person 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 his 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 the managing agent, manager or other person, as the case may be, and shall be liable to tax accordingly. But this amendment was made under the Finance Act, 1955, with effect from April 1, 1955, and has no application to the present case. The Indian Income-tax Act is not in pari materia with the English income-tax statutes. But the authorities under the English law which deal not with the interpretation of any specific provision, but on the concept of income, may not be regarded as proceeding upon an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es, who were shipmanagers employed by a steamship company under a contract which provided that they should be paid a percentage of the company's income, were paid compensation for loss of office in anticipation of liquidation of the steamship company. It was held that payment to make up for loss resulting from cessation of profits from employment was not itself an annual profit, but was payment in respect of termination of employment and was not assessable to tax. In Du Cros v. Ryall the assessee settled a claim made by his employee for damages for wrongful dismissal and paid pound 57,250 as compensation for wrongful dismissal. It was held that no part could be apportioned to salary and commission and the whole escaped assessment. In Duff v. Barlow the managing director of the appellant company, who was employed for a period of ten years, was asked by it to manage the business of one of its subsidiaries, and to receive a percentage of profits made by the subsidiary. The employment was terminated by mutual agreement two years after its commencement and pound 4,000 were paid as compensation to the managing director for loss of his rights of future remuneration. This was held not ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing company. " These cases establish the distinction between compensation for loss of a trading contract and solatium for loss of the source of income of the assessee. But payment of compensation for loss of office is not always regarded as capital receipt. Where compensation is payable under the terms of the contract which is determined, payment is in the nature of revenue and therefore taxable. For instance, in Henry v. Foster it was held that when compensation stipulated under a contract is paid for loss of office, it is taxable under Schedule E, and it was also held in Dale v. de Soissons, that compensation paid under an agreement to an assistant to the managing director for premature termination of employment was held to be income. The principle on which these cases proceeded as also applied by the Court of Session in Scotland in Kelsall Parsons and Co. v. Commissioners of Inland Revenue, to a case in which there was no express term for payment of compensation on termination of employment. The appellants in that case carried on business as agents on a commission basis for sale in Scotland of the products of various manufacturers, and entered into an agency agreement for th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....em of income. " Cases which have lately arisen before the courts in the United Kingdom have elaborated this distinction. In Commissioners of Inland Revenue v. Fleming and Co., the Court of Session held, following Kelsall Parsons and Co.'s case, that compensation paid to the assessee who carried on business as manufacturers' agent and general merchants and had acted as the sole agents since 1903 for certain products of the manufacturers for termination in 1948 of the agency at the instance of the manufacturer was regarded as revenue. In the view of Lord President Cooper the cases relating to determination of agencies, broadly speaking, fell on two sides of the line drawn in the light of the varying circumstances : " (a) the cancellation of a contract which affects the profit-making structure of the recipient of compensation and involves the loss by him of an enduring trading asset, and (b) the cancellation of a contract which does not affect the recipient's trading structure nor deprive him of any enduring trading asset, but leaves him free to devote his energies and organisation released by the cancellation of the contract to replacing the contract which has been lost by othe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....revenue nature. It is manifest that the principle, broadly stated in the earlier cases, that compensation for loss of office, or agency, must be regarded as a capital receipt has not been approved in later cases. An exception has been engrafted upon that principle that, where payment even if received for termination of an agency agreement, but the agency is one of many which the assessee holds, and the termination of the agency does not impair the profit-making structure but is within the framework of the assessee's business, it being a necessary incident of the business that existing agencies may be terminated and fresh agencies may be taken, the receipt is revenue and not capital. A case on the other side of the line may be noticed : Sabine v. Lookers Ltd. Under agreements, annually renewed with the manufacturers, the respondent company had acted for many years as their main distributors in the Manchester area of the manufacturer's products, which it bought for resale. The respondent had sunk considerable sums in fixtures and equipment specially designed for the trade of wholesale dealers and carried a large stock of spare parts mainly for wholesale sale. The whole of the tra....
X X X X Extracts X X X X
X X X X Extracts X X X X
....notes a periodical monetary return coming in with some sort of regularity, or expected regularity, from definite sources : the source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. They further observed that the income chargeable under head (iv) of section 6 " business " read with section 10 is to be in respect of the profits and gains of any business carried on by the assessee, and, therefore, the sums which the income-tax department sought to charge could only be taxable if they were the produce or the result of carrying on the agencies of the oil companies in the year in which they were received by the assessee. But when once it was admitted that they were sums received, not for carrying on this business, but as some sort of solatium for its compulsory cessation, the answer seemed fairly plain. The Board observed that if compensation received for sale of the business or its goodwill was capital, the same reasoning ought to apply when the sum received was in the nature of a solatium for cessation of a part of the business, and it wa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ll Parsons and Co. v. Commissioners of Inland Revenue, Commissioners of Inland Revenue v. Fleming and Co., Wiseburgh v. Domville and Commissioner of Income-tax and Excess Profits Tax v. South India Pictures Ltd. Nor is it true to say that where an assessee holds several agency contracts each agency contract cannot without more be regarded as independent of the other contracts, and income received from each contract cannot always be regarded as unrelated to the rest of the business continued by the assessee. The decision in Shaw Wallace & Co.'s case cannot therefore be read to yield the principle that compensation for loss of an agency may in all cases be regarded as capital receipt. Nor does it lay down that where the assessee has several lines of business each line must, in ascertaining the character of compensation for loss of a line of business, be deemed an independent source. This view is exemplified by decisions of this court and the decision of the Madras High Court in South India Pictures Ltd.'s case that compensation received for determination of the distribution rights of films was held taxable. After the assessee had exploited partially its right of distribution of cinem....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h leads to the business rather than the business itself. Considered in this light the agency right can be held to be of the nature of a capital asset invested in business. But this cannot be said of a contract entered into in the ordinary course of business. Such a contract is part of the business itself, not something outside it, and any receipt on account of such a contract can only be a trading receipt. Because compensation paid on the cancellation of a trading contract differs in character from compensation paid for cancellation of an agency contract, it should not be understood that the latter is always, and as a matter of law, to be held to be a capital receipt. An " agency contract which has the character of a capital asset in the hands of one person may assume the character of a trading receipt in the hands of another, as, for example, when the agent is found to make a trade of acquiring agencies and dealing with them. " Therefore, when the question arises whether the payment of compensation for termination of an agency is a capital or a revenue receipt, it must be considered whether the agency was in the nature of a capital asset in the hands of the agent, or whether it wa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ld or surrendered or destroyed, but the amount was simple received by the assessee in the course of its doing distributing agency business and therefore it was an income receipt. In that case the majority of the court held on three distinct grounds, viz : (i) that the assessee did not part with any capital asset ; (ii) that the amount was received in the course of the distributing agency business which was continued ; and (iii) that the termination of the agreements did not radically or at all affect or alter the structure of the assessee's business, that the sum received was revenue. Rai Bahadur Jairam Valji's case was one of compensation received for termination of a trading contract. In Peirce Leslie and Co.'s case there was termination of office, but it was held to be brought about in the ordinary course of the trading operations of the assessee. On the other side of the line are cases of Commissioner of Income-tax v. Vazir Sultan and Sons and Godrej and Co. v. Commissioner of Income-tax. In Vazir Sultan and Sons' case the majority of the court held that compensation paid for restricting the area in which a previous agency agreement operated was a capital receipt, not assessa....