AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
1959 (3) TMI 5
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....rectors dated January 6, 1931 : " Mr. Baker reported that an arrangement had been come to for the time being whereby the firm of Vazir Sultan & Sons, were given the distributorship of Charminar Cigarettes within the H.E.H. the Nizam's Dominions and that they were allowed a discount of 2% on the gross selling price." No written agreement was entered into between the company and the assessee in respect of the above mentioned arrangement nor was there any correspondence exchanged between them in this behalf. In 1939 another arrangement was arrived at between the assessee and the company whereby the assessee was given a discount of 2% not only on the goods sold in the Hyderabad State but on all the goods sold in the Hyderabad State and outside Hyderabad State. It does not appear that the board of directors passed any resolution in support of this new arrangement nor was any agreement drawn up between the parties incorporating the said new arrangement. On June 16, 1950, the board of directors passed the following resolution reverting to the old arrangement embodied in the resolution dated January 6, 1931 : " The Chairman, having referred to resolution No. 24 passed at the board ....
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....ceipt as contended by the assessee. It was urged on behalf of the appellant that the sole selling agency which was granted by the company to the assessee in the year 1931 was merely expanded as regards territory in 1939 and what was done in 1951 was to revert to the old arrangement, and the structure or the profit-making apparatus of the assessee's business was not affected thereby. The expansion as well as the restriction of the assessee's territory were in the ordinary course of the assessee's business and were mere accidents of the business which the assessee carried on and the sum of Rs. 2,19,343 received by the assessee as and by way of compensation for the restriction of the territory was a trading or an income receipt and was therefore liable to tax. It was, on the other hand, contended on behalf of the assessee that it did not carry on business of acquiring and working agencies, that the agency acquired in 1931 was a capital asset of the assessee's business of distributing Charminar cigarettes in the Hyderabad State, that the expansion of territory outside the Hyderabad State in 1939 was an accretion to the capital asset already acquired by the assessee, that the resolu....
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....y helpful in that they indicate the kind of consideration which may relevantly be borne in mind in approaching the problem. The character of the payment received may vary according to the circumstances. Thus the amount received as consideration for the sale of a plot of land may ordinarily be a capital receipt but if the business of the recipient is to buy and sell lands, it may well be his income." While considering the case law it is necessary to bear in mind that the Indian Income-tax Act is not in pari materia with the British income-tax statutes, it is less elaborate in many ways, subject to fewer refinements and in arrangement and language it differs greatly from the provisions with which the courts in England have had to deal. Little help can therefore be gained by attempting to construe the Indian Income-tax Act in the light of decisions bearing upon the meaning of the income-tax legislation in England. But on analogous provisions, fundamental concepts and general principles unaffected by the specialities of the English Income-tax statutes, English authorities may be useful guides. (Vide the observations of the Privy Council in Commissioner of Income-tax v. Shaw Wallace &....
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....Its applicability may, in particular cases, differ because the circumstances, though similar in some respects, may be different in others. Thus the profit realised on a sale of shares may be capital if the seller is an ordinary investor changing his securities, but in some instances at any rate it may be income if the seller of the shares is an investment or an insurance company. Income is not necessarily the recurrent return from a definite source, though it is generally of that character. Income again, may consist of a series of separate receipts, as it generally does in the case of professional earnings. The multiplicity of forms which 'income' may assume is beyond enumeration. Generally, however, the mere fact that the income flows from some capital assets, of which the simplest illustration is the purchase of an annuity for a lump sum, does not prevent it from being income, though in some analogous cases the true view may be that the payments, though spread over a period are not income, but instalments payable at specified future dates of a purchase price." (Vide Secretary of State for India v. Scoble). This court in Raghuvanshi Mills' case also observed that the definition ....
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....to produce or purchase films and then distribute the same for exhibition in different cinema halls and in other cases used to advance monies to producers of films produced with the help of monies so advanced. In the course of such business it advanced monies to the Jupiter Pictures for the production of these films and acquired the rights of distribution of the three films under three agreements in writing dated September, 1941, July, 1942, and May, 1943. In the accounting year ending March 31, 1946, and in the previous years the assessee had exploited its rights of distribution of the three pictures. On October 31, 1945, the assessee and the Jupiter Pictures entered into an agreement cancelling the three agreements relating to the distribution rights in respect of the three films and in consideration of such cancellation the assessee was paid Rs. 26,000 in all by the Jupiter Pictures as compensation. It was held by the majority of this court that the sum received by the assessee was a revenue receipt (and not a capital receipt) assessable under the Indian Income-tax Act inasmuch as : (1) the sum paid to the assessee was not truly compensation for not carrying on its business but....
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....was therefore capital in character. Moreover, the true character of the agreement was that it brought into existence an arrangement which would enable him to carry on a business and was not itself any business and any payment made for the termination of such an agreement was a capital receipt. This court on the facts and circumstances of the case came to the conclusion that the contract in question was entered into by the assessee in the ordinary course of business and was one entered into in the carrying on of that business. The arrangement ultimately entered into between the parties in regard to the payment of the said sum of Rs. 2,50,000 was accordingly treated as an adjustment made in the ordinary course of business and the receipt was therefore held to be an amount paid as solatium for the cancellation of a contract entered into by a person in the ordinary course of business. In the course of the discussion reference was made to agency agreements and this court observed : " In an agency contract, the actual business consists in the dealings between the principal and his customers, and the work of the agent is only to bring about that business. In other words, what he doe....
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....ature of the trade in which the asset is employed. The land upon which a manufacturer carries on his business is part of his fixed capital. The land with which a dealer in real estate carries on his business is part of his circulating capital. The machinery with which a manufacturer makes the articles that he sells is part of his fixed capital. The machinery that a dealer in machinery buys and sells is part of his circulating capital, as is the coal that a coal merchant buys and sells in the course of his trade. So, too, is the coal that a manufacturer of gas buys and from which he extracts his gas.' Therefore, when a question arises whether a payment of compensation for termination of an agency is a capital or a revenue receipt, it would have to be considered whether the agency was in the nature of capital asset in the hands of the assessee, or whether it was only part of his stock-in-trade. Thus, in Barr Crombie & Sons Ltd. v. Commissioners of Inland Revenue, the agency was found to be practically the sole business of the assessee, and the receipt of compensation on account of it was accordingly held to be a capital receipt, while in Kelsall's case the agency which was terminat....
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....res Ltd. was indeed a case where the assessee had entered into agency agreements for the exploitation of the three films in question, but in that case the conclusion was reached that entering into such agency agreements for acquiring the films was a part of the assessee's business and the agreements in question having been entered into by the assessee in the ordinary course of business the Cancellation of those agreements was also a part of the assessee's business and was resorted to in order to adjust the relation between the assessee and the producer of those films. It would not be profitable to review the various English decisions bearing on this question as they have been exhaustively reviewed in the above decisions of this court. The position as it emerges on a consideration of these authorities may now be summarised. The first question to consider would be whether the agency agreement in question for cancellation of which the payment was received by the assessee was a capital asset of the assessee's business, constituted its profit-making apparatus and was in the nature of its fixed capital or was a trading asset or circulating capital or stock-in-trade of his business. If ....
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....mpensation for loss of an employment which need not continue, but which was likely to continue, is not an annual profit within the scope of the income-tax at all." (See also W. A. Guff v. Commissioner of Income-tax where the question whether the amount paid was compensation for which the employer was liable or was a payment made ex gratia was considered immaterial for the purpose of the decision in that case). It was also urged that the agency in question before us was not an enduring asset of the assessee's business as in its very nature it was terminable at will, there being no agreement or arrangement for a fixed term between the assessee and the company. On the analogy of the test laid down by this court in Assam Bengal Cement Co., Ltd. v. Commissioner of Income-tax while considering the distinction between a capital expenditure and a revenue expenditure, it was argued that the agency agreement in question could not be a capital asset of the assessee's business in so far as it was not of an enduring character and the compensation paid for its termination could not, therefore, be a capital receipt in the hands of the assessee. Whatever be the position, however, in the case of ....
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....business, including the goodwill, the contracts in question. It was not by selling these contracts, of limited duration though they were, it was not by parting with them to other masters, but by retaining them, that he was able to employ his circulating capital in buying under them. I am accordingly of opinion that though they may have been of short duration, they were none the less part of his fixed capital." In the case before us the agency agreement in respect of territory outside the Hyderabad State was as much an asset of the assessee's business as the agency agreement within the Hyderabad State and though expansion of the territory of the agency in 1939 and the restriction thereof in 1950 could very well be treated as grant of additional territory in 1939 and the withdrawal thereof in 1950, both these agency agreements constituted but one employment of the assessee as the sole selling agents of the company. There is nothing on the record to show that the acquisition of such agencies constituted the assessee's business or that these agency agreements were entered into by the assessee in the carrying on of any such business. The agency agreements in fact formed a capital asse....
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....receipt in the hands of the assessee would only be a capital receipt, equally would it be a capital receipt if compensation was obtained by the assessee for the termination or cancellation of one of these agency agreements which formed a capital asset of the assessee's business. The facts of the present case are closely similar to those which obtained in the Commissioner of Income-tax v. Shaw Wallace & Co. In that case also the assessees had for a number of years prior to 1928 acted as distributing agents in India of the Burma Oil Company and the Anglo-Persian Oil Company, but had no formal agreement with either company. In or about the year 1927 the two companies combined and decided to make other arrangements for the distribution of their products. The assessee's agency of the Burma Company was accordingly terminated on December 31, 1927, and that of the Anglo-Persian Company on June 30, following. Some time in the early part of 1928 the Burma Company paid to the assessee a sum of Rs. 12,00,000 " as full compensation for cessation of the agency " and in August of the same year the Anglo-Persian Company paid them another sum of Rs. 3,23,000 as "compensation for the loss of your ....
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.... any compensation paid for it would prima facie be revenue. During the accounting year the amount of income profits and gains of the assessees from the cigarette distribution business and from another source, i.e., Acid Factory within the State of Hyderabad, was Rs. 4,53,159. The order of the Income-tax Officer or the Appellate Tribunal does not show how much of this sum was attributable to the cigarette distribution business and how much to the other source. There is no finding as to how and to what extent, if any, the business of the assessees was affected by the cesser of distribution business outside that State. The question now arises did the assessees receive the compensation in lieu of the commission they otherwise might or would have earned if the agreement had continued or did they receive it as compensation for the destruction of a profit making asset. The answer to this question would again be dependent upon whether the receipt in question is attributable to a fixed capital asset or to circulating capital. These two terms have been used in a number of cases but as applied to agencies compensation will be a capital receipt if it is received as the value of the agency,....
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.... The test of periodicity was rejected by this court in Raghuvanshi Mills Ltd. v. Commissioner of Income-tax where Bose, J., said that the remarks of periodical monetary return must be confined to the facts of that case and it was held that money received from an insurance company for insurance against losses was income representing loss of profits as opposed to loss of capital. In a later case, Commissioner of Income-tax v. South India Pictures Ltd., it was said that if Shaw Wallace & Co. had other agencies similar to those of the two oil companies it would be difficult to reconcile the decision in that case with the later decisions in Kelsall Parsons & Co. v. Commissioners of Inland Revenue and other cases (per Das, C. J.). In view of the decision in the South India Pictures' case and the observations of Bose, J., in the case of Raghuvanshi Mills Ltd. the authority of Shaw Wallace & Co.'s case must be taken to be considerably shaken. We have then to see how the question has to be determined. Various tests have been laid down in decided cases. According to Lord Cave, L.C., an expenditure made not only once and for all but with a view to bringing into existence an asset or an adva....
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....usiness. They were not agreements which must be regarded as pertinent to trading activities which yielded profits. As such the totality of payments on account of those agreements were held to be a capital receipt. The various decided cases demarcate the areas on the two sides of the line in which a receipt may lie and in every case it has to be determined as to whether it falls on one side or the other. The simplest case is of income from property or business as distinct from something received in lieu of property or business itself. One illustration of this is insurance against fire, destruction or damage and insurance against loss of profit. The former would bring in compensation in the nature of a capital. Another instance is where the whole business is bought over and the receipt is the price of the business itself as opposed to a lump sum payment for the loss of profit calculated on a proper basis. The test of income, i.e., periodicity or recurrence at fixed intervals, has been doubted in this court Raghuvanshi Mills. Another test is afforded by cases of tangible immovable property. If an owner of such property is paid compensation for not working a part of his property, e....
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.... then it is revenue (Wiseburgh v. Domville). So that the decision as to whether compensation was capital or revenue would depend upon whether the cessation of the agency destroys or materially cripples the whole structure of the recipient's profit-making apparatus or whether the loss is of the whole or part of the framework of business. If we apply these tests to the agreement which has been terminated in the present case, it does not fall in any of the class of cases of destruction of a capital asset. For the appellant reliance was placed on the observations of Venkatarama Aiyar, J., in Commissioner of Income-tax v. Rai Bahadur Jairam Valji where it was pointed out that in an agency contract the actual business consists in the dealings between the principal and his customers and the work of the agent is only to bring about that business. In other words what the agent does is not business itself but something which is intimately and directly linked with it. But an examination of the context shows that that is not what these observations mean. The point that was to be decided in that case was whether a payment of compensation for the cancellation of a trading contract was a capi....