Commissioner Of Income Tax, Hyderabad, Deacon vs Vazir Sultan And Sons

Judicial Analysis Court Copy Headnote Facts Arguments Court observation

1959 Supreme(SC) 33

SUPREME COURT OF INDIA
20th March, 1959.
N.H. BHAGWATI, B.P. SINHA AND J.L. KAPUR, JJ.
The Commissioner of Income-tax, Hyderabad, Deccan, Appellant
Versus
M/s. Vazir Sultan and Sons, Respondents.
Civil Appeal No. 340 of 1957.
Advocates appeared
M/s. K. N. Rajagopala Sastri, R. H. Dhebar and D. Gupta, Advocates, for Appellant; Mr. A. V, Viswanatha Sastri, Sr. Advocate (M/s. P. Rama Reddy and R. Mahalinga Iyer, Advocates, with him), for Respondents.

Advocates:
A.V.VISHWANATHA SASTRI, D.GUTPA, K.N.RAJAGOPAL SASTRI, P.RAM REDDY, R.H.Dhebar, R.MAHALINGA IYER

Headnote:
Whether the sum of Rs. 2,19,343 received by the assessee firm from Vazir Sultan Tobacco Co., Ltd., is a revenue receipt or a capital receipt?
Fact of the Case:

The assessee is a registered firm consisting of five brothers and the wife of a deceased brother having equal shares in the profit and loss of the partnership. The firm was appointed the sole selling agents and sole distributors for the Hyderabad State for the cigarettes manufactured by M/s. Vazir Sultan Tobacco Co., Ltd., under the terms of a resolution of the Board of Directors dated January 6,1931. 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 per cent not only on the goods sold in the Hyderabad State but on all the goods sold in the Hyderabad State and outside Hyderabad State. 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 sum of Rs. 2,19,343 was accordingly received by the assessee in the year of account 1359 F.
Finding of the Court:

The sum of Rs. 2,19,343 received by the assessee from the Company was a capital receipt.
Issues: Whether the sum which was in express terms of the resolution mentioned by way of "compensation" for the loss of the agency was a revenue receipt (trading receipt or an income receipt) as contended by the Revenue or a capital receipt as contended by the assessee.
Ratio Decidendi: The agency agreement in question before us was as much an asset of the assessee’s business as the agency agreement within the Hyderabad State and though Ex-pansion 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 at 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 asset of the assessee’s business worked or exploited by the assessee by entering into contracts for the sale of the "charminar" cigarettes manufactured by the Company to the various customer and dealers in the respective territories. This asset really formed part of the fixed capital of the assessee’s business. It did not constitute the business of the assessee but was the means by which the assessee entered into the business transactions by way of distributing those cigarettes within the respective territories. It really formed the profit-making apparatus of the assessee’s business of distribution of the cigarettes manufactured by the Company. If it was thus neither circulating capital nor stock-in-trade of the business carried on by the assessee it could certainly not be anything but a capital asset of its business and any payment made by the Company as and by way of compensation for terminating or cancelling the same would only be a capital receipt in the hands of the assessee.
Final Decision: Appeal dismissed with costs throughout.

Judgment

N. H. BHAGWATI J.: (with him B. P. Sinha J.) This appeal with a certificate from the High Court of Judicature at Hyderabad raises the question whether the sum of Rs. 2,19,343 received by the assessee in the year of account relevant for the assessment year 1951-52 was a revenue receipt or a capital receipt.

2. The facts leading up to this appeal may be shortly stated:

The assessee is a registered firm consisting of five brothers and the wife of a deceased brother having equal shares in the profit and loss of the partnership. The firm was appointed the sole selling agents and sole distributors for the Hyderabad State for the cigarettes manufactured by M/s. Vazir Sultan Tobacco Co., Ltd., under the terms of a resolution of the Board of Directors dated January 6,1931

"Mr. Baker reported that an arrangement had been come to for the time being whereby the firm of Vazir Sultan and 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 per cent on the gross selling price."

3. 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 per cent 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.

4. 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 meeting held on 6-1-31 and having reported that Vazir Sultan and Sons had agreed to revert to the arrangement outlined in that resolution with effect from 1-6-50, it was on the proposition of Mr. S. N. Bilgrami, seconded by Mr. N. B. Chenoy resolved that payment of the sum of O. S. Rs. 2,26,263 be made to Vazir Sultan and Sons by way of compensation, Vazir Sultan and Sons, to pay D. B. Akki and Co., out of that amount the sum of O. S. Rs. 6,920 also by way of compensation. Mr. Mohd. Sultan and Mr. Hameed Sultan stated that, as partners in the firm of Vazir Sultan and Sons, they did not take part in this resolution, although they had accepted on behalf of Vazir Sultan and Sons, the terms thereof."

5. The sum of Rs. 2,19,343 was accordingly received by the assessee in the year of account 1359 F.

6. The Income-tax Officer included this sum in the assessee s total income and taxed it as a revenue receipt. On appeal the appellate Assistant Commissioner held that the sum of Rs. 2,19,343 was not a revenue receipt but a capital receipt being compensation for the loss of the agency and as such not liable to tax. The Income-tax Officer .(C Ward) Hyderabad thereupon preferred an appeal to the Income-tax Appellate Tribunal, Bombay, which held that the said sum received by the assessee was a revenue receipt and liable to tax. The assessee then applied to the Appellate Tribunal for a reference to the High Court under S. 66(1) of the Income-tax Act and the Tribunal accordingly referred the following question of law to the High Court:-

"Whether the sum of O. S. Rs. 2,19,343 received by the assessee Firm from Vazir Sultan Tobacco Co., Ltd., is a revenue receipt or a capital receipt?"

7. The High Court answered the question in favour of the assessee stating the question in a different form, viz.,

"Whether the sum of O. S. Rs. 2,19,343 received by the assessee firm from Vazir Sultan Tobacco Co., Ltd., is liable to be taxed under the Indian Income-tax Act?"

8. The appellant thereafter applied to the High Court for a certificate

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