The termination of an agreement which constituted an asset and the payment received by the assessee as compensation for the loss of such an asset is not taxable as income, profits or gains under the Income-tax Act, 1922.

Judgment

HIDAYATULLAH, J.: This is an appeal on a certificate granted by the High Court of Bombay against the judgment and order of the High Court dated June 23, 1959. The appellants are two assessees whose cases were consolidated before the Tribunal and hence a single appeal. The facts of the case are as follows:-

2. Before the year 1938, the two appellants and one Jehangir Irani were carrying on business in electric goods including electric bulbs under two firm names. One of the firms was called the Precious Electric Co. and the other was named J. Pirojsha and Co. In June, 1938, Precious Electric Co. entered into an agreement with M/s. Philips Electrical Co. (India) Ltd. by which the Company demarcated a territory for the firm, undertaking to sell and deliver electric bulbs therein exclusively to the firm. By a letter which formed an annexure to the agreement the Company agreed to sell electric bulbs to the Firm at ex-ware-house prices subject to a commission of 12 1/2 per cent on the gross invoice amount and the Firm was allowed a further discount of 2 per cent on the net invoice prices to cover breakage or fault in manufacture. It was further agreed that if the Company sold any goods directly to the buyers in the territory the Company would pay to the Firm compensation amounting to 5 per cent of the net amount of invoices covering such sales. The Firm on its part undertook to sell only Philips bulbs in the territory and to prevent re-exportation of the bulbs by third parties. In addition to other conditions to which we need not refer at this stage there was a clause for termination of the agreement. The clause provided that the agreement would be deemed to have been made as from July 1, 1938, and would continue unless determined by either party by giving to the other party three months prior notice be registered letter of such party s intention to determine the agreement on the 30th of June 1939 or any subsequent 30th of June. This agreement continued for a period of sixteen years.

3. On March 8, 1954, the Company sent a letter to the Firm informing the Firm that the agreement would come to an end from June 30, 1954. The Company sent a draft of a new agreement which was intended to take the place of the earlier agreement. Some negotiations between the parties followed but no fresh agreement was signed. On 28-5-1954, the two assessees and the Manager of the Firm met the representatives of the Company to discuss the new agreement. Nothing much came of the discussion and since the Bombay branch of the Company was taking over the business of selling bulbs in the territory, a working scheme for the period immediately following the termination of the existing agreement was reached. This was recorded in the shape of minutes which were signed by the representatives of the Company and by the two partners of the Firm. The minutes covered arrangements for the period of transition, the stocks and the staff of the Firm. Of these the important provisions are as follows:-

"(a) Period of transition;

Philips Bombay Branch will continue the distribution of lamps, etc. to dealers and in this respect Messrs. Precious promised to furnish, their name list of dealers and their supplies over the past six months. It was concluded that the execution of orders of locally available good might be terminated in two months time, whereas this matter as far as orders placed with overseas suppliers are concerned might take about five months. During this period Messrs. Precious will receive all co-operation from M/s. Philip to ensure a smooth winding up of the business. Furthermore, particular attention will be given to the I. S. D. contracts and transactions in connection with public bodies. Messrs. Precious will inform these bodies that the supplies will be effected through their intermediary by Philips Bombay Branch which refers in particular to those cases where close personal contact between Messrs. Precious and the parties exists. The commission related t