Compensation received by an agent for termination of an agency agreement is revenue, not capital, if the termination does not impair the trading structure of the agent's business and the agent is compensated by payment to it the loss of profit it suffered by the cancellation of its agency, leaving it free to conduct its remaining business.

Headnote:
INCOME TAX - Compensation received by appellant for termination of agency agreement - Whether capital or revenue receipt - Held, revenue receipt.
Fact of the Case:

Appellant, a public limited company, acted as the sole agent and distributor of explosives manufactured by the principal company. The agency agreement was terminable at the option of the principal company. In 1947, the principal company informed the appellant that the agency would be terminated from April 1, 1948, and that it would compensate the appellant for the termination. The appellant received compensation in three installments, which were included in its profit and loss account as commission received. The Income-tax Officer held that the compensation was revenue, taxable under the Indian Income-tax Act, 1922. The Appellate Assistant Commissioner accepted the appellant's contention that the compensation was capital, but the Tribunal held that it was revenue. The High Court upheld the Tribunal's decision.
Finding of the Court:

The Supreme Court held that the compensation received by the appellant was revenue, not capital. The Court observed that the agency was one of many such agencies in which the appellant functioned as a distributing agent of a foreign principal. The termination of the agency did not impair the trading structure of the appellant's business, and the appellant was compensated by payment to it the loss of profit it suffered by the cancellation of its agency, leaving it free to conduct its remaining business.
Issues: Whether the compensation received by the appellant for termination of the agency agreement was capital or revenue receipt.
Ratio Decidendi: The Court held that the compensation was revenue, not capital, because: * The agency was one of many such agencies in which the appellant functioned as a distributing agent of a foreign principal. * The termination of the agency did not impair the trading structure of the appellant's business. * The appellant was compensated by payment to it the loss of profit it suffered by the cancellation of its agency, leaving it free to conduct its remaining business.
Final Decision: The Supreme Court dismissed the appeals with costs.

Judgment

SHAH, J. :

The appellant which is a public limited company incorporated under the Indian Companies Act, 1913, his its registered office at Calcutta, and branches in Bombay, Madras, New Delhi and Kanpur. The appellant carried on business in diverse lines, which may broadly be classified as (1) buying and selling on its own account, (2) introducing customers to principals (3) acting as managing agents, (4) acting as shipping agents, (5) acting as purchasing agents, (6) acting as sole importers and distributors on behalf of United Kingdom principals having no organisation in India and (7) acting as secretaries.

2. Since January 21, 1886, M/s. Gillanders Arbuthnot and Co., predecessors-in-interest of the appellant were the sole agents and distributors in India of explosives manufactured by the Imperial Chemical Industries (Export) Ltd. Glasgow, Scotland hereinafter called the principal company . There was no written 454 agreement between the principal company and M/s. Gillanders Arbuthnot and Co., incorporating the terms of the agency agreement. It is however common ground that the agency agreement was terminable at the option of the principal company. The appellant was incorporated for taking over the business of M/s. Gillanders Arbuthnot and Co., and since it took over the distributing agency the appellant acted as the sole agent and distributor of explosives manufactured by the principal company, but without a written agreement.

3. In May 1946 the principal company desired to set up its own organisation for distributing its products, and intimated the appellant that the agency, of the appellant may be cancelled after two or three years. By letter dated March 11, 1947, the principal company informed the appellant that the agency will stand terminated from April 1, 1948, and that it desired to compensate the appellant for termination of the agency on the following basis :

(1) For the first three post-transfer years the principal company shall pay to the appellant two-fifths of the commission accrued on actual sales in the territory of the latter s agency taken over by the principal company, such commission to be computed a the commission rates formerly paid to the appellant;

(2) That "in the third post-transfer year," the principal company shall pay the appellant in addition a sum equivalent to full commission on the sales for that year effected by the principal company in the appellant s territory calculated at the same rates.

(3) That payments would be made to the appellant after the end of each year as soon as the amount due was ascertained.

Certain other matters in the letter which have a bearing on the dispute, may be reproduced :

"For the purpose of calculating the commission due to you, the post-transfer will be deemed to run as from the date of the transfer of your agency to Imperial Chemical Industries (India) Ltd. We trust that you will find these proposals acceptable.

As a condition of our paying you compensation on the basis outlined above, we would request you to be good enough to give us a formal undertaking to refrain from selling or accepting any agency for explosives or other commodities competitive with those covered by the agency agreement now being terminated.

In this connection we are asking our Legal Department to prepare a formal agreement which we will submit to you for signature as soon as possible.

It is common ground that no formal agreement in writing, which was contemplated to be taken from the appellant, was executed: not even a draft of the agreement was submitted by the principal company to the appellant.

4. Pursuant to conditions (1) and (2) incorporated in the letter dated March 11, 1947, which have been set out earlier, the appellant received the following amounts from the principal company :

For the previous year corresponding to the assessment year ending 31st March, 1949. ... Rs. 1,53, 471/11/-

For the previous year corresponding to the assessment year ending 31st March, 1950. ... Rs. 1,59,271/

Click Here to Read the rest of this document

1964 Supreme(SC) 162

Cases Referred (1)