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SUPREME COURT OF INDIA
K. SUBBA RAO, J.C. SHAH AND S.M. SIKRI, JJ.
Commissioner of Income-tax, Madras, Appellant
Versus
M/s. Best and Co. (Private) Ltd. Madras, Respondent.
Civil Appeals Nos. 682 and 683 of 1964.
Advocates appeared
Mr. A. V. Viswanathan Sastri, Senior Advocate, (M/s. R. Ganapathy Iyer, R. H. Dhebar and R. N. Sachthey, Advocates with him for Appellant; Mr. K. N. Rajagopal, Senior Advocate, (M/s. G. L. Sanghi and B. R. Agarwala, Advocates and Mr. H. K. Puri, Advocate for M/s. Gagrat and Co. with him), for Respondent.
INCOME TAX - Compensation received by assessee for termination of agency - Whether capital or revenue receipt - Principles for determination - Apportionment of compensation between loss of agency and restrictive covenant.
Fact of the Case:
The assessee, a private limited company, carried on business in innumerable lines, including the distribution and marketing of ammunition, blasting explosives, and accessories for the Principal, Imperial Chemical Industries (Exports) Limited, Glasgow, under an agency agreement terminable at will. In 1947, the Principal decided to transfer all its agencies in India and Ceylon to Imperial Chemical Industries (India) Limited, and gave notice to the assessee terminating its agency from April 1, 1948. After some correspondence, the agency was terminated on March 31, 1948, and the Principal paid certain amounts in three installments calculated on the basis of the income earned by the Imperial Chemical Industries (India) Limited, which took over the business from that date. The assessee objected to the inclusion of these amounts in its taxable income, claiming that they represented compensation for termination of the agency business and consideration for a restrictive covenant not to do business in the same line for a prescribed period. The Income-tax Officer and the Appellate Assistant Commissioner held that the amounts were taxable as revenue income, but the Income-tax Appellate Tribunal held that they were of the same nature as the normal commission receipts of the assessee and dismissed the assessee's appeals.
Finding of the Court:
The Supreme Court held that the compensation paid to the assessee was partly capital and partly revenue in nature. The Court held that the loss of the agency was a normal trading loss and that the income received by the assessee was a revenue receipt. However, the Court also held that the restrictive covenant entered into by the assessee was an independent obligation not to compete with the new agents in the same field for a specified period and that it was wholly unconnected with the assessee's agency terminated. Therefore, the Court held that part of the compensation attributable to the restrictive covenant was a capital receipt and hence not assessable to tax.
Issues: Whether the compensation received by the assessee for the termination of the agency was a capital receipt or a revenue receipt.
Ratio Decidendi: The Supreme Court held that the compensation paid to the assessee was partly capital and partly revenue in nature. The Court held that the loss of the agency was a normal trading loss and that the income received by the assessee was a revenue receipt. However, the Court also held that the restrictive covenant entered into by the assessee was an independent obligation not to compete with the new agents in the same field for a specified period and that it was wholly unconnected with the assessee's agency terminated. Therefore, the Court held that part of the compensation attributable to the restrictive covenant was a capital receipt and hence not assessable to tax.
Final Decision: The Supreme Court partly allowed the appeals and modified the answer given by the High Court to the question referred to it.
Judgment
SUBBA RAO, J. : Messrs. Best and Co., Ltd., Madras the respondent herein, hereinafter called the Agency Company, is a private limited company carrying on business in innumerable lines. It is doing the business of importers exporters, agents and sub-agents of various shipping insurance, and manufacturing companies, in the course of which it acquired numerous agencies from, manufactures both in India and outside for sale in India of textiles, dairy products, engineering equipment, soaps, paints, toilet goods, etc. One of such agencies was from the Imperial Chemical Industries (Exports) Limited, Glasgow, hereinafter called the Principal for distribution and marketing in certain territories in South India of its ammunition, blasting explosives and accessories. The said agency came into existence in 1900. The terms of the agency were not reduced to writing. The rates of commission were paid on terms agreed upon from time to time. The agency was terminable at will; but because of their mutual confidence, it continued without break till the year 1947 when the Principal decided to transfer all its agencies in India and Ceylon to Imperial Chemical Industries (India) Limited. By its letter, dated March 11, 1947, the Principal gave notice to the Agency Company terminating its agency from April 1, 1948. After some correspondence, the agency was terminated on March 31, 1948, and the Principal paid certain amounts in three installments calculated on the basis of the income earned by the Imperial Chemical Industries (India) Limited, which took over the business from that date. Pursuant to that agreement, the Principal paid on September 30, 1949, a sum of Rs. 34,100 as commission on sales during the year ended March 31, 1949, on September 30, 1950, a commission of Rs. 66,790 on sales during the year ended March 31, 1950, and on September 30, 1951, a commission of Rs. 3,35,371 on sales during the year ended March 31, 1951. During the assessment year 1950-51, the first amount was brought to tax and the assessment had become final and nothing turns upon it in these appeals. But in respect of the other two assessment years namely, 1951-52 and 1952-53, the Agency Company objected to the inclusion of the said amounts in its taxable income one the ground that the said amounts represented only compensation received for termination of the Agency business and also as consideration for the restrictive covenant not to do business in the same line for a prescribed period. The Income-tax Officer, in the first instance, and, on appeals, the Appellate Assistant Commissioner held that termination of the said agency held that the structure of the respondent s business and that they represented only the remuneration paid voluntarily by the Principal to the agent in appreciation of its past services. On further appeals by the Agency Company, the Income-tax Appellate Tribunal held that, as the three annual installments were based on future sales in the same territory as before, they were of the same nature as the normal commission receipts of the respondent. On that ground, both the appeals were dismissed. At the instance of the assessee, the following question was referred by the Tribunal to the High Court of Judicature at Madras for its opinion under S. 66 (1) of the Indian Income-tax Act, 1922, hereinafter called the Act :-
"Whether the aforesaid sum Rs. 66,790 and Rs. 3,35,371 are assessable under S. 10 for the assessment years 1951-52 and 1952-53."
A Division Bench of the said High Court, having regard to the circumstances of the case, came to the conclusion that by the termination of the agency the assessee lost an earning asset and the compensation paid for the destruction of such an asset was a capital receipt and, therefore, not liable to tax. The revenue, on obtaining the necessary certificate from the High Court, has preferred the present two appeals to this Court.
2. Mr. Rajagopala Sastri, learned counsel for the assessee, advance the contentio
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