A sum received for sterilising as it were a capital asset, the consequence of which would be that it becomes unproductive of profits, cannot be regarded as income for purposes of taxation.

SRINIVASACHARI, J. : -

The following question has been referred to us by the Income-tax Appellate Tribunal, Madras Bench :

"Whether on the facts and in the circumstances of the case the sum of Rs. 40,000/- received from M/s. Chisty and Co., under the compromise dated 22-12-1943 is assessable to tax? The facts which led to the reference being made by the Appellate Tribunal may be briefly stated : The assessee in this case is a business-man carrying on business in the manufacture and sale of oil expellers and was the sole distributor for a certain type of oil expeller manufactured by Chisty and Co., Lahore, for the whole of India. By an agreement dated 15-2-1938, the assessee was appointed as the sole distributor. Under the terms of the agreement, the principals were not to deal directly or indirectly with any party. The agent agreed to purchase four expellers every month. Under the terms of the agreement this agency was to be in force for a period of six years certain, and the same was to continue automatically unless six months notice was given for termination by either party.

2. According to the assessee, the principals at Lahore stopped supplying the expellers as contracted, because they had started the manufacture of armaments, when the war broke out. The assessee, therefore, filed a suit being O. S. No. 125 of 1943 before the District Munsil, Bezwada alleging that the principals failed to supply expellers and spares according to his requirements and that the expellers and spares manufactured by them were being sold outside the territory of the assessee. In consequence of this, the assessee stated that he could not keep up his business engagements with his constituents in the matter of the supply of expellers.

The result was that he was put to heavy loss and inconvenience. He also claimed proprietary rights in a particular type of expeller "Diamond". He prayed that an injunction be issued restraining the merchants at Lahore from selling or otherwise disposing of any of the expellers with or without the trade name "Diamond. While the assessee filed a suit in Bezwada, as a counter-blast to this the firm at Lahore, Chisty and Co., filed a suit in Lahore claiming the termination of the agency and for permanent injunction restraining the assessee-firm from manufacturing expellers under the trade name Diamond. Both these suits were compromised on 22-12-1943.

3. The terms of the compromise are important for the purpose of the decision of the matter now before us. Under the terms of the compromise (a) both the parties were to withdraw the pending suits; (b) the sole distributorship granted to the assessee was to be cancelled, and (c) the respective parties were to continue to manufacture their own expellers, the firm at Lahore calling its expellers as "Chisty Diamond" and the firm at Bezwada "Andhra Diamond" and neither of the parties was permitted to imitate the patent of the other.

Above all, the most important clause was that the Lahore merchant was to give four expellers, two "N. S. Sholer type" and two "Standard type" free of price, (but without any ball bearing) by 25-1-1944 and if he failed to do so, the assessee was entitled to claim compensation of Rs. 12,000/- for each expeller.

As per the last condition of the compromise the Lahore firm supplied four expellers in January, 1944 and their cost price was fixed at Rs. 40,000/-. It is this amount in respect of which the assessee claims exemption from tax, as representing capital receipt.

4. The Income-tax Officer before whom exemption was claimed held that the four expellers that were given to the assessee were given to him in order that he might make good the loss of Profits in consequence of the failure of the Lahore firm to implement the terms of the agreement of 15-2-1938. Coming to that conclusion he held that the sum of Rs. 40,000/- represented a trading receipt. On appeal, the Appellate Assistant Commissioner concurred with the Income-tax Officer and confirmed the a