A receipt from the termination of a distribution agreement that impacts profit-earning capacity is classified as a capital receipt and not taxable as income.

1. In the above two tax cases, the common question referred to us for our opinion is as follows :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the amount received by the assessee on the termination of distributorship agreement is only a capital receipt and hence not includible in the assessee's total income ?"
The assessment years are 1986-87 and 1987-88, respectively.

2. The brief facts of the case are that the assessee is a non - industrial company and has been distributing on principal to principal basis, the products of three companies, viz., (1) Tube Investments of India Limited, (2) T. I. Miller Limited, and (3) T. I. Diamond Chain Ltd., from May 1, 1964, by means of a distribution agreement entered into between them. The distribution agreement so entered into was periodically renewed and the last one was dated October 21, 1983, renewed for a period of five years from that date. The said distribution agreements were terminated by an agreement called termination of distribution agreement dated June 29, 1984, with effect from June 30, 1984. Consequent to the termination of the distribution agreement, the assessee agreed to receive a lumpsum amount of Rs. 42 lakhs and the same was agreed to be paid in ten equal quarterly instalments commencing from the quarter ending September 30, 1984. The said amount of Rs. 42 lakhs has to be paid by the three companies as follows :
Rs.
(1) Tube Investments of India Ltd. 40.00
(2) T. I. Miller Ltd. (since amalgamated with Tube Investments of India Ltd.) 0.50 lakhs
(3) T. I. Diamond Chain Ltd. 1.50 lakhs
The Assessing Officer was of the view that the compensation so accrued to the assessee consisted of three elements, i.e., (1) compensation for the cost of trained manpower transferred (162 nos.) computed on the basis of salary and travelling expenses incurred by the assessee during the training period in a sum of Rs. 11 lakhs. (2) The compensation for the cost of dealers / customers network (2,700 nos.) computed on the basis of expenses incurred by the assessee in establishing the dealership network in a sum of Rs. 22 lakhs. The aggregate of the above two elements in a sum of Rs. 33 lakhs represented recouping of revenue expenditure incurred by the assessee. As regards the balance amount of Rs. 9 lakhs, the Assessing Officer was of the view that the said amount has accrued to the assessee towards compensation of loss of profits. In that view, the entire amount of Rs. 42 lakhs which accrued to the assessee under the termination agreement was regarded as representing revenue receipts. On the said reasoning, the Assessing Officer brought the said amount to assessment.

3. On appeal, the Commissioner of Income Tax (Appeals) confirmed the view of the Assessing Officer. The Appellate Tribunal on further appeal, on consideration of the covenants contained in the distribution agreement and in the termination agreement had come to the conclusion that the amount accrued to the assessee should be regarded as a capital receipt in nature and hence the said amount cannot be assessed to tax treating the same as a revenue receipt. Therefore, at the instance of the Revenue, the present reference is made.

4. It is evident from the records that the assessee was distributing the products of the three companies, viz., Tube Investments of India Ltd., (2) T. I. Miller Ltd., and (3) T. I. Diamond Chain Ltd., under the distribution agreement from May 1, 1964, onwards till the termination of the same with effect from June 30, 1984. One of the conditions of the distribution