PETITIONER: KETTLEWELL BULLEN AND CO. Vs. RESPONDENT: COMMISSIONER OF INCOME-TAX, CALCUTTA DATE OF JUDGMENT: 01/05/1964 BENCH: SHAH, J.C. BENCH: SHAH, J.C. SUBBARAO, K. SIKRI, S.M. CITATION: 1965 AIR 65 1964 SCR (8) 97 CITATOR INFO : APL 1965 SC 452 (11,15) R 1966 SC 54 (11) R 1966 SC1325 (4,5) R 1970 SC1811 (6) F 1971 SC1590 (9,10) R 1972 SC 386 (18) RF 1973 SC1011 (25) ACT: Income-tax-Compensation received for surrendering managing agency-If capital or revenue-Test--Income-tax Act, 1922 (11 of 1922), ss. 2(6c), 10, 12. HEADNOTE: By an agreement with the Fort William Jute Company in 1925 the appellant company became its Managing Agent. The terms, inter alia, were that the appellant or its successors, unless they chose to resign, were to continue as Managing Agent until they ceased to hold certain shares in the capital of the company and were on that account removed by a resolution of the company or their tenure of office was determined by the winding up of the company. On termination of the agency, the Managing Agent was to get such reasonable compensation as was agreed upon between the Managing Agent and the company. Besides this managing agency the appellant held five other managing agencies. In 1952, the appellant by in agreement with M/s. Mugneeram Bangur & Co., agreed to relinquished the managing agency of the Fort William Jute Co., Ltd., in their favour in consideration of M/s. Mugneeram Bangur and Co. taking over the shares held by the appellant, procuring repayment of loans advanced by the appellant to the Fort William Jute Company and further procuring that the Fort William Jute Company. will pay com- pensation to the appellant. The appellant intimated the members of the latter company that it would be in the best interest of the share-holders to terminate the appellant's agency which would otherwise continue till 1957 and that M/S. Mugneeram Bengur & Co. had agreed to reimburse the Fort William Jute Co. Ltd. for payment of Rs. 3,50,000 as compensation to the appellant. The arrangement with M/s. Mugneeram Bangur & Co. was accepted by the Fort William Jute Co. and the appellant tendered resignation. M/s. Mugneeram Bangur and Co. 94 became the Managing agent. The appellant received the sum of Rs. 3,50,000 and credited the sum in its profit and loss account as having been received from the Fort William Jute Co. Ltd. on account of compensation for loss of office and in calculating the net profit for the purpose of income- tax for the year 1953-54 did not include this amount in the return. The Income-tax Officer in assessment included the amount in the appellant's taxable income. The Assistant Appellate Commissioner on appeal modified the assessment holding that the sum received by the appellant as compensation for surrendering the managing agency, which was to enure for five years more and might have continued for another twenty years, was a capital receipt. The Appellate Tribunal confirmed the order of the Appellate Assistant Commissioner. At the instance of the Commissioner of Income-tax the following question was referred to the High Court: Whether on the facts and circumstances of the case the sum of Rs. 3,50,000 received by the assessee to relinquish the managing agency was a revenue receipt assessable under the Indian Income-tax Act?. The High Court answered the question in the affirmative. HELD: that the answer should be in the negative. The transaction in question was not a trading transaction, but one in which the assessee parted with an asset of enduring value. The compensation received was compensation for loss of capital. It was inconsequential whether the appellant conducted the remaining agencies after the determination of the one in question. Where payment is made as compensation for cancellation of a contract which does not affect the trading structure of the business, nor causes 'deprivation of what in substance is source of income, and is a normal incident of the business, the compensation is revenue. But where the cancellation impairs the trading structure or results in loss of the source of income, the compensation paid for the cancellation of the agreement is normally capital receipt. Commissioner of Income-tax Nagpur v. Rai Bahadur Jairam Yalji, 35 I.T.R. 148, referred to. Commissioner of Income-tax v. Shaw Wallace and Co. L.R. 59 I.A. 206, explained. Raja Bahadur Kamakshaya Narain Singh of Ramgarh v. Commissioner of Income-tax, Bihar and Orissa, L.R. 70 I.A. 180, Commissioner of Income-tax and Excess Profits Tax Madras v. South India Pictures, 29 I.T.R. 910, Peirce Leslie and Co. Ltd. v. Commissioner of Income-tax, Madras, 38 I.T.R. 356, Commissioner of Income-tax, Hyderabad-Deccan v. Vazir Sultan and Sons. 36 I.T.R. 175 and Godrej & Co. v. Commissioner of Income-tax, Bombay City, 37 I.T.R. 381, discussed. JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 226 of 1963.
95
Appeal from the judgment and order dated August 1, 1961, of
the Calcutta High Court in Income-tax Reference No. 75 of
1956.
S. Chaudhuri, D. N. Mukherjee and D. N. Gupta, for the
appellant.
K. N. Rajagopal Sastri and R. N. Sachthey, for the res-
pondent.
May 1, 1964. The Judgment of the Court was delivered by
SHAH J.-The appellant is a public limited company. and has
its registered office at Calcutta. By an agreement dated
May 1, 1925, the Fort William Jute Company Ltd. appointed
the appellant its managing agent upon certain terms and
conditions set out therein. Under the agreement the
appellant was to receive as managing agent remuneration at
the rate of Rs. 3,000 per month, commission at the rate of
ten per cent on the profits of the company’s working,
additional commission at three per cent on the cost price of
all new machinery and stores purchased by the managing agent
outside India on account of the company, and interest on all
advances made by the managing agent to the company on the
security of the company’s stocks, raw materials and
manufactured goods. The appellant and its successors in
business, whether under the same or any other style or firm,
unless they resigned their office were entitled to continue
as managing agent until they ceased to hold shares in the
capital of the company of the aggregate nominal value of Rs.
1,00,000 and were on that account removed by a special
resolution of the company passed at an Extraordinary meeting
of the company, or until the managing agent’s tenure was
determined by the winding up of the company. In the event
of termination of agency in the contingencies specified, the
managing agent was to receive such reasonable compensation
for deprivation of office, as may be agreed upon between the
managing agent and the company and in case of dispute, as
may be determined by two arbitrators. By cl. 8, the
managing agent was at liberty at any time to
resign the office of managing agent by leaving at the
registered office of the company previous notice in writing
of its intention in that behalf. The agreement did not
specify any period for which the managing agency was to
enure. Since the successors of the appellant were also to
continue as agents, unless they resigned or became
disqualified, the duration was in a sense unlimited. But by
virtue of s. 87-A(2) of the Indian Companies Act, 1913, the
appointment of the appellant as managing agent would expire
on January 14, 1957, i.e. on the expiry of twenty years from
the date on which the Indian Companies (Amendment) Act,
1956, was brought into operation. Section 87-A(2), however,
did not prevent the managing agent from being re-appointed
after the expiry of that period.
Beside the managing agency of the Fort William Jute Co. Ltd.
the appellant held at all material time managing agencies of
five other limited companies, viz., Fort Closter Jute
Manufacturing Co. Ltd., Bowreach Cotton Mills Co. Ltd.,
Dunbar Mills Ltd., Mothola Co. Ltd and Joonktollee Tea Co.
Ltd. The appellant had advanced Rs. 12,50,000 to the Fort
William Jute Co. Ltd. on the security of the stocks, raw
materials and manufactured goods of that company. The
appellant held in 1952, 600 out of 14,000 ordinary shares of
the face value of Rs. 100 each. and 6,920 out of 10,000
preference shares also of the face value of Rs. 100 each.
On May 21, 1952, the appellant entered into an agreement
with M/s Mugneeram Bangur & Co., the principal conditions of
which were:
(i) M/s Mugneeram Bangur & Co. to purchase the entire
holding of shares of the appellant in the Fort William Jute
Co. Ltd.-ordinary shares at Rs. 400 each and preference
-,hares at Rs. 185 each, and to make an offer to all holders
of the company’s shares-preference and ordinary-to purchase
their holdings at the same rates;
(ii) M/s Mugneeram Bangur & Co. to procure repayment on or
before June 30, 1952 of all loans
97
made by the appellant to the principal company;
(iii) M/s Mugneeram Bangur & Co. to procure that the
principal company will compensate the
appellant for loss of office in the sum of Rs. 3,50,000,
such sum being payable to the appellant after it submitted
its resignation as managing agent; and
(iv) M/s Mugneeram Bangur & Co. to reimburse the company the
amount payable to the appellant.
The reasons for which the appellant agreed to relinquish the
managing agency were set out in a letter dated May 28, 1952,
addressed by the appellant to the members of the company
intimating that M/s Mugneeram Bangur & Co. were willing to
purchase the shares at the same rates at which they had
agreed to purchase the share-holding of the appellant. It
was recited in the letter that the installation of modern
machinery in the company’s factory entailed heavy capital
expenditure and it was necessary to obtain a loan secured by
debentures charged on the company’s property; that large
sums were required for renewals and replacements of
machinery and it was not possible to obtain additional bank
accommodation; that the appellant had maade large advances
to the company exceeding Rs. 12,50,000 and, having regard to
its other commitments, it was doubtful if it would be able
to make available to the company addiional finance; that the
arrangement with M/s Mugneeram Bangur & Co., by acceptance
of the terms offered by them, was the most satisfactory
method of solving the company’s difficulties; that it was in
the best interests of the shareholders to terminate the
appointment of the appellant which in the normal course
would not fall due for renewal until January 14, 1957; that
M/s Mugneeram Bangur & Co. had agreed to procure that the
Fort William Jute Co. Ltd. will pay to the appellant Rs.
3,50,000 and that M/s Mugneeram Bangur & Co. will reimburse
the company for the payment, it being anticipated that they
will in Line course be appointed managing agents of the
company.
98
The arrangement with M/s Mugneeram Bangur & Co. was carried
out. The appellant tendered its resignation with effect
from July 1, 1952, in pursuance of the terms of the
agreement and M/s Mungneeram Bangur & Co. were appointed as
managing agent of the company. The sum of Rs. 3,50,000
received by the appellant from the company which it is
common ground was provided by M/s Mugneeram Bangur & Co.-was
credited in the profit and loss account of the appellant as
received from the Fort William Jute Co. Ltd. on account of
compensation for loss of office. But in arriving at the net
profit in the return for income-tax for the year 1953-54
this amount was deleted. In the proceedings for assessment
for the year 1953-54 the Incometax Officer, Companies
District 1V, Calcutta, included this amount in the
appellant’s taxable income. In appeal the Appellate
Assistant Commissioner modified the assessment holding that
the sum of Rs. 3,50,000 received by the appellant as
compensation for surrendering the managing agency, which was
to enure for five years more, and which in normal course
might have continued for another term of twenty years, was a
capital receipt. The Appellate Tribunal confirmed the order
of the Appellate Assistant Commissioner, observing that
compensation received tinder an agreement for “an outright
sale of such an agency to a third party”, not being one
which a businessman enters in the normal course of business,
nor being one which amounts to modification, alteration or
discharge of normal incidents of such a business, was not
assessable to income-tax as a revenue receipt.
At the instance of the Commissioner of Income-tax, the
Tribunal referred under s. 66(1) of the Income-tax Act,
1922, the following question to the High Court of Judicature
at Calcutta:
“Whether on the facts and in the circumstances of the case
the sum of Rs. 3,50,000 received by the assessee to
relinquish the managing agency was a revenue receipt
assessable under the Indian Income-tax Act?”
99
The High Court, for reasons which we will presently set out,
answered the question in the affirmative. With certificate
granted by the High Court, this appeal is preferred by the
appellant.
This case raises once again the question whether com-
pensation received by an agent for premature determination
of the contract of agency is a capital or a revenue receipt.
The question is not capable of solution by the application
of any single test: its solution must depend on a correct
appraisal in their true perspective of all the relevant
facts. As observed in Commissioner of Income-tax Nagpur v.
Rai Bahadur Jairam Valji(1) by Venkatarama Aiyar, J.,:
“The question whether a receipt is capital or income has
frequently come up for determination before the courts.
Various rules have been enunciated as furnishing a key to
the solution of the question, but as often observed by the
highest authorities, it is not possible to Jay down any
single test as infallible or any single criterion as
decisive in the determination of the question, which must
ultimately depend on the facts of the particular case, and
the authorities bearing on the question are valuable only as
indicating the matters that have to be taken into account in
reaching a decision. Vide, Van Den Berghs Ltd. v. Clark
[(1935) 3 I.T.R. (Engl. Cas.) 17]. That, however is not to
say that the question is one of fact, for as observed in
Davies (H. M. Inspector of Taxes) v. Shell Company of China
Ltd. (1952) 22 I.T.R. (Suppl.) 1) these questions between
capital and income, trading profit or no trading profit, are
questions which, though they may depend no doubt to a very
great extent on the particular facts of each case, do
involve a conclusion of law to be drawn from those facts’.”
(1) [1959] SUPP. 1 S.C.R. 110, 113.
100
The interrelation of facts which have a bearing on the ques-
tion propounded must therefore first be determined. The
managing agency was not, except in the circumstances set out
in cl. 2 of the agreement, liable to be determined at the
instance of the company before January 14, 1957, unless the
appellant by giving notice of three weeks voluntarily
resigned the agency. At the date of termination the agency
had five more years to run, and the Campanies Act did not
prohibit renewal of the agency in favour of the appellant,
after the expiry of the initial period of twenty years. The
appellant company was formed for the object, amongst others,
(vide cl. 3(2) of the Memorandum of Association of the
appellant) of carrying on the business of managing agencies.
The appellant was entitled under the terms of the agreement
to receive so long as the agency enured ‘Len per cent of the
profits of the company’s working, three per cent on all
purchases of stores and machinery abroad, and a monthly
remuneration of Rs. 3,000. The appellant submitted its
resignation in exercise of the power reserved under cl. 8 of
the managing agency agreement, but that resignation was it
is common ground part of the arrangement with M/s Mugneeram
Bangur & Co. dated May 21, 1952. Under the terms of the
managing agency agreement, the principal company was not
obliged to pay any compensation to the appellant for
voluntary resignation of the agency, but in consideration of
the appellant parting with its shareholding and submitting
resignation of the managing agency so as to facilitate the
appointment of M/s Mugneeram Bangur & Co. as managing agent,
the latter purchased the shareholding of the appellant,
undertook to make available Rs. 3,50,000 for payment to the
appellant and to discharge the debt due by the company to
the appellant. Payment of Rs. 3,50,000 was therefore an
integral part of an arrangement for transfer of the managing
agency. A managing agency of a company is in the nature of
a capital asset: that is not denied. It is true that it is
not like an ordinary asset capable of being transferred from
one person to another. Theoretically the power to appoint
or dismiss the managing agent may lie with the directors of
the company, but in practice the power lies with the person
or per-
101
sons having a controlling interest in the share-holding of
the company. M/s Mugneeram Bangur & Co. were anxious to be
appointed managing agents of the principal company, and for
the purpose the appellant had to be persuaded to agree to a
premature termination of its agency. This was secured for a
triple consideration; sale of shares held by the appellant
at an a-reed price, stipulation to discharge the liability
of the company to repay the loans due by the company, and
payment of Rs. 3,50,000 as compensation for termination of
the appellant’s agency.
The High Court summarised the effect of the agreement
between the appellant and M/s Mugneeram Bangur & Co. as
follows: The sum of Rs. 3,50,000 described as compensation
for loss of office of the managing agent was part of the
whole scheme incorporated in the agreement. Each clause of
the agreement was a consideration of the other clauses and
payment of compensation for the alleged loss of office did
not, being part of the total scheme, stand by itself.
Determination of the managing agency of the appellant was
not compulsory cessation of business: it was a voluntary
resignation for which under the agency agreement the
appellant was not entitled to any compensation, but by the
device of procuring a purchaser the appellant was doing
“business of selling the managing agency and getting a
profit and value for it which it otherwise could not have
got”. The High Court stamped this transaction with the
nature and character of a “trading or a business deal”,
because in their view the managing agency of a company-an
institution peculiar to Indian business conditions–which
creates a managing agent as an alter ego. of the managed
company with authority to utilise the existing structure of
the company’s Organisation to carry on business, earn
profits, and in fact, virtually to trade in every possible
sphere open to the company, may. be regarded as circulating
capital, where several managing agencies are conducted by an
assessee. Therefore in the view of the High Court the
compensation received for surrendering the agency was
remuneration received on account of conducting the business,
and was income. The judgment of the High Court proceeded
substantially upon the following two grounds:
102
(1) that on the facts of the case, the managing agency held
by the appellant of the Fort William Jute Co. Ltd. was
stock-in-trade; and
(2) that the appellant was formed with the object of
acquiring managing agencies, and in fact held managing
agencies of as many as six com-
panies. Earning profits by conducting the management of
companies, being the business of the appellant, compensation
received as consideration for surrendering the managing
agency was a revenue receipt.
We are unable to agree with the High Court that the managing
agency of the Fort William Jute Co. Ltd. was an asset of the
character of stock-in-trade of the company. The appellant
was formed with the object, among others, of acquiring
managing agencies of companies and to carry on the business
and to take part in the management, supervision or control
of the business or operations of any other company,
association, firm or person and to make profit out of it.
That only authorised the appellant to acquire as a fixed
asset, if a managing agency may be so described, and to
exploit it for the purpose of profit. But there is no
evidence that the company was formed for the purpose of
acquiring and selling managing agencies and making profit by
those transactions of sale and purchase. A managing agency
is not an asset for which there is a market, for it depends
upon the personal qualifications of the agent. Counsel
appearing on behalf of the Commissioner concedes that the
case that the managing agency was of the nature of stock-in-
trade was not set up before the Tribunal, and he does not
rely upon this part of the reasoning of the High Court in
support of the plea that the compensation received by the
appellant is a revenue receipt. He relies upon the
alternative ground, and contends that the managing agency of
the Fort William Jute Co. Ltd. was part of the framework of
the business of earning profit by working as managing agent
of different companies, and in the normal course,
termination of employment by the principal companies of the
appellant as managing agent being a normal incident of such
business, compensation received by the appellant is
103
not for loss of capital, but must be regarded as a trading
receipt especially when the termination of the agency does
not impair the structure of the business of the appellant.
In the present case there is a special circumstance which
must first be noticed. In truth the amount of Rs. 3,50,000
was received by the appellant from M/s Mugneeram Bangur &
Co. in consideration of the former agreeing to forego the
agency which it held and which M/s Mugneeram Bangur & Co.
were anxious to obtain. It was in a business sense a sale
of such rights as the appellant possessed in the agency to
M/s Mugneeram Bangur & Co. This is supported by the recitals
made in cl. 2 of the agreement that if at any time within
six months after the completion of such sale, M/s Mugneeram
Bangur & Co. were unable to exercise the voting rights
attached to the shares purchased by them the appellant will
appoint any person nominated by M/s Mugneeram Bangur & Co.
to attend and vote for them at any meeting of the company or
the holders of any class of shares to be held within such
period in such manner as M/s. Mugneeram Bangur & Co. may
decide. The object underlying the agreement was therefore
to transfer he managing agency to M/s Mugneeram Bangur & Co.
or at least to effectuate their appointment in place of the
appelant as managing agent of the Fort William Jute Co. Ltd.
All the stipulations and the covenants of the agreement,
viewed in the light of the surrounding circumstances, do
stamp the transaction as one of surrender of the rights of
the appellant in the managing agency so that corresponding
rights may arise in favour of M/s. Mugneeram Bangur & Co.
It would be irrelevant in considering the true nature of he
transaction, to project the somewhat legalistic con-
sideration that a managing agency is not transferable. It
is because it is not directly transferable, that the
arrangement incorporated in the agreement was effected. It
would be difficult to regard such a transaction relating to
a managing agency as a trading transaction.
Counsel for the assessee contended that even assuming at the
form of the transaction under which for loss of the managing
agency the appellant received compensation from the
principal company is decisive, or has even a dominant
104
impact, and the ultimate source from which the compensation
was provided is to be ignored, the compensation received for
loss of agency by the agent must always be regarded under
the Indian Income-tax Act as capital receipt. In support of
that contention counsel placed strong reliance upon the
judgment of the Judicial Committee in Commissioner of
Income-tax v. Shaw Wallace and Co.(‘). In the alternative,
counsel pleaded that even if the extreme proposition was not
found acceptable, the right of the assessee in the managing
agency of the principal company was to enure for another
five years and which in the normal course would have
continued for another twenty years was an enduring asset and
consideration received by the appellant for extinction of
that asset was a capital receipt.
On behalf of the Income-tax Department it was contended that
Shaw Wallace & Co’s case(‘) does not lay down any
proposition of general application to compensation paid for
determination of all agency contracts. It was further
submitted that, having regard to the nature of the agreement
and the voluntary resignation submitted by the assessee no
enduring asset remained vested in the assessee, and none was
attempted to be transferred: the compensation directly paid
by the principal company (which compensation was under the
terms of the contract not payable) was only a “measure of
profit” which the appellant would, but for the resignation,
have earned, and was therefore in the nature of revenue. It
was also urged that compensation was not payaable to the
assessee when resignation of the mainaging agency was
tendered under cl. 8 of the agreement, and therefore the
amount sought to be brought to tax was received by the
assesseein the course of a normal trading transaction
ofthe
assessee.Finally, it was urged that in any event,
bythe
loss ofthe agency the framework of the business
ofthe
assessee was not at all impaired, and therefore also the
compsensation received must be regarded as revenue and no
capital.
Whether a particular receipt is capital or income from
business, has frequently engaged the attention of the court
It may be broadly stated that what is received for loss of
cap-
(1) L. R. 59 I. A. 206
105
tal is a capital receipt: what is received as profit in
trading transaction is taxable income. But the difficulty
arises in ascertaining whether what is received in a given
case is compensation for loss of a source of income, or
profit in a trading transaction. Cases on the borderline
give rise to vexing problems. The Act contains no real
definition of income; indeed it is a term not capable of a
definition in terms of a general formula. Section 2(6C)
catalogues broadly certain categories of receipts which are
included in income. It need hardly be said that the form in
which the transaction which gives rise, to income is clothed
and the name which is given to it are irrelevant in
assessing the exigibility of receipt arising from a
transaction to tax. It is again not predicated that the
income must necessarily have a recurrent quality. We are
not called upon to enter upon an extensive area of enquiry
as to what receipts may be regarded as income generally, but
merely to consider in this case whether receipt of
compensation for surrendering the managing agency may be
regarded as capital or as revenue. In the absence of a
statutory rule, payment made by an employer in consideration
of the employee releasing him from his obligations under a
service or agency agreement or a payment made voluntarily as
compensation for determination of right to office arises not
out of employment, but from cessation of employment and may
not generally constitute income chargeable under ss. 10 and
12. It may be mentioned that this rule has been altered by
the legislature by the enactment of s. 10(5A) by the
Finnance Act of 1955, which provides that compensation or
other payment due to or received by a managing agent of an
Indian company at or in connection with the termination or
modification of his managing agency agreement with the
company, or by a manager of an Indian company at or in
connection with the termination of his office or
modification of the terms and conditions relating thereto,
or by any person managing the whole or substantially the
whole affairs of any other company in the taxable
territories at or in connection with the termination of his
office or the modification of the terms and conditions
relating thereto, or by any person holding an agency in the
taxable territories for any part of the
106
activities relating to the business of any other person, at
or in connection with the termination of his agency or the
modification of the terms and conditions relating thereto,
shall be deemed to be profits and gains of a business
carried on by the managing agent, manager or other person,
as the case may be, and shall be liable to tax accordingly.
But this amendment was made under the Finance Act,, 1955,
with effect from April 1, 1955, and has no application to
the present case.
The Indian Income-tax Act is not in pari materia with
the English Income-tax Statutes. But the authorities under
the English Law which deal not with the interpretation of
any specific provision, but on the concept of income, may
not be regarded as proceeding upon any special principles
peculiar to the English Acts so as to render them inappli-
cable in considering problems arising under the Indian
Income-tax Act. It is well-settled in England that money
paid to compensate for loss caused to an assessee’s trade is
nor income. In Short Bros. Ltd. v. The Commissioner of
Inland Revenue(l) a sum received as compensation for loss
resulting from cancellation of a contract was held to be
revenue in the ordinary course of the assessee’s trade, and
liable to excess profits duty. Similarly in The
Commissioners of Inland Revenue v. The North fleet Coal and
Ballast Co. Ltd.(‘), compensation paid by a person who had
agreed to purchase a certain quantity of chalk yearly for
ten years, from a company which was the owner of a quarry,
in consideration of being relieved of his liability under
the contract was held chargeable to excess profits duty as
trading profit in the hands of the company.
In The Commissioners of Inland Revenue v. Newcastle
Breweries Ltd.(3) compensation received under an order of
the War Compensation Court, under the Indemnity Act, 1920,
in addition to what was paid by the Admiralty for rum taken
over in exercise of the power under the Defence of the Realm
Regulations was held to be revenue.
(1) 12 T. C. 955
(3) 12 T. C. 927
(2) 12 T. C. 1102
107
In Ensign Shipping Co. Ltd. v. The Commissioner of Inland
Revenue(‘) an amount paid by the Government to a ship-owner
to compensate him for loss resulting from detention of his
ships during a coal-strike, and for wages etc. was held
liable to excess profits duty. Again as held in Burma Steam
Ship Co. Ltd. v. Commissioners of Inland Revenue(‘) money
received by a ship-owner from a firm of ship-builders to
compensate for loss resulting from the failure by the latter
to complete repairs to a ship within the stipulated period
was regarded as revenue.
These cases illustrate the principle that compensation for
injury to trading operations, arising from breach of
contract or in consequence of exercise of sovereign rights,
is revenue. These cases must, however, be distinguished
from another class of cases where compensation is paid as a
solatium for loss of office. Such compensation may be
regarded as capital or revenue: it would be regarded as
capital, if it is for loss of an asset of enduring value to
the assessee, but not where payment is received in
settlement of loss in a trading transaction.
In Chibbet v. Joseph Robinson & Sons 3) the assessees who
were ship-managers employed by a steamship company under a
contract which provided that they should be paid a
percentage of ,he company’s income, were paid compensation
for loss of office in anticipation of liquidation of the
steamship company. It was held that payment to make up for
loss resulting from cessation of profits from employment was
not itself an annual profit, but was payment in respect of
termination of employment and was not assessable to tax.
In Du Cros v. Ryall (4) the assessee settled a claim made by
his employee for damages for wrongful dismissal and paid
57,250 as compensation for wrongful dimissal. It was held
that no. part could be apportioned to salary and commission
and the whole escaped assessment.
In Duff v. Barlow(‘) the managing director of the appellant
company who was employed for a period of ten
(1) i2 T. C. 1169.
(3) 9 T. C. 48.
(2) 16 T. C. 67.
(5) 23 T. C. 631. (4) 19 T. C- 444.
108
years was asked by it to manage the business of one of its
subsidiaries, and to receive a percentage of profits made by
the subsidiary. The employment was terminated by mutual
agreement two years after its commencement and 4,000 were
paid as compensation to the managing director for loss of
his rights of future remuneration. This was held not
taxable. because it was a sum paid as compensation for loss
of a source of income and hence a capital asset. This case
was followed in Henley v. Murray(‘) where the appellant
employed as a managing director of a property company under
a service agreement which was not determinable till March
31, 1944, was also appointed a director of a subsidiary
company. At the request of the Board of directors of the
property company the appellant resigned his office in the
property company as well as its subsidiary and received from
the property company an amount equal to the remuneration
which he would, under the agreement, have been entitled to,
if his appointment had not been determined. It was held by
the Court of Appeal that the use of the expression
“compensation for loss of office”‘ was not the determining
factor when the bargain itself stood cancelled, and the sum
paid was in consideration of total abandonment of all
contractual rights which the other party
had. The receipt was in the circumstances not taxable.
The payment was not voluntarily made; the bargain was
that the appellant should resign and in consideration
thereof,
In Barr, Grombie and Co. Ltd. v. Commissioners of Inland
Revenue(‘) the appellant company managed the ships of
another company under an agreement for a period of fifteen
years. The shipping company went into liquidation and a sum
exceeding pound 16,000 was paid to the appellant company for
the eight years which were still to run to the date of
expiry of the agreement. Over a period upwards of sixteen
years only two per cent of the appellant company’s income
was derived from other managements, and on the liquidation
of the shipping company the appellant company lost its
entire business except for some abnormal and temporary
business. It was held by the Court of Ses-
(1) 31 T. C. 351 (2) 26 T. C. 406
109
sion in Scotland that the sum in question was not a trading
receipt of the appellant company. Lord President Normand
observed:
“In the present case virtually the whole assets of the
Appellant Company consisted in this agreement. When the
agreement was surrendered or abandoned practically nothing
remained of the Company’s business. It was forced to reduce
its staff and to transfer into other premises, and it really
started a new trading life. Its trading existence as
practised up to that time had ceased with the liquidation of
the shipping Company.”
These cases establish the distinction between compensation
for loss of a trading contract and solatium for loss of the
source of income of the assessee.
But payment Of compensation for loss of office is not always
regarded as capital receipt. Where compensation is payable
under the terms of the contract, which is determined,
payment is in the nature of revenue and therefore taxable.
For instance in Henry v. Foster(‘) it was held that when
compensation stipulated under a contract is paid for loss of
office, it is taxable under Sch. ‘E’, and it was also held
in Dale v. De Soissons(2) that compensation paid under an
agreement to an Assistant of the managing director for
premature termination of employment was held to be income.
The principle on which these cases proceeded was also
applied by the Court of Session in Scotland in Kessal
Parsons and Co. v. Commissioners of Inland Revenue(3) to a
case in which there was no express term for payment of
compensation on termination of employment. The appellants
in that case carried on business as agents on a commission
basis for sale in Scotland of the products of various
manufacturers, and entered into agency agreements for that
purpose. At the instance of the manufacturer concerned, one
of the agreements which was for a period of three years was
terminated at the end of the
(1) (1931) 145 L. T. R. 225
(3) 21 T. C. 608, 520
(2) [1950] 2 All E. R 460
110
second year in consideration of a payment of pouns_ 1,500.
It was held by the Court of Session that no capital asset of
the assessee was depreciated in value, or became of less use
for the purpose of the assessee’s business. The sum paid
was accordingly included in the calculation of the taxable
profits for the year in which it was received. Lord
President Normand Observed.
“We are not embarrassed here by the kind of difficulties
which arise when, by agreement, a benefit extending over a
tract of future years is renounced for a payment made once
and for all. The sum paid in this case is really and
substantially a surrogatum for one year’s profits.”
The foundation of the distinction made in Kelsall Parsons
and Co.’s case(‘): Henry v. Foster(‘): and Dale v. De
Soissons(3) is to be found in the observations made by Lord
Macmillan in Van Den Berchs Ltd. v. Clark(‘). In that case
two companies which were manufacturers of ,margarine an
margarine and similar products entered into an agreement
with a view to end competition between them and to work in
friendly alliance and to share the profits and losses in
accordance with an elaborate scheme. This arrangement was
terminated by mutual agreement in consideration of the
payment by the Dutch company pound 450,000 to the appellant
company as damages. It was held by the House of Lords that
the amount was received by the appellant as payment for
cancellation of the appellant company’s future rights under
the agreements, which constituted a capital asset of the
company, and that it was a capital receipt. lord Macmillan
observed.
“Now what were the Appellants giving up? They gave up their
whole rights under the agreements for thirteen years ahead.
These agreements are called in the States Case “pooling
agreements”, but that is a very inadequate description of
them, for they did much more than
(1) 21 T.C. 608,620 (2) [1931] 145 L.T.R.
225
(3) [I950] 2 All E.R. 460 (4) 19 T. C. 390, 431
111
merely embody a system of pooling and sharing profits. If
the Appellants were merely. receiving in one sum down the
aggregate of profits which they would otherwise have receiv-
ed over a series of years, the lump sum might be regarded as
of the same nature as the ingredients of which it was
composed. But even if a payment is measured by annual
receipt, it is not necessarily in itself an item of income.”
Cases which have lately arisen before the Courts in the
United Kingdom have elaborated this distinction. In
Commissioner of Inland Revenue v. Fleming and Co.(‘) the
Court, of Session held following Kelsall Parsons & Cos’
case(‘), that compensation paid to the assessee who carried
on business as manufacturers’ agent and general merchants
and had acted as the sole agents since 1903 for certain
products of the manufacturers for termination in 1948 of the
agency at the instance of the manufacturers was regarded as
revenue. In the view of Lord President Cooper the cases
relating to determination of agencies, broadly speaking,
fell on two sides of the line drawn in the light of the
varying circumstances:
(a) “the cancellation of a contract which affects the
profit-making sructure of the recipient of compensation and
involves the loss of an enduring trading asset”; and
(b) “the cancellation of a contract which does not affect
the recipient’s trading structure nor deprive him of any
enduring trading asset, but leaves him free to devote his
energies and Organisation released by the cancellation of
the contract to replacing the contract which has been lost
by other like contracts”,
and held that the case fell within the second class, and not
the first.
In Wiseburgh v. Domville(3) the appellant had entered into
an agreement in 1942 under which he acted
(1) 33 T. C. 57
(3) 36 T. C. .527
(2) 21 T.C. 608, (20
112
as sole agent for the manufacturer. In 1948 when this
agreement could have been determined by notice expiring in
October 1949, the manufacturer dismissed him. The appellant
received pound 4,000 as damages for breach of agreement.
The appellant had several agencies from time to time as
agents and it was one of the incidents of agency business
that one agency may be stopped
and another may come and it being a normal incident of the
kind of business that the appellant was doing, that an
agency should come to an end, compensation paid was regarded
as income on the principle laid down in Kelsall Parsons and
Co.’s case(‘).
In another case which soon followed-Anglo French Exploration
Co. Ltd. v. Clayson(2)-the appellant company carried on
business, among others, is secretary and agent for a number
of other companies. A South African Company appointed the
appellant company as its secretary and agent at a
remuneration of pound 1,500 per annum tinder a contract
terminable at six months’ notice. Under an arrangement with
the purchaser of the controlling interest of the
shareholders under which the appellant company was to resign
its office as secretary and agent of the South African
Company, an amount of pound 20,000 received by the appellant
company was held by the Court of Appeal in the nature of a
trading receipt.
In Blackburn v. Close Bros. Ltd.(‘) the respondent company
carried on business of merchant bankers and of a finance and
issuing house and derived income in the form of allowances
for performing managerial and secretarial services.
Following a dispute with one ‘S’ for which the respondent
company had agreed to provide secretarial services for three
years at a remuneration of pound 8,000 per annum, the
agreement was terminated within about 2-1/2 months from the
date of its commencement. pound 15,000 received by the
respondent company as compensation for termination of the
agreement was held to be a trading receipt. Pennycuick J.,
held that the contract was one of a number of ordinary
commercial contracts for rendering
(2) 36 T. C. 545
(1) 21 T.C. 608, 620
39 T.C. 164
113
services by the assessee in the course of carrying on its
trade, and therefore the sum received on the cancellation of
the agreement was a receipt of a revenue nature.
It is manifest that the principle broadly stated in the
earlier cases, that compensation for loss of office, or
agency, must be regarded as a capital receipt, has not been
approved in later cases. An exception has been engrafted
upon that principle that where payment even if received for
termination of an agency agreement, the agency is one of
many which the assessee holds, and the termination of the
agency does not impair the pofit making structure, but is
within the framework of the assessee’s business, it being a
necessary incident of the business that existing agencies
may be terminated and fresh agencies may be taken, the
receipt is revenue and not capital.
A case on the other side of the line may be noticed: Sabine
v. Lookers Ltd.(‘). Under agreements, annually renewed with
the manufacturers, the respondent company had acted for many
years as their main distributors in the Manchester area of
the manufacturers’ products, which it bought for resale.
The respondent had sunk considerable sums in fixtures and
equipment specially designed for the trade of wholesale
dealers and carried a large stock of spare parts mainly for
wholesale sale. The whole of the trade of the respondent
was geared to the display, sale, service and repairs of the
manufacturers’ products. Upto 1952 inclusive,, the
manufacturers had included in its agreements with
distributors a standard “continuity clause, giving the
distributors, on certain conditions, the option of renewal
for a further year. But in 1953, the manufacturers adopted
a new standard agreement, containing a new continuity clause
which the respondent company regarded as giving it less
security than before. As compensation for loss resulting
from the alterations, the manufacturers paid to the
respondent company, a sum calculated on sales to the trade
during the contract period. It was held that this was a
capital receipt, because, by the, modification the framework
of the respondent’s business was impaired.
(1) 38 T. C. 120
114
Elaborate arguments were presented before us on the decision
of the Judicial Committee in Shaw Wallace & Co.’s Case(‘).
The appellant contended that Shaw, Wallace’s Case(‘) laid
down a principle of general application applicable to all
cases of compensation received from the principal as
solatium for determination of the contract of agency.
Counsel for the Revenue contended that the principle should
be restricted to its special facts, and cannot be extended
in view of the later decisions. It is necessary to closely
examine the facts which gave rise to that case. Shaw
Wallace & Company carried on business as merchants and
agents of various companies and had branch offices in
different paris of India. For a number of years they acted
as distributing agents in India for the Burma Oil Company
and the Anglo-Persian Oil Company, but without a formal
agreement with either company. The two Oil Companies having
combined decided to make other arrangements for distributing
their products. Each Company terminated its contract with
Shaw Wallace & Company and paid compensation to it, which
aggregated to Rs. 15,25,000. This amount, subject to
certain allowances, was sought to he assessed to income-tax
under ss. 10 and 12. The High Court of Calcutta held that
the compensation received by the assessee was a capital
receipt. In appeal to His Majesty in Council the decision
of the High Court was affirmed.
The Judicial Committee declined to seek inspiration from the
English decisions cited at the Bar. The Board observed that
the expression “income” which is not defined in the Act
connotes a periodical monetary return coming in with some
sort of regularity, or expected regularity, from definite
sources: the source is not necessarily one which is expected
to be continuously productive, but it must be one whose
object is the production of a definite return, excluding
anything in the nature of a mere windfall. They further
observed that the income chargeable under head (iv) of s. 6
business” read with s. 10 is to be in respect of the profits
and gains of any business carried on by the assessee, and
therefore the sums which the Income-tax Department sought to
charge could only be taxable if they were the pro-
(1) L.R. 59 I.A. 2o6.
115
duce or the result of-carrying on the agencies of the Oil
Companies in the year in which they were received by the
assessee. But when once it was admitted that they were sums
received, not for carrying on this business, but as some
sort of solatium for its compulsory cessation, the answer
seemed fairly plain. The Board observed that if compen-
sation received for sale of the business or its goodwill was
capital, the same reasoning ought to apply when the sum
received was in the nature of a solatium for cessation of a
part of the business, and it was a matter of no consequence
that the assessee continued to pursue its other independent
commercial interests, and profits from which were taxed in
the ordinary course, for the sums sought to be taxed had no
connection with the continuance of the assessee’s other
business: the profits earned by the assessee, it was observ-
ed, were “the fruit of a different tree, the crop of a
different field”, and if under s. 10 the compensation was
not taxable, it was not taxable under s. 12 under the head ”
other sources” as well.
The judgment of the Board proceeds upon the ground that
compensation received not for carrying on the business, but
as solatium for its compulsory cessation, would be regarded
as capital receipt, and for the application of this
principle, existence of other independent commercial in-
terests out of which profits were earned by the assessee was
irrelevant. Two comments may be made at this stage. It
cannot be said as a general rule, that what is determinative
of the nature of the receipt is extinction or compulsory
cessation of an agency or office. Nor can it be said that
compensation received for extinction of an agency may always
be equated with price received on sale of goodwill of a
business. The test, applicable to contracts for termination
of agencies is: what has the assessee parted with in lieu of
money or money’s worth received by him which is sought to be
taxed? If compensation is paid for cancellation of a
contract of agency, which does not affect the trading
structure of the business of the recipient, or involve loss
of an enduring asset, leaving the tax-payer free to carry on
his trade released from the contract which is cancelled, the
receipt will be a trading receipt: where the cancellation
116
of a contract of agency impairs the trading structure, or
involves loss of an enduring asset, the amount paid for
compensating the loss is capital.
The view expressed by the Judicial Committee has not met
with unqualified approval in later cases, Lord Wright in
Raja Bahadur Kamakshya Narain Singh of Ramgarh v.
Commissioner of Income-tax. Bihar and Orissa(‘) observed
that it is incorrect to limit the true character of income,
by such picturesque similies like “fruit of a different
tree, or crop of a different field”. Again it cannot be
said generally that compensation for every transfer or
determination of a contract of agency is capital receipt:
Kelsall Parsons & Co. v. Commissioner of Inland Revenue(‘):
Commissioners of Inland Revenue v. Fleming & Co. (3): Wise-
burgh v. Domville(4) and Commisiosner of Income-tax and
Excess Profits Tax, Madras v. South India Pictures Ltd.(‘).
Nor is it true to say that where an assessee holds several
agency contracts, each agency contract cannot without more
be regarded as independent of the other contracts, and
income received from each contract cannot always be regarded
as unrelated to the rest of the business continued by the
assessee. The decision in Shaw Wallace Co.’s case(‘) cannot
therefore be read to yield the principle that compensation
for loss of an agency may in all cases be regarded as
capital receipt. Nor does it lay down that where the
assessee has several lines of business each line must in
ascertaining the character of compensation for loss of a
line of business be deemed an independent source. This view
is exemplied by decisions of this Court and a decision of
the Madras High Court. In the South India Pictures Ltd.’s
case(5) compensation received for determination of the
distribution rights of films was held taxable. After the
assessee had exploited partially its right of distribution
of cinematographic films to which it was entitled under the
terms of agreement under which he had advanced money to the
producers, the agreements were cancelled and the producers
paid an aggregate sum of Rs. 26,000 to the assessee towards
commission. It was held by Das C. J.,
(1) L. R, 70 1. A. 180 (2) 21 T.C. 608, 620
(3) 33 T.C. 57 (4) 36 T.C. 527
(5) 29 1. T. R. 910 (6) L.R. 59 I.A. 2o6
117
and Venkaterama Aiyar, J., (Bhagwati J., dissenting) that
the sum paid to the assessee was not compensation for not
carrying on its business, but was a sum paid in the ordinary
course of business to adjust the relations between the
assessee and the producers, and was taxable. Similarly in
Rai Bahadur Jairam Valji’s cave(‘) a contract for the supply
of limestone and dolomite was terminated when the purchaser
the Bengal Iron Company Ltd. found the rates uneconomical.
A suit was then filed by the respondent for specific
performance of the contract and for an injunction
restraining the company from purchasing limestone and
dolomite from any other person. A fresh agreement made
between the respondent and the company fell through because
of circumstances over which the parties to the agreement had
no control. The company then agreed to pay Rs. 2,50,000 to
the respondent as solatium, besides the monthly instalments
of Rs. 4,000 remaining unpaid under the contract of 1940.
The Income-tax Department sought to bring to tax the amount
of Rs. 2,50,000 and the balance due towards the monthly
instalments of Rs. 4,000. It was held by this Court that
the sum of Rs. 2,50,000 was not paid to the respondent as
compensation for expenses laid out for works at the quarry
of a capital nature and could not be held to be a capital
receipt on that account, the agreements were merely
adjustments made in the ordinary course of business. There
was in the view of the Court no profit-making apparatus set
up by the agreement of 1941, apart from the business which
was to be carried on under it and there was at no time any
agreement which operated as a bar to the carrying of the
business of the respondent and therefore the receipt of Rs.
2,50,000 was chargeable to tax. Venkatarama Aiyar, J.,
observed, in at,agency contract the actual business consists
of dealings between the principal and his customers, and the
work of the agent is only to bring about the business: what
he does is not the business itself, but something which is
intimately and directly linked up with it. The agency may,
therefore, be viewed as the apparatus which leads to the
business rather than the business itself. Considered in
this light the
(1) [1959] Supp. 1 S.C.R. 110
118
agency right can be held to be of the nature of a capital
asset invested in business. But this cannot be said of a
contract entered into in the ordinary course of business.
Such a contract is part of the business itself, not some
thing outside it, and any receipt on account of such a
contract can only be a trading receipt. Because
compensation paid on the cancellation of a trading contract
differs in character from compensation paid for cancellation
of an agency contract, it should not be understood that the
latter is always, and as a matter of law, to be held to be a
capital receipt. An “agency contract which has the
character of a capital asset in the hands of one person may
assume the character of a trading receipt asset in the hands
of another, as for example, when the agent is found to make
a trade of acquiring agencies and dealing with them.”
Therefore, when the question arises whether the payment of
compensation for termination of an agency is a capital or a
revenue receipt, it must be considered whether the agency
was in the nature of a capital asset in the hands of the
agent, or whether it was only part of his stock-in-trade.
The learned Judge also observed that payments made in
settlement of rights under a trading contract are trading
receipts and are assessable to revenue, but where a trader
is prevented from doing so by external authority in exercise
of a paramount power and is awarded compensation therefor,
whether the receipt is a capital receipt or a revenue
receipt will depend upon whether it is compensation for
injury inflicted on a capital asset or on stock-in-trade.
In Pairce Leslie and Co. Ltd. v. Commissioner of Income-tax,
Madras(‘) the assessee company took up managing agencies of
several plantation companies. The managing agencies were
liable to termination, but the assessee was entitled to
compensation by the terms of the agreement. The Talliar
Estates Ltd. was one of the companies managed by the
assessee. The agreement was a composite agreement about the
managing agency rights and certain other rights. When the
Talliar Estates Ltd. went into liquidation the assessee
received Rs. 60,000 by way of compensation for loss of
office and the question arose
(1) 38 I. T. R. 356
119
whether that amount was income in the hands of the assessee.
The Madras High Court held that the loss of one of several
managing agencies had little effect on the structure of the
assessee’s business even in tea or on its profit earning
apparatus as a whole and the termination of the agreement
with the Talhar Estates could well be said to have been
brought about in the ordinary course of business of the
assessee and therefore the amount received was a trading
receipt.
In the South India Picture Ltd.’s case(): Rai Bahadur Jairam
Valji’s case(‘) and Peirce Leslia Company’s case(‘) it was
held that the receipt of compensation for loss of agency was
in the nature of revenue. In the South India Pictures
Ltd.’s case(‘) the amount received was not compensation for
not carrying on its business, but was a sum paid in the
ordinary course of business to adjust the relations between
the assessee and the producers; the termination of the
agreements did not radically or at all affect or alter the
structure of the assessee’s business, and the amount
received by the assessee was only so received towards
commission i.e. as compensation for the loss of commission
which it would have earned, had the agreements not been
terminated. Therefore, the amount was not received by the
assessee as the price of any capital assets sold or
surrendered or destroyed, but the amount was simply received
by the assessee in the course of its going distributing
agency business and therefore it was an income receipt. In
that case the majority of the Court held on three distinct
grounds, viz., (i) that the assessee did not part with any
capital asset; (ii) that the amount was received in the
course of the distributing agency business which was
continued, and (iii) that the termination of the agreements
did not radically or at all affect or alter the structure of
the assessee’s business, that the sum received was revenue.
Rai Bahadur Jairam Valji’s case(‘) was one of compensation
received for termination of a trading contract. In Peirce
Leslie and Company’s case(‘) there was termination of
office, but it was held to be brought about in the ordinary
course of the trading operations of the assessee.
(i) 29 I.T.R. 910 (2) [1959] Supp. I S.C.R. iio (3- 38
I.T.R. 356
120
On the other side of the line are cases of Commissioner of
Income-tax, Hyderabad-Deccan v. Vazir Sultan and Sons(‘) and
Godrej and Co. v. Commissioner of Incometax, Bombay City
(2). In Vazir Sultan and Son’s case(‘) the majority of the
Court held that compensation paid for restricting the area
in which a previous agency agreement operated was a capital
receipt, not assessable to incometax. It was held that the
agency agreements were not entered into by the assessee in
the carrying on of their business, but formed the capital
asset of the assessee’s business which was exploited ‘by the
assessee by entering into contracts with various customers
and dealers in the respective territories; it formed part of
the fixed capital of the assesssee’s business and was not
circulating capital or stockin-trade of their business and
therefore payment made by the company for determination of
the contract or cancellation of the agreement was a capital
receipt in the hands of the assessee.
In Godrej and Co.’s case(‘) the managing agency agreement in
favour of the assessee of a limited company which was
originally for a period of thirty years and under which the
assessee was entitled to a commission at certain rates was
modified and remuneration payable to the managing agents was
reduced. As compensation for agreeing to this reduction,
the assessee received Rs. 7,50,000 which was sought to be
taxed as income in the hands of the assessee. This Court
held, having regard to all the attending circumstances, that
the amount was paid not to make up the difference between
the higher remuneration and the reduced remuneration, but in
truth as compensation for releasing the company from the
onerous terms as to remuneration as it was in terms
expressed to be; so far as the assessee firm was concerned
it was received as compensation for the deterioration or
injury to the managing agency, by reason of the release of
its rights to get higher remuneration and, therefore, a
capital receipts.
On an analysis of these cases which fall on two sides of the
dividing line, a satisfactory measure of consistency
(1) 36 1. T. R. 175
(3) 36 I.T.R. 175
(2) 37 r.T.R. 381
121
in principle is disclosed. Where on a consideration of the
-circumstances, payment is made to compensate a person for
cancellation of a contract which does not affect the trading
structure of his business, nor deprive him of what in
substance is his source of income, termination of the
,contract being a normal incident of the business, and such
cancellation leaves him free to carry on his trade (freed
from the contract terminated the receipt is revenue: Where
by the cancellation of an agency the trading structure of
the assessee is impaired, or such cancellation results in
loss ,of what may be regarded as the source of the
assessee’s income, the payment made to compensate for
cancellation of the agency agreement is normally a capital
receipt.
In the present case, on a review of all the circumstances,
we have no doubt that what the assessee was paid was to
compensate him for loss of a capital asset. It matters
little whether the assessee did continue after the
determination of its agency with the Fort William Jute Co.
Ltd to conduct the remaining agencies. The transaction was
not in the nature of a trading transaction, but was one in
which the assessee parted with an asset of an enduring
value. We are, therefore, unable to agree with the High
Court that the amount received by the appellant was in the
nature of a revenue receipt.
We accordingly record the answer on the question submitted
by the Tribunal in the negative. The appellant would be
entitled to its costs in this Court.