JUDGMENT
N.V. Balasubramanian, J.
1. Pursuant to the directions of this Court, the Tribunal has stated a case and referred the following question of law for the opinion of this Court :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the additional remuneration received by the assessee should be included in the assessment relevant for the asst. yr. 1970-71 ?
2. Whether, the Tribunal had materials to hold and was correct in holding that the termination of the assessee’s contract with Southern Asbestos Ltd. affected the structure of the business of the assessee and consequently whether the said sum was in the nature of a capital receipt not liable to tax ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the provisions of s. 28(i)(c) of the IT Act, 1961 are not attracted in regard in the sum of Rs. 60,000 received by the assessee from M/s Southern Abestos Ltd. ?”
2. The second and third questions are inter-connected in the sense that the contention of the Revenue is that if the receipt is held to be not a revenue receipt it is still assessable under the provisions of s. 28(ii)(c) of the Act. We clarify that in the third question referred to us, though there is a reference to the provisions of s. 28(i)(c) of the IT Act, 1961, the provisions of law ought to be in s. 28(ii)(c) of the IT Act, 1961.
3. The assessee is a private limited company and during the previous year relevant for the asst. yr. 1970-71, the assessee acted as managing agents for Mettur Chemicals and Industrial Corporation Ltd. and also South Madras Electric Supply Corporation. The assessee entered into an agreement on 1st March, 1965, with Mettur Chemicals & Industrial, Corporation Ltd. and under the agreement, the assessee was entitled to claim remuneration at a certain percentage, on a sliding scale, from the profit of the company as computed under the provisions of ss. 349 to 351 of the Companies Act, 1956. The assessee-company was entitled to a minimum remuneration of Rs. 30,000. The assessee-company entered into another agreement with South Madras Electric Supply Corporation and there also, the assessee was entitled to claim remuneration of 10 per cent of the net profit and the assessee was also entitled to a minimum remuneration of Rs. 12,000 per annum. The minimum remuneration was received every month and there is no dispute about its taxability. The additional remuneration which was payable to the assessee was with reference to the profit at a specified percentage in the event of remuneration payable exceeding the minimum remuneration under the agreement, and the additional remuneration drawn by the assessee was only after the audited balance sheet and P&L a/c of the relevant year were placed before the general body meeting and approved by the general body meeting. The assessee was offered additional remuneration on the basis of the approval of the audited balance sheet and P&L a/c by the company. There is no dispute that the assessee was maintaining its accounts on mercantile basis and the Department was also making; assessment upto the asst. yr. 1970-71 on the basis that the additional remuneration was assessable in the hands of the assessee when the relevant balance sheet of P&L a/c was placed before the annual general meeting and approved in the said meeting. But, in the year 1971-72, the ITO changed the method of taxation of the additional remuneration and according to the AO, the additional remuneration became due to the assessee as per the agreement entered into with Mettur Chemicals and Industrial Corporation Ltd. and South Madras Electric Supply Corporation and it is assessable in the year in which the minimum remuneration was payable and the fact that it was paid subsequently is not a relevant consideration. The assessee preferred an appeal before the AAC. Trichirapalli against the assessment of the additional remuneration, and the AAC confirmed the assessment.
The assessee preferred an appeal before the Tribunal against the order of the AAC and the Tribunal, following a decision of this Court in the case of CIT vs. South Madras Industrial Development Company (P) Ltd. found that the terms of the agreements entered into by the assessee with the said companies were similar to the agreement which was the subject-matter of consideration of this Court in South Madras Industrial Development Company (P) Ltd. case, cited supra. According to the Tribunal, the additional remuneration was approved only after the audited balance sheet and P&L a/c were placed before the general body meeting of the managing company and approved in the said annual general body meeting. The Tribunal also noticed that the method adopted by the assessee was also accepted and followed by the Department consistently in the earlier years and there is no justification to depart from the practice that has been adopted hitherto. In this view of the matter, the Tribunal allowed the appeal of the assessee and the Department has come before us by way of reference with reference to the first question.
4. Mr. S. V. Subramanian, learned senior standing counsel appearing for the Revenue submitted that insofar as the first question is concerned, the additional remuneration accrued on the basis of the agreement and there is no difference between the minimum remuneration and the additional remuneration payable under the agreement and once it is found taxable on the basis of the accrual the same principle should also apply in the case of taxing the additional remuneration as well.
5. We have seen that the Tribunal has recorded a categorical finding that the terms of the agreements entered into by the assessee with Mettur Chemical and Industrial Corporation Ltd. and South Madras Electric Supply Corporation are similar to the agreement which was a subject-matter of consideration before this Court in case of CIT vs. South Madras Industrial Development Company (P) Ltd. (supra). This Court has held that in the absence or inadequacy of the profit, under the agreement, the managing agent was entitled to the minimum remuneration payable at such rate for each year and in so far as the additional remuneration is considered, there was no provision of agreement as to when it accrues. This Court held that in the absence of any provision in the agreement as to when it accrues, it accrued at the time when it became payable to the assessee, Similarly, on the facts of the case the contract is silent as to when the amount becomes due and in the absence of any material, we have to hold that it is not possible to treat the amount as being due on the last date of the accounting year. The finding of the Tribunal is that the additional remuneration became due only after the audited balance sheet and P&L a/c of the company were laid before the company’s general body meeting and approved by the same. Since the additional remuneration is based on the profit and unless the amount of profit is known, it is not possible to hold that the additional remuneration accrued at the end of the relevant accounting year. Learned counsel for the Department is not able to show that under provision of the agreement, the additional remuneration became due prior to the approval in the general body meeting. The agreement is in not anyway different from the agreement which was subject-matter of consideration in the case of South Madras Industrial Development Company (P) Ltd., cited supra. Therefore, we hold that the view of the Tribunal that the income did not accrue to the assessee on or before 31st March, 1970, and the additional remuneration received by the assessee is not liable to be included for the asst. yr. 1970-71 appears to us, to be in order. In the result, we answer the first question in the affirmative and against the Department.
6. The facts leading to the second and third questions are under : The assessee-company received a compensation from one Southern Asbestos Cements Ltd. for the termination of its agreement with the assessee. The assessee-company was holding some industrial licence for manufacturing cement from the Government of India and it was subsequently transferred to Southern Asbestos Cements Ltd. with the concurrence of the Government of India for the utilisation of the licence. Southern Asbestos Cements Ltd. appointed the assessee as its business consultant in the matter of securing foreign collaboration and for rendering technical assistance to assist in export, foreign publicity, etc. under the agreement entered into by the assessee with Southern Asbestos Cements Ltd., the assessee was entitled to a remuneration of Rs. 20,000 per annum from 1st January, 1965 to the date of commencement of production by Southern Asbestos Cements Ltd. and Rs. 30,000 thereafter. The agreement also provided that in the event of termination of the agreement by Southern Asbestos Cements Ltd. for any reason whatsoever, the assessee was to be paid a remuneration for the unexpired portion of the 10 year contract period. As Southern Asbestos Cements Ltd. felt that the consultancy service agreement of the assessee was no longer required, it wrote a letter to the assessee seeking termination of the agreement. There was a mutual agreement and ultimately it was decided that Southern Asbestos Cements Ltd. was to pay a sum of Rs. 60,000 in lieu of Rs. 1,42,500 which would have been otherwise payable by the said company to the assessee as per the agreement entered into on 1st January, 1965. The ITO proceeded on the basis that it was a capital receipt, but however, he held that the amount of all compensation received is a taxable under the provisions of s. 28(ii)(c) of the IT Act. The AAC, on appeal, felt that the consultancy agreement of the assessee with the said company was terminated during the accounting year ending on 31st March, 1970, and the compensation became due for the accounting year ending on 31st March, 1970 and, therefore, the amount received was taxable for the asst. yr. 1970-71 under the provisions of s. 28(ii)(c) of the Act. The first Appellate Authority therefore, held that the sum of Rs. 60,000 was rightly assessed as tax by the ITO, On the assessee’s appeal, before the Tribunal, two arguments were advanced by the Revenue. One was that the amount of Rs. 60,000 received by the assessee was not a capital receipt, but revenue receipts and even the receipt being regarded as capital receipt, it is taxable under the provisions of s. 28(ii)(c) of the Act. The Tribunal held that the termination of the agreement affected the business structure of the assessee’s business and the unexpired period of the agreement was sufficiently long and so, it could be inferred that the compensation amount paid for the termination of the agreement is a capital receipt. As regards the applicability of s. 28(ii)(c) of the Act, the Tribunal held that the agreement entered into by the assessee with Southern Asbestos Cement Ltd. is not an agency agreement at all but an agreement entered into purely for rendering consultancy services and the arrangement is between principal and principal. In this view of the matter, the Tribunal held that the amount is not taxable even under the provisions of s. 28(ii)(c) of the Act. This order of the Tribunal is the subject-matter of the reference before this Court.
7. Mr. S. V. Subramanian, learned senior standing counsel appearing for the Revenue submitted that a sum of Rs. 60,000 received by the assessee from Southern Asbestos Cements Ltd. cannot be regarded as capital receipt and it is purely a revenue receipt and hence, it is taxable under the provisions of s. 28(ii)(c) of the Act. The further submission of the learned counsel for the Revenue is that even if this Court holds that it is a capital receipt, the amount would be taxable under the provisions of s. 28(ii)(c) of the Act, as the consultancy agreement is also an agency agreement and the Tribunal was not correct in holding that the provisions of s. 28(ii)(c) of the Act are not applicable to the facts of the case.
8. The second and third questions are inter-connected. The second question challenges the findings of the Tribunal that the compensation received from Southern Asbestos Cements Ltd. is a capital receipt and the third question challenges the finding of the Tribunal that even if it is held to be a capital receipt under the provisions of s. 28(ii)(c) of the Act the amount is assessable as business income. The Tribunal, after considering the agreement and the nature of the business of the assessee, came to the conclusion that on the termination of the agreement the business structure of the assessee’s business was affected. We find that the agreement entered into was for a period of 10 years from 1st January, 1965, and the assessee was entitled to a remuneration of Rs. 20,000 per annum till the date of commencement of production and thereafter Rs. 30,000 per annum. On termination of the agreement, the assessee received the amount towards compensation. The agreement was terminated on 27th March, 1970, and on the date of termination of the agreement, a period of 5 years was still available. The Tribunal found that the agreement cannot be termed as one of ordinary contract and it is a comprehensive one. The Tribunal also recorded its findings that it affected the business structure of the assessee’s business. Considering the unexpired period, which is quite a long period and also in view of the finding that the agreement affected the business structure of the assessee, the view of the Tribunal that the amount received towards compensation is a capital receipt, according to us, appears to be justified.
9. Mr. S. V. Subramanian, learned counsel contended that the amount was paid under the agreement and not for the termination of the agreement. He referred to the observation of the Tribunal that in the event of termination of the agreement, the assessee was entitled to be paid in advance the remuneration for the unexpired portion of the period of agreement. But we are not able to accept the contention advanced on behalf of the Revenue. As already said the compensation paid did not represent the remuneration for unexpired period. The clause providing for a fixed amount of damage has fixed the amount of damages that would be payable in the event of the termination of the agreement. The clause merely affords in a measure to quantify the amount of compensation that would be payable in the event of termination of the agreement. Further, the compensation also did not represent the remuneration for the past services rendered by the assessee. According to us, it is not permissible to draw an inference that the amount paid represented the remuneration that would be payable for the unexpired period of the agreement. The clause was previously inserted as a terrorum to provide against the breach of the contract and the compensation received cannot be regarded as revenue receipt. As a matter of fact, the AO as well as the first Appellate Authority have proceeded on the basis that the amount received was a capital receipt and it was only before the Tribunal, a contention was raised by the Revenue that the amount was a revenue receipt which was rightly negatived by the Tribunal.
10. The finding of the Tribunal is that by termination of the contract, the profit-making structure of the assessee was affected and at the termination of the contract involved the loss to the assessee of an enduring trading asset. In other words, the finding of the Tribunal is by virtue of the cancellation or the extinction of the contract the trading structure of the assessee was impaired and it is not the case of the Revenue that the agreement entered into by the assessee was in course of carrying on its business. Hence, it cannot be said that the termination of the contract was a normal incident of the business of the assessee. As already seen, the cancellation of the contract has impaired the trading structure of the assessee which has resulted in a loss to the source of income to the assessee. Therefore, the payment made to the assessee for the cancellation of the contract was rightly held by the Tribunal to be a capital asset (receipt).
11. Insofar as the third question is concerned, it relates to the application of s. 28(ii)(c) of the IT Act. Sec. 28(ii)(c) of the Act provides if any compensation or other payment was received by any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of the agency or the modification of the terms and conditions relating to it, the amount received would be regarded as profits and gains of business carried on by it. The section, a reading of it, shows that it aims at an agency agreement, and the prerequisite for the applicability of the section is that there must be an agency agreement. The assessee was appointed as a consultant and on a perusal of the agreement, the Tribunal recorded a finding that the agreement was purely one of consultancy service and what is contemplated in the agreement is between principal and principal. In other words, the finding is that there was no agency agreement. The agreement envisages assistance in securing foreign collaborations, technical assistance in its productions, assistance in discussion with Government. The Tribunal, therefore, came to the conclusion that the agreement was one for consulting services and there was no principal and agency relationship between the parties. The finding of the Tribunal has not been challenged by the Revenue in the reference. As already observed, the Revenue has not even requested to enclose a copy of the agreement which was the subject-matter of consideration by the Tribunal and in the absence of the copy of the assessment, we have to proceed on the basis of the finding of the Tribunal that the agreement was not an agency agreement. The Tribunal noticed a decision of the Bombay High Court in the case of the Daruvala Bros. (P) Ltd. vs. CIT (1971) 80 ITR 213 (Bom) : TC 13R.1256 wherein the Bombay High Court held that even in the case of distributorship agreement which described the distributor as an agent, the provisions of s. 28(ii)(c) of the Act was held to be not applicable. The question whether there was an agency agreement or not has to be decided on the facts of each case. Therefore, in view of the finding of the Tribunal, we are of the view that the compensation received by the assessee on termination of the agreement with Southern Asbestos Cements Ltd. is not taxable even under the provisions of s. 28(ii)(c) of the Act. Therefore, the view of the Tribunal that the provisions of s. 28(ii)(c) of the Act are not attracted to the facts of the case is in order. Therefore, we answer the questions 2 and 3 as referred to us in the affirmative and against the Department.
12. Consequently, we answer all the three questions referred to us in the affirmative and against the Department, No order as to costs.