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PETITIONER: P.   H. DIVECHA AND ANOTHER

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX,BOMBAY I

DATE OF JUDGMENT: 11/12/1962

BENCH: HIDAYATULLAH, M. BENCH: HIDAYATULLAH, M. DAS, S.K. KAPUR, J.L. SARKAR, A.K. DAYAL, RAGHUBAR

CITATION:  1964 AIR  758            1963 SCR  Supl. (2) 949  CITATOR INFO :  R          1971 SC1590  (9)  R          1973 SC 524  (4)  E          1992 SC1495  (14,31)

ACT: Income   Tax-Firm   of  three  partners-Agreement   with   a company--creates  monopoly  to sell  and  deliver  company’s bulbs in favour of the firm-Undertaking by firm-To sell only company’s  bulbs-Agreement  operates  16  years-Failure   of negotiations for reneuul-Transition agreement-Company agrees to  pay  Rs.  40,000/- per annum to each  partner  during  3 years-Assessment  year-Each  partner receives  Rs.  10,000/- -Whether trading asset or Capital assets-Compensation or  ex gratia payment.

HEADNOTE: The  two  appellants  along with another  were  carrying  on business  in Electrical goods under the firm  name  Precious Electric  Co.  In 1938 this firm entered into  an  agreement with M/s.  Phillips Electric Co. (India) Ltd.  The  material terms of the agreement were the following.  The firm was  to have  an exclusive territory for sale of Phillips bulbs  and undertook to sell only Phillips bulbs in the territory.  The agreement  allowed the firm compensation if  Phillips  bulbs were  sold in the territory by the company.   The  agreement was  terminable  by a three months notice  on  either  side. There was no stipulation in the agreement as to the quantity or quality of bulbs to be bought by the firm, neither was it agreed that the firm was to act as an agent of the  company. The agreement continued for 16 years.  In 1954  negotiations for  a  fresh  agreement were conducted but  they  were  not successful.  Since the company was taking over the  business of  selling the bulbs in the territory a working scheme  for the  transition  period  following the  termination  of  the agreement was reached.  The most material term of the scheme was  that  the company would pay Rs. 40,000/per annum  as  a gesture of goodwill in quarterly instalments to each of  the partners during a period of three years from the date of the expiry  of the existing agreement.  In the  assessment  year

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each of the partners received two quarterly payments of  Rs. 10,000/-  each.   This amount was taxed by  the  Income  Tax Officer in respect of the two appellants under s. 10 (5A) of the  Indian Income Tax Act, 1922.  The  appellants  appealed without success to. the Assistant Commissioner.  Thereupon 950 they  appealed  to the Tribunal contending that  the  amount assessed  was compensation paid for the termination  of  the agreement  or it was an ex gratia payment.  It  was  further contended  that the payment made to the individual  partners did  not  constitute  a  receipt  of  the  firm’s  business. Alternatively  it was argued that the said receipt  was  not liable to be included in the total income of the receipients by  reason, of s. 4 (3) (VI I) of the Income Tax  Act.   The Tribunal  did  not accept any of these  contentions  but  it referred three questions for the decision of the High Court. These  questions were whether the receipt in question was  a taxable  receipt,  if  so whether it was liable  to  be  not ’included  in  the  total income under s. 4  (3)  (VII)  and whether  the said receipt fell within s, 10 (5A)  (d).   The High  Court answered that the receipt was a taxable  receipt and s. 4(3)VII did not exempt it from liability.  The  third question was left unanswered.  The present appeal has arisen byway of a certificate granted by the High Court. The  contentions were that the agreement was not  a  trading agreement;  it  constituted an asset on the  termination  of which compensation was paid to make up for the loss of  this capital  asset; in the alternative that even if it  was  not compensation for loss of capital it was an ad hoc ex  gratia payment  in  the nature of ‘solatium’ as  described  by  the Privy  Council in Income-tax Commissioner v. Shaw Wallace  & Co.  (1932) L. R. 59 1. A. 206.  For the respondent  it  was contended  that since there was no premature termination  of the  agreement  even  if it is treated as  capital,  it  has exhausted  itself and therefore must be treated  as  revenue from other sources’ under s. 12 of the Act. Held,  that  in determining whether a payment amounts  to  a return  for loss of a capital asset or is income, profit  or gain  liable  to  income-tax, one must have  regard  to  the nature  and quality of the payment.  If the payment was  not received  to compensate for loss of profits of business  the receipt  cannot properly be described as income,  profit  or gains.   The size of the amount paid or the  periodicity  of the payments have no decisive bearing on the matter. The  Commissioner  of Incone-tax v. Vazir  Sultan  &  Sons., [1959] Supp. 2 S. C. R. 375, Godrej & Co. v. Commissioner of Income-tax.-[1960] I S. C. R. 572, Commissioner of IncomeTax v.  Jairam Yalji, [1959] 36 I.T.R. 148 and Senainam  Doongar Mal  v. Commissioner of Income-tax, [ 1 961] 42 I.T.R.  392, referred to. The  payment  cannot  be connected with  estimated  loss  of profits since, the terms of the agreement show that the firm  951 was not entitled to be compensated for temporary  suspension of the benefits or a complete termination of those benefits. Glenboig  Union Fireclay Co. Ltd. v. Commissioner of  Inland Revenue, (1922) T.C. 472, referred to. In  the  absence of any proof that the amount paid  was  the likely  profit  it  is difficult to  say  that  the  payment replaced those profits. The  agreement in the present case was not an agreement  for the purchase of bulbs.  It mentioned no quantity or  quality or price.  It only secured to the firm a right to  exclusive purchase  of bulbs for sale in an exclusive territory.   The agreement  can  only  be described  as  an  agreement  which

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constituted  a  source  and a monopoly  and  which  gave  an enduring  advantage to a trader in his trade.  The  loss  of such an agreement must be regarded as falling on the capital side and not in the course of his ordinary trading.  If  the agreement  had been breached prematurely the  damages  would not  have  been  calculated  on  the  basis  of  outstanding contracts only but on the basis of an a vantage lost. Bush  Beach  & Gent Ltd. v. Road. (1939) 22 T.C.  519  Short Bros.   Ltd.  v. Commissioner of Inland Revenue,  (1927)  12 T.C. 955, Commissioner of Inland Revenue v. North Fleet Coal and Ballast Co. Ltd., [1927] 12 T.C. 1302 and Yen Den Berghs Ltd. v. Clark, (1935) 19 T. C. 390, referred to. Even  if the payment cannot be considered as a  payment  for loss  of  capital it cannot be regarded as payment  for  any services  rendered or likely to be rendered.  It was  an  ad hoc  payment  out of gratitude and in  appreciation  of  the personal qualities of the assessees. Chibbett  v.  Joseph  Robinson & Sons,  (1924)  9  T.C.  49, referred to. The  receipt not being income profit or gain s. 4 (3)  (VII) had no application.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 332 of 1961. Appeal from the judgment and ordered dated June 23, 1959, of the  Bombay  High Court in Income-tax Reference  No.  51  of 1958. 952 A.   V.  Viswanatha Sastri, S. P. Mehta, J.  B.  Dodachanji, O.C. Mathur and Ravinder Narain, for the appellants. K.   N.  Rajagopal  Sastri  and  R.  N.  Sachthey,  for  the respondent. 1962.   December,  11.   The  judgment  of  the  Court   was delivered by- HIDAYATULLAH, I.-This is an appeal on a certificate  granted by  the High Court of Bombay against the judgment and  order of  the High Court dated June 23, 1959.  The appellants  are two  assesses  whose  cases  were  consolidated  before  the Tribunal  and hence a single appeal.  The facts of the  case are as follows : Before  the year 1938, the two appellants and  one  Jehangir Irani were carrying on business in electric goods  including electric  bulbs under two firm names.  One of the firms  was called the Precious Electric Co. and the other was named  J. Pirojsha & Co. In June, 1938, Precious Electric Co.  entered into an agreement with M/s.  Philips Electrical Co.  (India) Ltd.  by  which the Company demarcated a territory  for  the Firm, undertaking to sell and deliver electric bulbs therein exclusively  to  the  Firm.  By a  letter  which  formed  an annexure  to  the  agreement  the  Company  agreed  to  sell electric bulbs to the Firm at ex-warehouse prices subject to a  commission of 12-21 %on the gross invoice amount and  the Firm was allowed a further discount of 2% on the net invoice prices  to cover breakage or fault in manufacture.   It  was further  agreed that if the Company sold any goods  directly to the buyers in the territory the Company would pay to  the Firm  compensation  amounting  to 5% of the  net  amount  of invoices  covering  such  sales.   The  Firm  on  its   part undertook to sell only Philips bulbs in the territory and to  953 prevent  re-exportation of the bulbs by third  parties.   In addition  to other conditions to which we need not refer  at this  stage  there  was  a clause  for  termination  of  the

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agreement.  The clause provided that the agreement would  be deemed  to  have been made as from July 1, 1938,  and  would continue unless determined by either party by giving to  the other party three months’ prior notice by registered  letter of such party’s intention to determine the agreement on  the June  30,  1939 or any subsequent June 30.   This  agreement continued for a period of sixteen years. On  March  8, 1954, the Company sent a letter  to  the  Firm informing  the Firm that the agreement would come to an  end from  June  30,  1954.  The Company sent a draft  of  a  new agreement  which  was  intended to take  the  place  of  the earlier  agreement.  Some negotiations between  the  parties followed  but  no fresh agreement was signed .  On  May  28, 1954, the two assessees and the Manager of the Firm met  the representatives of the Company to discuss the new agreement. Nothing  much  came of the discussion and since  the  Bombay branch  of  the  Company was taking  over  the  business  of selling  bulbs  in the territory, a working scheme  for  the period   immediately’  following  the  termination  of   the existing  agreement was reached.  This was recorded  in  the shape of minutes which were signed by the represen.  tatives of  the  Company and by the two partners of the  Firm.   The minutes  covered arrangements for the period of  transition, the  stocks  and  the  staff of  the  firm.   Of  these  the important provisions are as follows :- (a) PERIOD OF TRANSITION: Philips  Bombay  Branch will continue  the  distribution  of lamps, etc. to dealers and in this respect Messrs.  Precious promised to furnish their name list of dealers and their 954 supplies  over the past six months.  It was  concluded  that the execution of orders of locally available goods might  be terminated  in two months’ time, whereas this matter as  far as orders placed with overseas suppliers are concerned might take about five months. During this    period Messrs.  Precious will receive all    co-operation from Messrs.  Philips to ensure a    smooth winding up of the business. Furthermore, particular attention will be given to the I. S. D.  contracts  and transactions in  connection  with  public bodies.  Messrs.  Precious will inform these bodies that the supplies  will  be effected through  their  intermediary  by Philips  Bombay, Branch which refers in particular to  those cases where close personal contact between Messrs.  Precious and the parties exists.  The commission related to the above special  cases,-  executed  after  the  termination  of  the existing  agreement will be due to Messrs.  Precious  if  no technical objection emanating from ELA’S agreement will come forward." "’(b) STOCKS Messrs.   Philips, Bombay will take care that the stocks  of Messrs.   Precious  will be disposed of in one  way  or  the other  as  soon as possible in order to avoid  that  Messrs. ’Precious’ capital might unnecessarily be tied up. In  order  to  achieve this, the  available  goods  will  be classified in three categories, viz (i)  Easily saleable goods. (ii) Goods  which  require some sales efforts,  which  means that  they might -be disposed of in a period of four to  six weeks.  955- (iii)     Slow  moving  items which will be  taken  over  by Bombay Branch. The goods mentioned under (iii) above will be taken over  by Messrs.   Philips  at  the original  invoice  price  if  not

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otherwise decided due to deterioration of the goods whilst a deduction is valid for cost incurred for transfer." The  following minutes, headed "Miscellaneous", were at  the end and read :- "MISCELLANEOUS:As  a gesture of goodwill,  Messrs.   Philips are prepared to pay in quarterly instalments to each of  the three partners’ during a period of three years, Rs. 40,000/- per  annum  from  the date of the  expiry  of  the  existing contract.   The three partners referred to above as  far  as Messrs.  Philips Electrical Co., understand are                   Mr. Pirojsha H. Devecha 2.   Mr. Khurshedji A. Irani 3.   Mr. Noshir J. Irani Finally,  Mr.  Van Rhijn stated that  Messrs.   Philips  are quite willing to continue Messrs.  Precious as regular  lamp dealers  and  the profit they realise therfrom  will  be  in addition  to  the  three  years’  remuneration  referred  to above." In the account year ended December 31, 1954 relative to  the assessment year 1955-56, each of the three partners received two quarterly payments of Rs. 10,000 each.  This amount  was taxed  by  the  Income-tax Officer in  respect  of  the  two appellants  as compensation under s. 10 (5A) of the  income- tax Act.  An assessment was also made on the third 956 partner but we are not concerned with that assessment. The  appellate Assistant Commissioner to whom  the  assessee appealed held that provisions of s. 10 (5A) did not apply to the facts of the case on the ground that the appellants were not  agents  of  the Company from  which  payment  had  been received and the amount received was not compensation as  no legal  damage had been caused to them by the  Company.   He, however, held that the sum of Rs. 20,000 in respect of  each of  the  appellants was a taxable receipt.   The  -assessees appealed to the Tribunal and four contentions were raised by them.  They were "(i)  it was compensation paid for termination of  agreement which constituted the frame work of the Firm’s business. (ii) the  amount  was an ex-gratia payment made  by  way  of testimonial. (iii)     the payment is made to individual partners and not to the firm as such and does not represent a receipt in  the course of firm’s business. (iv) alternatively,  the said receipt was not liable  to  be included in the total income of the recipient by reasons  of Section 4 (3) (vii)." The  Tribunal  did not accept these contentions but  at  the request  of  the  firm  referred  three  questions  for  the decision of the High Court.  Those questions were as follows :- whether the receipt of Rs. 20,000/- is a taxable receipt for the purpose of the Indian Income-tax Act, 1922 ?  957 (ii) If  so,  is it liable to be not included in  the  total income of the recipient by reason of Section 4 (3) (vii) ? (iii)     Does the said receipt fall within the mischief  of Section 10 (5A) (d) and as such liable to tax accordingly ?" The  reference was heard by the High Court and  the  learned judges answered the -first question as follows :- "The  receipt of Rs. 20,000/- is a taxable receipt  for  the purpose of the Indian Income-tax Act, 1922." In view of the answer the High Court observed as follows :- "As we have already held that the amount is taxable receipt, being  receipt  arising from business, Section 4  (3)  (vii) does  not  exempt it from liability to tax.  We are  in  the

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view we have taken not called upon to consider whether  even if  the  receipt of Rs. 20,000/- is a  capital  receipt,  by operation of Section 10 (5A) (d) the amount can be  regarded as  a  revenue receipt.  We answer the  second  question  as follows : It   is   liable  to  be  included  in  the   total   income notwithstanding Section 4 because it arose from business." The  third  question was left unanswered.   The  High  Court certified the case as fit for appeal and hence this appeal. The  High  Court  in reaching its  conclusion  examined  the agreement of 1938 and come to the conclusion that though  it involved  a  ""monopoly purchase" and gave to  the  Firm  an exclusive right to 958 sell Philips bulbs in the assigned territory, it was no more than a trading agreement which did not constitute a  trading asset.   By the loss of this monopoly right, the High  Court went  on to say, the business of the firm was not  destroyed because even after the termination of the agreement the firm was  entitled to carry on the business of  selling  electric bulbs  as a ,-,regular lamp dealer".  According to the  High Court  the agreement while it lasted only conferred  on  the Firm  the right to obtain Philips bulbs on favourable  terms as   their  stock-in-trade.   By  the  termination  of   the agreement  this  right  to  acquire  the  stock-in-trade  on favourable  terms was lost but there was no capital loss  as the  business  of selling bulbs continued.  The  High  Court also referred to the minutes where the payment of Rs. 40,000 per  annum  to each of the partners for a  period  of  three years was "expressly designated" ’three years remuneration’. They  referred  to numerous cases in which  distinction  has been  made  in  India and in  England  between  capital  and revenue  receipts.  The learned judges ,distinguished  those in which receipts were described as on the capital side.  In particular  they relied on the case in Bush, Beach  &  Gent. Ltd. v. Road (1).  They distinguished between those cases in which   the  cancellation  of  the  contract  affected   the structure  of the assessee’s business and those in which  it did  not,  and  held  that this was  a  case  in  which  the structure  of the business of the Firm was not affected  and the  payment  made must be treated as on  the  revenue  side particularly  because it was described as  remuneration  and was payable yearly for a period of three years. In  the appeal before us Mr. Vishwanath Sastri has  put  the case  of the appellants from two angles.  He  contends  that the agreement was not a trading agreement but constituted an asset  on the termination of which compensation was paid  to make  up  for the loss of this capital asset.   He  contends that the (1)  (1939) 22 Tax Cases 519.  959 agreement,  though it could be terminated on the June 30  in any  year  with three months’ notice, had  run  for  sixteen years to the advantage of both the Company and the Firm  and thus was always likely to run unless terminated.  He  points out that it involved a monopoly right to sell Philips  bulbs exclusively  in  the territory assigned and  also  conferred other  rights  like favourable terms of purchase  of  bulbs, compensation  for  invasion  of territory  and  a  right  to discount  in  case of breakage or  faulty  manufacture.   In other  words,  the  agreement was not  an  ordinary  trading agreement  by  which  the  stock-in-trade  was  secured  but involved something more than the purchase of stock-in-trade. It  constituted  the means of earning profits or  as  it  is commonly  described  ,,,the money-making apparatus"  of  the

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appellants.    When  this  agreement  was   terminated,   he continued,  it  was  not a  premature  termination  but  the expectancy was that it was to run unless terminated and  the compensation which was paid though described as remuneration was,  in a business sense, merely compensation for the  loss of  those  rights which the Firm had enjoyed  and  which  it expected  to  enjoy in the future if the agreement  was  not terminated. In  the  alternative, Mr. Vishwanatha Sastri  contends  that even  if  the amount could not be referable to a loss  of  a capital asset it was not referable to any future service  to be  rendered by the assessees who had by the termination  of the  agreement  become ordinary dealers in  bulbs  like  any other dealer in the same territory.  Nor was it referable to any  past  service  but  was  a  payment  ex-gratia  out  of appreciation of the personal qualities of the partners whose services  in  the  past were fully  remunerated.   In  other words, this was an ad hoc payment in the nature of a ’testi- monial’ as it is sometimes described or as a "solatium’,  by which  term  the  Privy Council  described  the  payment  in Income-tax Commissioner v. Shaw Wallace & Co. (1) - (1)  (1932) L.R. 59 I.A. 206. 960 Mr. K. N. Rajagopal Sastri on behalf of the Commissioner  of Income-tax  contends that the business of selling bulbs  was only  a  part  of  the  business    activities  of  Precious Electric Co. and that Firm was one of the two firms carrying on the same or similar businesses.  The agreement  conferred the benefit of a favourable mode of acquiring stock-in-trade only and its termination did not lead to any loss of capital because it was not a capital asset in the hands of the  Firm but  was  only  a trading agreement,  entered  into  in  the ordinary course of business.  Mr. Raiagopal Sastri  contends that  the  monoply  involved in  the  agreement  was  merely incidental to such a trading agreement and was not an  asset which could be said to have been lost on the termination  of the  agreement.   He contends that there  was  no  premature termination as the agreement had worked itself out and  even if  treated as capital it had exhausted itself.   An  amount paid  after capital has exhausted itself must be treated  as revenue from ’other sources’ within s. 12 of the  Income-tax Act.    He  contends  that  even  if  the  entire   business activities  of the assessees were confined  to  implementing the agreement it cannot be considered as capital because  it had  a  very minor place in the entire business of  the  two firms  which continued unaffected by the termination of  the agreement.   In  reply  to  the argument  that  this  was  a "testimonial’  or ‘solatium’ Mr. Rajagopal  Sastri  contends that  the  minutes did not describe it as such  but  on  the other  hand stated that the payment was made  to  supplement the  business  receipt  of the partners in  the  next  three years.   He  accordingly contends that  the  judgment  under appeal  is right and this payment cannot be regarded  either as a capital receipt or as an exgratia payment. Before  we  consider  these  questions  and  refer  to   the authorities  which were cited at the bar we shall  refer  in some  detail to the terms of the agreement of 1938  to  find out its true nature so as to be able to  961 decide  whether  it can be regarded as a  trading  agreement entered into for the purpose of obtaining the stock-in-trade for  the  business or it can be regarded as an  asset.   The agreement  consisted of 13 clauses but all of them were  not equally  important.   The  first  clause  provided  for  two matters  : (a) it fixed a territory and (b) it  defined  the

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scope  of the agreement.  In the first part  were  mentioned the  Bombay  Presidency, Rajputana,  Central  Provinces  and Berar,  and  in the second part "all  lamps  for  electrical lighting  purposes"’of certain kinds  (compendiously  called ’Philips lamps’) were said to be covered by -the  agreement. Clause  2 was also divided into two parts.  The  first  part said  that the Company undertook to sell and/or  to  deliver Philips lamps exclusively to the Firm in the territory,  the second  part provided that should any buyer refuse  to  pur- chase  from  the  Firm, the Company would  make  the  supply direct  but ’.pay five per cent. compensation over  the  net amount  of  invoice  covered in such orders  ,to  the  Firm. Clause  3  recited  the terms accepted by  the  Firm.   This clause  was  also divided into two parts.   The  first  part bound territory only such Philips lamps it by the Company. prevent re-export of the lamps the Firm to sell in the  as were supplied to The second part bound it to  by third parties as far as possible.  By clause 4  the Firm bound itself to observe clause 3 in  respect  of such lamps as might remain undisposed of with the Firm after the termination of the agreement.  Clause 5 reserved to  the Company  the right to alter the prices rate of discount  and conditions  of  sale  without notice to  the  Firm  even  in respect  of unexecuted contracts.  Clause 6 reserved to  the Company  the right to refuse orders and/or to cancel  or  to suspend  deliveries for any reason, whatever, including  the reason  that the prices obtaining had  become  unprofitable. That clause also provided that in case of such cancellation, cessation- or suspension of deliveries the Firm would not be entitled  to  receive -compensation.  By clause 7  the  Firm bound 962 itself  to push the sale of the Philips lamps  according  to the  directions of the Company and not to sell  lamps  other than  Philips  lamps and not to support any  firm  competing with  the Company in any way and to keep secret  methods  of work  etc.  Clause 8 then provided that the Firm  would  buy and  sell  Philip lamps on its own account and  at  its  own risk.  The rest of the terms need not be referred to. The gist of the agreement, therefore, was that the Firm  was to have an exclusive territory for sale of Philips lamps and undertook to sell only Philips lamps in that territory.  The agreement  allowed  the Finn compensation if  Philips  lamps were  sold  in the territory by the Company.  There  was  no provision  in the agreement how many lamps the Firm  was  to buy from the Company in a particular period and there was no condition  that  the  Firm -would be  required  to  buy  any specified  quantity and/or quality.  There was no  agreement that the Firm was to act as the agent of the Company.   This was  an  agreement  between  principal  and  principal,  the measure of the business depending upon how far the Firm  wag able to push the sales of Philips lamps in its own  interest and  in the interest of the Company.  The agreement  was  to commence  on July 1, 1938, and was termi. nable by  a  three months notice on either side on June 30, of any year.  It is fair  to  inforce that as long as the Company and  the  Firm found  the arrangement profitable the agreement  would  have continued.   By an annexure to the agreement, which  was  in the form of a letter, the terms of business between the Firm and  the  Company were laid down.  This  letter  stated  the commission  payable  to  the Firm and the  manner  in  which payments were to be made by the Firm.  Sufficient  reference to  these  terms has already been made by us in  an  earlier part  of this judgment.  This annexure was to be read  as  a

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part  of  the agreement.  It was probably kept  separate  so that  in  case of need only the annexure  might  be  altered without the trouble of executing a fresh agreement.  063 In determining whether this payment amounts to a return  for loss  of  a  capital asset or is income,  profits  or  gains liable to income-tax, one must have regard to the nature and quality of the payment.  If the payment was not received  to compensate for a loss of profits of business the receipt  in the  hands of the appellant cannot properly be described  as income, profits or gains as commonly understood.  To consti- tute  income, profits or gains, there must be a source  from which  the particular receipt has arisen, and  a  connection must  exist  between  the quality of  the  receipt  and  the source.   If  the payment is by another person  it  must  be found  out  why that payment has been made.  It is  not  the motive  of  the  person who pays  that  is  relevant.   More relevance attaches to the nature of the receipt in the hands of the person who receives it though in trying to find’  out the  quality  of  the receipt one may have  to  examine  the motive  out of which the payment was made.  It may  also  be stated  as  a  general rule that the fact  that  the  amount involved was large or that it was periodic in character have no decisive bearing upon the matter.  A payment may even  be described  as ’pay’, ’remuneration’ etc. but that  does  not determine its quality, though the name by which it has  been called  may  be  relevant in determining  its  true  nature, because this gives an indication of how the person who  paid the  money and the person who received it viewed it  in  the first  instance.   The periodicity of the payment  does  not make the payment a recurring income because periodicity  may be the result of convenience and not necessarily the  result of  the establishment of a source expected to be  productive over  a certain period.  These general principles have  been settled  firmly by this Court in a large number  of  ,cases. See  for example : The Commissioner of Income-tax  v.  Vazir Sultan, & Sons (1), Oodrej & Co, v. Commissioner of  Income- tax  (2),  Commissioner of Income-tax v. Jairam  Valji  (3), Senairam Doongarmall v. Commissioner of Income-tax (4). (1) [1959] Sapp. 2 S.C.R. 375.  (2) 11960] 1 S.C.R. 527. (3) [1959] 35 I.T.R. 148.    (4) (1961] 42 I.T.R, 392. 964 We  shall begin by considering whether the payment  made  in this case can be related to the termination of the agreement of  1938 and can be said to arise from that  termination  in the shape of compensation in lieu of profits.  The agreement of  1938  did  not  state that on  the  termination  of  the agreement in the way provided there compensation was payable to  the  Firm.   For temporary  suspension  of  supplies  no compensation was payable.  These terms of the agreement show that  though the agreement was to run its course as long  as it  proved profitable to the parties, at least the Firm  was not  entitled  to  be compensated  either  for  a  temporary suspension of the benefits under the agreement or a complete termination  of those benefits.  The payment cannot,  there- fore,  on the terms of the agreement be connected with  loss of  estimated profits.  It was said, a long time ago in  the well-known  case  of Glenboig Union Fireclay  Co.   Ltd.  v. Commissioner  of   Inland  Revenue  (1)  that  there  is  no relation between the measure that is used for the purpose of calculating  a  particular  result and the  quality  of  the figure that is arrived at by means of application of that test.  Here, the amount is large  but there  is  nothing  to show that it was  ever)  an  adequate measure of the profits that were expected to be made  during

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the three years in which the amount was to be paid.  Even if it had been there would have been no inference in law.   But in the absence of any proof that this was the likely  profit it  is  difficult  to say that the  payment  replaced  those profits. Another way of looking at the matter is to consider  whether the agreement was a trading agreementor something which  was in the nature of an asset in the hands of the firm.  In this connection  the Department relies strongly upon the case  of Bush  Beach  & Gent.  Ltd. v. Road (2).  In that  case  ,the agreement was different.  No doubt by that agreement also  a territory was reserved (1) (1922) Tax Cas 427.  (2) (1939) 2 Tax Cases 519.  965 and  a monopoly was created but that agreement was  to  last for four years and was prematurely terminated at the end  of two  years.   Under  that agreement a  minimum  quantity  of chemicals  had  to  be bought and if the  buyers  failed  to exercise their option to take up the minimum quantity in any one  year,  the  contract itself was  to  be  considered  as terminated  without  any further option.  The  assessees  in that  case  were industrial chemists till 1933  and  by  the agreement had offered to buy agricultural chemicals and  had set-up, is a result of the agreement, a special organisation for   selling   agricultural  chemicals.   The   amount   of compensation  on the premature termination of the  agreement was  arrived at after negotiations and the  sum  represented profits  of  the  lost business and not the  price  for  the purchase of the contract.  It was observed by Lawrence,  J., that  the business of the assessee continued unaffected  and that  if a trading contract made in the ordinary  course  of business,  though  covering  a new  field,  was  prematurely -terminated  and  compensation was paid for  that  premature termination,  it must be considered to be in replacement  of profits  and not capital.  In reaching this  conclusion  the learned  judge  pointed out that the  case  resembled  Short Bros.   Ltd.  v.  Commissioners of Inland  Revenue  (1)  and Commissioner  of  Inland  Revenue  v.  Northfleet  Coal  and Ballast  Co.  Ltd. () but was distinguishable from  Ven  den Berghts’  case (3).  In Short Brother’s case (1)  a  trading contract  was terminated and compensation was  paid  towards loss of profits in respect of that contract.  Lord  Hanworth M. R. observed that the payment was not compensation for not carrying  on  of  the business but was a  sum  paid  in  the ordinary course in order to adjust the relation between  the shipyard  and its customers.  In the same case Lawrence,  L. J.  observed  that  the  payment was in  the  nature  of  an ordinary  trading  receipt on the termination of  a  trading agreement which might or might not have been profitable  but on the termination of which the (1) (1927 ) 12 Tax Cas. 955.  (2) (1927) 12 Tax Cas. 1102 (3) (1935)     19 Tax Cas. 390. 966 payment was made on the expectation that it would have  been profitable.  In Northfleet’s case (1) compensation was  paid to get rid of a contract under which supplies of chalk  from a  quarry had to be made.  The purchaser received a  payment of pound 900 a year and in return released the supplier from liability  under the contract.  Later a lumpsum of  E.  3000 was  accepted  and  this amount was held  to  be  a  trading profit.  It was observed by Rowlatt, J. "’These  contracts are not being sold.  They are  not  being even   extinguished  really  for  this  purpose.   What   is happening  is that the profits under them are being taken  ; something is being taken in respect of the profits of  them.

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That  is the position.  This sum represents the  profits  of the  Company  on the contracts, treating them  as  contracts which notionally have earned or are going to earn a  profit. Those profits are relating to this sum.  The profits are not destroyed.   It is the profits which we are concerned  with, not the contract itself" On  the  other  side there is the leading case  of  Ven  den Berghs  Ltd.  v. Clark (2) where mutual  trading  agreements between  two  companies  were rescin. ded  and  one  of  the companies  was  paid lb. 450,000 as  "’damages".   This  was treated as a capital receipt and not an income receipt to be included  in  computing  the  profits  of  the  trade  under Schedule  D,  Case  1, of the  Income-tax  Act  1918.   Lord Macmillan described the payments as follows "On  the  contrary the cancelled agreements related  to  the whole structures of the appellants’ profit-making apparatus. They, resulted the Appellants’ activities, defined what they might  and  what they might not do, and affected  the  whole conduct of their business.  I have difficulty in seeing  how money laid out to secure, (1) (1927) 12 Tax Cas.  I 10?.                 (2) (1935) 19 Tax Cas. 390.  967 or money received for the cancellation of, so fundamental an Organisation of a trader’s activities can be regarded as  an income disbursement or an income receipt." The  agreement  in  our case was not an  agreement  for  the purchase  of  bulbs or lamps.  It mentioned no  quantity  or quality  or price.  It only secured to the firm a  right  to exclusive  purchase for sale in an exclusive territory.   In other words, it created a monopoly right of purchase for and a  monoploy  right  of sale in  a  certain  territory.   The agreement secured to the firm an advantage of an enduring nature. No doubt, the agreement was terminable in anyyear on three months’ notice but it would have lastedas long as it was profitable to the contracting parties and the indications were that it was  to subsist  for some time.  It was an agreement which need  not have  continued  but  which was  likely  to  continue.   The question,  therefore,  is  whether  by  termination  of  the agreement  the  firm lost an advantage or  merely  lost  the right  to  obtain certain stockin-trade for which  they  had bargained.   If it was first then the receipt, if  connected with  that loss, was a capital receipt and if the latter  it was a replacement of the profits which were likely to  ensue from the trading agreement.  In our opinion, it is  impossi- ble  to describe this agreement as a trading agreement.   It can  only be described as an agreement which  constituted  a source and a monopoly, and which gave an enduring  advantage to  a  trader in his trade.  The loss of such  an  agreement must  be  regarded as falling on the capital  asset  of  the person  affected  and  not in the  course  of  his  ordinary trading.  If the agreement had been breached prematurely the damages  would  not  have been calculated on  the  basis  of outstanding contracts only but on the basis of an  advantage lost.  Indeed, the agreement itself contemplated in some  of its  terms other contracts under which the supplies were  to be made and refers in 968 terms  to the cancellation of "’orders" and "contracts  This shows  that in addition to this agreement there were  to  be trading contracts in the shape of orders for bulbs which the Firm  would  have placed with the Company  in  the  ordinary course  of their business.  The agreement said that even  on the   termination   of  those  contracts   and   orders   no

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compensation  was payable.  It is difficult to see how  this payment  can be related to profits or how it can  be  called income,  profits  or  gains  or  even  income  from  "’other sources."  The payments can be regarded only as ad hoc  pay- ments. Even if it be not regarded as a payment for loss of  capital it  cannot be regarded as payment for any services  rendered or  likely  to be rendered.  The services in the  past  were amply  remunerated.  The payment does not  contemplate  that the  agreement  in  the  past  had  not  been   sufficiently remunerative  to the Firm.  It does not pretend to pay  them for past services.  The minutes do not show that any service in  the  future was expected from  these  appellants.   What remained to be done was to wind up the business with  regard to  the  agreement of 1938 itself.  For  this  purpose,  the Company agreed to give all facilities to the Firm in respect of  easily  saleable articles and to take over  those  which required  a longer duration to sell.  The only  service,  if service it can be called, was that the Firm was to hand over to the Company a list of customers and the supplies made  to them during the past six months.  It cannot be said that for this service the payment was made.  The payment was thus not related to any service either in the past or in the  future. Both sides have relied upon cases in which certain  payments were  held  to be taxable or not taxable  according  as  the facts in those cases suggested that the payment was for some services  in the past or future or was entirely  gratuitous. No  useful purpose will be served by going over  such  cases because the facts of  969- two very dissimilar cases lead to different principles.   We do  not,  therefore,  refer to  the  cases  of  professional cricketers for whom benefit matches are held or who  receive payments for outstanding performance with the bat or ball or cases of persons working in honorary capacity or in  little- paid jobs who on retirement receive some payment in token of their  worth.   Those cases stand on their own  facts.   The safest  method is to take the facts of the case in hand  and to   consider  for  what  was  the  payment   received   and incidentally for what was the payment made. judged from this angle it is quite clear that the payment here was not made for      any service.  In fact it was not made to the firm  but  to the three partners individually.  It  was  not related  to any service that was likely to be  performed  in the  future even though it -A as described  as  remuneration additional to the ordinary profits of trading.  It was in no sense a remuneration.  It was in fact a payment made out  of regard  for the qualities of the three partners of the  firm who were’long associated with -the Company to its profit and who  had  built up a vast network of sales  Organisation  of which  the  Company  would have  obtained  benefit  when  it entered on the business of selling for itself.  This payment need not be given a particular name.  It need not be  called a ’testimonial’ as to which Rowlatt, J, said in Chibbett  v. Joseph  Robinson & Sons (1) that there is no magic  in  that name.  It need not be called a "solatium’, a term devised by Rowlatt J, in the same case and applied by the Privy Council in  Shaw  Wallace’s case (2) but which this  Court  did  not adopt in Senairam Doongarmall’s case (3) without  attempting to  give it a name we are satisfied that the payment was  in token  of appreciation and was not related to  any  business done  or  to loss of profits and it was not  recompense  for services past or future.  It was a payment out of  gratitude and  must be regarded as a payment which does not  bear  the character  of  income,  profits or  gains  which  alone  are

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taxable under the Income-tax Act.  In our, opinion, the (1) [l924) 9 T.C. 49.    (2) (1932) L.R. 59 I.A. 206 (3) [1959) 35   148 970 High  Court, with all due respect, was in error  in  holding that  this  amount  was taxable.  The answer  to  the  first question must therefore be against the    Department. The next question is whether the receipt can be    described under s. 4 (3) (vii) as of a casual and nonrecurring  nature and  not  by  way  of addition to  the  remuneration  of  an employee.  The assessees were not "employees" of the Company and  were  not  in  receipt  of  remuneration.   After   the termination  of the agreement they were to work  as  regular leap dealers if they cared.  Therewas,nocompulsion that they must  sell electric lamps whether made by the Company or  by other  manufacturers.   If they did, they  were  to  receive commission at any other regular dealer.  It is thus  obvious that the latter part of s. 4 (3) (vii) does not apply.   The receipt  may only be described as a receipt of a casual  and non-recurring  nature if it were income, profits  or  gains. We  have already said that the fact that payment was  spaced over three years did not make this a recurring receipt.   In our  judgment the receipt would be saved by s. 4  (3)  (vii) from  being included in the total income in any event.   But we are of opinion that not being income, profits or gains s. 4  (3) (vii) has no application.  Our answer to  the  second question is that s. 4 (3) (vii) does not apply. The  third  question  need  hardly detain  us.  it  was  not answered  by  the High Court.  ’Section 10 (5A) of  the  Act deals  with  four categories of persons.   The  first  three categories ex- facie do not apply.  The fourth category also does  not  apply  as  the  appellants  in  their  individual capacity were not holding "an agency" and the Firm -of which they  were  partners was also not an agent of  the  Company. The answer to that question must be against the Department. In view of what we have said above this appeal must succeed. It is allowed with costs on the respondent in this Court and in the High Court. Appeal allowed.  971