http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 10  

PETITIONER: COMMISSIONER OF INCOME TAX, MADRAS

       Vs.

RESPONDENT: MESSRS.  BEST & CO.

DATE OF JUDGMENT: 02/11/1965

BENCH: SUBBARAO, K. BENCH: SUBBARAO, K. SHAH, J.C. SIKRI, S.M.

CITATION:  1966 AIR 1325            1966 SCR  (2) 430  CITATOR INFO :  R          1971 SC1590  (9)  RF         1980 SC 793  (4,8)  R          1986 SC1821  (32)  D          1992 SC 959  (17)

ACT: Income-tax Act (11 of 1922), s. 10--Assessee a  multi-agency concern-One  of the agencies terminated with  a  restrictive covenant  not  to carry on  business--compensation,  whether capital or revenue receipt.

HEADNOTE: The respondent was a multi-agency concern.  The principal of one  of  the agencies terminated that agency  and  paid  the respondent certain amounts.  When the amounts were sought to be  assessed to Income-tax, the respondent objected  on  the ground  that  the  amounts  represented  only   compensation received  for  termination  of the agency  business  and  as consideration  for  the  restrictive  covenant  not  to   do business  in  the same line for a  prescribed  period.   The Income-tax  Officer, the Appellate  Assistant  Commissioner. and the Appellate Tribunal held against the respondent,  but the High Court on a reference, held that by the  termination of the agency, the respondent lost an earning asset and that the  compensation paid for the destruction of such an  asset was a capital receipt not liable to tax. In appeal to this Court, HELD  : While the income-tax authorities have to gather  the relevant  material to establish that the compensation  given for the loss of the agency was a taxable income, an  adverse inference could be drawn against the assessee if he had  not produced  evidence which was in his exclusive knowledge  and keeping.   The  ’respondent gave up one of  its  innumerable agencies  in different lines without any protest  presumably because  it  was in the normal course of its  business,  and continued  to  do business without any mishap.  it  did  not place  any material before the Department to  establish  the relative importance of the said agency in the frame work  of the  earning apparatus of its business.  The loss of  -  the agency  would therefore only be -a normal trading loss,  and the  amount  of compensation attributable to it would  be  a

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 10  

revenue  receipt  assessable under S. 10 of  the  Income-tax Act, 1922. [486 H; 487 A, C; 488 B-C] The  restrictive  covenant  was  one of  the  terms  of  the agreement  relating  to  consideration,  and  therefore  the compensation  paid was not only in lieu of the giving up  of the   agency  but  also  for  the  respondent  accepting   a restrictive  covenant  for  a specific  period.   Since  the covenant  was  an  independent obligation  which  came  into operation  only  after  the agency was  terminated  and  was wholly  unconnected with it, that part of  the  compensation attributable  to  the  restrictive covenant  was  a  capital receipt not assessable, to tax. [491 B, C, H; 492 A] Gillandars  Arbuthnot & Co. Ltd. v. Commissioner of  Income- tax,  Calcutta,  [1964]  8 S.C.R. 121  and  Commissioner  of Income-tax, Madras v.    Chari  and  Chari [1965]  3  S.C.R. 692, followed. The  apportionment of the compensation has to be made  on  a reasonable basis between the loss of the agency in the usual course  of  business  and the restrictive  covenant  by  the assessing authority.  The compensation was severable and any difficulty in apportionment cannot be a 481 ground  for  rejecting  the claim by  the  revenue  and  the assessee for apportionment. [492 B-D] Wales (H.  M. Inspector of Taxes) v. Tilley, (1942) 25  T.C. 136  Carter v. Wadman (H.  M. Inspector of Taxes) (1946)  28 T.C.  41  and T. Sadasivam v.  Commissioner  of  Income-tax, (1954) 28 I.T.R. 435, referred to.

JUDGMENT: CIVIL  APPELLATE JURISDICTION : Civil Appeals Nos.  682  and 683 of 1964. Appeals  from the judgment and order dated July 24, 1961  of the Madras High Court in Case Referred No. 29 of 1957. A.   V.  Viswanatha Sastri, R. Ganapathy lyer, R. H.  Dhebar and R. N. Sachthey, for the appellant. K.   N. Rajagopala Sastri, G. C. Sanghi, B. R. Narwala and H.   K. Puri, for the respondent. The Judgment of the Court was delivered by Subba Rao, J. Messrs.  Best & Co., Ltd., Madras, the respon- dent  herein,  hereinafter called the Agency Company,  is  a private limited company carrying -on business in innumerable lines.   It is doing the business of  importers,  exporters, agents  and  subagents of various shipping,  insurance,  and manufacturing companies, in the course of which it  acquired numerous  agencies  from  manufacturers both  in  India  and outside  for  sale  in India of  textiles,  dairy  products, engineering  equipments, soaps., paints, toilet goods,  etc. One  of  such  agencies  was  from  the  Imperial   Chemical Industries  (Exports) Limited, Glasgow,  hereinafter  called the  "Principal", for distribution and marketing in  certain territories  in  South  India of  its  ammunition,  blasting explosives  and  accessories.   The said  agency  came  into existence in 1900.  The terms of the agency were not reduced to  writing.   The rates of commission were  paid  on  terms agreed upon from time to time.  The agency was terminable at will; but, because of their mutual confidence, it  continued without break till the year 1947 when the Principal  decided to transfer all its agencies in India and Ceylon to Imperial Chemical  Industries (India) Limited.  By its  letter  dated March  11,  1947, the Principal gave notice  to  the  Agency Company  terminating its agency from April 1,  1948.   After some correspondence, the agency was terminated on March  31,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 10  

1948,  and  the  Principal paid  certain  amounts  in  three instalments calculated on the basis of the income earned  by the Imperial Chemical Industries (India) Limited, which took over  the  business  from  that  date.   Pursuant  to   that agreement, the Prin- Sup.CI/66-18 482 cipal  paid  on September 30, 1949, a sum of Rs.  34,100  as commission on sales during the year ended March 31, 1949, on September  30,  1950, a commission of Rs.  66,790  on  sales during the year ended March 31, 1950, and on September’  30, ’1951,  a  commission of Rs. 3,35,371 on  sales  during  the year,  ended  March 31, 1951.  During  the  assessment  year 1950-51,  the  first  amount  was brought  to  tax  and  the assessment  had  become final and nothing turns upon  it  in these  appeals.  But in respect of the other two  assessment years,  namely,  1951-52 and 1952-53, the.   Agency  Company objected to the inclusion of the said amounts in its taxable income on the ground that the said amounts represented  only compensation received for termination of the agency business and  also as consideration for the restrictive covenant  not to  do  business in the same line for a  prescribed  period. The  Income-tax  Officer,  in the first  instance,  and,  on appeals, the Appellate Assistant Commissioner held that  the termination  of the said agency did not alter the  structure of the respondent’s business and that they represented  only remuneration paid voluntarily by the Principal to the  agent in appreciation of its past services.  On further appeals by the  Agency Company, the Income-tax Appellate Tribunal  held that,  as the three annual instalments were based on  future sales in the same territory as before, they were of the same nature as the normal commission receipts of the  respondent. On  that  ground, both the appeals were dismissed.   At  the instance  of  the  assessee,  the  following  question   was referred by the Tribunal to the High’ Court of Judicature at Madras for its opinion under s. 66(1) of the Indian  Income- tax Act, 1922, hereinafter called the Act "Whether the aforesaid sum of Rs. 66,790 and Rs. 3 ’  35,371 are  assessable  under Section 10 for the  assessment  years 1951-52- and 1952-53." A  Division Bench of the said High Court, having  regard  to the  circumstances of the case, came to the conclusion  that by  the  termination  of the agency  the  assessee  lost  an earning asset and the compensation paid for the  destruction of  such an asset was a capital receipt and, therefore,  not liable  to  tax.  The Revenue, on  obtaining  the  necessary certificate  from the High Court, has preferred the  present two appeals to this Court.. Mr.  A. V. Viswanatha Sastri, learned counsel for the  Reve- nue,  contended that the assessee had innumerable  agencies, that it was a normal incident in the course of its  business to  give  up  agencies  and  acquire  new  ones,  that   the termination   of  the  agency  in  question  was  a   normal occurrence in the course of its 483 business, that it had no impact on the earning assets or the structure  of  the business, that  the  alleged  restrictive covenant  was only an act of grace on the part of the  agent in  view  of  the long  standing  relationship  between  the parties  and that it did not enter into the  calculation  of the,  compensation  paid  to the assessee.   In  short,  his argument was that the said compensation only represented the taxable  income of the assessee should the Court  hold  that the  compensation  was in part capital and in  part  revenue income, the argument proceeded, the said compensation  would

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 10  

have to be apportioned reasonably between the said parts. Mr.  Rajagopala  Sastri, learned counsel for  the  assessee, advanced  the  argument that on a true construction  of  the agreement disclosed by the correspondence it should be  held that  the  amount received by the assessee was wholly  as  a consideration for. the restrictive covenant and,  therefore, was  of a capital nature.  Alternatively he  contended  that even  if the amount was wholly paid as compensation for  the loss  of  the  agency,  it was a  capital  receipt,  as  the assessee lost a substantial source of income in relation  to the  totality of its business.  On the assumption  that  the payment  partook  of  a  composite  character,  the  learned counsel  would  say that an appointment should  be  made  in proportion of the value to the assessee of the loss incurred under both the heads, namely, the loss of the agency and the restrictive  covenant  not to do business  for  a  specified period in the same field. These appeals raise the familiar question, namely, whether a particular income arising from the termination of one of the agencies of a multi-agency concern is a capital receipt or a revenue receipt.  The decisions on this question are legion. Eminent  judges  in India as well as  in  England  expressed their inability to lay down a precise principle of universal application  but were able to evolve some workable rules  of guidance.  The difficulty is inherent in the problem itself. This  Court  in a recent decision has  surveyed  the  entire field  and, therefore, no useful purpose will be  served  to cover the ground over again.  That case is Kettlewell Bullen &  Co.  Ltd.  v. Commissioner  of  Income-tax,  Calcutta(1). There, this Court, speaking through Shah, J., expressed  its conclusion thus:               "’Where,    on   a   consideration   of    the               circumstances, payment is made to compensate a               person for cancel-               (1)   [1964] 8 S.C.R. 93               484               lation 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." But  the difficulty still remains in the application of  the said  principle  to the facts of each case.   In  Gillanders Arbuthnot  and  Co.   Ltd. v.  Commissioner  of  income-tax, Calcutta(1)  this Court applied the said rules to the  facts of that case, which, by and large, are similar to, the facts in  the  present case.  It would, therefore,  be  useful  to notice briefly the facts of that case.  There, the appellant company  carried  an business in diverse lines :  acting  as managing  agents,  shipping agents, purchasing  agents,  and secretaries,  the  company  also  acted  as  importers   and distributors on behalf of foreign principals and bought  and sold on its own account.  Under an unwritten agreement which was  terminable at will the appellant acted as  sole  agents and distributors of explosives manufactured by the Imperical

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 10  

Chemical   Industries   (Export)  Ltd.   That   agency   was terminated and by way of compensation the Imperial  Chemical Industries  (Export)  Ltd. paid for the  first  three  years after  the  termination  of the  agency  two-fifths  of  the commission  accrued  on its sales in the  territory  of  the appellant’s  agency  computed  at the  rates  at  which  the appellant  had  formerly been paid and in  addition  in  the third  year full commission for the sales effected  in  that year  at the same rates.  The Imperial  Chemical  Industries (Exports)  Ltd.  had intended to take a  formal  undertaking from the appellant to refrain from selling or accepting  any agency for explosives or other competitive commodities,  but no  such  agreement in writing was taken or  insisted  upon. The  question  was  whether  the  amounts  received  by  the appellant  for  those  three years were  of  the  nature  of capital  or revenue.  This Court held that the amounts  paid were  of the nature of income and, therefore, assessable  to tax.  The reason given for that conclusion was that,  having regard to the vast array of business done (1)  [1964] 8 S.C.R. 121 485 by the appellant as agents, the acquisition of agencies  was in  the  normal  course of  business  and  determination  of individual  agencies  a  normal incident  not  affecting  or impairing its trading structure.  The material facts of that case  are on all fours with the present case.   Indeed,  the Principal  in  both the cases was the same  and  the  agency terminated  was also a similar one.  The compensation  given was  worked out on the same lines.  The only  difference  is that  in  that case it was not found  that  the  restrictive covenant entered into the bargain. This  Court again reiterated the same principle  in  Commis- sioner of Income-tax, Madras v. Chari & Chari Ltd.(1).  But, on  the facts of that case, it came to the  conclusion  that the compensation paid for the loss of agency was. a  capital asset.  There, Shah, J., speaking for the Court, said               "In  Kettlewell Bullen and Co.’s case(1)  this               Court pointed out that ordinarily compensation               for loss of office or agency is regarded as  a               capital receipt, but the rule is subject to an               exception  that  payment  received  even   for               termination of an agency agreement, where  the               agency  is  one  of many  which  the  assessee               holds, and the termination of the agency  does               not impair the profit making structure of  the               assessee,  but is within the framework of  the               business, it being a necessary incident of the               business  that existing agencies may  be  ter-               minated,  and fresh agencies may be taken,  is               revenue  and not capital, Kelsall  Parson  and                             Co.’s case(8) falls within the excepti on to the               ordinary rule, and circumstances which brought               the   case  of  the  respondent   within   the               exception must be clearly established." As  we  have observed earlier, in view of the  judgments  of this Court, no further citation is called for.  Whether  the compensation received by an assessee for the loss of  agency is  a capital receipt or a revenue receipt depends upon  the circumstances  of each case.  Before coming to a  conclusion one  way or the other, many questions have to be  asked  and answered  : what was the scope of the earning  apparatus  or structure,   from   physical,  financial,   commercial   and administrative standpoints ? If it was a business of  taking agencies,  how many agencies it had, what was  their  nature

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 10  

and  variety  ? How were they acquired, how one or  some  of them were lost and what was the total income they were (1) [1965] 3 S.C.R. 692  (2) [1964] 8 S.C.R. 93 (3) [1938] 21 T.C. 608 C.I./66-19 486 yielding ? If one of them was given up what was the  average income  of  the  agency lost ? What was  its  proportion  in relation  to the total income of the company ? What was  the impact  of  giving  it up on the  structure  of  the  entire business ? Did it amount to a loss of enduring asset causing an unabsorbed shock dislocating the entire or a part of  the earning apparatus or structure ? or was it a loss due to  an ordinary  incident  in  the course of  the  business  ?  The answers  to  these questions would enable one to come  to  a conclusion  whether  the  loss of a  particular  agency  was incidental to the business or whether it amounted to a  loss of   an  enduring  asset.   If  it  was  the   former,   the compensation paid would be a revenue receipt; if it was  the latter, it would be a capital receipt.  But these  questions can only be answered satisfactorily if the relevant material is  available to the income-tax authorities.  The  evidence, of  witnesses  in  charge  of  the  business,  the  relevant accounts and balance sheets of the assessee before and after the loss, other evidence disclosing the previous history  of the total business and the relative importance of the agency lost and the present position of the business after the loss of the said agency have to be scrutinized by the Department. At this stage the question of burden of proof raised at  the Bar may be noted.  In Commissioner of Income-tax v. Chari  & Chari Ltd.(1), this Court observed :  it  must in the first instance be observed that it  is  for the revenue to establish that a particular receipt is income liable to tax................ ". We may point out, as some argument was advanced on the ques- tion  of burden of proof, that this Court did not  lay  down that the burden to establish that an income was taxable  was on  the  Revenue was immutable in the sense  that  it  never shifted  to  the  assessee.  The expression  "in  the  first instance"  clearly indicates that it did not say  so.   When sufficient  evidence,  either direct or  circumstantial,  in respect  of  its contention was disclosed  by  the  Revenue, adverse inference could be drawn against the assessee if  he failed  to put before the Department material which  was  in his  exclusive possession.  The process is described in  the law  of evidence as shifting of the onus in the course of  a proceeding from one party to the other.  There is no  reason why  the  said  doctrine is  not  applicable  to  income-tax proceedings.   While  the  Income-tax  authorities  have  to gather   the  relevant  material  to  establish   that   the compensation given for the loss of agency was (1)  [1965] 3 S.C.R. 692 487 a  taxable income, adverse inference could be drawn  against the  assessee if he had suppressed documents  and  evidence, which were exclusively within his knowledge and keeping. With  this background let us scrutinize the evidence in  the present case.  As we have stated earlier, the assessee is  a well  established and long standing company in South  India. It  has taken innumerable agencies in different lines.   One of  such  agencies  was the agency it  had  taken  from  the Imperial  Chemical  Industries (Exports)  Limited,  Glasgow. Though  the said agency had been with the assessee for  over 47 years, it was an agency terminable at will.  The assessee did  not  place  any  material  before  the  Department   to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 10  

establish the relative importance of the said agency in  the framework  of the earning apparatus of its business; it  did not adduce any evidence to prove that the said agency was  a pivot of its structure and that it had closed any branch  or part  of the establishment in consequence of the said  loss. It could have placed material before the Department to  show that  the average income from the said agency compared  with the total income from all the agencies was so large that  by this  loss the entire business was dislocated.  But  it  did not do so.  The only evidence on which the High Court relied and  on  which  the learned counsel for  the  assessee  laid emphasis  was  the  fact that the  income  returned  by  the assessee  for the year 1952-53 was very nearly the  same  as that  it received by way of compensation from the  Principal during  the  accounting  year  corresponding  to  the   said assessment year.  On that basis the High Court held that the income  from the source which had been taken away  from  the assessee by reason of the termination of the agency would be very nearly half of its total income and, therefore, it lost an  enduring asset.  This reasoning does not appeal  to  us. Firstly,  the compensation paid for the third year  did  not represent  only  the  commission on the  sales  effected  in respect of that agency during that year, but it  represented not  only  the  commission on the said  sales  but  also  in addition  two-fifths  of  that  commission;  secondly,   the figures for the earlier two years show that during (he  year ending  March  31, 1949, if the whole commission  had,  been paid,  the figures would have been Rs. 85,250 for the  first year  and  Rs.  1,66,975 for the second  year.   The  second year’s figures was about one-fourth of the total income  and the  first  year’s  would be one-eighth  of  it.   There  is another  fallacy  in  this line  of  reasoning.   The  sales effected during the said three years were the sales effected by  the  agency.  It is not possible to predicate  that  the assessee  would  have effected the same  sales  during  that period if it had continued the agency.  The real facts 488 could  have  been  brought out if  only  the  average  total commission earned by the assessee for a reasonable period of time  before the transfer was disclosed.  In the absence  of such material it is not possible to arrive at any conclusion one way or the other, on the line of enquiry pursued by  the High Court.  What remains, therefore, is only the fact  that the assessee had innumerable agencies in different lines and that  it  only  gave  up one of them  and  continued  to  do business  without any apparent mishap.   The  correspondence between  the  parties shows that the assessee  gave  up  the agency without any protest presumably because such  termina- tion  of  agencies  was part of the  normal  course  of  its business.   We, therefore, hold on the facts of the  present case  that the loss of the said agency by the  assessee  was only  a normal trading loss and that the income it  received was a revenue receipt. Mr.  Rajagopala Sastri’s next contention is that on  a  fair reading  of  the  correspondence  that  passed  between  the parties it should be held that the compensation given to the assessee  was  only in lieu of a restrictive  covenant  and, therefore, it was a capital receipt. To  appreciate this contention it is necessary to  read  the relevant  correspondence.  On March 11, 1947, the  Principal wrote  a  letter to the assessee.  As  the  argument  mainly turned upon the contents of this letter, it is necessary  to extract it in full.  It reads : IMPERIAL CHEMICAL INDUSTRIES (EXPORT) LIMITED Explosives Branch, Nobel House,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 10  

25, Bothwell Street, Glasgow C-2. lath March 1947. Our Ref. : Export sales Section GIL/NR. Messrs.  Best and Company Limited, P.O. Box 63, Madras, India. Dear Sirs, Agency arrangements. We refer to the interview which Mr. J. W. Donaldon had  with your Mr. Ruddle in May 1945, when it 489 was  intimated  that as a matter of long  term  policy,  our agencies in India and Ceylon would ultimately be taken  over by  Imperial Chemical Industries (India), Limited.   It  was indicated  at that time that a period of two to three  years might  elapse  before any steps were taken as  regards  this transfer.   We  now have to advise you that the  matter  has been receiving further consideration, and Imperial  Chemical Industries (India), Limited desire to take over the  various agencies as from the first April 1948. It  is with regret, therefore, that we have to intimate  our intention  of  transferring your agency, as from  the  above date, to Imperial Chemical Industries (India), Limited,  and would take this opportunity of expressing to you our sincere appreciation  of the valuable services you have rendered  to us over a period of many years. As  a  result  of the transfer of your  agency  to  Imperial Chemical   Industries  (India)  Limited,  we  propose   that compensation should be paid to you on the following basis :- (1)  For  the first three post-transfer years, we shall  pay you two-fifths of the commission accruing on annual sales in the  territory  of  your  Agency  taken  over  by,  Imperial Chemical Industries (India)- Limited, such commission to  be computed at the commission rates formerly paid to you. (2)In  the  third post-transfer year we shall  pay  you,  in addition, a sum equivalent to the full commission on   sales for  that  year  effected by  Imperial  Chemical  Industries (India)  Limited in your territory, calculated at  the  same rates. (3)  Payment will be made to you after the end of each  year as soon as the amount is ascertained. For  the purposes of calculating the commission due to  you, the  post-transfer years will be deemed to run as  from  the date  of  the transfer of your agency to  Imperial  Chemical Industries  (India)  Limited.  We trust that you  will  find these proposals acceptable. As  a  condition  of our paying compensation  on  the  basis outlined  above, we would request you to be good  enough  to give us a formal undertaking to refrain from 4 90 selling  or  accepting any agency for  explosives  or  other commodities  competitive  with those covered by  the  agency agreement now being terminated. In  this connection, we are asking our legal  department  to prepare  a formal agreement which we will submit to you  for your signature as soon as possible. Yours faithfully, for Imperial Chemical Industries (Export) Limited. Mr.  Rajagopala Sastri contended that for the past  valuable services  the Principal expressed only sincere  appreciation and  for the termination of the agency and thus  putting  an end  to the assessee’s future benefits it proposed  to  give the assessee compensation measured by the sales effected  by the  new  agent.   But his main argument  is  that  whatever

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 10  

terminology was used, commission or compensation, the amount agreed  to  be  paid  was wholly  as  compensation  for  the assessee  agreeing to refrain from selling or accepting  any agency  for selling explosives.  That conclusion was  sought to  be  arrived at on the ground that the  said  restrictive covenant  was a condition for the payment  of  compensation. We  find  it difficult to accept this  construction  of  the document.  The scope of this document cannot be  appreciated ignoring   the  circumstances  under  which  it  came   into existence.  As we have stated earlier, the agency, which  is the  subject-matter of this agreement, was only one of  many other agencies the assessee had. We cannot agree with the learned counsel that the  compensa- tion was given wholly for the restrictive covenant.  Indeed, the  compensation  was  given expressly for  giving  up  the agency.   In the last paragraph of the letter a request  was made to the assessee to agree to a restrictive covenant as a condition  for paying compensation.  The letter dated  April 8,  1947,  written by the Principal to  the  Agency  Company makes the position clear.  Therein it was stated               "With regard to the point you raise concerning               the  period during which you  would  undertake               not  to take any competitive agency, we  would               like  you to understand that it was never  our               intention that you should be tied down on this               Point  for  all time.  We had felt  that  the,               limiting  period should be one of  five  years               and  we are pleased to note, from your  letter               that this appa-               491               rently  is in accordance with your own  ideas.               It  is  suggested that the five  years  should               date  from  the  termination  of  the  agency,               namely, 1st April, 1948." The  letter written by the assessee to the Principal is  not on  the  file.  But it is clear from this  letter  that  the restrictive  covenant was one of the terms of the  agreement relating   to   consideration.   It  was  a  part   of   the consideration  that passed from the assessee  for  receiving the compensation.  We cannot also agree with Mr.  Viswanatha Sastri, who went to the other extreme and contended that the restrictive covenant was only an act of grace on the part of the  Agent and that it did not enter into the bargain.   We, therefore, hold that the compensation agreed to be paid  was not only in lieu of the giving up of the agency but also for the assessee accepting a restrictive covenant for a specific period. The  next question is whether that part of the  compensation attributable  to  the  restrictive  covenant  is  a  capital receipt or a revenue receipt. The  House  of Lords in Beak (H.M. Inspector  of  Taxes)  v. Robson(1), had to consider, whether compensation paid for  a restrictive  covenant  was a capital receipt  or  a  revenue receipt.   Under a service agreement the respondent  therein covenanted in consideration of the payment to him of &-7,000 on  the  execution of the agreement, that if  the  agreement were  determined by notice given by him or by his breach  of its  Provisions he would not compete directly or  indirectly with the company within a radius of fifty miles of its place of business untill the five years had expired.  The House of Lords held that the said amount was a payment for giving  up a  right  wholly unconnected with his office  and  operative only after he ceased to hold that office and, therefore,  it was not taxable under Schedule E of the Income-tax Acts. This  Court in Gillanders Arbuthnot and Co. Ltd. v.  Commis-

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 10  

sioner   of  Income-tax,  Calcutta(1)  accepted   the   said principle  and held that the compensation paid for  agreeing to  refrain  from carrying on competitive  business  in  the commodities in respect of the agency terminated or for  loss of  goodwill  was  prima facie of the nature  of  a  capital receipt. In the present case, the covenant was an independent obliga- tion undertaken by the assessee not to compete with the  new agents  in the same field for a specified period.   It  came into operation only after the agency was terminated.  It was wholly un- (1) [1942] 25 T.C. 33. (2) [1964] 8 S.C.R. 121 4 9 2 connected  with  the  assessee’s  agency  terminated.    We, therefore,   hold  that  that  part  of   the   compensation attributable  to  the  restrictive covenant  was  a  capital receipt and hence not assessable to tax. The next question is whether the compensation paid is sever- able.   If  the  compensation paid was  in  respect  of  two distinct  matters,  one taking the character  of  a  capital receipt  and the other of a revenue receipt, we do  not  see any principle which prevents the apportionment of the income between  the two matters.  The difficulty  in  apportionment cannot  be  a ground for rejecting the claim either  of  the Revenue  or  of  the assessee.  Such  an  apportionment  was sanctioned  by courts in Wales (H.M. Inspector of, Taxes  v. Tilley(1), Carter v. Wadman (H.M. Inspector of Taxes (2 )  , and  T. Sadasivam v. Commissioner of Income-tax,  Madras(1). In the present case apportionment of the compensation has to be made on a reasonable basis between the loss of the agency in  the usual course of business and the  restrictive  cove- nant.   The manner of such apportionment has perforce to  be left to the assessing authorities. The  answer to the question referred to the, High  Court  is that  only  such  part of the sums of  Rs.  66,790  and  Rs. 3,35,371  as  is attributable to the loss of the  agency  is assessable  under S. 10 of the Act for the assessment  years 1951-52 and 1952-53.  We accordingly modify the answer given by the High Court in that regard. In the result, the appeals are partly allowed.  As both  the parties failed in part and succeeded in part, they will bear their respective costs here and in the High Court. Appeals allowed in part. (1) [1942] 25 T.C. 136                   (3) [1955] 28 I.T.R. 435 (2) [1946] 28T.C. 41 493