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PETITIONER: GILLANDERS ARBUTHNOT AND CO., LTD.

       Vs.

RESPONDENT: THE  COMMISSIONER OF INCOME-TAX, CALCUTTA

DATE OF JUDGMENT: 01/05/1964

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

CITATION:  1965 AIR  452            1964 SCR  (8) 121  CITATOR INFO :  R          1966 SC1325  (4,12)  R          1971 SC1590  (9)

ACT: Income     Tax-Capital     or     revenue-Termination     of agency--Compensation--Business          of           several agencies--Cancellation    of   single    agency-Nature    of compensation.

HEADNOTE: The  appellant company was carrying on business  in  diverse lines  as  managing agents of  some  concerns,  distributing agents of others and a& secretaries of still other class  of concerns.  It also dealt as an ex- 122 porter and importer, shipping agent, and as buyer and dealer in  diverse:  commodities.  A large amount of  business  was done  by the appellant as an agent of foreign  companies  in respect of different kind& of goodsIn respect of  explosives manufactured  by the Imperial Chemical  Industries  (Export) Ltd., Glasgow, Scotland, the appellant was acting as thesole agent and distributor of that company.  The agency agreement was  terminable at the option of the principal company,  and by  a letter dated March 11, 1947, the latter  informed  the appellant that the agency would stand terminated from  April 1, 1948 and that compensation would be paid for  termination of  the agency.  The appellant was be paid an  amount  which was  computed on the basis of the profits of  the  business. In  the course of the proccedings for assessment to  income- tax  appellant  claimed  that the  amount  was  received  on determination  of  the  agency being receipt  of  a  capital nature and was not liable to be included in total income  of the appellant, but the Income-tax Officer rejected the claim holding that cancellation of a single contract of agency out of a number of selling agencies held by the appellant was in the ordinary course of business and that the sum received as compensation was revenue taxable under the Indian Income-tax Act, 1922.  Held:  Having regard to the vast array of business done  by the appellant as agents, the acquisition of agencies was  in the  normal  course  of business and  the  determination  of

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individual agencies, a normal incident, could not affect  or impair the trading structure of the appallant, nor involve a loss  of  an enduring trading asset.  and  the  compensation received by the appellant, therefore, did not represent  the price  paid for loss of a capital asset but only  a  payment made for the loss of profit it suffered by the  cancellation of its agency and was income chargeable to the income-tax.

JUDGMENT: CIVIL APPELLATE JURISDICTION:    Civil  Appeals Nos. 825-828 of 1963. Appeals from the judgment and order dated January 10,  1962, of the Calcutta High Court in Income-tax Reference No. 33 of 1957. B.   Sen,  P.  K.  Chatterjee  and  D.  N.  Gupta,  for  the appellant. K.   N.  Rajagopal  Sastri  and  R.‘N.  Sachthey,  for   the respondent. May 1, 1964.  The Judgment of the Court was delivered by SHAH,  J.-The  appellant which is a public  limited  company incorporated  under the Indian Companies Act, 1913, has  its registered  office  at  Calcutta, and  branches  in  Bombay, Madras, New Delhi and Kanpur.  The appellant carried on 123 business  in diverse lines, which may broadly be  classified as   (1)  buying  and  selling  on  its  own  account,   (2) introducing  customers to principals (3) acting as  managing agents,  (4)  acting  as  shipping  agents,  (5)  acting  as purchasing   agents,  (6)  acting  as  sole  importers   and distributors  on behalf of United Kingdom principals  having no Organisation in India and (7) acting as secretaries. Since  January  21, 1886, M/s.  Gillanders Arbuthnot  &  Co. predecessors-in-interest  of  the appellant  were  the  sole agents and distributors in India of explosives  manufactured by the Imperial Chemical Industries (Export) Ltd.   Glasgow, Scotland, hereinafter called ’the principal company’.  There was  no written agreement between the principal company  and M/s  Gillanders Arbuthnot & Co. incorporating the  terms  of the agency agreement.  It is however common ground that  the agency  agreement  was  ’terminable at  the  option  of  the principal  company.   The  appellant  was  incorporated  for taking  over the business of M/s Gillanders Arbuthnot &  Co. and since it took over the distributing agency the appellant acted  as  the  sole agent  and  distributor  of  explosives manufactured by the principal company, but without a written agreement. In May 1945 the principal company desired to set up its  own Organisation  for distributing its products,  and  intimated the  appellant  that the agency of the .  appellant  may  be cancelled after two or three years.  By letter dated  March, 11, 1947, the principal company informed the appellant  that the  agency  will stand terminated from April 1,  1948,  and that it desired to compensate the appellant for  termination of the agency on the following basis: (1)  "For the first three post-transfer years" the principal company  shall  pay  to  the  appellant  two-fifths  of  the commission  accrued on actual sales in the territory of  the lattees  agency  taken  over  the  principal  company,  such commission  to be computed at the commission rates  formerly paid to the appellant; (2)  That  "in  the third  post-transfer  yeae"          the principal company shall pay the appellant in

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I24 addition  a sum equivalent to full commission on  the  sales for  that  year  effected by the principal  company  in  the appellant’s territory calculated at the same rates. (3)  That payments would be made to the appellant after  the end of each year as soon as the amount due was ascertained. Certain other matters in the letter which have a bearing  on the dispute, may be reproduced: "For  the purpose of calculating the commission due to  you, the post-transfer will be deemed to run as from the date  of the transfer of your agency to Imperial Chemical  Industries (India)  Ltd., We trust that you will find  these  proposals acceptable. As  a condition of our paying you compensation on the  basis outlined  above, we would request you to be good  enough  to give  us  a formal undertaking to refrain  from  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 signature as soon as possible." It  is  common ground that no formal agreement  in  writing, which  was contemplated to be taken from the appellant,  was executed: not even a draft of the agreement was submitted by the principal company to the appellant. Pursuant  to  conditions  (1) and (2)  incorporated  in  the letter  dated  March  11,  1947, which  have  been  set  out earlier,  the appellant received the following amounts  from the principal company,      .....125      For the previous year corresponding to the      assesment year ending 31st March, 1949.Rs.1,53,471/11/-      For the previous year corresponding to the      assessment year ending 31st March, 1950.Rs.1,59,271/41-      For the previous year corresponding to the      assessment year ending 31st March, I951Rs.6,20,13I/2/- These amounts were included in its profit & loss account  by the  appellant  as commission received by it.   But  in  the course  of the proceedings for assessment to income-tax  and Business Profits Tax, the appellant claimed that the amounts were  compensation received on determination of  the  agency being receipts of a capital nature and were not liable to be included in the total income of the appellant.  The  Income- tax  Officer, Companies District IV, Calcutta, rejected  the contention of the appellant, holding that cancellation of  a single  contract  of  agency  out of  a  number  of  selling agencies held by the appellant was in the ordinary course of business   and  the  sums  received  by  the  appellant   as compensation  for Cancellation were revenue,  taxable  under the Indian Incometax Act, 1922.  The Income-tax Officer also assessed  the  relevant amount of compensation  to  Business Profits  tax  for the chargeable  accounting  period  ending March 31, 1949. In  appeal  to  the Appellate  Assistant  Commissioner,  the contention of the appellant was accepted principally on  the ground  that  the  amounts received by  the  appellant  were compensation for termination of the agency with the  princi- pal  company  and as consideration for agreeing  to  refrain from   carrying  on  in  future  competitive   business   in explosives.    The   Appellate  Tribunal   held   that   the compensation received by the appellant was merely incidental to the carrying on of the business.  The Tribunal  negatived the  contention of the appellant that the explosives  agency was a separate business or that termination of that business

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amounted  to loss of an enduring asset.  The  Tribunal  also held  that  the  covenant referred to in  the  letter  dated March,  11,  1947, about the appellant agreeing  to  refrain from  carrying on a competitive business in  explosives  did not form consideration for the amount paid, because although proposed in the 126 letter dated March 11, 1947, there was no formal  acceptance of  the  offer  or an undertaking in writing  given  by  the appellant  agreeing not to carry on a competitive  business. In the view of the Tribunal the offer relating to the under- taking not to carry on- a competitive business contained  in the  letter  was not accepted, and the amounts paid  by  the principal company could not therefore be regarded as forming consideration partially or wholly for acceptance of that.offer. The Tribunal thereafter referred three questions under s.   66(l) of the Indian Income-tax Act, 1922 to the High Court of Judicature at Calcutta.  These questions were: (1)  Whether the assessee’s agency of the Imperial  Chemical Industries (Export) Ltd. was a separate business by  itself, the  closure  of  which resulted in  the  destruction  of  a capital asset of the assessee; (2)  Whether  on the facts and in the circumstances of  this case,  the compensation sums received by the  assessee  from the  Imperial Chemical Industries (Export) Ltd.  are  income chargeable in the hands of the assessee; and (3)  Whether  on the facts and in the circumstances of  this case  no part of the compensation money was received by  the assessee  on  the condition not to carry  on  a  competitive business  in the same line of activity in explosives and  as such no part of the money was in the nature of capital being exempt from Indian Income-tax levy? The High Court recorded answers to the question as follows: "Question l.--The assessee’s agency of the Imperial Chemical Industries  (Export)  Ltd. was not a  separate  business  by itself  and the closure of this business did not  result  in the destruction of a capital asset of the assesee. I27 Question  2.--The  amounts of compensation received  by  the assessee from the Imperial Chemical Industries (Export) Ltd. were income chargeable in the hands of the assessee. Question 3.--No part of the compensation money was  received by  the assessee on condition not to carry on a  competitive business in explosives and consequently no part thereof  was exempt from Indian Income-tax levy." With  certificate  of  fitness granted by  the  High  Court, ,these appeals have been preferred by the appellant. The  principal  question in dispute is  whether  the  amount received by the appellant as compensation for loss of agency are of the nature of capital or revenue.  It is necessary in the  first instance to eliminate two subsidiary  contentions raised  by  the appellant.  It was urged  that  the  amounts received  by the appellant were in lieu of compensation  for cancellation  of  the agency by the principal  company,  for loss  of goodwill of the appellant’s business, and  also  in consideration  of the appellant’s agreeing not to  carry  on any competitive business in explosives or other  commodities in which business was carried on by the appellant under  the agency  agreement.   It cannot seriously  be  disputed  that compensation  paid for agreeing to refrain from carrying  on competitive business in the commodities in respect of  which the  agency was terminated, or for loss of  goodwill  would, prima  facie, be off the nature of a capital  receipt.   But there  is  no  evidence that compensation was  paid  to  the

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appellant as consideration for giving the undertaking not to carry on a competitive business, or as compensation for loss of goodwill. In the letter dated March 11, 1947, it was expressly recited that as a condition of payment of compensation on the  basis outlined  therein the principal company had called upon  the appellant  to  give  a formal undertaking  to  refrain  from selling  or  accepting any agency for  explosives  or  other commodities  competitive  with those covered by  the  agency agreement,  but no such formal undertaking was  ever  given. It was recited in the last paragraph of the letter that  the prin- 128 cipal  company  will submit a formal agreement  to  the  ap- pellant for execution.  But it appears that at the time  of’ Payment  of the compensation and thereafter also both  sides ignored this condition.  Payment of compensation was. spread over a period of three years, but that will not give rise to an  inference  that the object behind the  payment  was.  to enforce the undertaking, for the undertaking, if any,  would have  operated  permanently whereas  full  compensation  was payable  within three years.  If importance was attached  to the undertaking the principal company would have declined to make even the first payment without insisting upon, a formal agreement   incorporating  the  undertaking.   Whether   the appellant did not in fact carry on any competitive, business was never investigated, and the absence of evidence on  that point   may  reasonably  justify  the  inference  that   the appellant  never  attempted to establish that  part  of  its case.   Granting that an agreement to refrain from  carrying on  a  competitive business may be implied  from  subsequent conduct, in the absence of any material at any stage, of the proceedings before the Revenue authorities, it would be  re- asonable  to hold that the appellant did not place  any  re- liance  upon the case that part of the compensation was  at- tributable  to an undertaking not to engage  in  competitive business. No  part  of the compensation may be attributed to  loss  of goodwill  suffered  by the appellant.  It is true  that  the agency had continued in the hands of the predecessors of the appellant  and thereafter with the appellant for upwards  of sixty years.  It was urged that an extensive market had been built  up in India and the goodwill of that business was  on termination of the appellant’s agency; taken over by the new agents  of the principal company, and compensation  paid  in that behalf must be regarded as capital.  But this  question also  was  never raised before theRevenue  authorities,  nor even  before the Tribunal.  The, Tribunal observed  that  it had not been supplied with "any material regarding the basis of the value of the goodwill, nor anything to indicate as to what the written down value of the goodwill was, due to  the termination of the agency". 129 It  therefore held that the inference sought to be drawn  by the appellant that compensation was referable to the loss of goodwill, was based on no evidence and the High Court agreed with  that conclusion.  We are unable to hold that the  High Court  was, in so holding in error.  If it was the  case  of the  appellant that a part of the compensation was  in  fact paid  for  loss of goodwill of the business,  the  appellant could  have  led evidence to establish that it was  the  in- tention of the parties that the loss of good will was to  be compensated  by payment of an amount which was  included  in the compensation ultimately paid by the principal company to the  appellant.   The  business of  agency  had  undoubtedly

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continued  for  more  than  sixty years,  but  there  is  no evidence about the terms of the agency agreement.  There was no  written  agreement,  and it is common  ground  that  the agency  was terminable at will.  The principal company  had, as  early  as  1945, informed the appellant  that  the  dis- tribution  arrangement  "would be terminated  after  two  or three  years".  The appellant had sufficient notice  of  the proposed determination.  Thereafter the agency was cancelled with  effect from April 1, 1945, and in  the  correspondence which is tendered in evidence, there is not even an indirect reference to any negotiation for payment of Compensation for loss of goodwill, or any agreement in that behalf. We  may  now  address ourselves  to  the  question,  whether compensation paid by the principal company for  cancellation of  the agency may be regarded as a capital or  revenue  re- ceipt.  We have in a recent case in Kettlewell Dullen &  Co. v.  The  Commissioner  of Income-tax, Calcutta  (1)  made  a survey  of the important cases which have arisen before  the Courts  in the United Kingdom and in India about  the  prin- ciples which govern the determination of the nature of  com- pensation  received  on the termination of  an  agency.   We observed in that case: "On  an analysis of these cases which fall on two  sides  of the dividing line, a satisfactory measure of consistency  in principle is disclossed.  Where (1) 1964] S.C.L. 93. 51 S.C.-9 130 on a consideration of the circumstances, payment is made  to compensate  a  person for cancellation of a  contract  which does  not affect the trading structure of his business,  nor deprive  him of what in substance is his source  of  income, termination of -the contract being a normal incident of  the business, and such cancellation leaves him free to carry  on his  trade (freed from the contract terminated) the  receipt is  revenue:  where  by the cancellation of  an  agency  the trading  structure  of  the assessee is  impaired,  or  such cancellation results in loss of what may be regarded as  the source  of  the assessees income, the payment made  to  com- pensate for cancellation of the agency agreement is normally a capital receipt." Examining the circumstances of the present case in the light of  that principle, we agree with the High Court  that  what was  received by the appellant was income and  not  capital. Compensation  received by the appellant for cancellation  of the  agency which was terminable at will, the appellant  was to  be paid an amount which was to be computed on the  basis of  the  profits of the business.  Under  the  letter  dated March 11, 1947, the appellant was to be paid "for the  first three  post-transfer  years" two-fifths  of  the  commission accrued on actual sales in the territory of the  appellant’s agency  taken  over  by  the  Imperial  Chemical  Industries (India) Ltd., such commission to be computed at the rates of commission formerly paid to the appellant, and that in  "the third  post-transfer year" the principal company was to  pay the  appellant  in addition a sum equivalent  to  full  com- mission on the sales for that year effected by the  Imperial Chemical  Industries (India) Ltd. in the appellant’s  terri- tory calculated at the same rates. The   appellant  was  conducting  business  as  selling   or distributing agent of numerous principals.  The agency which was  terminated was one of many such agencies in  which  the appellant functioned as distributing agent of a 131 foreign principal.  There is not even a suggestion, that  by

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the  determination  of the agency held by the  appellant  in explosives from the principal company, the trading structure of  the  assessee’s business was impaired.  It  is  manifest that  the  agencies  of  the  companies  conducted  by   the appellant must have been obtained at different times.  There is  no  evidence  that  these agencies  were  of  any  fixed duration.  it would be reasonable to infer that some of  the agencies may be cancelled and fresh agencies obtained.   The list   furnished  by  the  appellant  before  the   Tribunal analysing the different classes of business carried on by it disclosed  that  the business was done in many  lines.   The appellant  acted  as  managing  agent  of  some,   concerns, distributing  agent  of others. and as  secretary  of  still other class of concerns.  Again it dealt as an exporter  and importer,  shipping  agent,  and as a buyer  and  dealer  in diverse commodities.  A large amount of business was done by the  appellant  as  an  agent  of  foreign  companies.   The appellant  had  obtained  agencies  for  paints,  varnishes, petroleum, kerosene oil, medicines and toilet  preparations, cement, timber, stationery, metals, tea, engineering  goods, air-conditioning  equipment  and  a large  number  of  other commodities.   It may reasonably be held, having  regard  to the vast array of business done by the appellant as  agents, that the acquisition of agencies was in the normal course of business and determination of individual agencies, a  normal incident,  not affecting or impairing the trading  structure of the appellant.  The appellant was compensated by  payment to it the loss of profit it suffered by the cancellation  of its  agency,  leaving  it  free  to  conduct  its  remaining business. It was said that the appellant had employed expert  officers who  were  accustomed  to  handle  explosives  which  are  a specialised  commodity and the cancellation of  that  agency seriously   affected   the  organization  of   its   trading operations.   But the appellant was undoubtedly  dealing  in several kinds of inflammable substances, such as, petroleum, kerosene  oil,  imber and similar other commodities.  it  is true that explosives  would  require  great  care  in  handling.    It appears, however, that eighty per cent of the staff attached to the Magazine Section was maintained not at the expense of tile 132 appellant, but at the expense of the principal company.  out of  the  officers  who  were  attached  to  the   explosives business,  services of five officers were taken over by  the principal  company  and  six others  were  retained  by  the appellant  and  absorbed  in  other  branches.   It  cannot, therefore,  be said that termination of the agency  resulted in impairment of the trading organisation of the  appellant. One  of the agencies was undoubtedly lost to the  appellant, and  even temporary dislocation in the Organisation  of  the business  thereby  may De assumed.  There  is  no  evidence, however, that the appellant could not in the ordinary course of  business repair the dislocation.  There is  no  evidence that it could not obtain an agency from another manufacturer of  explosives.   Even  assuming  that  such  an  agency  in explosives may not be replaced, that circumstance by  itself may   not  justify  the  inference  that  the   agency   was independent of the other lines of business conducted by  the appellant,  or  that by the cancellation of  the  agency  an enduring asset was lost to the appellant.  The  circumstance that  the  agency  was  determinable  at  the  will  of  the principal  company which maintained a large staff  at  their expense  justifies the inference that upon  cancellation  of

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that  agency the appellant’s business organization  was  not substantially  impaired.  The cancellation. it may be  held, was an incident of the trading operations of the  appeallant in  the normal course of business.  The payment received  by the  appellant  could not, therefore, be regarded  truly  as compensation for not carrying on the business: it was a  sum which was worked out in terms of profits which the appellant would  have earned during the period of notice and  paid  in the  ordinary  course of business to  adjust  the  relations between the appellant and the principal company. There  is,  in  our judgment, no  immutable  principle  that compensation received on cancellation of an agency must always be.regarded as capital.  In each case the question has to be.determined in the light of the attendant circum- stances. .In the judgment in Kettlewall Bullen and Co.’ case(’) we have explained that the judgment of the Judicial Committee in the Commissioner of Income-tax v. Shaw [1964] 8.S.C.R. 93. 133 Wallace and Co.(’) was not intended to, and did not lay down that  in every case, cancellation of an agency  resulted  in loss  of  a source of revenue or that amounts paid  to  com- pensate for loss of agency must be regarded as capital loss. On a careful consideration of all the circumstances we agree with  the High Court that cancellation of tile  contract  of agency  did  not affect the profit-making structure  Of  the appellant, nor did it involve a loss of an enduring  trading asset; it merely deprived the appellant of a trading avenue, leaving   him  free  to  devote  his  energies   after   the cancellation  to carry on the rest of the business,  and  to replace  the  contract  lost by  a  similar  contract.   The compensation  paid, therefore, did not represent  the  price paid for loss of a capital asset.  We therefore dismiss  the appeals with costs. Appeal dismissed.