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PETITIONER: KETTLEWELL BULLEN AND CO.

       Vs.

RESPONDENT: COMMISSIONER  OF INCOME-TAX, CALCUTTA

DATE OF JUDGMENT: 01/05/1964

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

CITATION:  1965 AIR   65            1964 SCR  (8)  97  CITATOR INFO :  APL        1965 SC 452  (11,15)  R          1966 SC  54  (11)  R          1966 SC1325  (4,5)  R          1970 SC1811  (6)  F          1971 SC1590  (9,10)  R          1972 SC 386  (18)  RF         1973 SC1011  (25)

ACT: Income-tax-Compensation  received for surrendering  managing agency-If capital or revenue-Test--Income-tax Act, 1922  (11 of 1922), ss. 2(6c), 10, 12.

HEADNOTE: By  an agreement with the Fort William Jute Company in  1925 the appellant company became its Managing Agent.  The terms, inter  alia,  were  that the appellant  or  its  successors, unless  they chose to resign, were to continue  as  Managing Agent  until  they  ceased to hold  certain  shares  in  the capital of the company and were on that account removed by a resolution  of  the company or their tenure  of  office  was determined by the winding up of the company.  On termination of the agency, the Managing Agent was to get such reasonable compensation  as was agreed upon between the Managing  Agent and the company.  Besides this managing agency the appellant held  five other managing agencies.  In 1952, the  appellant by in agreement with M/s.  Mugneeram Bangur & Co., agreed to relinquished  the managing agency of the Fort  William  Jute Co.,  Ltd.,  in  their  favour  in  consideration  of   M/s. Mugneeram Bangur and Co. taking over the shares held by  the appellant,  procuring  repayment of loans  advanced  by  the appellant  to  the  Fort William Jute  Company  and  further procuring that the Fort William Jute Company. will pay  com- pensation  to  the appellant.  The appellant  intimated  the members  of the latter company that it would be in the  best interest  of the share-holders to terminate the  appellant’s agency  which  would otherwise continue till 1957  and  that M/S.   Mugneeram  Bengur & Co. had agreed to  reimburse  the Fort  William Jute Co. Ltd. for payment of Rs.  3,50,000  as compensation  to the appellant.  The arrangement  with  M/s. Mugneeram Bangur & Co. was accepted by the Fort William Jute

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Co. and the appellant tendered resignation.  M/s.  Mugneeram Bangur and Co. 94 became  the Managing agent.  The appellant received the  sum of     Rs. 3,50,000 and credited the sum  in  its profit and loss  account as having been received from the Fort  William Jute Co. Ltd. on account of compensation for loss of  office and in calculating the net profit for the purpose of income- tax for the year 1953-54 did not include this amount in  the return.   The Income-tax Officer in assessment included  the amount  in  the appellant’s taxable income.   The  Assistant Appellate  Commissioner  on appeal modified  the  assessment holding   that  the  sum  received  by  the   appellant   as compensation for surrendering the managing agency, which was to  enure for five years more and might have  continued  for another twenty years, was a capital receipt.  The  Appellate Tribunal  confirmed  the order of  the  Appellate  Assistant Commissioner.   At  the  instance  of  the  Commissioner  of Income-tax  the following question was referred to the  High Court: Whether  on the facts and circumstances of the case the  sum of  Rs. 3,50,000 received by the assessee to relinquish  the managing  agency was a revenue receipt assessable under  the Indian Income-tax Act?. The High Court answered the question in the affirmative. HELD:     that  the answer should be in the  negative.   The transaction  in question was not a trading transaction,  but one  in which the assessee parted with an asset of  enduring value.  The compensation received was compensation for  loss of  capital.  It was inconsequential whether  the  appellant conducted the remaining agencies after the determination  of the one in question. Where payment is made as compensation for cancellation of  a contract which does not affect the trading structure of  the business,  nor causes ’deprivation of what in  substance  is source of income, and is a normal incident of the  business, the  compensation  is revenue.  But where  the  cancellation impairs  the  trading structure or results in  loss  of  the source of income, the compensation paid for the cancellation of the agreement is normally capital receipt. Commissioner  of  Income-tax Nagpur v.  Rai  Bahadur  Jairam Yalji, 35 I.T.R. 148, referred to. Commissioner  of Income-tax v. Shaw Wallace and Co. L.R.  59 I.A. 206, explained. Raja   Bahadur  Kamakshaya  Narain  Singh  of   Ramgarh   v. Commissioner  of Income-tax, Bihar and Orissa, L.R. 70  I.A. 180,  Commissioner  of  Income-tax and  Excess  Profits  Tax Madras v. South India Pictures, 29 I.T.R. 910, Peirce Leslie and  Co.  Ltd.  v. Commissioner of  Income-tax,  Madras,  38 I.T.R. 356, Commissioner of Income-tax, Hyderabad-Deccan  v. Vazir  Sultan  and Sons. 36 I.T.R. 175 and Godrej &  Co.  v. Commissioner  of  Income-tax, Bombay City,  37  I.T.R.  381, discussed.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 226 of 1963. 95 Appeal from the judgment and order dated August 1, 1961,  of the  Calcutta High Court in Income-tax Reference No.  75  of 1956. S.   Chaudhuri,  D.  N. Mukherjee and D. N. Gupta,  for  the appellant. K.   N.  Rajagopal Sastri and R. N. Sachthey, for  the  res-

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pondent. May 1, 1964.  The Judgment of the Court was delivered by SHAH  J.-The appellant is a public limited company. and  has its  registered office at Calcutta.  By an  agreement  dated May  1, 1925, the Fort William Jute Company  Ltd.  appointed the  appellant  its managing agent upon  certain  terms  and conditions  set  out  therein.   Under  the  agreement   the appellant  was to receive as managing agent remuneration  at the  rate of Rs. 3,000 per month, commission at the rate  of ten  per  cent  on the profits  of  the  company’s  working, additional commission at three per cent on the cost price of all new machinery and stores purchased by the managing agent outside India on account of the company, and interest on all advances  made by the managing agent to the company  on  the security   of  the  company’s  stocks,  raw  materials   and manufactured  goods.   The appellant and its  successors  in business, whether under the same or any other style or firm, unless they resigned their office were entitled to  continue as  managing agent until they ceased to hold shares  in  the capital of the company of the aggregate nominal value of Rs. 1,00,000  and  were  on that account removed  by  a  special resolution of the company passed at an Extraordinary meeting of  the  company, or until the managing agent’s  tenure  was determined  by the winding up of the company.  In the  event of termination of agency in the contingencies specified, the managing  agent was to receive such reasonable  compensation for deprivation of office, as may be agreed upon between the managing  agent and the company and in case of  dispute,  as may  be  determined  by  two arbitrators.   By  cl.  8,  the managing agent was at liberty at any time to resign  the  office  of managing agent  by  leaving  at  the registered office of the company previous notice in  writing of  its  intention in that behalf.  The  agreement  did  not specify  any  period for which the managing  agency  was  to enure.   Since the successors of the appellant were also  to continue   as  agents,  unless  they  resigned   or   became disqualified, the duration was in a sense unlimited.  But by virtue of s. 87-A(2) of the Indian Companies Act, 1913,  the appointment of the appellant as managing agent would  expire on January 14, 1957, i.e. on the expiry of twenty years from the  date  on which the Indian  Companies  (Amendment)  Act, 1956, was brought into operation.  Section 87-A(2), however, did  not prevent the managing agent from being  re-appointed after the expiry of that period. Beside the managing agency of the Fort William Jute Co. Ltd. the appellant held at all material time managing agencies of five  other  limited  companies,  viz.,  Fort  Closter  Jute Manufacturing  Co.  Ltd., Bowreach Cotton  Mills  Co.  Ltd., Dunbar  Mills Ltd., Mothola Co. Ltd and Joonktollee Tea  Co. Ltd.   The appellant had advanced Rs. 12,50,000 to the  Fort William  Jute  Co. Ltd. on the security of the  stocks,  raw materials  and  manufactured  goods of  that  company.   The appellant held in 1952, 600 out of 14,000 ordinary shares of the  face  value of Rs. 100 each. and 6,920  out  of  10,000 preference  shares also of the face value of Rs.  100  each. On  May  21, 1952, the appellant entered into  an  agreement with M/s Mugneeram Bangur & Co., the principal conditions of which were: (i)  M/s  Mugneeram  Bangur  & Co. to  purchase  the  entire holding of shares of the appellant in the Fort William  Jute Co.  Ltd.-ordinary  shares at Rs. 400  each  and  preference -,hares at Rs. 185 each, and to make an offer to all holders of the company’s shares-preference and ordinary-to  purchase their holdings at the same rates; (ii) M/s  Mugneeram Bangur & Co. to procure repayment on  or

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before June 30, 1952 of all loans 97 made by the appellant to the principal company; (iii)     M/s  Mugneeram  Bangur & Co. to procure  that  the principal company will compensate the appellant  for  loss of office in the sum of  Rs.  3,50,000, such  sum being payable to the appellant after it  submitted its resignation as managing agent; and (iv) M/s Mugneeram Bangur & Co. to reimburse the company the amount payable to the appellant. The reasons for which the appellant agreed to relinquish the managing agency were set out in a letter dated May 28, 1952, addressed  by  the appellant to the members of  the  company intimating  that M/s Mugneeram Bangur & Co. were willing  to purchase  the  shares at the same rates at  which  they  had agreed  to purchase the share-holding of the appellant.   It was  recited in the letter that the installation  of  modern machinery  in the company’s factory entailed  heavy  capital expenditure and it was necessary to obtain a loan secured by debentures  charged  on the company’s property;  that  large sums   were  required  for  renewals  and  replacements   of machinery and it was not possible to obtain additional  bank accommodation;  that the appellant had maade large  advances to the company exceeding Rs. 12,50,000 and, having regard to its  other commitments, it was doubtful if it would be  able to make available to the company addiional finance; that the arrangement  with M/s Mugneeram Bangur & Co., by  acceptance of  the  terms offered by them, was  the  most  satisfactory method of solving the company’s difficulties; that it was in the  best  interests of the shareholders  to  terminate  the appointment  of  the appellant which in  the  normal  course would not fall due for renewal until January 14, 1957;  that M/s  Mugneeram Bangur & Co. had agreed to procure  that  the Fort  William  Jute Co. Ltd. will pay to the  appellant  Rs. 3,50,000 and that M/s Mugneeram Bangur & Co. will  reimburse the company for the payment, it being anticipated that  they will  in  Line course be appointed managing  agents  of  the company. 98 The arrangement with M/s Mugneeram Bangur & Co. was  carried out.   The  appellant tendered its resignation  with  effect from  July  1,  1952,  in pursuance  of  the  terms  of  the agreement and M/s Mungneeram Bangur & Co. were appointed  as managing  agent  of the company.  The sum  of  Rs.  3,50,000 received  by  the  appellant from the company  which  it  is common ground was provided by M/s Mugneeram Bangur & Co.-was credited in the profit and loss account of the appellant  as received  from the Fort William Jute Co. Ltd. on account  of compensation for loss of office.  But in arriving at the net profit  in  the return for income-tax for the  year  1953-54 this amount was deleted.  In the proceedings for  assessment for  the  year  1953-54  the  Incometax  Officer,  Companies District   1V,  Calcutta,  included  this  amount   in   the appellant’s   taxable  income.   In  appeal  the   Appellate Assistant Commissioner modified the assessment holding  that the  sum  of  Rs.  3,50,000 received  by  the  appellant  as compensation for surrendering the managing agency, which was to  enure  for five years more, and which in  normal  course might have continued for another term of twenty years, was a capital receipt.  The Appellate Tribunal confirmed the order of  the  Appellate Assistant  Commissioner,  observing  that compensation  received tinder an agreement for "an  outright sale  of  such an agency to a third party",  not  being  one which a businessman enters in the normal course of business, nor  being one which amounts to modification, alteration  or

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discharge  of normal incidents of such a business,  was  not assessable to income-tax as a revenue receipt. At  the  instance  of the Commissioner  of  Income-tax,  the Tribunal  referred  under s. 66(1) of  the  Income-tax  Act, 1922, the following question to the High Court of Judicature at Calcutta: "Whether  on the facts and in the circumstances of the  case the  sum  of  Rs.  3,50,000  received  by  the  assessee  to relinquish  the  managing  agency  was  a  revenue   receipt assessable under the Indian Income-tax Act?" 99 The High Court, for reasons which we will presently set out, answered the question in the affirmative.  With  certificate granted  by the High Court, this appeal is preferred by  the appellant. This  case  raises  once again  the  question  whether  com- pensation  received by an agent for premature  determination of the contract of agency is a capital or a revenue receipt. The  question is not capable of solution by the  application of  any single test: its solution must depend on  a  correct appraisal  in  their true perspective of  all  the  relevant facts.  As observed in Commissioner of Income-tax Nagpur  v. Rai Bahadur Jairam Valji(1) by Venkatarama Aiyar, J.,: "The  question  whether a receipt is capital or  income  has frequently  come  up for determination  before  the  courts. Various  rules have been enunciated as furnishing a  key  to the  solution of the question, but as often observed by  the highest  authorities,  it is not possible to  Jay  down  any single  test  as  infallible  or  any  single  criterion  as decisive  in the determination of the question,  which  must ultimately  depend on the facts of the particular case,  and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching  a  decision.  Vide, Van Den Berghs Ltd.  v.  Clark [(1935) 3 I.T.R. (Engl.  Cas.) 17].  That, however is not to say  that  the question is one of fact, for as  observed  in Davies (H.  M. Inspector of Taxes) v. Shell Company of China Ltd.  (1952) 22 I.T.R. (Suppl.) 1) these  questions  between capital and income, trading profit or no trading profit, are questions  which, though they may depend no doubt to a  very great  extent  on  the particular facts  of  each  case,  do involve a conclusion of law to be drawn from those facts’." (1)  [1959] SUPP. 1 S.C.R. 110, 113. 100 The interrelation of facts which have a bearing on the ques- tion  propounded  must therefore first be  determined.   The managing agency was not, except in the circumstances set out in  cl. 2 of the agreement, liable to be determined  at  the instance of the company before January 14, 1957, unless  the appellant  by  giving  notice  of  three  weeks  voluntarily resigned the agency.  At the date of termination the  agency had  five more years to run, and the Campanies Act  did  not prohibit  renewal of the agency in favour of the  appellant, after the expiry of the initial period of twenty years.  The appellant company was formed for the object, amongst others, (vide  cl.  3(2)  of the Memorandum of  Association  of  the appellant) of carrying on the business of managing agencies. The appellant was entitled under the terms of the  agreement to receive so long as the agency enured ’Len per cent of the profits  of  the company’s working, three per  cent  on  all purchases  of  stores and machinery abroad,  and  a  monthly remuneration  of  Rs. 3,000.  The  appellant  submitted  its resignation in exercise of the power reserved under cl. 8 of the  managing agency agreement, but that resignation was  it is common ground part of the arrangement with M/s  Mugneeram

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Bangur  &  Co. dated May 21, 1952.  Under the terms  of  the managing  agency  agreement, the principal company  was  not obliged  to  pay  any  compensation  to  the  appellant  for voluntary resignation of the agency, but in consideration of the  appellant parting with its shareholding and  submitting resignation  of the managing agency so as to facilitate  the appointment of M/s Mugneeram Bangur & Co. as managing agent, the  latter  purchased the shareholding  of  the  appellant, undertook to make available Rs. 3,50,000 for payment to  the appellant  and to discharge the debt due by the  company  to the  appellant.   Payment of Rs. 3,50,000 was  therefore  an integral part of an arrangement for transfer of the managing agency.  A managing agency of a company is in the nature  of a capital asset: that is not denied.  It is true that it  is not like an ordinary asset capable of being transferred from one  person to another.  Theoretically the power to  appoint or dismiss the managing agent may lie with the directors  of the company, but in practice the power lies with the  person or per- 101 sons  having a controlling interest in the share-holding  of the company.  M/s Mugneeram Bangur & Co. were anxious to  be appointed managing agents of the principal company, and  for the purpose the appellant had to be persuaded to agree to  a premature termination of its agency.  This was secured for a triple  consideration; sale of shares held by the  appellant at  an a-reed price, stipulation to discharge the  liability of  the company to repay the loans due by the  company,  and payment  of Rs. 3,50,000 as compensation for termination  of the appellant’s agency. The  High  Court  summarised the  effect  of  the  agreement between  the  appellant and M/s Mugneeram Bangur  &  Co.  as follows:  The sum of Rs. 3,50,000 described as  compensation for  loss  of office of the managing agent was part  of  the whole scheme incorporated in the agreement.  Each clause  of the  agreement was a consideration of the other clauses  and payment  of compensation for the alleged loss of office  did not,  being  part  of the total  scheme,  stand  by  itself. Determination  of the managing agency of the  appellant  was not  compulsory  cessation of business: it was  a  voluntary resignation  for  which  under  the  agency  agreement   the appellant  was not entitled to any compensation, but by  the device  of  procuring a purchaser the  appellant  was  doing "business  of  selling  the managing agency  and  getting  a profit  and value for it which it otherwise could  not  have got".   The  High Court stamped this  transaction  with  the nature  and  character of a "trading or  a  business  deal", because  in their view the managing agency of  a  company-an institution  peculiar to Indian  business  conditions--which creates  a  managing agent as an alter ego. of  the  managed company with authority to utilise the existing structure  of the  company’s  Organisation  to  carry  on  business,  earn profits,  and in fact, virtually to trade in every  possible sphere open to the company, may. be regarded as  circulating capital, where several managing agencies are conducted by an assessee.   Therefore  in  the view of the  High  Court  the compensation  received  for  surrendering  the  agency   was remuneration received on account of conducting the business, and  was income.  The judgment of the High  Court  proceeded substantially upon the following two grounds: 102 (1)  that on the facts of the case, the managing agency held by  the  appellant  of the Fort William Jute  Co.  Ltd.  was stock-in-trade; and (2)  that  the  appellant  was formed  with  the  object  of

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acquiring  managing  agencies,  and in  fact  held  managing agencies of as many as six com- panies.   Earning  profits by conducting the  management  of companies, being the business of the appellant, compensation received  as  consideration for  surrendering  the  managing agency was a revenue receipt. We are unable to agree with the High Court that the managing agency of the Fort William Jute Co. Ltd. was an asset of the character  of stock-in-trade of the company.  The  appellant was  formed  with  the object, among  others,  of  acquiring managing agencies of companies and to carry on the  business and  to take part in the management, supervision or  control of  the  business  or  operations  of  any  other   company, association,  firm or person and to make profit out  of  it. That  only  authorised the appellant to acquire as  a  fixed asset,  if  a managing agency may be so  described,  and  to exploit  it  for  the purpose of profit.  But  there  is  no evidence  that  the company was formed for  the  purpose  of acquiring and selling managing agencies and making profit by those transactions of sale and purchase.  A managing  agency is not an asset for which there is a market, for it  depends upon  the  personal qualifications of  the  agent.   Counsel appearing  on behalf of the Commissioner concedes  that  the case that the managing agency was of the nature of stock-in- trade  was not set up before the Tribunal, and he  does  not rely  upon this part of the reasoning of the High  Court  in support  of the plea that the compensation received  by  the appellant  is  a  revenue  receipt.   He  relies  upon   the alternative ground, and contends that the managing agency of the Fort William Jute Co. Ltd. was part of the framework  of the business of earning profit by working as managing  agent of   different   companies,  and  in  the   normal   course, termination of employment by the principal companies of  the appellant as managing agent being a normal incident of  such business, compensation received by the appellant is                             103 not  for loss of capital, but must be regarded as a  trading receipt  especially when the termination of the agency  does not impair the structure of the business of the appellant. In  the present case there is a special  circumstance  which must first be noticed.  In truth the amount of Rs.  3,50,000 was  received by the appellant from M/s Mugneeram  Bangur  & Co.  in consideration of the former agreeing to  forego  the agency  which it held and which M/s Mugneeram Bangur  &  Co. were  anxious to obtain.  It was in a business sense a  sale of  such rights as the appellant possessed in the agency  to M/s Mugneeram Bangur & Co. This is supported by the recitals made  in cl. 2 of the agreement that if at any  time  within six months after the completion of such sale, M/s  Mugneeram Bangur  &  Co.  were unable to exercise  the  voting  rights attached to the shares purchased by them the appellant  will appoint  any person nominated by M/s Mugneeram Bangur &  Co. to attend and vote for them at any meeting of the company or the  holders of any class of shares to be held  within  such period  in such manner as M/s.  Mugneeram Bangur &  Co.  may decide.   The object underlying the agreement was  therefore to transfer he managing agency to M/s Mugneeram Bangur & Co. or at least to effectuate their appointment in place of  the appelant as managing agent of the Fort William Jute Co. Ltd. All  the  stipulations and the covenants of  the  agreement, viewed  in  the light of the surrounding  circumstances,  do stamp  the transaction as one of surrender of the rights  of the  appellant in the managing agency so that  corresponding rights  may arise in favour of M/s.  Mugneeram Bangur &  Co. It would be irrelevant in considering the true nature of  he

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transaction,   to  project  the  somewhat  legalistic   con- sideration  that a managing agency is not transferable.   It is  because  it  is  not  directly  transferable,  that  the arrangement incorporated in the agreement was effected.   It would be difficult to regard such a transaction relating  to a managing agency as a trading transaction. Counsel for the assessee contended that even assuming at the form of the transaction under which for loss of the managing agency   the  appellant  received  compensation   from   the principal company is decisive, or has even a dominant 104 impact, and the ultimate source from which the  compensation was provided is to be ignored, the compensation received for loss  of agency by the agent must always be  regarded  under the Indian Income-tax Act as capital receipt.  In support of that  contention  counsel placed strong  reliance  upon  the judgment  of  the  Judicial  Committee  in  Commissioner  of Income-tax  v. Shaw Wallace and Co.(’). In the  alternative, counsel pleaded that even if the extreme proposition was not found acceptable, the right of the assessee in the  managing agency  of  the principal company was to enure  for  another five  years  and  which  in the  normal  course  would  have continued for another twenty years was an enduring asset and consideration  received by the appellant for  extinction  of that asset was a capital receipt. On behalf of the Income-tax Department it was contended that Shaw   Wallace  &  Co’s  case(’)  does  not  lay  down   any proposition of general application to compensation paid  for determination  of  all  agency contracts.   It  was  further submitted that, having regard to the nature of the agreement and  the voluntary resignation submitted by the assessee  no enduring asset remained vested in the assessee, and none was attempted to be transferred: the compensation directly  paid by  the principal company (which compensation was under  the terms  of the contract not payable) was only a  "measure  of profit" which the appellant would, but for the  resignation, have earned, and was therefore in the nature of revenue.  It was  also  urged that compensation was not payaable  to  the assessee  when  resignation  of  the  mainaging  agency  was tendered  under  cl. 8 of the agreement, and  therefore  the amount sought to be brought to tax was received by the      assesseein the course of a normal trading transaction ofthe      assessee.Finally,  it  was urged that  in  any  event, bythe      loss ofthe  agency  the framework  of  the  business ofthe assessee  was  not at all impaired, and therefore  also  the compsensation  received must be regarded as revenue  and  no capital. Whether  a  particular  receipt is capital  or  income  from business, has frequently engaged the attention of the  court It  may be broadly stated that what is received for loss  of cap- (1)  L. R. 59 I. A. 206 105 tal  is  a capital receipt: what is received  as  profit  in trading  transaction is taxable income.  But the  difficulty arises  in ascertaining whether what is received in a  given case  is  compensation for loss of a source  of  income,  or profit  in a trading transaction.  Cases on  the  borderline give  rise  to vexing problems.  The Act  contains  no  real definition  of income; indeed it is a term not capable of  a definition  in  terms of a general formula.   Section  2(6C) catalogues broadly certain categories of receipts which  are

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included in income.  It need hardly be said that the form in which the transaction which gives rise, to income is clothed and  the  name  which  is given  to  it  are  irrelevant  in assessing   the  exigibility  of  receipt  arising  from   a transaction  to  tax.  It is again not predicated  that  the income  must necessarily have a recurrent quality.   We  are not  called upon to enter upon an extensive area of  enquiry as to what receipts may be regarded as income generally, but merely   to  consider  in  this  case  whether  receipt   of compensation  for  surrendering the managing agency  may  be regarded  as  capital or as revenue.  In the  absence  of  a statutory rule, payment made by an employer in consideration of  the employee releasing him from his obligations under  a service or agency agreement or a payment made voluntarily as compensation for determination of right to office arises not out of employment, but from cessation of employment and  may not generally constitute income chargeable under ss. 10  and 12.  It may be mentioned that this rule has been altered  by the  legislature  by  the  enactment of  s.  10(5A)  by  the Finnance  Act of 1955, which provides that  compensation  or other  payment due to or received by a managing agent of  an Indian  company at or in connection with the termination  or modification  of  his  managing agency  agreement  with  the company,  or  by  a manager of an Indian company  at  or  in connection   with   the  termination  of   his   office   or modification  of the terms and conditions relating  thereto, or  by  any person managing the whole or  substantially  the whole   affairs  of  any  other  company  in   the   taxable territories at or in connection with the termination of  his office  or  the  modification of the  terms  and  conditions relating thereto, or by any person holding an agency in  the taxable territories for any part of the 106 activities relating to the business of any other person,  at or  in connection with the termination of his agency or  the modification  of the terms and conditions relating  thereto, shall  be  deemed  to be profits and  gains  of  a  business carried  on by the managing agent, manager or other  person, as the case may be, and shall be liable to tax  accordingly. But  this amendment was made under the Finance  Act,,  1955, with effect from April 1, 1955, and has no application to the  present case. The Indian Income-tax Act is not in pari materia with the  English Income-tax Statutes.  But the authorities under the  English Law which deal not with the interpretation of any  specific provision, but on the concept of  income,  may not  be regarded as proceeding upon any  special  principles peculiar  to the English Acts so as to render them  inappli- cable  in  considering  problems arising  under  the  Indian Income-tax  Act.  It is well-settled in England  that  money paid to compensate for loss caused to an assessee’s trade is nor  income.   In Short Bros.  Ltd. v. The  Commissioner  of Inland  Revenue(l) a sum received as compensation  for  loss resulting  from  cancellation of a contract was held  to  be revenue in the ordinary course of the assessee’s trade,  and liable   to   excess  profits  duty.    Similarly   in   The Commissioners of Inland Revenue v. The North fleet Coal  and Ballast  Co. Ltd.(’), compensation paid by a person who  had agreed  to purchase a certain quantity of chalk  yearly  for ten  years, from a company which was the owner of a  quarry, in  consideration of being relieved of his  liability  under the  contract was held chargeable to excess profits duty  as trading profit in the hands of the company. In   The  Commissioners  of  Inland  Revenue  v.   Newcastle Breweries  Ltd.(3) compensation received under an  order  of

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the  War Compensation Court, under the Indemnity Act,  1920, in addition to what was paid by the Admiralty for rum  taken over in exercise of the power under the Defence of the Realm Regulations was held to be revenue. (1)  12 T. C. 955 (3)  12 T. C. 927 (2) 12 T. C. 1102 107 In  Ensign Shipping Co. Ltd. v. The Commissioner  of  Inland Revenue(’) an amount paid by the Government to a  ship-owner to  compensate him for loss resulting from detention of  his ships  during  a coal-strike, and for wages  etc.  was  held liable to excess profits duty.  Again as held in Burma Steam Ship  Co. Ltd. v. Commissioners of Inland  Revenue(’)  money received  by  a ship-owner from a firm of  ship-builders  to compensate for loss resulting from the failure by the latter to  complete repairs to a ship within the stipulated  period was regarded as revenue. These  cases illustrate the principle that compensation  for injury  to  trading  operations,  arising  from  breach   of contract or in consequence of exercise of sovereign  rights, is  revenue.   These cases must, however,  be  distinguished from another class of cases where compensation is paid as  a solatium  for  loss  of office.  Such  compensation  may  be regarded  as  capital or revenue: it would  be  regarded  as capital, if it is for loss of an asset of enduring value  to the   assessee,  but  not  where  payment  is  received   in settlement of loss in a trading transaction. In  Chibbet v. Joseph Robinson & Sons 3) the  assessees  who were  ship-managers employed by a steamship company under  a contract   which  provided  that  they  should  be  paid   a percentage  of ,he company’s income, were paid  compensation for  loss  of office in anticipation of liquidation  of  the steamship company.  It was held that payment to make up  for loss resulting from cessation of profits from employment was not  itself an annual profit, but was payment in respect  of termination of employment and was not assessable to tax. In Du Cros v. Ryall (4) the assessee settled a claim made by his  employee  for damages for wrongful dismissal  and  paid 57,250  as compensation for wrongful dimissal.  It was  held that no. part could be apportioned to salary and  commission and the whole escaped assessment. In Duff v. Barlow(’) the managing director of the  appellant company who was employed for a period of ten (1)  i2 T. C. 1169. (3)  9 T. C. 48. (2)  16 T. C. 67. (5) 23 T. C. 631.  (4) 19 T. C- 444. 108 years  was asked by it to manage the business of one of  its subsidiaries, and to receive a percentage of profits made by the  subsidiary.   The employment was terminated  by  mutual agreement  two years after its commencement and  4,000  were paid  as compensation to the managing director for  loss  of his  rights  of  future remuneration.   This  was  held  not taxable. because it was a sum paid as compensation for  loss of a source of income and hence a capital asset.  This  case was  followed  in Henley v. Murray(’)  where  the  appellant employed as a managing director of a property company  under a  service agreement which was not determinable  till  March 31,  1944,  was also appointed a director  of  a  subsidiary company.   At the request of the Board of directors  of  the property  company the appellant resigned his office  in  the property company as well as its subsidiary and received from the  property  company an amount equal to  the  remuneration

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which he would, under the agreement, have been entitled  to, if his appointment had not been determined.  It was held  by the  Court  of  Appeal  that  the  use  of  the   expression "compensation  for loss of office"’ was not the  determining factor when the bargain itself stood cancelled, and the  sum paid  was  in  consideration of  total  abandonment  of  all contractual rights which the other party had. The receipt was in the circumstances not taxable. The  payment was not voluntarily made; the bargain was that the  appellant  should  resign  and  in   consideration thereof, In  Barr,  Grombie and Co. Ltd. v. Commissioners  of  Inland Revenue(’)  the  appellant  company  managed  the  ships  of another  company under an agreement for a period of  fifteen years.  The shipping company went into liquidation and a sum exceeding pound 16,000 was paid to the appellant company for the  eight  years  which were still to run to  the  date  of expiry  of the agreement.  Over a period upwards of  sixteen years  only two per cent of the appellant  company’s  income was  derived from other managements, and on the  liquidation of  the  shipping  company the appellant  company  lost  its entire  business  except  for some  abnormal  and  temporary business.  It was held by the Court of Ses- (1) 31 T. C. 351                      (2) 26 T. C. 406 109 sion in Scotland that the sum in question was not a  trading receipt  of the appellant company.  Lord  President  Normand observed: "In  the  present  case virtually the whole  assets  of  the Appellant  Company  consisted in this agreement.   When  the agreement  was surrendered or abandoned practically  nothing remained of the Company’s business.  It was forced to reduce its staff and to transfer into other premises, and it really started  a  new  trading life.   Its  trading  existence  as practised up to that time had ceased with the liquidation of the shipping Company." These  cases establish the distinction between  compensation for loss of a trading contract and solatium for loss of  the source of income of the assessee. But payment Of compensation for loss of office is not always regarded as capital receipt.  Where compensation is  payable under  the  terms  of the  contract,  which  is  determined, payment  is in the nature of revenue and therefore  taxable. For  instance  in Henry v. Foster(’) it was held  that  when compensation stipulated under a contract is paid for loss of office, it is taxable under Sch.  ’E’, and it was also  held in  Dale v. De Soissons(2) that compensation paid  under  an agreement  to  an  Assistant of the  managing  director  for premature  termination of employment was held to be  income. The  principle  on  which these  cases  proceeded  was  also applied  by  the  Court of Session  in  Scotland  in  Kessal Parsons  and Co. v. Commissioners of Inland Revenue(3) to  a case  in  which  there was no express term  for  payment  of compensation  on termination of employment.  The  appellants in  that case carried on business as agents on a  commission basis  for  sale  in Scotland of  the  products  of  various manufacturers,  and entered into agency agreements for  that purpose.  At the instance of the manufacturer concerned, one of the agreements which was for a period of three years  was terminated at the end of the (1)  (1931) 145 L. T. R. 225 (3)  21 T. C. 608, 520 (2) [1950] 2 All E. R 460 110 second  year in consideration of a payment of pouns_  1,500.

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It was held by the Court of Session that no capital asset of the assessee was depreciated in value, or became of less use for  the purpose of the assessee’s business.  The  sum  paid was  accordingly included in the calculation of the  taxable profits  for  the  year  in which  it  was  received.   Lord President Normand Observed. "We  are  not embarrassed here by the kind  of  difficulties which  arise when, by agreement, a benefit extending over  a tract  of future years is renounced for a payment made  once and  for  all.   The sum paid in this  case  is  really  and substantially a surrogatum for one year’s profits." The  foundation of the distinction made in  Kelsall  Parsons and  Co.’s  case(’):  Henry v. Foster(’):  and  Dale  v.  De Soissons(3) is to be found in the observations made by  Lord Macmillan in Van Den Berchs Ltd. v. Clark(’).  In that  case two  companies  which were manufacturers  of  ,margarine  an margarine  and  similar products entered into  an  agreement with  a view to end competition between them and to work  in friendly  alliance  and to share the profits and  losses  in accordance  with an elaborate scheme.  This arrangement  was terminated  by  mutual  agreement in  consideration  of  the payment by the Dutch company pound 450,000 to the  appellant company as damages.  It was held by the House of Lords  that the  amount  was received by the appellant  as  payment  for cancellation of the appellant company’s future rights  under the  agreements,  which constituted a capital asset  of  the company,  and that it was a capital receipt. lord  Macmillan observed. "Now what were the Appellants giving up?  They gave up their whole rights under the agreements for thirteen years  ahead. These  agreements  are called in the  States  Case  "pooling agreements",  but that is a very inadequate  description  of them, for they did much more than (1)  21 T.C. 608,620                 (2) [1931]  145  L.T.R. 225 (3) [I950] 2 All E.R. 460            (4) 19 T. C. 390, 431 111 merely  embody a system of pooling and sharing profits.   If the  Appellants were merely. receiving in one sum  down  the aggregate of profits which they would otherwise have receiv- ed over a series of years, the lump sum might be regarded as of  the  same  nature as the ingredients  of  which  it  was composed.   But  even  if a payment is  measured  by  annual receipt, it is not necessarily in itself an item of income." Cases  which  have lately arisen before the  Courts  in  the United   Kingdom  have  elaborated  this  distinction.    In Commissioner  of  Inland Revenue v. Fleming and  Co.(’)  the Court,  of  Session held following Kelsall  Parsons  &  Cos’ case(’), that compensation paid to the assessee who  carried on  business as manufacturers’ agent and  general  merchants and  had  acted as the sole agents since  1903  for  certain products of the manufacturers for termination in 1948 of the agency at the instance of the manufacturers was regarded  as revenue.   In  the view of Lord President Cooper  the  cases relating  to  determination of agencies,  broadly  speaking, fell  on  two sides of the line drawn in the  light  of  the varying circumstances: (a)  "the  cancellation  of  a contract  which  affects  the profit-making sructure of the recipient of compensation  and involves the loss of an enduring trading asset"; and (b)  "the  cancellation of a contract which does not  affect the  recipient’s  trading structure nor deprive him  of  any enduring  trading asset, but leaves him free to  devote  his energies  and Organisation released by the  cancellation  of the  contract to replacing the contract which has been  lost

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by other like contracts", and held that the case fell within the second class, and not the first. In  Wiseburgh v. Domville(3) the appellant had entered  into an agreement in 1942 under which he acted (1)  33 T. C. 57 (3)  36 T. C. .527 (2) 21 T.C. 608, (20 112 as  sole  agent  for the manufacturer.  In  1948  when  this agreement  could have been determined by notice expiring  in October 1949, the manufacturer dismissed him.  The appellant received  pound  4,000 as damages for breach  of  agreement. The  appellant  had several agencies from time  to  time  as agents  and it was one of the incidents of  agency  business that one agency may be stopped and another may come and  it being a normal incident of  the kind  of  business  that the appellant was  doing,  that  an agency should come to an end, compensation paid was regarded as income on the principle laid down in Kelsall Parsons  and Co.’s case(’). In another case which soon followed-Anglo French Exploration Co.  Ltd.  v. Clayson(2)-the appellant  company  carried  on business, among others, is secretary and agent for a  number of  other companies.  A South African Company appointed  the appellant   company  as  its  secretary  and  agent   at   a remuneration  of  pound 1,500 per annum  tinder  a  contract terminable at six months’ notice.  Under an arrangement with the   purchaser   of  the  controlling   interest   of   the shareholders under which the appellant company was to resign its  office  as  secretary and agent of  the  South  African Company, an amount of pound 20,000 received by the appellant company  was held by the Court of Appeal in the nature of  a trading receipt. In Blackburn v. Close Bros.  Ltd.(’) the respondent  company carried on business of merchant bankers and of a finance and issuing  house and derived income in the form of  allowances for   performing   managerial  and   secretarial   services. Following  a dispute with one ’S’ for which  the  respondent company had agreed to provide secretarial services for three years  at  a  remuneration of pound  8,000  per  annum,  the agreement was terminated within about 2-1/2 months from  the date  of  its  commencement. pound 15,000  received  by  the respondent  company as compensation for termination  of  the agreement was held to be a trading receipt.  Pennycuick  J., held  that  the  contract was one of a  number  of  ordinary commercial contracts for rendering (2)  36 T. C. 545 (1) 21 T.C. 608, 620 39 T.C. 164  113 services  by the assessee in the course of carrying  on  its trade, and therefore the sum received on the cancellation of the agreement was a receipt of a revenue nature. It  is  manifest that the principle broadly  stated  in  the earlier  cases,  that compensation for loss  of  office,  or agency, must be regarded as a capital receipt, has not  been approved  in later cases.  An exception has  been  engrafted upon that principle that where payment even if received  for termination  of  an agency agreement, the agency is  one  of many  which the assessee holds, and the termination  of  the agency  does not impair the pofit making structure,  but  is within the framework of the assessee’s business, it being  a necessary  incident of the business that  existing  agencies may  be  terminated  and fresh agencies may  be  taken,  the

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receipt is revenue and not capital. A case on the other side of the line may be noticed:  Sabine v. Lookers Ltd.(’). Under agreements, annually renewed  with the manufacturers, the respondent company had acted for many years  as their main distributors in the Manchester area  of the  manufacturers’  products, which it bought  for  resale. The  respondent had sunk considerable sums in  fixtures  and equipment  specially  designed for the  trade  of  wholesale dealers and carried a large stock of spare parts mainly  for wholesale  sale.  The whole of the trade of  the  respondent was geared to the display, sale, service and repairs of  the manufacturers’   products.    Upto  1952   inclusive,,   the manufacturers   had   included  in   its   agreements   with distributors  a  standard  "continuity  clause,  giving  the distributors,  on certain conditions, the option of  renewal for a further year.  But in 1953, the manufacturers  adopted a new standard agreement, containing a new continuity clause which  the  respondent company regarded as  giving  it  less security  than before.  As compensation for  loss  resulting from   the  alterations,  the  manufacturers  paid  to   the respondent  company, a sum calculated on sales to the  trade during  the  contract period.  It was held that this  was  a capital receipt, because, by the, modification the framework of the respondent’s business was impaired. (1)  38 T. C. 120 114 Elaborate arguments were presented before us on the decision of  the Judicial Committee in Shaw Wallace & Co.’s  Case(’). The  appellant contended that Shaw, Wallace’s  Case(’)  laid down  a principle of general application applicable  to  all cases  of  compensation  received  from  the  principal   as solatium  for  determination  of  the  contract  of  agency. Counsel for the Revenue contended that the principle  should be  restricted to its special facts, and cannot be  extended in view of the later decisions.  It is necessary to  closely examine  the  facts  which gave rise  to  that  case.   Shaw Wallace  &  Company  carried on business  as  merchants  and agents  of  various  companies and  had  branch  offices  in different paris of India.  For a number of years they  acted as  distributing agents in India for the Burma  Oil  Company and  the  Anglo-Persian Oil Company, but  without  a  formal agreement with either company.  The two Oil Companies having combined decided to make other arrangements for distributing their  products.  Each Company terminated its contract  with Shaw  Wallace & Company and paid compensation to  it,  which aggregated  to  Rs.  15,25,000.   This  amount,  subject  to certain allowances, was sought to he assessed to  income-tax under  ss. 10 and 12.  The High Court of Calcutta held  that the  compensation  received by the assessee  was  a  capital receipt.   In appeal to His Majesty in Council the  decision of the High Court was affirmed. The Judicial Committee declined to seek inspiration from the English decisions cited at the Bar.  The Board observed that the  expression  "income" which is not defined  in  the  Act connotes  a periodical monetary return coming in  with  some sort  of regularity, or expected regularity,  from  definite sources: the source is not necessarily one which is expected to  be  continuously productive, but it must  be  one  whose object  is  the production of a definite  return,  excluding anything  in  the nature of a mere windfall.   They  further observed that the income chargeable under head (iv) of s.  6 business" read with s. 10 is to be in respect of the profits and  gains of any business carried on by the  assessee,  and therefore the sums which the Income-tax Department sought to charge could only be taxable if they were the pro-

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(1)  L.R. 59 I.A. 2o6. 115 duce  or the result of-carrying on the agencies of  the  Oil Companies  in  the year in which they were received  by  the assessee.  But when once it was admitted that they were sums received,  not  for carrying on this business, but  as  some sort  of solatium for its compulsory cessation,  the  answer seemed  fairly  plain.  The Board observed that  if  compen- sation received for sale of the business or its goodwill was capital,  the  same reasoning ought to apply  when  the  sum received was in the nature of a solatium for cessation of  a part of the business, and it was a matter of no  consequence that the assessee continued to pursue its other  independent commercial  interests, and profits from which were taxed  in the ordinary course, for the sums sought to be taxed had  no connection  with  the continuance of  the  assessee’s  other business: the profits earned by the assessee, it was observ- ed,  were  "the  fruit of a different tree, the  crop  of  a different  field", and if under s. 10 the  compensation  was not taxable, it was not taxable under s. 12 under the head " other sources" as well. The  judgment  of the Board proceeds upon  the  ground  that compensation received not for carrying on the business,  but as solatium for its compulsory cessation, would be  regarded as  capital  receipt,  and  for  the  application  of   this principle,  existence  of other independent  commercial  in- terests out of which profits were earned by the assessee was irrelevant.   Two  comments may be made at this  stage.   It cannot be said as a general rule, that what is determinative of  the  nature of the receipt is extinction  or  compulsory cessation  of an agency or office.  Nor can it be said  that compensation received for extinction of an agency may always be  equated  with price received on sale of  goodwill  of  a business.  The test, applicable to contracts for termination of agencies is: what has the assessee parted with in lieu of money or money’s worth received by him which is sought to be taxed?   If  compensation  is paid  for  cancellation  of  a contract  of  agency,  which does  not  affect  the  trading structure of the business of the recipient, or involve  loss of an enduring asset, leaving the tax-payer free to carry on his trade released from the contract which is cancelled, the receipt will be a trading receipt: where the cancellation 116 of  a contract of agency impairs the trading  structure,  or involves  loss  of an enduring asset, the  amount  paid  for compensating the loss is capital. The  view  expressed by the Judicial Committee has  not  met with  unqualified  approval in later cases, Lord  Wright  in Raja   Bahadur   Kamakshya  Narain  Singh  of   Ramgarh   v. Commissioner  of Income-tax.  Bihar and  Orissa(’)  observed that it is incorrect to limit the true character of  income, by  such  picturesque similies like "fruit  of  a  different tree,  or  crop of a different field".  Again it  cannot  be said  generally  that  compensation for  every  transfer  or determination  of a contract of agency is  capital  receipt: Kelsall Parsons & Co. v. Commissioner of Inland  Revenue(’): Commissioners of Inland Revenue v. Fleming & Co. (3):  Wise- burgh  v.  Domville(4) and Commisiosner  of  Income-tax  and Excess Profits Tax, Madras v. South India Pictures  Ltd.(’). Nor  is it true to say that where an assessee holds  several agency  contracts, each agency contract cannot without  more be  regarded  as  independent of the  other  contracts,  and income received from each contract cannot always be regarded as  unrelated to the rest of the business continued  by  the assessee.  The decision in Shaw Wallace Co.’s case(’) cannot

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therefore  be read to yield the principle that  compensation for  loss  of  an agency may in all  cases  be  regarded  as capital  receipt.   Nor  does it lay  down  that  where  the assessee  has  several lines of business each line  must  in ascertaining  the  character of compensation for loss  of  a line of business be deemed an independent source.  This view is  exemplied by decisions of this Court and a  decision  of the  Madras High Court.  In the South India Pictures  Ltd.’s case(5)  compensation  received  for  determination  of  the distribution  rights of films was held taxable.   After  the assessee  had exploited partially its right of  distribution of cinematographic films to which it was entitled under  the terms of agreement under which he had advanced money to  the producers,  the agreements were cancelled and the  producers paid an aggregate sum of Rs. 26,000 to the assessee  towards commission.  It was held by Das C. J.,      (1) L. R, 70 1. A. 180   (2) 21 T.C. 608, 620      (3) 33 T.C. 57 (4) 36 T.C. 527      (5) 29 1. T. R. 910 (6) L.R. 59 I.A. 2o6 117 and  Venkaterama Aiyar, J., (Bhagwati J.,  dissenting)  that the  sum paid to the assessee was not compensation  for  not carrying on its business, but was a sum paid in the ordinary course  of  business  to adjust the  relations  between  the assessee  and the producers, and was taxable.  Similarly  in Rai Bahadur Jairam Valji’s cave(’) a contract for the supply of limestone and dolomite was terminated when the  purchaser the  Bengal Iron Company Ltd. found the rates  uneconomical. A  suit  was  then  filed by  the  respondent  for  specific performance   of   the  contract  and  for   an   injunction restraining  the  company  from  purchasing  limestone   and dolomite  from  any other person.  A  fresh  agreement  made between the respondent and the company fell through  because of circumstances over which the parties to the agreement had no control.  The company then agreed to pay Rs. 2,50,000  to the respondent as solatium, besides the monthly  instalments of  Rs. 4,000 remaining unpaid under the contract  of  1940. The Income-tax Department sought to bring to tax the  amount of  Rs.  2,50,000 and the balance due  towards  the  monthly instalments  of Rs. 4,000.  It was held by this  Court  that the  sum of Rs. 2,50,000 was not paid to the  respondent  as compensation  for expenses laid out for works at the  quarry of  a capital nature and could not be held to be  a  capital receipt   on  that  account,  the  agreements  were   merely adjustments made in the ordinary course of business.   There was in the view of the Court no profit-making apparatus  set up  by the agreement of 1941, apart from the business  which was  to be carried on under it and there was at no time  any agreement  which  operated as a bar to the carrying  of  the business of the respondent and therefore the receipt of  Rs. 2,50,000  was  chargeable to tax.   Venkatarama  Aiyar,  J., observed, in at,agency contract the actual business consists of dealings between the principal and his customers, and the work of the agent is only to bring about the business:  what he  does is not the business itself, but something which  is intimately and directly linked up with it.  The agency  may, therefore,  be  viewed as the apparatus which leads  to  the business  rather  than the business itself.   Considered  in this light the (1)  [1959] Supp. 1 S.C.R. 110 118 agency  right can be held to be of the nature of  a  capital asset  invested in business.  But this cannot be said  of  a contract  entered into in the ordinary course  of  business. Such  a  contract is part of the business itself,  not  some

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thing  outside  it,  and any receipt on account  of  such  a contract   can   only  be  a   trading   receipt.    Because compensation paid on the cancellation of a trading  contract differs in character from compensation paid for cancellation of an agency contract, it should not be understood that  the latter is always, and as a matter of law, to be held to be a capital   receipt.   An  "agency  contract  which  has   the character of a capital asset in the hands of one person  may assume the character of a trading receipt asset in the hands of another, as for example, when the agent is found to  make a  trade  of  acquiring agencies  and  dealing  with  them." Therefore,  when the question arises whether the payment  of compensation for termination of an agency is a capital or  a revenue  receipt, it must be considered whether  the  agency was  in  the nature of a capital asset in the hands  of  the agent,  or whether it was only part of  his  stock-in-trade. The  learned  Judge  also observed  that  payments  made  in settlement  of rights under a trading contract  are  trading receipts  and are assessable to revenue, but where a  trader is prevented from doing so by external authority in exercise of  a paramount power and is awarded compensation  therefor, whether  the  receipt  is a capital  receipt  or  a  revenue receipt  will  depend upon whether it  is  compensation  for injury inflicted on a capital asset or on stock-in-trade. In Pairce Leslie and Co. Ltd. v. Commissioner of Income-tax, Madras(’) the assessee company took up managing agencies  of several  plantation companies.  The managing  agencies  were liable  to  termination, but the assessee  was  entitled  to compensation  by  the terms of the agreement.   The  Talliar Estates  Ltd.  was  one  of the  companies  managed  by  the assessee.  The agreement was a composite agreement about the managing  agency rights and certain other rights.  When  the Talliar  Estates  Ltd. went into  liquidation  the  assessee received  Rs.  60,000  by way of compensation  for  loss  of office and the question arose (1)  38 I. T. R. 356 119 whether that amount was income in the hands of the assessee. The  Madras High Court held that the loss of one of  several managing agencies had little effect on the structure of  the assessee’s  business  even in tea or on its  profit  earning apparatus  as a whole and the termination of  the  agreement with  the  Talhar Estates could well be said  to  have  been brought  about  in the ordinary course of  business  of  the assessee  and  therefore the amount received was  a  trading receipt. In the South India Picture Ltd.’s case(): Rai Bahadur Jairam Valji’s  case(’) and Peirce Leslia Company’s case(’) it  was held that the receipt of compensation for loss of agency was in  the  nature  of revenue.  In the  South  India  Pictures Ltd.’s case(’) the amount received was not compensation  for not  carrying  on its business, but was a sum  paid  in  the ordinary course of business to adjust the relations  between the  assessee  and  the producers; the  termination  of  the agreements  did not radically or at all affect or alter  the structure  of  the  assessee’s  business,  and  the   amount received  by  the  assessee was  only  so  received  towards commission  i.e. as compensation for the loss of  commission which  it  would have earned, had the  agreements  not  been terminated.   Therefore, the amount was not received by  the assessee  as  the  price  of  any  capital  assets  sold  or surrendered or destroyed, but the amount was simply received by  the  assessee in the course of  its  going  distributing agency business and therefore it was an income receipt.   In that  case the majority of the Court held on three  distinct

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grounds,  viz., (i) that the assessee did not part with  any capital  asset;  (ii) that the amount was  received  in  the course  of  the  distributing  agency  business  which   was continued, and (iii) that the termination of the  agreements did not radically or at all affect or alter the structure of the assessee’s business, that the sum received was  revenue. Rai  Bahadur Jairam Valji’s case(’) was one of  compensation received  for termination of a trading contract.  In  Peirce Leslie  and  Company’s  case(’)  there  was  termination  of office, but it was held to be brought about in the  ordinary course of the trading operations of the assessee. (i)  29 I.T.R. 910  (2) [1959] Supp.  I S.C.R. iio   (3-  38 I.T.R. 356 120 On  the other side of the line are cases of Commissioner  of Income-tax, Hyderabad-Deccan v. Vazir Sultan and Sons(’) and Godrej  and  Co. v. Commissioner of Incometax,  Bombay  City (2).  In Vazir Sultan and Son’s case(’) the majority of  the Court  held that compensation paid for restricting the  area in which a previous agency agreement operated was a  capital receipt, not assessable to incometax.  It was held that  the agency  agreements were not entered into by the assessee  in the  carrying on of their business, but formed  the  capital asset of the assessee’s business which was exploited ’by the assessee  by entering into contracts with various  customers and dealers in the respective territories; it formed part of the  fixed capital of the assesssee’s business and  was  not circulating  capital or stockin-trade of their business  and therefore  payment made by the company for determination  of the contract or cancellation of the agreement was a  capital receipt in the hands of the assessee. In Godrej and Co.’s case(’) the managing agency agreement in favour  of  the  assessee of a  limited  company  which  was originally for a period of thirty years and under which  the assessee  was entitled to a commission at certain rates  was modified and remuneration payable to the managing agents was reduced.   As compensation for agreeing to  this  reduction, the  assessee received Rs. 7,50,000 which was sought  to  be taxed  as income in the hands of the assessee.   This  Court held, having regard to all the attending circumstances, that the  amount was paid not to make up the  difference  between the higher remuneration and the reduced remuneration, but in truth  as  compensation for releasing the company  from  the onerous  terms  as  to  remuneration  as  it  was  in  terms expressed  to be; so far as the assessee firm was  concerned it  was  received as compensation for the  deterioration  or injury  to the managing agency, by reason of the release  of its  rights  to get higher remuneration  and,  therefore,  a capital receipts. On an analysis of these cases which fall on two sides of the dividing line, a satisfactory measure of consistency (1) 36 1. T. R. 175                      (3) 36 I.T.R. 175 (2) 37 r.T.R. 381 121 in principle is disclosed.  Where on a consideration of  the -circumstances,  payment is made to compensate a person  for cancellation of a contract which does not affect the trading structure  of  his  business, nor deprive  him  of  what  in substance  is  his  source of  income,  termination  of  the ,contract being a normal incident of the business, and  such cancellation  leaves him free to carry on his  trade  (freed from  the contract terminated the receipt is revenue:  Where by  the cancellation of an agency the trading  structure  of the  assessee is impaired, or such cancellation  results  in

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loss  ,of  what  may  be  regarded  as  the  source  of  the assessee’s  income,  the  payment  made  to  compensate  for cancellation  of the agency agreement is normally a  capital receipt. In  the present case, on a review of all the  circumstances, we  have  no doubt that what the assessee was  paid  was  to compensate  him  for loss of a capital  asset.   It  matters little   whether  the  assessee  did  continue   after   the determination  of its agency with the Fort William Jute  Co. Ltd to conduct the remaining agencies.  The transaction  was not  in the nature of a trading transaction, but was one  in which  the  assessee  parted with an asset  of  an  enduring value.   We  are, therefore, unable to agree with  the  High Court  that the amount received by the appellant was in  the nature of a revenue receipt. We  accordingly record the answer on the question  submitted by  the  Tribunal in the negative.  The appellant  would  be entitled to its costs in this Court.