Case: P. H. Divecha And Another Vs. Commissioner Of Income-Tax,Bombay I

be called income, profits or gains or even income from "other sources. The payments can be regarded only as ad hoc payments. 16. Even if it be not regarded as a payment for loss of capital it cannot be regarded as payment for any services rendered or likely to be rendered. The services in the past were amply remunerated. The payment does not contemplate that the agreement in the past had not been sufficiently remunerative to the Firm. It does not pretend to pay them for past service. The minutes do not show that any service in the future was expected from these appellants. What remained to be done was to wind up the business with regard to the agreement of 1938 itself. For this purpose, the Company agreed to give all facilities to the Firm in respect of easily saleable articles and to take over those which required a longer duration to sell. The only service, if service it can be called, was that the Firm was to hand over to the Company a list of customers and the supplies made to them during the past six months. It cannot be said that for this service the payment was made. The payment was thus not related to any service either in the past or in the future. Both sides have relied upon cases in which certain payments were held to be taxable or not taxable according as the facts in those cases suggested that the payment was for some services in the past or future or was entirely gratuitous. No useful purpose will be served by going over such cases because the facts of two very dissimilar cases lead to different principles. We do not, therefore, refer to the cases of professional cricketers for whom benefit matches are held or who receive payments for outstanding performance with the bat or ball or cases of persons working in honorary capacity or in little-paid jobs who on retirement receive some payment in token of their worth. Those cases stand on their own facts. The safest method is to take the facts of the case in hand and to consider for what was the payment received and incidentally for what was the payment made. Judged from this angle it is quite clear that the payment here was not made for any service. In fact it was not made to the firm but to the three partners individually. It was not related to any service that was likely to be performed in the future even though it was described as remuneration additional to the ordinary profits of trading. It was in no sense a remuneration. It was in fact a payment made out of regard for the qualities of the three partners of the firm who were long associated with the Company to its profit and who had built up a vast net-work of sales organisation of which the Company would have obtained benefit when it entered on the business of selling for itself. This payment need not be given a particular name. It need not be called a testimonial as to which Rowlatt J. said in Chibbet v. Joseph Robinson and Sons, (1924) 9 Tax Cas 49 that there is no magic in that name. It need not be called a solatium, a term devised by Rowlatt J. in the same case and applied by the Privy Council in Shaw, Wallaces case, 59 Ind App 206 : (AIR 1932 PC 138 ) but which this Court did not adopt in Senairam Doongarmalls case, (1961) 42 ITR 392 : (AIR 1961 SC 1579 ).Without attempting to give it a name we are satisfied that the payment was in token of appreciation and was not related to any business done or to loss of profits and it was not recompense for services past or future. It was a payment out of gratitude and must be regarded as a payment which does not bear the character of income, profits or gains which alone are taxable under the Income-tax Act. In our opinion, the High Court, with all due respect, was in error in holding that this amount was taxable. The answer to the first question must therefore be against the Department. 17. The next question is whether the receipt can be described under S. 4(3) (vii) as of a casual and non-recurring nature and not by way of addition to the remuneration of an employee. The assessees were not "employees of the Company and were not in receipt of remuneration. After the termination of the agreement they were to work as regular lamp dealers if they cared. There was no compulsion that they must sell electric lamps whether made by the Company or by other manufacturers. If they did, they were to receive commission as any other regular dealer. It is thus obvious that the latter part of S. 4(3) (vii) does not apply. The receipt may only be described as a receipt of a casual and non-recurring nature if it were income, profits or gains. We have already said that the fact that payment was spaced over three years did not make this a recurring receipt. In our judgment the receipt would be saved by S. 4 (3) (vii) from being included in the total income in any event. But we are of opinion that not being income, profits or gains S. 4 (3) (vii) has no application. Our answer to the second question is that S. 4 (3) (vii) does not apply. 18. The third question need hardly detain us. It was not answered by the High Court Section 10(5A) of the Act deals with four categories of persons. The first three categories ex facie do not apply. The fourth category also does not apply as the appellants in their individual capacity were not holding "an agency and the Firm of which they were partners was also not an agent of the Company. The answer to that question must be against the Department.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]11. The gist of the agreement, therefore was that the Firm was to have an exclusive territory for sale of Philips lamps and undertook to sell only Philips lamps in that territory. The agreement allowed the Firm compensation if Philips lamps were sold in the territory by the Company. There was no provision in the agreement how many lamps the Firm was to buy from the Company in a particular period and there was no condition that the Firm would be required to buy any specified quantity and/or quality. There was no agreement that the Firm was to Act as the agent of the Company. This was an agreement between principal and principal, the measure of the business depending upon how far the Firm was able to push the sales of Philips lamps in its own interest and in the interest of the Company. The agreement was to commence on July 1, 1938, and was terminable by a three months notice on either side on 30th June of any year. It is fair to infer that as long as the Company and the Firm found the arrangement profitable the agreement would have continued. By an annexure to the agreement, which was in the form of a letter, the terms of business between the Firm and the Company were laid down. This letter stated the commission payable to the Firm and the manner in which payments were to be made by the Firm. Sufficient reference to these terms has already been made by us in an earlier part of this judgment. This annexure was to be read as a part of the agreement. It was probably kept separate so that in case of need only the annexure might be altered without the trouble of executing a fresh agreementIf the payment was not received to compensate for a loss of profits of business the receipt in the hands of the appellant cannot properly be described as income, profits or gains as commonly understood. To constitute income, profits or gains, there must be a source from which the particular receipt has arisen, and a connection must exist between the quality of the receipt and the source. If the payment is by another person it must be found out why that payment has been made. It is not the motive of the person who pays that is relevant, More relevance attaches to the nature of the receipt in the hands of the person who receives it though in trying to find out the quality of the receipt one may have to examine the motive out of which the payment was made. It may also be stated as a general rule that the fact that the amount involved was large or that it was periodic in character have no decisive bearing upon the matter. A payment may even be described as pay, remuneration etc. but that does not determine its quality, though the name by which it has been called may be relevant in determining its true nature, because this gives an indication of how the person who paid the money and the person who received it viewed it in the first instance. The periodicity of the payment does not make the payment a recurring income because periodicity may be the result of convenience and not necessarily the result of the establishment of a source expected to be productive over a certain periodThe agreement of 1938 did not state that on the termination of the agreement in the way provided there compensation was payable to the Firm. For temporary suspension of supplies no compensation was payable. These terms of the agreement show that though the agreement was to run its course as long as it proved profitable to the parties, at least the firm was not entitled to be compensated either for a temporary suspension of the benefits under the agreement or a complete termination of those benefits. The payment cannot, therefore, on the terms of the agreement be connected with loss of estimated profits. It was said a long time ago in the well-known case of Glenboig Union Fireclay Co. Ltd v. Commr. of Inland revenue, (1922) 8 Tax Cas 427 that there is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of application of that test. Here, the amount is large but there is nothing to show that it was even an adequate measure of the profits that were expected to be made during the three years in which the amount was to be paid. Even if it had been there would have been no inference in law. But in the absence of any proof that this was the likely profit it is difficult to say that the payment replaced those profits15. The agreement in our case was not an agreement for the purchase of bulbs or lamps. It mentioned no quantity or quality or price. It only secured to the firm a right to exclusive purchase for sale in an exclusive territory. In other words, it created a monopoly right of purchase for and a monopoly right of sale in a certain territory. The agreement secured to the firm an advantage of an enduring nature. No doubt, the agreement was terminable in any year on three months notice but it would have lasted as long as it was profitable to the contracting parties and the indications were that it was to subsist for some time. It was an agreement which need not have continued but which was likely to continue. The question, therefore, is whether by termination of the agreement the firm lost an advantage or merely lost the right to obtain certain stock-in-trade for which they had bargained. If it was first then the receipt, if connected with that loss, was a capital receipt and if the latter it was a replacement of the profits which were likely to ensue from the trading agreement. In our opinion, it is impossible to describe this agreement as a trading agreement. It can only be described as an agreement which constituted a source and a monopoly, and which gave an enduring advantage to a trader in his trade. The loss of such an agreement must be regarded as falling on the capital asset of the person affected and not in the course of his ordinary trading. If the agreement had been breached prematurely the damages would not have been calculated on the basis of outstanding contracts only but on the basis of an advantage lost. Indeed, the agreement itself contemplated in some of its terms other contracts under which the supplies were to be made and refers in terms to the cancellation of "orders and "contracts. This shows that in addition to this agreement there were to be trading contracts in the shape of orders for bulbs which the Firm would have placed with the Company in the ordinary course of their business. The agreement said that even on the termination of those contracts and orders no compensation was payable. It is difficult to see how this payment can be related to profits or how it can be called income, profits or gains or even income from "other sources. The payments can be regarded only as ad hoc payments16. Even if it be not regarded as a payment for loss of capital it cannot be regarded as payment for any services rendered or likely to be rendered. The services in the past were amply remunerated. The payment does not contemplate that the agreement in the past had not been sufficiently remunerative to the Firm. It does not pretend to pay them for past service. The minutes do not show that any service in the future was expected from these appellants. What remained to be done was to wind up the business with regard to the agreement of 1938 itself. For this purpose, the Company agreed to give all facilities to the Firm in respect of easily saleable articles and to take over those which required a longer duration to sell. The only service, if service it can be called, was that the Firm was to hand over to the Company a list of customers and the supplies made to them during the past six months. It cannot be said that for this service the payment was made. The payment was thus not related to any service either in the past or in the future. Both sides have relied upon cases in which certain payments were held to be taxable or not taxable according as the facts in those cases suggested that the payment was for some services in the past or future or was entirely gratuitous. No useful purpose will be served by going over such cases because the facts of two very dissimilar cases lead to different principles. We do not, therefore, refer to the cases of professional cricketers for whom benefit matches are held or who receive payments for outstanding performance with the bat or ball or cases of persons working in honorary capacity or in little-paid jobs who on retirement receive some payment in token of their worth. Those cases stand on their own facts. The safest method is to take the facts of the case in hand and to consider for what was the payment received and incidentally for what was the payment made. Judged from this angle it is quite clear that the payment here was not made for any service. In fact it was not made to the firm but to the three partners individually. It was not related to any service that was likely to be performed in the future even though it was described as remuneration additional to the ordinary profits of trading. It was in no sense a remuneration. It was in fact a payment made out of regard for the qualities of the three partners of the firm who were long associated with the Company to its profit and who had built up a vast net-work of sales organisation of which the Company would have obtained benefit when it entered on the business of selling for itself. This payment need not be given a particular name. It need not be called a testimonial as to which Rowlatt J. said in Chibbet v. Joseph Robinson and Sons, (1924) 9 Tax Cas 49 that there is no magic in that name. It need not be called a solatium, a term devised by Rowlatt J. in the same case and applied by the Privy Council in Shaw, Wallaces case, 59 Ind App 206 : (AIR 1932 PC 138  ) but which this Court did not adopt in Senairam Doongarmalls case, (1961) 42 ITR 392   : (AIR 1961 SC 1579  ).Without attempting to give it a name we are satisfied that the payment was in token of appreciation and was not related to any business done or to loss of profits and it was not recompense for services past or future. It was a payment out of gratitude and must be regarded as a payment which does not bear the character of income, profits or gains which alone are taxable under the Income-tax Act. In our opinion, the High Court, with all due respect, was in error in holding that this amount was taxable. The answer to the first question must therefore be against the DepartmentThe assessees were not "employees of the Company and were not in receipt of remuneration. After the termination of the agreement they were to work as regular lamp dealers if they cared. There was no compulsion that they must sell electric lamps whether made by the Company or by other manufacturers. If they did, they were to receive commission as any other regular dealer. It is thus obvious that the latter part of S. 4(3) (vii) does not apply. The receipt may only be described as a receipt of a casual and non-recurring nature if it were income, profits or gains. We have already said that the fact that payment was spaced over three years did not make this a recurring receipt. In our judgment the receipt would be saved by S. 4 (3) (vii) from being included in the total income in any event. But we are of opinion that not being income, profits or gains S. 4 (3) (vii) has no application. Our answer to the second question is that S. 4 (3) (vii) does not apply18. The third question need hardly detain us. It was not answered by the High Court Section 10(5A) of the Act deals with four categories of persons. The first three categories ex facie do not apply. The fourth category also does not apply as the appellants in their individual capacity were not holding "an agency and the Firm of which they were partners was also not an agent of the Company. The answer to that question must be against the DepartmentIn that case the agreement was different. No doubt by that agreement also a territory was reserved and a monopoly was created but that agreement was to last for four years and was prematurely terminated at the end of two years. Under that agreement a minimum quantity of chemicals had to be bought and if the buyers failed to exercise their option to take up the minimum quantity in any one year, the contract itself was to be considered as terminated without any further option. The assessees in that case were industrial chemists till 1933 and by the agreement had offered to buy agricultural chemicals and had set up, as a result of the agreement, a special organisation for selling agricultural chemicals. The amount of compensation on the premature termination of the agreement was arrived at after negotiations and the sum represented profits of the lost business and not the price for the purchase of the contract, It was observed by Lawrence L. J. that the business of the assessee continued unaffected and that if a trading contract made in the ordinary course of business, though covering a new field, was prematurely terminated and compensation was paid for that premature termination, it must be considered to be in replacement of profits and not capital.