Case: Gillanders Arbuthnot And Co., Ltd Vs. The Commissioner Of Income-Tax, Calcutta

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 commission on the sales for that year effected by the Imperial "Chemical Industries (India) Ltd., in the appellants territory calculated at the same rates.13. 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 foreign principal. There is not even a suggestion, that by the termination of the agency held by the appellant in explosives from the principal company, the trading structure of the assessees 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 carded on by it disclosed that the business was done in many lines. The appellant acted as managing agent of some concerns, as 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.14. 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, timber 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 the 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 results in impairment of the trading organization 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 be 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 that agency the appellants business organization was not substantially impaired. The cancellation it may be held, was an incident of the trading operations of the appellant 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.15. 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 determinate in the light of the attendant circumstances. In the judgment in Kettlewell Dullen and Cos case, C. A. No. 226 of 1963 D/- 1-5-1984 : (AIR 1965 SC 65 ) we have explained that the judgment of the Judicial Committee in the Commissioner of Income-tax, Bengal v. shaw Wallace and Co. 59 Ind App 206 : (AIR 1932 PC 138 ) 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 compensate for loss of agency must be regarded as capital loss.16. On a careful consideration of all the circumstances we agree with the High Court that cancellation of the 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.17

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

Explanation:
0[ds]15. 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 determinate in the light of the attendant circumstances. In the judgment in Kettlewell Dullen and Cos case, C. A. No. 226 of 1963 D/- 1-5-1984 : (AIR 1965 SC 65  ) we have explained that the judgment of the Judicial Committee in the Commissioner of Income-tax, Bengal v. shaw Wallace and Co. 59 Ind App 206 : (AIR 1932 PC 138  ) 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 compensate for loss of agency must be regarded as capital loss.16. On a careful consideration of all the circumstances we agree with the High Court that cancellation of the 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 capitalcannot 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 of the nature of a capital receipt. But there is no evidence that compensation was paid to the appellant as consideration for giving the undertaking not to carry on a competitive business, or as compensation for loss ofthat 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 reasonable to hold that the appellant did not place any reliance upon the case that part of the compensation was attributable to an undertaking not to engage in competitivetherefore 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 intention of the parties that the loss of goodwill 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 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 distribution arrangement "would be terminated after two or three years". The appellant had sufficient notice of the proposed termination. Thereafter the agency was cancelled with effect from April 1, 1948 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 thathave in a recent case in Kettlewell Bullen and Co. v. Commissioner ofCalcutta, C.A. No. 226 of 1963 D/: (AIR 1965 SC 65  ) made a survey of the important cases which have arisen before the Courts in the United Kingdom and an India about the principles which govern the determination of the nature of compensation received on the termination of an agency. We observed in that casean analysis of these cases which fall on two sides of the dividing line, a satisfactory measure of consistency 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 deprivehim 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 compensate 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 that 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 threehs of the commission accrued on actual sales in the territory of the appellants 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 thirdyear" the principal company was to pay the appellant in addition a sum equivalent to full commission on the sales for that year effected by the Imperial "Chemical Industries (India) Ltd., in the appellants territory calculated at the samemay 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 remainingpayment 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.