Case: The Commissioner Of Income-Tax, Madras Vs. Chari And Chari Ltd

that a particular remuneration stipulated to be paid is not bona fide, or is unreasonable, the High Court in exercising its advisory jurisdiction has no power to interfere with that opinion. But the material circumstances relating to the nature of the contract, the services to be performed and the nature of the duties by the employee were not at all taken into account by the Tribunal and the income-tax authorities. We therefore agree with the High Court that the first question should be answered in the negative. 10. The contract under which respondent company was appointed managing agent for the Nellore Power and Light Company Ltd. was to ensure till 1960, but it had to be prematurely terminated because the Government of Madras exercising its powers under the Madras Electrical Undertakings Acquisition Act, 1949 had compulsorily acquired the electricity undertaking. With the acquisition of that undertaking the right of the respondent as managing agent ceased. Under Sec. 15 of the Electrical Undertakings Acquisition Act, the Government was bound to pay compensation which would include compensation for termination of the managing agency agreement. The respondent received Rs.17,346 as compensation for termination of the agency, computed in the manner laid down in S. 15 of that Act. Prima facie, such a receipt being in lieu of extinction of an asset of the assessee, is a capital receipt. It was urged, however, on behalf of the revenue that the respondent was carrying on business of taking up managing agencies and that by the extinction of one of the managing agencies, the business structure of the respondent was not impaired. In a recent judgment delivered by this Court in Kettlewell Bullen and Co. Ltd. v. Commissioner of Income-tax, Calcutta, 1964-53 ITR 261 : (AIR 1965 SC 65 ) it was pointed out that :"It may be broadly stated that what is received for loss of capital is a capital receipt: what is received as profit in a 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". The Court further observed:"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 moneys worth received by him which is sought be taxed? If compensation is paid for cancellation of the 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 taxpayer free to carry on his trade released from the contract which is cancelled, the receipt will be a trading receipt; where the cancellation 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." 11. Turning to the facts of the present case, it must in the first instance be observed that it is for the revenue to establish that a particular receipt is income liable to tax, and beyond stating that the respondent was the managing agent of the Nellore Power and Light Company Ltd., and of two other Companies, there is no other evidence about the nature of the business of the two other Companies of which the respondent was the managing agent, about their relative importance qua the managing agency of the Nellore Power and Light Company Ltd. and whether by reason of the extinction of the managing agency of the Nellore Power and Light Company Ltd., any enduring asset was lost to the respondent, or its trading organisation was adversely affected. The Income-tax Officer observed that the "Companys business of Managing Agency as such had not come to an end" the Company still continues as "meaning agents of other companies. Even after surrender of one of the agencies, the Company carries on business as before its structure not being affected" and thereafter "the receipt is to be considered as revenue, in accordance with the decision in Kelsall Parsons and Co. v. Commr. of Inland Revenue, (1937) 21 Tax Case 608 and with that view the Appellate Assistant Commissioner and the Tribunal agreed. But in the absence of evidence as to what effect the determination of the managing agency of the Nellore Power and Light Company Ltd. had upon the business of the respondent, the mere circumstances that the respondent had managing agencies of two other companies without more will not bring the case within (1937) 21 Tax Case 608. In Kettlewell Bullen and Co.s case, 1964-53 ITR 261 : (AIR 1965 SC 65 ) this Court pointed out that ordinarily compensation for loss of office or agency is regarded as a capital receipt, but the rule is subject to an exception that payment received even for termination of an agency agreement, where the agency is one of many which the assessee holds, and the termination of the agency does not impair the profit-making structure of the assessee, but is within the framework of the business, it being a necessary incident of the business that existing agencies may be terminated, and fresh agencies may be taken, is revenue and not capital Kelsal Parsons and Co.s case, (1937) 21 Tax Case 608 falls within the exception to the ordinary rule and circumstances which brought the case of the respondent within the exception must be clearly established. The High Court was of the opinion that compensation received for taking over the Nellore Power and Light Company Ltd. was a capital receipt not liable to be taxed, and on the materials placed before us, we are unable to disagree with the High Court on this question.

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

Explanation:
0[ds]11. Turning to the facts of the present case, it must in the first instance be observed that it is for the revenue to establish that a particular receipt is income liable to tax, and beyond stating that the respondent was the managing agent of the Nellore Power and Light Company Ltd., and of two other Companies, there is no other evidence about the nature of the business of the two other Companies of which the respondent was the managing agent, about their relative importance qua the managing agency of the Nellore Power and Light Company Ltd. and whether by reason of the extinction of the managing agency of the Nellore Power and Light Company Ltd., any enduring asset was lost to the respondent, or its trading organisation was adversely affected. The Income-tax Officer observed that the "Companys business of Managing Agency as such had not come to an end" the Company still continues as "meaning agents of other companies. Even after surrender of one of the agencies, the Company carries on business as before its structure not being affected" and thereafter "the receipt is to be considered as revenue, in accordance with the decision in Kelsall Parsons and Co. v. Commr. of Inland Revenue, (1937) 21 Tax Case 608 and with that view the Appellate Assistant Commissioner and the Tribunal agreed. But in the absence of evidence as to what effect the determination of the managing agency of the Nellore Power and Light Company Ltd. had upon the business of the respondent, the mere circumstances that the respondent had managing agencies of two other companies without more will not bring the case within (1937) 21 Tax Case 608. In Kettlewell Bullen and Co.s case, 1964-53 ITR 261   : (AIR 1965 SC 65  ) this Court pointed out that ordinarily compensation for loss of office or agency is regarded as a capital receipt, but the rule is subject to an exception that payment received even for termination of an agency agreement, where the agency is one of many which the assessee holds, and the termination of the agency does not impair the profit-making structure of the assessee, but is within the framework of the business, it being a necessary incident of the business that existing agencies may be terminated, and fresh agencies may be taken, is revenue and not capital Kelsal Parsons and Co.s case, (1937) 21 Tax Case 608 falls within the exception to the ordinary rule and circumstances which brought the case of the respondent within the exception must be clearly established. The High Court was of the opinion that compensation received for taking over the Nellore Power and Light Company Ltd. was a capital receipt not liable to be taxed, and on the materials placed before us, we are unable to disagree with the High Court on this question.