Case: The Commissioner Of Income-Tax,Hyderabad-Deccan Vs. Messrs. Vazir Sultan &amp; Sons

had continued then it is revenue. (Wiseburgh v. Domville, (1956) 36 Tax Cas 527). So that the decision as to whether compensation was capital or revenue would depend upon whether the cessation of the agency destroys or materially cripples the whole structure of the recipients profit making apparatus or whether the loss is of the whole or part of the framework of business.51. If we apply these tests to the agreement which has been terminated in the present case, it does not fall in any of the class of cases of destruction of a capital asset.52. For the appellant reliance was placed on the observations of Venkatarama Aiyar J., in 1959-35 ITR 148 at pp. 161, 163: (AIR 1959 SC 291 at pp. 297, 298) where it was pointed out that in an agency contract the actual business consists in the dealings between the principal and his customers and the work of the agent is only to bring about that business. In other words what the agent does is not business itself but something which is intimately and directly linked with it. But an examination of the context shows that that is not what these observations mean. The point that was to be decided in that case was whether a payment of compensation for the cancellation of a trading contract was a capital or revenue receipt, and dealing with decisions relating to the cancellation of agency contracts which were quoted in support of the contention that they were capital, the learned Judges observed that considerations applicable to agency contracts were inapplicable to trading contracts, because the two classes of contracts were essentially different, and these differences were there pointed out. The purpose of these observations was to show that receipts from trading contracts were revenue and not that receipts from agency contracts are capital. That that is the true scope of these observations is clear from the following passage:"In holding that compensation paid on the cancellation of a trading contract differs in character from compensation paid for cancellation of an agency contract, we should not be understood as deciding that the latter must always, and as a matter of law be held to be a capital receipt. Such a conclusion will be directly opposed to the decisions in Kelsalls case, (1938) 21 Tax Cas 608 and 1956 SCR 223: ( (S) AIR 1956 SC 492 ) The fact is that an agency contract which as the character of a capital asset in the hands of one person may assume the character of a trading receipt in the hands of another, as, for example, when the agent is found to make a trade of acquiring agencies and dealing with them."The Court there observed that when the assessee holds a number of agencies, the compensation paid for cancellation of any of them could be regarded as revenue receipt. This is inconsistent with the conclusion that an agency contract must always be regarded as a capital asset. The learned Judges further observed that they were not elaborating this part as they were there concerned with a trading contract and therefore the statement as to when receipts from agency contracts could be regarded as revenue receipts cannot be read as exhausting the circumstances under which they could be held to be revenue.53. As a matter of fact there are three kinds of cases of agencies shown by the decided cases: (1) Kelsall Parsons case (1938) 21 Tax Cas 608 where the recipient was carrying on several agencies and the test laid down was whether the business structure could absorb a shock of the termination of one. (2) The other is where the compensation is for a temporary and variable element of assessees profit making apparatus; MacDonalds case (1955) 36 Tax Cas 388. The third class of cases is represented by Inland Revenue Commrs. v. Fleming and Co. (Machinery), (1951) 33 Tax Cas 57 where the rights and advantages surrendered were such as to destroy or materially cripple the whole structure of the profit making apparatus.54. The agencies themselves are of different kinds: (1) where the agent himself carries on the business and sells the product of the principal and gets commission for it; (2) where the agents function is confined to bringing the principal and the customer together and he gets agency commission for the performance of only that service; (3) where the agent is a distributor and distributes the products of the principal through his subagents and charges commission for the distribution work. Cases (1) and (3) would not strictly fall within the scope of the observations in 1959-35 ITR 148 : (AIR 1959 SC 291 ) and case (2) would fall within the second class of agreements mentioned in Van Den Berghs case, (1935) 19 Tax Cas 390.55. The agreement which is now before us and which was surrendered was terminable at will. The amount of profit which the assessee made from working the agency contract in Hyderabad State alone was much more than the amount which the assessee received for the termination of the whole of their agency outside the State. Thus it is clear that the termination did not affect the trading activities of the assessees and therefore the termination of the contract viewed against the background of the assessees business organisation and profit-making structure appears to be no more than compensation for the loss of future profit and commission. The true effect of the facts of this case appears to be this that in 1939 the assessees area of distribution was increased from the State of Hyderabad to the whole of India and in 1950 it was again reduced to the original area of 1931. The assessees never lost their agency. As a result of this contraction of area they at the most have lost some agency commission. The compensation therefore was in the nature of surrogatum and in this view of the matter it is revenue and not capital.56. I would therefore allow this appeal with costs throughout.

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

Explanation:
0[ds]35. In the case before us the agency agreement in respect of territory outside the Hyderabad State was as much an asset of the assessees business as the agency agreement within the Hyderabad State and though Ex-pansion of the territory of the agency in 1939 and the restriction thereof in 1950 could very well be treated as grant of additional territory in 1939 and the withdrawal thereof in 1950, both these agency agreements constituted but one employment of the assessee at the sole selling agents of the Company. There is nothing on the record to show that the acquisition of such agencies constituted the assessees business or that these agency agreements were entered into by the assessee in the carrying on of any such business.The agency agreements in fact formed a capital asset of the assessees business worked or exploited by the assessee by entering into contracts for the sale of the "charminar" cigarettes manufactured by the Company to the various customer and dealers in the respective territories. This asset really formed part of the fixed capital of the assessees business. It did not constitute the business of the assessee but was the means by which the assessee entered into the business transactions by way of distributing those cigarettes within the respective territories. It really formed the profit-making apparatus of the assessees business of distribution of the cigarettes manufactured by the Company. If it was thus neither circulating capital nor stock-in-trade of the business carried on by the assessee it could certainly not be anything but a capital asset of its business and any payment made by the Company as and by way of compensation for terminating or cancelling the same would only be a capital receipt in the hands of the assessee.36. It would not make the slightest difference for this purpose whether either one or both of the agency agreements were terminated or cancelled by the Company.The position would be the same in either event. As was observed by Lord Wrenbury in (1927) 12 Tax Cas 427 at p.matter may be regarded from another point of view; the right to work the area in which the working was to be abandoned was part of the capital asset consisting of the right to work the whole area demised. Had the abandonment extended to the whole area all subsequent profit by working would, of course have been impossible but it would be impossible to contend that the compensation would be other than capital. It was the price paid for sterilising the asset from which otherwise profit might have been obtained. What is true of the whole must be equally true of part.If both the agency agreements viz. one for the territory within the Hyderabad State and the other for the territory outside Hyderabad State had been terminated or cancelled on payment of compensation, the whole profit-making structure of the assessees business would have been destroyed. Even if one of these agency agreements was thus terminated, it would result in the destruction of the profit-making apparatus or sterilisation of the capital asset pro tanto, and if in the former case the receipt in the hands of the assessee would only be a capital receipt, equally would it be a capital receipt it compensation was obtained by the assessee for the termination or cancellation of one of these agency agreements which formed a capital asset of the assessees business.The facts of the present case are closely similar to those which obtained in 59 Ind App 206: (AIR 1932 PC 138  ). In that case also the assessees had for a number of years prior to 1928 acted as distributing agents in India of the Burma Oil Company and the Anglo-Persian Oil Company, but had no formal agreement with either Company. In or about the year 1927 the two companies combined and decided to make other arrangements for the distribution of their products. The assessees agency of the Burma Company was accordingly terminated on December 31, 1927, and that of the Anglo-Persian Company on June 30, following. Some time in the early part of 1928 the Burma Company paid to the assessee a sum of Rs. 12,00,000 "as full compensation for cessation of the agency" and in August of the same year the Anglo-Persian Company paid them another sum of Rs. 3,25,000 as "compensation for the loss of your office as agents to the company". On the facts and circumstances of the case the Privy Council came to the conclusion that the sums could only be taxable if they were the produce, or the result of, carrying on the agencies of the oil companies in the year in which they were receive by the assessees. But when once it was admitted that they were sums received, not for carrying on that business, but as some sort of solatium for its compulsory cessation, the answer seemed fairly plain.Whatever be the criticism in regard to the concept of income adopted in this case noted earlier in this judgment, the decision could just as well be supported on the grounds which we have hereinbefore discussed and was quite correct, the payments having been received by the assessees as and by way of compensation for the termination or cancellation of the agency agreements in question which were in fact the capital assets of the assessees business.