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

2. The facts leading up to this appeal may be shortlyassessee is a registered firm consisting of five brothers and the wife of a deceased brother having equal shares in the profit and loss of the partnership. The firm was appointed the sole selling agents and sole distributors for the Hyderabad State for the cigarettes manufactured by M/s. Vazir Sultan Tobacco Co., Ltd., under the terms of a resolution of the Board of Directors dated JanuaryBaker reported that an arrangement had been come to for the time being whereby the firm of Vazir Sultan and Sons, were given the distributorship of "Charminar" Cigarettes within the H. E. H, the Nizams Dominions and that they were allowed a discount of 2 per cent on the gross selling price.No written agreement was entered into between the Company and the assessee in respect of the above mentioned arrangement nor was there any correspondence exchanged between them in this behalf. In 1939 another arrangement was arrived at between the assessee and the Company whereby the assessee was given a discount of 2 per cent not only on the goods sold in the Hyderabad State but on all the goods sold in the Hyderabad State and outside Hyderabad State. It does not appear that the Board of Directors passed any resolution in support of this new arrangement nor was any agreement drawn up between the parties incorporating the said new arrangement.4. On June 16, 1950, the Board of Directors passed the following resolution reverting to the old arrangement embodied in the resolution dated January 6,Chairman, having referred to resolution No. 24 passed at the board meeting held on 6-1-31 and having reported that Vazir Sultan and Sons had agreed to revert to the arrangement outlined in that resolution with effect from 1-6-50, it was on the proposition of Mr. S. N. Bilgrami, seconded by Mr. N. B. Chenoy resolved that payment of the sum of O. S. Rs. 2,26,263 be made to Vazir Sultan and Sons by way of compensation, Vazir Sultan and Sons, to pay D. B. Akki and Co., out of that amount the sum of O. S. Rs. 6,920 also by way of compensation. Mr. Mohd. Sultan and Mr. Hameed Sultan stated that, as partners in the firm of Vazir Sultan and Sons, they did not take part in this resolution, although they had accepted on behalf of Vazir Sultan and Sons, the terms thereof.The sum of Rs. 2,19,343 was accordingly received by the assessee in the year of account 1359 F.6. The Income-tax Officer included this sum in the assessees total income and taxed it as a revenue receipt. On appeal the appellate Assistant Commissioner held that the sum of Rs. 2,19,343 was not a revenue receipt but a capital receipt being compensation for the loss of the agency and as such not liable to tax. The Income-tax Officer .(C Ward) Hyderabad thereupon preferred an appeal to the Income-tax Appellate Tribunal, Bombay, which held that the said sum received by the assessee was a revenue receipt and liable to tax. The assessee then applied to the Appellate Tribunal for a reference to the High Court under S. 66(1) of the Income-tax Act and the Tribunal accordingly referred the following question of law to the Highthe sum of O. S. Rs. 2,19,343 received by the assessee Firm from Vazir Sultan Tobacco Co., Ltd., is a revenue receipt or a capitalThe High Court answered the question in favour of the assessee stating the question in a different form,the sum of O. S. Rs. 2,19,343 received by the assessee firm from Vazir Sultan Tobacco Co., Ltd., is liable to be taxed under the Indian Income-taxThe appellant thereafter applied to the High Court for a certificate of fitness which was granted by the High Court on February 21, 1955, and hence this appeal,

Reasoning:
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.