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

1. The respondent is a Private Limited Company; it carried on business in hides and skins, minerals, tobacco and other commodities and also acted as managing agents for the Nellor Power and Light Company Ltd. and for two other Companies. T. M. Ayyadurai, T. M. Rangachari and P. C. Chakrabarti were directors of the Company. Each director was paid a fixed remuneration of Rs.4,800 per annum for attending to the business of the Company. On June 21, 1951 the respondent was appointed by the Central Government as its agent for buying, checking weighing, leaf drying, storing, transporting, retaining and reselling tobacco under and in accordance with the directions issued from time to time. The Central Government agreed to pay to the respondent price of the tobacco purchased, charge at the rate of one anna per lb. for tobacco not redried, and at the rate of two annas per lb. for tobacco redried, and commission on all purchases. On June 22, 1951 the respondent passed a resolution placing T. M. Ayyadurai in "special charge" for arranging purchases of tobacco on credit, inspecting tobacco at Guntur and at Madras Port, and for supervising shipment of tobacco, and agreed to pay him 30 per cent of the net profit as remuneration. Under the contract with the Government of India Rs. 1,38,454/- became due to the respondent as commission in the account year ending March 31, 1952. After providing Rs.41,473/- for expenses, 30 per cent of the balance among Rs.29,094 was paid to T. M. Ayyadurai as commission and was claimed in the assessment year 1952-53 as a permissible deduction under S. 10(2)(xv) of the Indian Income-tax Act, 1922. The Income-tax Officer allowed only 10 per cent of the net profits for the services rendered by T. M. Ayyadurai in the contract for tobacco purchase and sale, and disallowed Rs.19,796 out of the amount claimed by the respondent.      2. The managing agency agreement of the respondent with the Nellor Power and Light Company Ltd. was terminated with effect from September 28, 1951 when the Government of the State of Madras in exercise of the powers conferred upon it by the Electrical Undertakings Acquisition Act, 1949 compulsorily acquired the undertaking of that Company, and the respondent was paid Rs.17,346 as compensation for premature termination of its agency. This amount was taken into account by the Income-tax Officer in computing the income of the respondent in the assessment year ending March 31, 1952.      3. Appeals against the order passed by the Income-tax Officer to the Appellate Assistant Commissioner and to the Tribunal challenging the disallowance of part of the commission and inclusion of compensation for termination of the managing agency agreement were unsuccessful.      4. The Tribunal thereafter being directed by the High Court of Judicature, Madras under S. 66 (2) of the Indian Income-tax Act, drew up a statement of the case and referred the following two questions to the High Court"(1) Whether on the facts and in circumstances of the case the disallowance of a sum of Rs.19,796 out of the remuneration paid to Mr. T. M. Ayyadurai is justifiable; and      (2) Whether a sum of Rs.17,346 which represented compensation received by the assessee for the loss of the managing agency of the Nellore Power and Light Company Ltd. is income liable to tax?"The High Court answered both the questions in the negative.      5. Allowance in respect of the amount covered by the first question was sought by the respondent under S. 10 (2)(xv) of the Income-tax Act, 1922, which provided:"any expenditure not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of such business, profession or vocation."

Reasoning: 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.