- (1.) Messrs. Best and Co., Ltd., Madras the respondent herein, hereinafter called the Agency Company, is a private limited company carrying on business in innumerable lines. It is doing the business of importers exporters, agents and sub-agents of various shipping insurance, and manufacturing companies, in the course of which it acquired numerous agencies from, manufactures both in India and outside for sale in India of textiles, dairy products, engineering equipment, soaps, paints, toilet goods, etc. One of such agencies was from the Imperial Chemical Industries (Exports) Limited, Glasgow, hereinafter called the 'Principal' for distribution and marketing in certain territories in South India of its ammunition, blasting explosives and accessories. The said agency came into existence in 1900. The terms of the agency were not reduced to writing. The rates of commission were paid on terms agreed upon from time to time. The agency was terminable at will; but because of their mutual confidence, it continued without break till the year 1947 when the Principal decided to transfer all its agencies in India and Ceylon to Imperial Chemical Industries (India) Limited. By its letter, dated March 11, 1947, the Principal gave notice to the Agency Company terminating its agency from April 1, 1948. After some correspondence, the agency was terminated on March 31, 1948, and the Principal paid certain amounts in three installments calculated on the basis of the income earned by the Imperial Chemical Industries (India) Limited, which took over the business from that date. Pursuant to that agreement, the Principal paid on September 30, 1949, a sum of Rs. 34,100 as commission on sales during the year ended March 31, 1949, on September 30, 1950, a commission of Rs. 66,790 on sales during the year ended March 31, 1950, and on September 30, 1951, a commission of Rs. 3,35,371 on sales during the year ended March 31, 1951. During the assessment year 1950-51, the first amount was brought to tax and the assessment had become final and nothing turns upon it in these appeals. But in respect of the other two assessment years namely, 1951-52 and 1952-53, the Agency Company objected to the inclusion of the said amounts in its taxable income one the ground that the said amounts represented only compensation received for termination of the Agency business and also as consideration for the restrictive covenant not to do business in the same line for a prescribed period. The Income-tax Officer, in the first instance, and, on appeals, the Appellate Assistant Commissioner held that termination of the said agency held that the structure of the respondent's business and that they represented only the remuneration paid voluntarily by the Principal to the agent in appreciation of its past services. On further appeals by the Agency Company, the Income-tax Appellate Tribunal held that, as the three annual installments were based on future sales in the same territory as before, they were of the same nature as the normal commission receipts of the respondent. On that ground, both the appeals were dismissed. At the instance of the assessee, the following question was referred by the Tribunal to the High Court of Judicature at Madras for its opinion under S. 66 (1) of the Indian Income-tax Act, 1922, hereinafter called the Act :- "Whether the aforesaid sum Rs. 66,790 and Rs. 3,35,371 are assessable under S. 10 for the assessment years 1951-52 and 1952-53." A Division Bench of the said High Court, having regard to the circumstances of the case, came to the conclusion that by the termination of the agency the assessee lost an earning asset and the compensation paid for the destruction of such an asset was a capital receipt and, therefore, not liable to tax. The revenue, on obtaining the necessary certificate from the High Court, has preferred the present two appeals to this Court.
(2.) Mr. Rajagopala Sastri, learned counsel for the assessee, advance the contention that the assessee had innumerable agencies, that it was normal incident in the course of its business to give up agencies and acquire new ones, that the termination of the agency in question was a normal occurrence in the course of its business, that it had no impact on the earning assets or the structure of the business, that the alleged restrictive covenant was only an act of grace on the part of the Principal in view of the long standing relationship between the parties and that it did not enter into the calculation of the compensation paid to the assessee. In short, his argument was that the said compensation only represented the taxable income of the assessee. Should the Court hold that the compensation was in part capital and in part revenue income, the argument proceeded, the said compensation would have to be apportioned reasonably between the said parts.
(3.) Mr. Rajagopala Sastri, learned counsel for the assessee, advanced the argument that on a true construction of the agreement disclosed by the correspondence it should be held that the amount received by the assesse was wholly as a consideration for the restrictive covenant and, therefore, was of a capital nature. Alternatively, he contended that even if the amount was wholly paid as compensation for the loss of the agency, it was a capital receipt, as the assessee lost a substantial source of income in relation to the totality of its business. On the assumption that the payment partook a composite character, the learned counsel would say that an apportionment should be made in proportion of the value to the assessee of the loss incurred under both the heads, namely, the loss of the agency and the restrictive covenant not to do business for a specified period in the same field.;