G.K.MTTER J. - (1.) THE questions referred to this Court by the Tribunal arise out of the termination of the agency business carried on by the assessee of explosives manufactured by a Scottish company, the Imperial Chemical Industries (Export) Limited. In the eightys of the last century Gillanders Arbuthnot and Co., a firm, became the agents of the Scottish Company for the sale of their explosives of various kinds in India. THE original agreement in writing is not before us but the parties have proceeded on the basis that there was such an agreement. THE business of the firm was taken over in the year 1935 by the assessee company along with the above-mentioned agency as well as other agencies of various manufacturers and producers. In the year 1945 the Scottish Company appears to have informed the assessee that its agencies in India and Ceylon were going to be taken over by the Imperial Chemicals Industries (India) Limited within two or three following years. In fact the agency came to an end as from 1st April, 1948, on the basis of a letter written by the Scottish company to the assessee on 11th March, 1947. As the arguments addressed to us focused on the text of this document it is necessary to set forth the same in extenso : "M/s Gillanders Arbuthnot and Co. P.O. Box No. 174, Calcutta, India. Agency Arrangements. Dear Sirs, We would refer to the interview which we had with your London associates in May, 1945, when it was intimated that as a matter of long term policy, our agencies in India and Ceylon would ultimately be taken over by Imperial Chemical Industries (India) Ltd. It was indicated at that time that a period of two to three years might elapse before any steps were taken as regards this transfer. We now have to advise you that the matter has been receiving further consideration and Imperial Chemicals Industries (India) Ltd. desire to take over the various agencies as from the 1st April, 1948. It is with regret, therefore, that we have to intimate our intention of transferring your agency, as from the above date, to Imperial Chemical Industries (India) Ltd. and would take this opportunity of expressing to you our sincere appreciation of the valuable services you have rendered to us over a period of many years. As a result of the transfer of your agency to Imperial Chemical Industries (India) Ltd., we propose that compensation should be paid to you on the following basis : 1. For the first three post-transfer years, we shall pay you two- fifths of the commission accruing on annual sales in the territory of your agency taken over by Imperial Chemical Industries (India) Ltd., such commission to be computed at the commission rates formerly paid to you. 2. In the third post-transfer we shall pay you, in addition, a sum equivalent to the full commission on sales for that year affected by Imperial Chemical Industries (India) Ltd., in your territory calculated at the same rates. 3. Payment will be made to you after the end of each year as soon as the amount due is ascertained. For the purpose of calculating the commissioner due to you, the post-transfer years will be deemed to run as from the date of the transfer of your agency to Imperial Chemical Industries (India) Ltd. We trust that you will find these proposals acceptable.
(2.) AS a condition of our paying you compensation on the basis outlined above we would request you to be good enough to give us a formal undertaking to refrain from selling or accepting any agency for explosives or other commodities competitive with those covered by the agency agreement now being terminated. In this connection, we are asking our legal Department to prepare a formal agreement which we will submit to you for signature as soon as possible. In terms of the above letter the assessee received the following amounts and included the same as commission in its profit and loss account. The assessee does not appear to have signified its acceptance of the proposal contained in the above letter in writing, but there is no dispute that payment was received by the assessee in terms of the same. It should further be noted that the assessee never gave a formal undertaking not to accept any agency for explosive as mentioned in the penultimate paragraph of the letter nor did the principals ever submit a formal agreement to the assessee for execution. According to the statements of activities file by the assessee before the IT authorities, so far as the Calcutta organisation is concerned, it carried on business as agents classified under seven heads. They are as follows : Category A--Buying and selling on own account including maintenance of own stocks of the goods dealt in, but prices and other terms regulated by agency agreements. Category B--Introducing clients to principals, submission of bills to clients and collection thereof. No stocks held or handled by the agents on own account or on behalf of principals. Category C--Managing agency. Category D--Shipping agents. Category E--purchasing agents. Category F--Sole importers and distributors on behalf of U.K. principals having no organisation in ndia. Stocks held and handled by the agents on behalf, and on account, of the principals and, at the letter's risk and expense; but agents responsible for observance of statutory regulations connected with the special type of goods dealt in and also for submission and collection of bills. Category G--Secretaries. It will be noticed that the assessee dealt in various kinds of goods for various principals and manufacturers both foreign and Indian. To give only a few instances of the said activities : (a) it bought and sold paints manufactured by five different companies, (b) it engaged in similar activities on behalf of different manufacturers for diverse kinds of goods, to wit, cement, copper, petrol, kerosene oil, medicine, tea chests, beltings, wire nails, timber, etc., (c) it had a shipping business and an agency in engineering business, (d) it acted as managing agents of two jute mills. . Yours faithfully, . For Imperial Chemical Industries (Export) Ltd., . (Sd.) J. Robinson." For the assessment year ending 31st March, 1949 ... Rs. 1,53,471- 11- 0 For the assessment year ending 31st March, 1950 ... Rs. 1,59,271-4-0 For the assessment year ending 31st March, 1951 ... Rs. 6,20,131-2-0 The agency in question was one of importing and distributing explosives on behalf of the Scottish company. According to the assessee, this business stood by itself and its activities in connection therewith were entirely different from its activities in respect of other agencies. It is said that the assessee was required to maintain technical experts and specialists qualified to handle the special class of commodities and the termination of the agency resulted in a large number of members of the staff working in this Department being transferred to the new agents or being taken over in other Departments. The Tribunal found that "the assessee was carrying on various businesses in different lines as general merchants, manufacturers, brokers, agents, etc. The agency included the agency of distributing, buying and selling, and also managing agents of different companies as well as secretaries of different joint stock companies. The Tribunal referred to the activities of the assessee contained in annexure "B" to the statement of the case relating to its organisation in places like Bombay, Madras, New Delhi and Kanpur to show that it was buying and selling goods at various places, acting as the local agents for Indian principals in respect of some classes of goods and in yet others it was introducing clients to principals besides acting as secretaries for one or two concerns. According to the Tribunal "broadly speaking, all sorts of selling agency businesses came under one head and commission earned on account of these agency agreements were clubbed together under one head and incorporated in the assessee's revenue account. It is not material that for a particular agency or a group of agencies the assessee maintained separate subsidy account books, but in the end the total of the receipts as commission earned has been taken into account under the head 'commissions'. In the circumstances, the loss of one agency is incidental to the business and the receipt on account of such loss arose out of the business of carrying on of the agency and, as such, was income- taxable under the It Act.
(3.) ON behalf of the assessee particular stress was laid on the character of the agency in explosives and it was argued that it differed widely from the other agencies. Reference was made to an affidavit affirmed by one G.W. Easson, the chief accountant of the assessee company, on 5th Sept., 1956, with the enclosure thereto and the explanatory statement addressed to the income-tax Tribunal by the assessee in October, 1956. According to the explanatory statement "the Department in explosives was a specialized business and an independent commercial unit. Secondly, the agency was being handled for an unbroken period of more than 60 years and but for a change of policy of the Imperial Chemicals Industries (Export) Ltd. it would have continued indefinitely. Thirdly, the Department which handled the import, storage and distribution of explosives and its administration had a separate staff of its own. The conduct of this business was governed by the provisions of the Indian Explosives Act and its Rules and Regulations at each stage, and accordingly technical and skilled personnel had to be and were employed. As a consequence of the termination of the agency, this staff had to be disbanded and the Department of explosives had to be wound up. Fourthly, this Department maintained separate books of accounts, and annual balance-sheets and profit and loss statements were prepared separately for this business which were finally incorporated in the consolidated published accounts. Fifthly, due to the termination of the agency, a substantial loss in the income of the assessee resulted, varying from 10per cent to 15per cent of the total income of the assessee. Sixthly the compensation paid was referable to an undertaking and covenant by the assessee with the Imperial Chemicals Industries (Export) Ltd. not to carry on any competitive business in the same line of explosives. Lastly, even on the assumption (which was not conceded) that the agency in explosives could be regarded as merely a part of a bigger activity of selling agency in other commodities, the compensation referable to that part of the activity in explosives was nevertheless capital in nature". The enclosures to the affidavit of G.W. Easson, which were not included in the paper book but were allowed to be used at the hearing before us, show that the assessee had eleven officers in the explosives Department on 30th March, 1948, five on these were taken one by the Imperial Chemical Industries (India) Ltd. and the rest continued in service with the assessee, some of them retiring in due course. Besides these officers, the Department had also a staff numbering about eighty working in the magazine section. This staff was being maintained by the assessee at the expense of the Scottish principals and was taken over by the Imperial Chemicals Industries (India) Ltd. on and from 1st April, 1948. The question referred to this Court are as follows : "1. Whether the assessee's agency of the Imperial Chemicals Industries (Export) Ltd. was a separate business by itself, the closure of which resulted in the destruction of a capital asset of the assessee ? 2. Whether, on the facts and in the circumstances of this case, the compensation sums received by the assessee from Imperial Chemical Industries (Export) Ltd. are income chargeable in the hands of the assessee ? and 3. Whether, on the facts and in the circumstances of this case, no part of the compensation money was received by the assessee on the condition not to carry on a competitive business in the same line of activity in explosives and as such no part of the money was in the nature of capital being exempt from Indian income-tax levy ?" ;