DIVECHA P H Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference raises the vexed question whether certain amounts received by the assessee are capital receipts or revenue receipts. Elaborate arguments have been advanced before us by Mr. Palkhivala for the assessee in support of the plea that the amounts received by the assessee were capital receipts and not liable to tax and he has invited our attention to several discussions of the Supreme Court as well as of other Courts. Before we refer to the arguments, advanced at the Bar, it is necessary to set out the facts which give rise to this reference.

(2.) PRIOR to the year 1938, three persons, Jehangir A. Irani, Pirojsha H. Divecha and Khurshed A. Irani were conducting in partnership a business in "electrical goods" and as commission agents and merchants in the name and style of "Precious Electric Co." The duration of the partnership was initially limited to a certain period but was from time to time renewed. Jehangir A. Irani died on 22nd Aug., 1942, and in is place his son Noshir J. Irani was admitted to the partnership. In June, 1938, the three partners of Precious Electric Co. entered into an agreement with Philips Electrical Co. (India) Ltd. (which will hereafter be referred to as "the Philips"). Under that agreement, the Precious Electric Co. (which will be hereafter referred to as "the firm") was given the monopoly rights to sell electric bulbs manufactured by the Philips in the Bombay Presidency, Rajputana, Central India, Central Provinces and the Berar. By cl. 2 of the agreement, Philips undertook to deliver lamps of their manufacture, for sale in that territory exclusively to the firm. If any buyer refused to purchase lamps from the firm Philips had the right to supply such buyers directly allowing compensation to the firm at the rate of 5 per cent. on the net amount of invoices. By cl. 3, the firm undertook only to sell lamps as were supplied to them by Philips and to sell the lamps supplied to them only in that territory and to do "everything possible to prevent their re - exportation by third parties". By cl. 7, the firm undertook to promote the sales of lamps in the territory always according to the directions given by Philips and in no way whatever to act against their interests and not to sell during the continuance of the agreement either directly or indirectly lamps other than Philips lamps and to refrain from doing any business, "either directly or indirectly, in Arts. competing with Philips Arts. and not to support and/or to participate in, either directly or indirectly, competing firms in any way." By cl. 4, the firm undertook in reselling lamps purchased from Philips, not to deviate under any circumstances, either directly or indirectly from the prices, rebates, selling terms and/or conditions as established by Philips. By cl. 6 right was reserved to Philips to refuse orders and/or cancel or to suspend deliveries for any reason whatsoever and in case of such cancellation, cessation or suspension of deliveries the firm was not to receive any compensation. By cl. 8, it was provided that the firm was to buy and sell Philips lamps on their own account and at their own risk and that the lamps were to be purchased by the firm at prices and on conditions which from time to time may be communicated to them by Philips. Authority was reserved to Philips to refuse delivery or to cancel orders in the event of the firm being in arrears. By cl. 12, the agreement was deemed to have come in force from the 1st July, 1938, and was to

(3.) THE minutes of the meeting which recorded the terms of the settlement were signed on behalf of Philips and they were seen and approved on behalf of the firm.