COMMISSIONER OF INCOMETAX Vs. GHASIRAM SRINIVAS

JUDGEMENT

(1.) THIS is a reference under section 66(1) of the Income-tax Act. The facts are as follows :

(2.) ON the 24th of February, 1952, the company again wrote to the assessee firm to the effect that the compensation had been paid for the summary termination of the banyanship agreement. It was categorically mentioned that it was not for compensation of the banyanship agreement for three months, being the period stipulated in the agreement for serving notice of termination. ON the 30th of March, 1952, the assessee firm wrote back to say that the firm itself would have to be discontinued and, therefore, an early adjustment of all accounts was desirable. Now I come to the assessment proceedings. During the assessment year 1952-53 the payment of Rs. 1,80,000 mentioned above came to the notice of the Income-tax Officer. He found, however, that it had not been shown in the return submitted by the firm. Upon being asked why this had not been shown, it was contended that the receipt was a capital receipt and not subject to income-tax. The Income-tax Officer did not agree with this and brought the entire amount under tax. The firm appealed to the Appellate Assistant Commissioner but without success. There was a further appeal to the Appellate Tribunal and this time a partial relief was obtained. The Tribunal held that, as it was found that on an average the remuneration which was earned by the firm during a period of three months would be Rs. 50,000, that amount at least must be said to be referable to the contract of service and must be deemed to be paid in lieu of notice, that is to say, represented the earnings which the firm would have made during the period of three months for which notice had to be given to terminate the agency but had not in fact been given. Therefore, the Tribunal held that at least Rs. 50,000 should be treated as revenue but the balance of Rs. 1,30,000 should be treated as capital receipt. Both the assessee and the department were dissatisfied with this decision. The assessee wanted a reference in order to have the opinion of this court as to whether the Tribunals treatment of Rs. 50,000 was right or not. The department also wanted the matter to be referred to court in order to have its opinion on the question whether the treatment of Rs. 1,30,000 as a capital receipt was right. The Tribunal was of the opinion that both were points of law that did arise in the case, and the following two questions were referred :

(3.) WE have now before us the answers given by the Appellate Tribunal in a supplementary statement of case dated the 21st November, 1958. It has now been found that the assessee firm was not carrying on any business before it started the business as banyans of the company. In fact, it borrowed certain moneys from strangers in order to deposit a sum of Rs. 1,00,000 with the company in connection with the banyanship agreement. The other facts found show that the banyanship firm was actually built up around this contract with the Imperial Chemical Industries (India) Ltd. It had no other business. Neither did it have any business of a general kind of banking or money-lending involving various contracts and ventures. The relevant correspondence has now been set out and, as mentioned above, shows clearly that upon the termination of this contract the banyanship firm received a death-blow, leading to its dissolution. In other words, the termination of the contract brought about the termination of the banyans themselves. Apart from this, the correspondence shows clearly that the parties contemplated that this amount of Rs. 1,80,000 was given, not in lieu of three months notice, but as a consolidated amount paid for the purpose of compensating the banyans for the termination of their services. As I stated above at no time did the banyans raise the point of insufficiency of the notice nor was any investigation made into the question as to what they would have earned during the three months for which notice would have to be given under the contract if the banyanship was terminated in accordance with it. These being the facts, we have to consider the law that has to be applied. I think the position in law is very well set out in a case decided by the Court of Appeal in England - Wiseburgh v. Domville, 1956 30 ITR 295. In that case, Lord Evershed M. R. pointed out that there were two cases which represented the two different views on the subject. The first was Kelsall Parsons & Co. v. Inland Revenue Commissioners, 1938 21 TaxCas 608 and the case on the other side of the border line was the case of Barr, Crombie & Co. v. Inland Revenue Commissioners, 1947 15 ITR 56. I will shortly state the facts in both the cases and the conclusions arrived at. In the case of Kelsall Parsons & Co., the appellants carried on business as agents on a commission basis for the sale in Scotland of the products of various manufactures and entered into an agency agreement for that purpose. One of the agreements was for a period of 3 years, and this was terminated at the end of the second year, but compensation was paid to the extent of 1,500. The question was whether this payment was of the nature of revenue or capital. The Lord President (Normand) said that these cases depended on their own facts. He pointed out that where a merchant has a number of agencies then it was a normal incident of his business that one or more of them might be modified, altered or discharged from time to time. Since he had other contracts, those would go to bear the shock of the termination of one of them. In parting with the benefit of one of the contracts, the assessee was not parting with something which could be described as an asset of an enduring nature. On the facts of the case it was held that the sum paid was really and substantially a surrogatum for one years profit and, therefore, it was of a revenue nature. On the other hand, in the case of Barr, Crombie & Co. v. Inland Revenue Commissioners, 1947 15 ITR 56 the agency that was cancelled amounted in substance to the termination of the whole business of the assessee company because its receipts from this particular source amounted to nearly 9/10ths of its total earnings. The termination of this particular agency took the bottom out of its business and the entire substratum of it was gone. In fact, it had to reorganise itself in a different manner altogether. It was held that in such a case, the compensation received was of a capital nature. In the particular case that the Master of Rolls was considering, he came to the conclusion that the assessee had more than one agency and the termination of one of them did not destroy his business, although it may have been a disaster. The Master of Rolls pointed out that in such cases the argument that it was still a capital receipt was quite attractive, but the matter was now set at rest by authority. There are other cases on the subject : for example, Short Bros. Ltd. v. Commissioners of Inland Revenue, 1927 12 TaxCas 955 referred to in Kelsall Parsons & Co. [[1938] 21 Tax Cas. 608.]. It is, however, unnecessary to multiply cases. That being the legal test to be applied, let us apply them to the facts of this case and see where we arrive. The facts found herein have established that the assessee firm had only this one banyanship business and no other. In fact, the whole business was built round the banyanship agreement, and the termination of it made it collapse completely. It ceased to exist any further. The parties undoubtedly never thought about a compensation to be given for three months or for any particular period. The compensation was offered and accepted as a solatium for the destruction of the whole banyanship business. In my opinion, there cannot be any doubt that it was in the nature of a capital receipt and the conduct of the parties confirms it. The case, therefore, leans towards the decision in Barr, Crombie & Co.s case, 1947 15 ITR 56 rather than that of Kelsall Parsons & Co. [[1938] 21 Tax Cas 608.].