# Cl.T v. Kanpur Coal Syndicate Subba Rao }

- **Citation:** [1964] 8 S.C.R. 93
- **Court:** Supreme Court of India
- **Decided:** 1964-05-01
- **Bench:** K. SuB!lA RAo, J. C. Shah Ands. M. S1Kri
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/cl-t-v-kanpur-coal-syndicate-subba-rao-3283
- **Pages:** 29

## Headnote

Income-tax-Compensation received for surrendering managing agency-
]/ capital or revenue-Test-lncome .. tax ... tct, 1922 (11 of 1922),
ss. 2(6c), 10, 12.
By an agreement \vith the Fort Willi:in1 Jute Company in 1925 the
appellant company becm1e its Managing Agent.
The terms, inter .ilia,
were that the appellant or its successors, unless they chose to resign,
were to continue as l\1anaging Agent until they ceased to hold certain
shares in the capital of the company and were on that account re1noved
by a resolution of the company or their tenure of office was determined
by the winding U? _of the company.
On termination of the agency, the
Managing Agent was to get such reasonable compensation as was agreed
upon bet\'leen the !\1a0aging Agent and th~ comvany.. Besides
this
managing agency the appellant held five other man<iging agencies.
In
1952, the appellant by tn agreement with ~T/s. Mugneeram Bangur &
Co., agreed to relinquished the managing agency of the ·Fort William Jute
Co., Ltd., in their favour in consideration of M/s. ~1ugneeram Bangur
and Co. taking over the shares held by the appellant, procuring repayfl1ent
of loans advanced by the appellant to the Fort William Jute Con1p:.1ny
and further procuring that the Fort William Jute Company will pay com ..
pensation to the appellant. The appellant intimated the members of the
latter company that it would be in the best interest of the share-holders
to terminate the appellant's agency which would otherwise continue till
1957 and that .M/S. Mugneeratn Bengur & Co. had agreed to reimburse
the Fort William Jute Co. Ltd. for payment of Rs. 3,50,000 as compensation to the appeIIant.
The
arrangement
with
M/s.
Mugneeram
Bangur & Co. was accepted
by the Fort William Jute Co.
and the
appellant tendered
resignation.
M/s. Mugneeram
Bangur and
C9.
1964
Cl.T.
v
Kanpur Coal
Syndicate
Subba Rao }.
1964
May I.
1964
lCtttlew•ll Bun.n
and Co.
...
CJ.T.
94
SUPREME COURT REPORTS
[rg64]
became the Managing agent.
The appellant received
the
sum
ol
Rs. 3,50,000 and credited the sum in its profit and 1068 account as having
been received from the Fort William Jute Co. Ltd. on account of com·
pensation for loss of office and in calculating the net profit for the purpose of income-tax for the year 1953-54 did not include this amount
in the return. The Income-tax Officer in assessment included the
amount in the appellant's taxable income. The Assistant Appellate Com·
missioner on appeal modified the assessment holding that the sum received
by the appellant as compensation for surrendering the managing agency,
which was to enure for five years more and might have continued for
another twenty years, was a capital receipt. The Appel1ate Tribunal confirmed the order of the Appellate
Assistant
Commissioner.
At the
instance of the Commissioner ,of Income-tax the following question was
referred to the High Court:
Whether on the facts and circumstances of the case the sum of
Rs. 3,50,000 received by the
assessee
to
relinquish
the
managing agency was a revenue receipt assessable under the
Indian Income-tax Act?.
The High Court answered the question in the affirmative.
HELD: that the answer should be in the negative. The transaction in
question was not a trading transaction, but one in which the
asses.,ee
parted with an asset of enduring value. The compensation received was
compensation for loss of capital.
It was inconsequential whether the
appellant conducted the remaining agencies after the determination of
the one in question.
Where payment is made as compensation for cancellation of a contract which does not affect the trading structure of the business,
nor
causes 'deprivation of what in substance is ~c of income, and is a
normal incident Gf the business, the compensation is revenue. But 'vb.ere
the cancellation impairs the trading structure or results in loss of tbe
source of income, the compensation paid for the cancellation of the
aareement is normally rapital receipt.
Commissioner of Income-tax Na1pur

## Text

_Characters 0–39,875 of 64,624. This is a partial read: ask again with offset=39875 for what follows._

8 S.C.R.
SUPREME COURT REPORTS
93
to the authority concerned to make a fresh assessment on the
members of that as~ociation individually.
The answer given
by the High Court to the question propounded is correct.
In the result, the appeal fails and is dismissed with costs.
Appeal dismissed.
KETTLEWELL BULLEN AND CO.
v.
COMMISSIONER OF INCOME-TAX, CALCUTTA
(K. SuB!lA RAo, J. C. SHAH ANDS. M. S1KRI, JJ.)
Income-tax-Compensation received for surrendering managing agency-
]/ capital or revenue-Test-lncome .. tax ... tct, 1922 (11 of 1922),
ss. 2(6c), 10, 12.
By an agreement \vith the Fort Willi:in1 Jute Company in 1925 the
appellant company becm1e its Managing Agent.
The terms, inter .ilia,
were that the appellant or its successors, unless they chose to resign,
were to continue as l\1anaging Agent until they ceased to hold certain
shares in the capital of the company and were on that account re1noved
by a resolution of the company or their tenure of office was determined
by the winding U? _of the company.
On termination of the agency, the
Managing Agent was to get such reasonable compensation as was agreed
upon bet\'leen the !\1a0aging Agent and th~ comvany.. Besides
this
managing agency the appellant held five other man<iging agencies.
In
1952, the appellant by tn agreement with ~T/s. Mugneeram Bangur &
Co., agreed to relinquished the managing agency of the ·Fort William Jute
Co., Ltd., in their favour in consideration of M/s. ~1ugneeram Bangur
and Co. taking over the shares held by the appellant, procuring repayfl1ent
of loans advanced by the appellant to the Fort William Jute Con1p:.1ny
and further procuring that the Fort William Jute Company will pay com ..
pensation to the appellant. The appellant intimated the members of the
latter company that it would be in the best interest of the share-holders
to terminate the appellant's agency which would otherwise continue till
1957 and that .M/S. Mugneeratn Bengur & Co. had agreed to reimburse
the Fort William Jute Co. Ltd. for payment of Rs. 3,50,000 as compensation to the appeIIant.
The
arrangement
with
M/s.
Mugneeram
Bangur & Co. was accepted
by the Fort William Jute Co.
and the
appellant tendered
resignation.
M/s. Mugneeram
Bangur and
C9.
1964
Cl.T.
v
Kanpur Coal
Syndicate
Subba Rao }.
1964
May I.
1964
lCtttlew•ll Bun.n
and Co.
...
CJ.T.
94
SUPREME COURT REPORTS
[rg64]
became the Managing agent.
The appellant received
the
sum
ol
Rs. 3,50,000 and credited the sum in its profit and 1068 account as having
been received from the Fort William Jute Co. Ltd. on account of com·
pensation for loss of office and in calculating the net profit for the purpose of income-tax for the year 1953-54 did not include this amount
in the return. The Income-tax Officer in assessment included the
amount in the appellant's taxable income. The Assistant Appellate Com·
missioner on appeal modified the assessment holding that the sum received
by the appellant as compensation for surrendering the managing agency,
which was to enure for five years more and might have continued for
another twenty years, was a capital receipt. The Appel1ate Tribunal confirmed the order of the Appellate
Assistant
Commissioner.
At the
instance of the Commissioner ,of Income-tax the following question was
referred to the High Court:
Whether on the facts and circumstances of the case the sum of
Rs. 3,50,000 received by the
assessee
to
relinquish
the
managing agency was a revenue receipt assessable under the
Indian Income-tax Act?.
The High Court answered the question in the affirmative.
HELD: that the answer should be in the negative. The transaction in
question was not a trading transaction, but one in which the
asses.,ee
parted with an asset of enduring value. The compensation received was
compensation for loss of capital.
It was inconsequential whether the
appellant conducted the remaining agencies after the determination of
the one in question.
Where payment is made as compensation for cancellation of a contract which does not affect the trading structure of the business,
nor
causes 'deprivation of what in substance is ~c of income, and is a
normal incident Gf the business, the compensation is revenue. But 'vb.ere
the cancellation impairs the trading structure or results in loss of tbe
source of income, the compensation paid for the cancellation of the
aareement is normally rapital receipt.
Commissioner of Income-tax Na1pur v. Rai Bahadur Jairam
Yalji,
35 l.T.R. 148, referred to.
Commissioner of Income-tax v. Shaw Wallace and Co. L.1l. 59 I.A.
206, explained.
Raja Bahadur Kamakshaya Narain Singh of Ramgarh v. Co1n111i.s•
aioner of Income-tax, Bihar and Orism, L.R. 70 I.A. 180, Commissioner
of Income-tax and Excess Profits Tax Madras v. South India Pictures,
29 I.T.R. 910, Peirce Leslie and Co. Ltd. v. Commissioner of lncome·tnx,
M11dras, 3R l.T.R. -356, Commissioner of lncome•tax, Hyderabad-Deccan
v. Vazir Sultan and Sonz. 36 I.T.R. 175 and Godrej & Co. Y. Commis-
•ionor of Income-tax, Bombay City, 37 I.T,R.. 381, discussed.
c,viL APPELLATE JURISDICTION: Civil Appeal No. 226
of 1963.
8 S.C.R.
SUPREME COURT REPORTS
95
1964
Appeal from the judgment and order dated August I,
i961, of the Calcutta High Court in Income-tax Reference
No. 75 of 1956.
Kri.rhna Warriar
•nd Co.
S. Chaudhuri, D. N. Mukherjee and D. N. Gupta, for
the app~llant.
K. N. Rajagopal Sastri and R. N. Sachthey, for the respondent.
May 1, 1964. The Judgment of the Court was delivered
by
SHAH, J .-The appellant is a public limited company.
and has its registered office at Calcutta. By an agreement
dated May l, 1925, the Fort William Jute Company Ltd.
appointed the appellant its managing agent upon certain
terms and conditions set out therein. Under the agreement
the appellant was to receive as managing agent remuneration at the rate of Rs. 3 ,000 per month, commission at the
rate of ten per cent on the profits of the company's working,
additional commission at three per cent on the cost price of
all new machinery and stores purchased by the managing
agent outside India on account of the company, and interest
on all advances made by the managing agent to the company
on the security of the company's stocks, raw materials and
manufactured goods.
The appellant 'and its successors in
business, whether under the same or any other style or firm,
unless they resigned their office were entitled to continue as
managing agent until they ceased to hold shares in the capital of the company of the aggregate nominal value
of
Rs. 1,00,000 and were on that account removed by a special resolution of the company passed at an Extraordinary
meeting of the company, or until the managing agent's
tenure was determined by the winding up of the company.
In the event of termination of agency· in the contingencies
specified, the managing agent was to receive such reasonable
compensation for deprivation of office, as may be agreed
upon between the .managing agent and the company and
in case of dispute, as may· be determined by two arbitrators.
By cl. 8, the managing 'agent was at liberty at any time to
v.
CJ.T.
Shah J.
96
SUPREME COURT REPORTS
[1964]
1964
resign the office of managing agent by leaving at the register-
~11/ewell Bullen ed office of the company previous notice in writing of its
and Co.
intention in that behalf. The agreement did not specify any
c~.T.
period for which the managing agency was to enure. Since
Shah J.
the successors of the appellant were also to continue as
agent~, unless they resigned or became disqualified, the duration was in a sense unlimited. But by virtue of s. 87-A(2)
of the Indian Companies Act, 1913, the appointment of the
appellant as managing agent would expire on January 14,
1957, i.e. on the expiry of twenty years from the date on
which the Indian Companies (Amendment) Act, 1956, was
brought into operation. Section 87-A(2), however, did not
prevent the managing agent from being re-appointed after
the expiry of that period.
Beside the managing agency of the Fort William Jute
Co. Ltd. the appellant held at all material time managing
agencies of five oilier limited companies, viz., Fort Closter
Jute Manufacturing Co. Ltd., Bowreach Cotton Mills Co.
Ltd., Dunbar Mills
Ltd., Mothola Co. Lld and
Joonktollee Tea Co.
Ltd.
The
appellant
had
advanced
Rs. 12,50,000 to the Fort William Jute Co. Ltd. on the security of the stocks, raw materials and manufactured goods
of that company. The appellant held in 1952, 600 out of
14,000 ordinary shares of the face value of Rs. 100 each,
and 6,920 out of 10,000 preference shares also of the face
value of Rs. 100 each.
On May 21, 1952, the appellant
entered into an agreement with M/s Mugneeram Bangur &
Co., the principal conditions of which were:
(i) M/s Mugneeram Bangur & Co. to purchase the
entire holding of shares of the appellant in
the Fort William Jute Co. Ltd.-ordinary
shares at Rs. 400 each and preference shares
at Rs. 185 each, and to make an ofier to all
holders of the
company's shares-preference
and ordinary-to purchase their holdings at the
same rates;
(ii) M/ s Mugneeram Bangur & Co~ to procure repay·
ment on or before June 30, 1952 of all loan!
8 S.C.R.
SUPREME COURT REPORTS
97
'
made by the appellant to the principal com1964
pany; _-
'
.. •.(.. l Kettlewell .Bullen
and Co.
(iii) M/s Mugoeeram Bangur & Co. to procure that
v.
C.l.T.
the . principal company will compensate , the
appellant for · loss of office in the -sum ·. of
- Rs. 3,50,000, such sum being payable to the
· appellant. after it submitted its resignation as
managing_ agent; and
(iv) M/s Mugneeram Bangur & Co. to reimburse the
company the amount payable to the appellant.
The reasons for which the appellant agreed to relinquish
the managing agency were set out in a letter dated May 28,
1952, addressed by the appellant to the members of the.,
company intimating thar M/s Mugneeram Bangur & Co.
were willing to purchase the shares at the same rates at
which they had agreed to purchase the share-holding of the
appellant. It was recited in the letter that the installation
of modem machinery in the
company's factory entailed
heavy capital expenditure and it was necessary to obtain a
loan secured by debentures charged on the company's property; that large sums were
required for renewals
and
replacements of machinery and it was not possible to obtain
additional bank accommodation; that the' appellant had
made
large -advances
to
the
company -exceeding
Rs. 12,50,000 and, having regard to its other commitments,
it was doubtful if it would be able to make available to the
company additional finance; that the arrangement with M/s
Mugneeram Bangur & Co., by acceptance of the terms offered ty them, was the most satisfactory method of solving the
company's difficulties; that it was in the best interests of the
shareholders to terminate the appointment of the appellant
which in the normal course would not fall due for renewal
until January 14, 1957; that 'lvl/s Mugneeram Bangur & Co.
had agreed Jo procure that the Fort William Jute Co. Ltd.
will pay to the appellant Rs: 3,50,000 and that M/s Mug-.
neeram Bangur & Co. will reimburse the company ·for the
payment, it· being anticipated that they will in due course
De appointed managing agents of the company.
51 S.C.-7
Shah /.
·l
SUPI~El\IE COURT REPORTS
1964
The arrangement with M/s Mugneeram Bangur & Co.
Kettlrn-:;u- Bullen was carried out.
The appellant tendered its resignation
and Co.
with effect from July l, 1952, in pursuance of the terms of
c".i.T.
the agreement and M/s Mungneeram Bangur & Co. were
Shah 1•
appointed as managing agent of the company. The sum of
_ __Rs. 3,50,000 received by the appellant from the companywhich it is common ground was provided by M/s Mugneeram
Bangur & Co.-was credited in the profit and loss account
of the appellant as received from the Fort William Jute Co.
Ltd. on account of compensation for loss of office. -But
in arriving at the net profit in the return for income-tax for
the year 1953-54 this amount was deleted. In the proce_edings for assessment for the year 1953-54 the Incometax Officer, Companies District IV, Calcutta, included this
amount in the appellant's taxable income. In -appeal the
Appellate Assistant Commissioner modified the assessment
holding that the_ sum of Rs. 3,50,000 received by the appellant as compen'sation for surrendering
the
managing
agency; which was to enure for five years more, and which
in normal course might have continued for another term of
twenty years, was a capital receipt. The Appellate Tribunal
confirmed the order of the Appellate ·Assistant Commissiciner, observing that
compensation
received under an
agreement for "an outright sale of such an agency to a third
party", not being one which a businessman enters in the
normal course of business. nor being one which amounts
to modification, alteration or discharge of normal incidents
of such a business, was not assessable to income-tax as a
revenue receipt.
At the instance of the Commissioner of Income-tax, the
Tribunal referred under s. 66(1) of the Income-tax Act,
1922, the following question to the High Court of Judicature at Calcutta:
"Whether on the fact~ 1'nd in the circumstances of
the case the sum of Rs. 3,50,000 received by
the assessee to relinquish the managing agency
was a revenue receipt assessable under the
Indian Income-tax Act?"
8 S.C.R
SUPREME COURT REPORTS
99
The High Court, for reasons which we will presently set out,
~
answered the question in the affirmative. With certificate Kettlewell Bullla
granted by the High Court, this appeal is preferred by the
and Qi.
v.
appellant.
C.l.T.
This case raises once again 'the question whether compensation received by an agent for premature determination
of the contract of agency is a capital or a revenue receipt.
The
question is not capable
of solution
by the
application of any single test: its solution must depend on
a com:ct appraisal in their true perspective of all the relevant facts.
As observed in Commissioner of Income-tax
Nagpur v. Rai Bahadur Jairam Valji(') by Venkatarama
Aiyar, J.,:
"The question whe<her a receipt is capital or income
has frequently come up for determination before
the courts. Various rules have been enunciated as furnishing a key to the solution of the
question, but as often observed by the highest
authorities, it is not possible to lay down any
single test as infallible or any single criterion
as decisive in the determination of the question,
which must ultimately depend on the facts of
the particular case, and the authorities bearing on the question are valuable only as indicating the matters that hav,e to be taken into
account in reaching a decision.
Vide,
Van
Den Berghs Ltd. v. Clark [(1935) 3 I.T.R.
(Engl. Cas.) 17]. That, however is
not to
say that the question is one of fact,
for
as
observed in Davies (H. M. Inspector of Taxes)
v. Shell Company of China Ltd. (1952) 22
l.T.R. (Suppl.) 1) 'these questions between capital and income, trading profit or no trading
profit, are questions which, though they may
depend no doubt to a very great extent on the
particular facts of each case, do involve a conclusion of law to be drawn from those facts'."
(t) [I9.l9] Supp. I S.C.R. no, II3.
Shah J,
1964
Kett/ewe// Bullen
and Co.
v.
C.l.T.
Shah J.
JOO
SUPREME COURT REPORTS
The interrelation of facts which have a bearing on the question propounded must therefore first be determined.
The
managing agency was not, except in the circumstances set
out in cl. 2 of the agreement, liable to be determined at the
instance of the company before January 14, 1957, unless
the appellant by giving notice of three weeks voluntarily
resigned the agency. At the date of termination the agency
had five more years to run, and the Campanies Act did not
prohibit renewal of the agency in favour of the appellant,
after the expiry of the initial period of twenty years.
The
appellant company was formed for the object, amongst
others, (vide cl. 3(2) of the Memorandum of Association
of the appellant) of carrying on the business of managing
agencies.
The appellant was entitled under the terms of
the agreement to receive so long as the agency enured ten
per cent of the profits of the company's working, three per
cent on all purchases of stores and machinery abroad, and
a monthly remuneration of Rs. 3,000. The appellant submitted its resignation in exercise of the power reserved under
cl. 8 of the managing agency agreement, but that resignation
was it is common ground part of the arrangement with Mis
Mugneeram Bangur & Co. dated May 21, 1952.
Under
the terms of the managing agency agreement, the principal
company was not obliged to pay any compensation to the
appellant for voluntary resignation of the agency, but in
consideration of the appellant parting with its shareholding
and submitting resignation of the managing agency so as
to facilitate the appointment of M/s Mugneeram Bangur
& Co. as managing agent, the latter purchased the shareholding of the appellant, undertook to make
available
Rs. 3,50,000 for payment to the appellant and to discharge
the debt due by the company to the appellant. Payment
of Rs. 3,50,000 was therefore an integral part of an arrangement for transfer of the managing agency. A managing
agency of a company is in the nature of a capital asset:
that is not denied. It is true that 'it is not like an ordinary
asset capable of being transferred from one person to
another.
Theoretically the power to appoint or dismiss
the managing agent may lie with the directors of the company, but in practice the power lies with the person or per-
8 S.C.R.
SUPREME COURT REPORTS
IOI
sons having a controlling interest in the share-holding of
1964
the company. M/s Mugneeram Bangur & Co. were anxious Kettlewell Bulltit
to be appointed managing agents of the principal company,
and Co.
v.
and for the purpose the appellant had to be persuaded to
CJ.T.
agree to a premature termination of its agency. This was
Shah 1.
secured for a triple consiqeration; sale of shares held by the
appellant at an agreed price, stipulation to discharge the
liability of the company to repay the loans due by the company, and payment of Rs. 3,50,000 as compensation for
termination of the appellant's agency.
The High Court summarised the effect of the agreement between the appellant and M/s Mugnecram Bangur
& Co. as follows:
The sum of Rs. 3,50,000 described as
compensation for loss of office of the managing agent was
part of the whole scheme incorporated in the agreement.
Each clause of the agreement was a consideration of the
other clauses and payment of compensation for the alleged
loss of office did not, being part of the total scheme, stand
by itelf.
Determination of the managing agency of the
appellant was not compulsory cessation of business: it was
a voluntary resignation for which under the agency agreement the appellant was not entitled to any compensation,
but by the device of procuring a purchaser the appellant was
doing "business of selling the managing agency and getting
a profit and value for it which it otherwise could not have
got".
The High Court stamped this transaction with the
nature and character of a "trading or a business deal",
be:cause in their view the managing agency of a companyan institution peculiar to Indian business conditions-which
r.reates a managing agent as an alter ego_ of the managed
company with authority to utilise the existing structure of
the company's organisation to carry on business, earn profits,
and in fact, virtually to trade in every possible sphere open
to the company, may be regarded as circulating capital,
where several managing agencies are conducted by an
m;sessee.
Therefore in the view of the High Court the
c:ompensation received for
surrendering the agency was
remuneration received on account of conducting the business, and was income. The judgment of the High Court
proceeded substantially upon the following two grounds:
I02
SUPREME COURT REPORTS
[rg64]
1964
«ani.wen Bullen
ond Co.
(1) that on the facts of the case, the
managing
agency held by the appellant of the Fort William Jute Co. Ltd. was stock-in-trade; and
v.
C.I.T.
Shah 1.
(2) that the appellant was formed with the object
of acquiring managing a¥encies, and in fact
held managing agencies of as many as six companies.
Earning profits by conducting the
management of companies, being the business
of the appellant, compensation received as consideration for surrendering the managing
agency was a revenue receipt.
We are unable to agree with the High Court that the
managing agency of the Fort William Jute Co. Ltd. was
an asset of the character of stock-in-trade of the company.
The appellant was formed with the object, among others, of
acquiring managing agencies of companies and to carry
on the business and to take part in the management, supervision or control of the business or operatiom of any other
company, association, firm or person and to make profit
out of it. That only authorised the appellant to acquire as
a fixed asset, if a managing agency may be so described,
and to exploit it for the purpose of profit. But there is no
evidence that the company was formed for the purpose of
acquiring and selling managing agencies and making profit
by those transactions of sale and purchase. A managing
agency is not an asset for which there is a market, for it
depends upon the personal qualifications of the agent. Counsel appearing on behalf of the Commissioner concedes that
the case that the managing agency was of the nature of
stock-in-trade was not set up before the Tribunal, and he
does not rely upon this part of the reasoning of the High
Court in support of the plea that the compensation received by the appellant is a revenue receipt. He relies upon the
alternative ground, and contends that the managing agency
of the Fort William Jute Co. Ltd. was part of the framework of the business of earning profit by working as managing agent of different companies, and in the normal course,
termination of employment by the principal companies of
the appellant as managing agent being a normal incident of
such business, compensation received by the appellant is
8 S.C.R
SUPREME COURT REPORTS
103
not for loss of capital, but must be regarded as a trading
1964
receipi, especially when the termination of the agency does Kettlewell Bullen
not impair the ~tructure of the business of the appellant.
and Co.
v.
In the present case there is a special circumstance
CJ.T.
which must first be noticed.
In truth the amount of
Shah J.
Rs. 3,50,000 was received by the
appellant from M/s
Mugneeram Bangur & Co. in consideration of the former
agreeing to forego the agency which it held and which M/s
Mugneeram Bangur & Co. were anxious to obtain. It was
in a business sense a sale of such rights as the appellant possessed in the agency to M/s Mugneeram Bangur & Co. This
is supported by the recitals made in cl. 2 of the agreement
that if a• any time within six months after the completion of
such sale, M/s Mugneeram Bangur & Co. were unable to
exercise the voting rights attached to the shares purchased
by them, the appellant will appoint any person nominated
by M/s Mugneeram Bangur & Co. to attend and vote for
them at any meeting of the company or the holders of any
class of shares to be held
within such period in such
manner as M/s. Mugneeram Bangur & Co. may decide. The
object underlying the agreement was therefore to transfer
the managing agency to M/s Mugnecram Bangur & Co. or
at least to effectuate their appointment in place of the appellant as managing agent of the Fort William Jute Co. Ltd.
All the stipulations and the covenants of the agreement,
viewed in the light of the surrounding circumstances, do
stamp the transaction as one of surrender of the rights
of the appellant in the managing agency so that corresponding rights may arise in favour Qf M/s. Mugneeram Bangur
& l ~o. It would be irrelevant in considering the true nature
of 1he transaction, to project the somewhat legalistic consideration that a managing agency is not transferable. It is
because it is not directly transferable, that the arrangemP.nt
incorporated in the agreement was effected.
It would be
difficult to regard such a transaction relating to a managing
agency as a trading transaction.
(;ounsel for the assessee contended that even assuming
that the form of the.transaction under which for Joss of the
managiilg agency the appellant received compensation from
the principal company is decisive, or has even a dominant
'
SUPREME COURT REPORTS
[rg64]
~
impact, and the ultimate source from which the compensaKe11/mel! Bul!en tion was provided is to be ignored, the compensation receivand Co.
ed for loss of agency by the agent must always be regarded
v.
C.l.T.
under the Indian Income-tax Act as capital receipt. In supShah 1.
port of that contention counsel placed strong reliance upon
the judgment of the Judicial Committee in Commissioner
of Income-tax v. Shaw Wallace and Co.('). In the alternative, counsel pleaded that even if the extreme proposition
was not found acceptable, the right of the assessee in the
managing agency of the principal company was to enure
fur another five years and which in the normal course would
have continued for another twenty years was an enduring
asset and consideration received by the appellant for extinc
tion of that asset was a capital receipt.
On behalf of the Income-tax Department it was contended that Shaw Wallace & Co's case (1) does not lay down
any proposition of general application to compensation paid
for determination of all agency contracts.
It was further
submitted that, having regard to the nature of the agreement and the voluntary resignation submitted by the assessee,
no enduring asset remained vested in the assessee, and none
was attempted to be transferred: the compensation directly
paid by the principal company (which compensation was
under the terms of the contract not payable) was only a
"measure of profit" which the appellant wonld, but for the
resignation, have earned, and was therefore in the nature of
revenue. It was also urged that compensation was not payable to the assessee when resignation of the managing agency
was tendered under cl. 8 of the agreement, and therefore the
amount sought to be brought to tax was received by the
assessee in the course of a normal trading transaction of the
assessee.
Finally, it was urged that in any event, by the
loss of the agency the framework of the business of the
assessee was not at all impaired, and therefore also the compensation received must be regarded as revenue and not
capital.
Whether a particular receipt is capital or income from
business, has frequently engaged the attention of the courts.
It may be broad,Iy stated that what is received for Joss of capi-
(1) L. R. 59 I. A. 206
8 S.C.R
SUPREME COURT REPOI<TS
105
ta! is a capital receipt: what is received as profit in trading
~964
transaction is taxable income.
But the difficulty arises in Ke111ewTi Bullen
ascertaining whether what is received in a given case is
and Co.
v.
compensation for loss of a source of income, or profit in a
CJ.T.
trading transaction.
Cases on the borderline give rise to
vexing problems.
The Act contains no real definition of
income; indeed it is a term not capable of a definition in
terms of a general formula.
Section 2(6C) catalogues
broadly certain categories of receipts which are included in
income. It need hardly be said that the form in which the
transaction which gives rise to income is clothed and the
name whirh is given to it are irrelevant in assessing the
exigibility of receipt· arising from a transaction to tax. It
is again not predicated that the income must necessarily
have a recurrent quality.
We are not called upon to enter
upon an extensive area of enquiry as to what receipts may
be regarded as income generally, but merelv to consider in
this case whether receipt of compensation for surrendering
the managing agency may be
regarded as capital or as
revenue. In the absence. of a statutory rule, payment made
by an employer in consideration of the employee releasing
him from his obligations under a service or agency agreement
or a payment made voluntarily as compensation for determination of right to office arises not out of employment, but
from cessation of employment and may not generally constitute income chargeable under ss. 10 and 12. It may be
mentioned that this rule has been altered by the Legislature
by the enactment of s. 10(5A) by the Pinnace Act of 1955,
which provides that compensation or other payment due to
or received by a managing agent of an Indian company
at or in connection with the termination or modification of
his managing agency agreement with the company, or by
a manager of an Indian company at or in connection w!th
the termination of his office or modification of the terms
and conditions relating thereto, or by any person managing
the whole or substantially the whole affairs of any other
company in ·the taxable territories at or in connection with
the termination of his office or the modification of the terms
and conditions relating thereto, or by any person holding
an agency in the taxable territories for any part
of the
Sha~ ).
1o6
SUPREME COURT REPORTS
1964
activities relating to the business of any other person, at or
Kettlewell Bullen in connection with the termination of his agency or the
and Co.
modification of the terms and conditions relating thereto,
CJ.T.
shall be deemed to be profits and gains of a business carried
Shah /.
on by the managing agent, manager or other person, as
the case may be, and shall be liable to tax accordingly. But
this amendment was made under the Finance Act,, 1955,
with effect from April 1, 1955, and has no application to
the present case.
-The Indian Income-tax Act is not in pari materia with
the English Income-tax Statutes. But the authorities under
the English Law which deal not with the interpretation of
any specific provision, but on the concept of income, may
not be regarded as proceeding upon any special principles
peculiar to the English Acts' so as to render them inapplicable in considering problems arising under the Indian
Income-tax Act.
It is well-settled in England that money
paid to compensate for Joss caused to an assessee's trade
is normally regarded as income.
In Short Bros. Ltd. v.
The Commissioner of Inland Revenue(') a sum received as
compensation for loss resulting from cancellation of a contract was held to be revenue in the ordinary course of the
assessee's trade, and liable to excess profits duty. Similarly
in The Commissioners of Inland Revenue v. The North
fleet Coal and Ballast Co. Ltd. (2), compensation paid by
a person who had agreed to purchase a certain quantity
of chalk yearly for ten years, from a company which was
the owner of a quarry, in consideration of being relieved
of his liability under the contract was held chargeable to
excess profits duty as trading profit in the hands of the
company.
In The Commissioners of Inland Revenue v. Newcastle
Breweries Ltd.(') compensation received under an order of
the War Compensation Court, under the Indemnity Act,
1920, in addition to what was paid by the Admiralty for
rum taken over in exercise of the power under the Defence
of the Realm Regulations was held to be revenue.
(t) i2 T. C. 955
(3) 12 T. c. 927
(2) 12 T. c. noz
8 S.C.R
SUPREME COURT REPORTS
107
In Ensign Shipping Co. Ltd. v; The Commissioner of
1964
Inland Revenue(') an amount paid by the Government to Kettlew;;;: Bullen
a ship-owner to compensate him for loss resulting from
and Co.
detention of his ships during a coal-strike, and for wages
CJ.T.
etc. was held liable to excess profits duty. Again as held in
Burma Steam Ship Co. Ltd. v. Commissioners of Inland
Revenue(') money received by a ship-owner from a firm of
ship-builders to compensate for loss resulting from the
failure by the latter to complete repairs to a ship within the
stipulated period was regarded as revenue.
These cases illustrate the principle that compensation
for injury to tradin~ operations, arising from breach of
contract or in consequence of exercise of sovereign rights,
is revenue.
These cases must, however, be distinguishe<I
from another class of cases where compensation is paid as
a solatium for loss of office. Such compensation may be
regarded as capital or revenue: it would be regarded as
capital, if it is for loss of an asset of enduring value to the
assessee, but not where payment is received in settlement
of loss in a trading transaction.
In Chibbet v. Joseph Robinson & Sons(') the assessees
who were ship-managers employed by a steamship company under a contract which provided that they should
be paid a percentage of the company's income, were paid
""
compensation ·for loss of office in anticipation of liquidation of tjie steamship company. It was held that payment
to make up for loss resulting from cessation of profits from
employment was not itself an annual profit, but was payment in respect of termination of employment and was not
assessable to tax.
In Du Cros v. Ryall(') the assessee settled a claim
made by his employee for damages for wrongful dismissal
and paid £ 57 ,250 as compensation for wrongful dimissal.
It was held that no part could be apportioned to salary
and commission and the whole escaped assessment.
In Duff v. Barlow(") the managing director of the
appellant company who was employed for a period of ten
(1) 12 T. C. n69.
(3) 9 T. C. 48,
(2) 16 T. C. 67.
(4) 19 T. C. 444,
(5) 23 T. C. 633,
Slrllh J.
1964 -
Kett/ewe/! Bullen
Olld Co.
v.
C.I.T.
Sllah J.
108
SUPREME COURT REPORTS
years was asked by it to manage the business of one of its
subsidiaries, and to receive a percentage of profits made
by fue subsidiary.
tThe employment was terminared by
mutual agreement two years after its commencement and
£ 4,000 were paid as compensation to the managing director for loss of his rights of future remuneration. This was
held not taxable_. because it was a sum paid as compensation
for loss of a source of income and hence a capital asset.
This case was followed in Henley v. Murray(') where the
apellant employed as a managing director of a property
company under a service agreement which was not determinable till March 31, 1944, was also appointed a director
of a subsidiary company. At the request of the Board of
directors of the property company the appellant resigned
his office in the property company as well as its subsidiary
and received from the property company an amount equal
to the remuneration \\hich he would, under the agreement,
have been entitled to, if his appointment had not been determined. It was held by the Court of Appeal tpat the use of
the expression "compensation for loss of office'' was not
the determining factor when the bargain itself stood cancelled, and the sum paid was in consideration
of total
abandonment of all contractual rights which the other party
had.
The receipt was in the circumstances not taxable.
The payment was not voluntarily made; the bargain was
that the appellant should resign and in consideration thereof,
the company should make the payment.
In Barr, Crombie and Co. Ltd. v. Commissioners of
Inland Revenue(') the appellant company managed the
ships of another company under an agreement for a period
of fifteen years. The shipping company went into liquidation and a sum exceeding£ 16,000 was paid to the appellant
company for the eight years which were still to run to
the date of expiry of the agreement. Over a period upwards
of sixteen years only two per cent of the appellant company's income was derived from other managements, and
on the liquidation of the shipping company the appellant
company lost its entire business except for some abnormal
and temporary business. It was held by the Court of Ses-
(I) jI T. c. 351
(2) 26 T. C. 406
•
8 S.C.R.
SUPREME COURT REPORTS
109
sion in Scotland that the sum in question was not a trading
1964
~
receipt of the appellant company.
Lord .President Nor- Kettl.l\ven Bullen
mand observed:
and Co.
"In the present case virtually the whole assets of
the Appellant Company consisted in this agreement.
When the agreement was surrendered
or abandoned practically nothing remained of
the Company's business.
It was
forced to
reduce its staff and to transfer into other premises, and it really started a new trading life.
Its trading existence as practised up to that
time had ceased with the liquidation of the
shipping Company."
These cases establish the distinction between compensation for loss of a trading contract and solatium for loss
of the source of income of the assessee.
But payment of compensation for loss of .office is not
always regarded as capital receipt.
Where compensation
is payable under the terms of the contract, which is determined, payment is in the nature of revenue and therefore
taxable.
For instance in Henry v. Foster(') it was held
that when compensation stipulated under a contract is paid
for loss of office, it is taxable under Sch. 'E', and it was
also held in Dale v. De Soissons( 2 ) that compensation
paid under an agreement to an Assistant of the managing
director for premature termination of !employment was hela
to be income.
The principle on which these cases proceeded was also applied by the Court of Session in Scotland in Kessal Parsons and Co. v. Commissioners of Inland
Revenue(') to a case in which there was no express term
for paymem of compensation on termination of employment.
The appellants in that case carried on business as
agents on a commission basis for sale .in Scotland of the
products of various manufacturers, and entered into agency
agreements for that purpose. At the instance of the manufacturer concerned, one of the agreements which was for
a period of three years was terminated at the end of the
(I) (1931) 145 L. T. R. 225
(3) 21 T. C. 608, 520
(2) [1950]
2 All E. R 460
v.
C.l.T.
ShlJh /.
IIO
SUPREME COURT REPORTS
~
second year in consideration of a payment of£ 1,500. It
K•ttllwel! Bullen was heid by the Court of Session that no capital asset
and Ca.
of the assessee was depreciated in value, or became of less
v.
C.I.T.
use for the purpose of the assessee's business.
The sum
Shale 1•
paid was accordingly included in the calculation of the
taxable profits for the year in which it was received. Lord
President Normand Observed.
"We are not embarrassed here by ihc kind of difficulties which
arise when,
by agreement,
a
benefit extending over a tract of future years
is renounced for a payment made once and
for all.
The sum paid in this case fa really
and substantially a surrogatum for 0;1e year's
profits."
The foundation of the distinction made in Ke/sail Parsons
and Co.'s case('): Henry v. Foster( 2 ): and Dale v.
De Soissons( 3 ) is to be found in the observations made
by Lord Macmillan in Van Den Berchs Ltd. v. Clark(').
In that case two companies which were manufacturers of
margarine and similar products entered into an agreement
with a view to end competition between them and to work
in friendly alliance and to share the profits and losses in
accordance with an elaborate scheme.
This arrangement
was terminated by mutual agreement in consideration of
the payment by the Dutch company £450,000 to the appellant company as damages.
Jt was held by the House of
Lords that the amount was received by the appellant as
payment for cancellation of the appellant company's future
rights under the agreements, which constituted a capital
asset of the company, and that it was a cnpital receipt.
ford Macmillan observed.
"Now what were the Appellants giving up?
They
gave up their whole rights under the agreements for thirteen years ahead.
These agreements are called in the States Case "pooling
agreements", but that is a very inadequate description of them, for they did much more than
(l) 21 T.C. 6o8, 620
(3) [195012 All E.R. 46o
(2) [1931] 145 L.T.R. 225
(4) 19 T. C.