Commissioner of Taxes, Dhaka Vs. M/S. Macneil & Kilburn Ltd., 39 DLR (AD) (1987) 68

Case No: Civil Appeal No. 15 of 1983

Judge: Badrul Haider Chowdhury,

Court: Appellate Division ,,

Advocate: Mr. Habibul Islam Bhuyan,,

Citation: 39 DLR (AD) (1987) 68

Appellant: Commissioner of Taxes

Respondent: M/S. Macneil & Kilburn Ltd.

Subject: Income Tax, Fiscal Law,

Delivery Date: 1986-8-3

 
Supreme Court
Appellate Division
(Civil)
 
Present:
F.K.M.A.Munim CJ
Badrul Haider Chowdhury J
Shahabuddin Ahmed J
M.H. Rah­man J
A.T.M. Afzal J
 
Commissioner of Taxes, Dhaka (East Zone), Dhaka
.................... Appellant
Vs
M/S. Macneil & Kilburn Ltd., Adamjee Court, Dhaka
....................Respondent
 
Judgment
August 3, 1986.
 
Income Tax Act (XI of 1922)
Section 12
In determining whether the particular receipt is a capital receipt or revenue receipt the nature of the transaction has to be ascertained. If it is a remuneration of the assessee it is a revenue receipt.… (11)
 
Cases Referred To-
AIR 1932 (PC) 138: C.I.T Vs. K Rahman & Co. Ltd 1980 B.T.D. 242: C.I.T. vs. Vizir Sultan & Son 36.I.T.R. Goderaj Co vs. C.I.T. 37 I.T.R. 381; Karam Chand Tahapar and Bros. P. Ltd. vs. C.I.T. 80 ITR. (SC) 167 A.I.R. 1932 138 (P.C.) C.I.T Vs. K Rahman Co. Ltd. 1980 B.T D. 242; C.I.T. vs. Vazir Sultan & Sons 36 I.T.R. 174; Kelsall Parsons Co Vs. I. R. 21 TC 608; Barr, Crombie & Co. Ltd., Vs. IR 15 ITR 56; CIT vs. South India Pictures Ltd. 29 ITR 910; Hari Kailash vs. CIT 22 ITR 195, AIR 1953 ALL 170; Kettlewell Bullen Vs. C.I.T. AIR 1965 S.C. 65; C.I.T. Vs. Chari & Chari Ltd. AIR 1966 S.C. 34; Karam Chand Thapra 80 I.T.R. 167.
 
Lawyers Involved:
Habibul Islam Bhuiyan, Advocate, instruc­ted by Md. Sajjadul Huq, Advocate-on-Record— For the Appellant.
Exparte —For Respondent.
 
Civil Appeal No. 15 of 1983
(From the judgment and order dated 11th January 1984 passed by the High Court Division Dhaka Bench, in Application No. 24 of 1983.)
 
JUDGMENT
Badrul Haider Chowdhury J.
 
1. This appeal by special leave is directed against tae judg­ment and order passed by the Division Bench of the High Court Division, Dhaka, in Appli­cation No. 24 of 1983.
 
2. Leave was granted to consider the question whether the amount received by the respondent assessee on account of termination of the agency was a capital receipt or a revenue receipt.
 
3. The assessee claimed that the amount of Tk. 1, 50,000/- was compensation paid by the Pakistan River Service Ltd., for premature termination of secretaryship agreement which was executed between the assessee and B.R.S. Ltd., for 10 years commencing from 1961, which, however, was terminated during the accounting year 1967.
 
4. The assessee's contention was repelled by the Income Tax Officer, who treated the receipt as revenue receipt and disallowed the claim of the respondent. Appeal before the Appellate Joins Commissioner of Taxes was dismissed. The assessee further appealed be­fore the Income Tax Appellate Tribunal which was also dismissed.
 
5. In the proceeding under section 66(1) of the Income Tax Act the following question was considered by the High Court Division:
 
"Whether in the facts and circumsta­nces of the case, the Tribunal was legally justified in holding that the receipts of Tk. 1, 50,000/-as compensation was revenue receipt and not capital receipt."
 
6. The High Court Division took the view that "by the termination there was a com­plete stoppage of business so far as the age­ncy of Bangladesh River Steamers Ltd., was concerned." and in this view of the matter, it was held that the receipt of Tk. 1,50,000/00 was capital receipt and it was not liable to tax.
 
7. Mr. Habibul Islam Bhuiyan. learned Counsel, appearing for the appellant, in a painstaking manner placed before us the fin­dings of the Income Tax Tribunal on Clause 5 of the agreement which reads as  under :—
 
"The Secretaries shall be entitled to receive from the company as remune­ration for their services as secretaries and treasurers a commission at the rate of 10% on the net profits of the company as defined in section 87C of the Companies Act, 1913 for each year during which this agreement continues provided that if 10% of the not profits of any year is less than Rs. 1,30.000/00 that the remuneration payable for that year shall be the said sum of Rs. 1,50.000/-."
 
The agreement was terminated during the accounting year, 1967. It was held by the Tri­bunal that this sum was received as remunera­tion in the normal course of the business as per clause 5 of the agreement date 31-12-60.
 
8. In a well-considered judgment the In­come Tax Appellate Tribunal noticed that the loss of Secretaryship did not affect the income earning apparatus of the com­pany at all. It appears from the Income Tax return that the business of company did not suffer any setback due to the cancellation of the contract and it had "practically no impact on the trading capacity of the appellant com­pany." It was noticed that during the year 1967 (when the agency was terminated) the income of the assessee was Tk. 7,94,320/-while after termination of contract, the Income of the company went up to Tk. 12,77,464/ (in 1963).The Tribunal further noticed the following features:
 
"(i) the Secretaryship of PRS Ltd. is not the only job of this nature managed by the assessee
(ii) it is the agent of R.S. & I.G.N. & Railway Co. Ltd. Pakistan Tyre, Kara­chi, Nick Ltd.
(iii) it is the agent of three insurance comp­anies;
(iv) it is the manufacturer of Tarpolin,
(v) handler of coal to Pakistan Tea Association;
(vi) Supplier of Limestone to Assam Bengal Cement Factory and Karnafully Paper Mills.
(vii) Servicing Tea Garden Machineries.
 
In this view it was concluded:
  1. Loss of Secretaryship did not affect the income earning apparatus,
  2. termination was in course of normal bu­siness,
  3. Procurement of the agency was a trading asset and hence termination thereof had no impact on the trading capacity. 
In view of the above fact and circumstances, the view was taken that the Deputy Commissioner of Taxes was fully justified in trea­ting it as revenue receipt and thereby dis­allowed the claim of deduction.
 
9. The learned Judges of the High Court Division without traversing findings of the Tribunal dealt with the point whether the amount was compensation having the nature of cap­ital receipt considered the number of rulings namely, Shaw Wallace case reported in AIR 1932 (PC) 138: C.I.T Vs. K Rahman & Co. Ltd 1980 B.T.D. 242: C.I.T. vs. Vizir Sultan & Son 36.I.T.R. Goderaj Co vs. C.I.T. 37 I.T.R. 381; Karam Chand Tahapar and Bros. P. Ltd. vs. C.I.T. 80 ITR. (SC) 167. The High Court Division concluded: "on consi­deration of the agency agreement for pavement of compensation particularly clause 5 of the Agreement, we hold that this amount that has been received by this assessee on account of termination of the agency was compensation paid for the loss of the agency and as such in our opinion it is a capital receipt and not revenue receipt and as such not liable to be taxed." It was further considered that by termination of the agency the assessee has lost its revenue earning source and ''it has destroyed the structure of agency business with P.R.S now Bangladesh River Steamer Ltd. By the termination there was a complete stopp­age of bushiest so far as the agency of Bangla­desh River Steamers Ltd. was concerned."
 
10. Income is a word of broadest conno­tation and it is not easy to decide whether the particular payment is to be regarded as his capital receipt. The character of the payment varied according to the circumstance, for in­stance, the amount received as consideration for the sale of a plot of land may ordinarily he capital receipt but if the business of the recipient is to buy and sell land it may well be his income.
 
11. In determining whether the particular receipt is a capital receipt or revenue receipt the nature of the transaction has to be ascer­tained. It is unfortunate that the High Court Division did not consider Clause 5 in its correct perspective. It has been quoted above and a plain leading of it shows that it was clear remuneration of the assessee for the year in question. Fit is a remuneration of the assessee then it is a revenue receipt. The learned Judges however overlooked that the income of the assessee went up to a much higher figure in the following year. Hence it could not be said by any stretch of imagination that the termination of the agency in question had resulted "in the destruction of the profit-making stru­ctures of the assessee” the Income Tax Dep­artment had admirably set out the facts which show that the business of the company was not affected. The conclusion of the learned Judges that it destroyed the structures of the business is unfounded.
 
12. The High Court Division relied hea­vily on Shah Wallace case A.I.R. 1932 138 (P.C.). The facts of that case was that the assessee's agency business terminated and the amount was given "as full compensation for cessation of agency" and the other company, namely, Anglo-Persian company paid the asse­ssee another sum as compensation "for the loss of your office as an agency to the Company." It is well settled that a case law is to be un­derstood in the light of the facts of the given case. The Privy Council in that decision pointedly referred "once it is admitted that they were sums received not for carrying on this business but as some sort of solatium for its compulsory cessation the answer seem fairly plain". But it is not the position in Clause 5 which has been quoted above. Not a word was said that the amount had been given as com­pensation It talks of remuneration" which shall be "the said turn of Rs. 1, 50,000/-" Shah Wallace case has no manner of application in the facts of this case, nor the case of C.I.T Vs. K Rahman Co Ltd, 1980 B.T D. 242, In that case the assessee received the amount from gramophone company on account of the termination of a contract for sole distributor­ship for sale of gramophone records. It was held that it was not a revenue receipt.
 
13. In C.I.T. vs. Vazir Sultan & Sons 36 I.T.R. 174 the Supreme Court of India con­sidered the question of termination of the agency business of the assessee. In that case the assessee was appointed as sole selling agent and sole distributors for the cigarettes man­ufactured by the company in Hyderabad State. That was the agreement in 1913. In 1939 the assessee was given discount for goods sold outside the Hyderabad State In 1950, how­ever, the company reverted to the old arra­ngement confirming the sole agency of the assessee to the Hyderabad State only. It, however, paid a sum of Rs. 2,19,343/- (by way of compensation) for the loss of the agency for the territory outside the Hyderabad Stats. The question was whether the sum received by the assessee was revenue receipt or capital receipt. It was held that the agency business was a capital asset of the assessee, which was exploited by entering into contracts with vari­ous customers and dealers in the respective territories. It formed part of the fixed capital of the assessee's business and it was not cir­culating capital or stock-in-trade of their business, Hence the payment made by the company as and by way of compensation for terminating or cancelling the agreement was a capital receipt in the hands of the asses­ses.
 
14. Though it is not safe to seek guidance from English jurisdiction as the Privy Council pointed out that the Indian. Act is not in pari materia with the English Act yet a clue can be taken as to how the Judicial thinking crystalise in the given set of facts so as to come to a conclusion as to the nature of the receipt whether capital or revenue. There are two cases of premature termination of the agency agreements which may me noticed.
 
15. In Kelsall Parsons Co Vs. I. R. 21 TC 608 the assessee carried on business as selling agent of various manufacturers  and entered into about dozen agency agreements for that purpose. One of the agreements, which was for the period of 3 years was terminated at the end of the second year by manufacturer concerned upon the payment to the assessee of £ 1,500 as compensation. It was held to be a revenue receipt. The view was taken that the assessee was a selling agent and that was his profit making enterprise. The agreement in question had only a year more to run and though the sum called compensation was "really and substantially surrogatum for one year's profits."
 
It will be at once noticed that by Clause 5 the remuneration payable was fixed and minimum was assured at depending upon profits but "then the remuneration will be Tk. 1,50,000/-".
 
16. In Barr, Crombie & Co. Ltd., Vs. IR 15 ITR 56 the assessee company acted as the ship managers of a shipping company, it was agreed that if the shipping company went into liquidation the remuneration of the assessee company of the unexpired period of the agreement which was to last op to 1951 would be­come immediately due. In 1942 the company went into liquidation and paid the assessee £16,306 under the agreement. It was held that it was clearly compensation for cessation of business of the assessee company which came practically to a standstill upon the liquidation of the Company. It was held that it was a capital sum being the price of the extinction of the assessee’s only important capital asset.
 
17. In CIT vs. South India Pictures Ltd, 29 ITR 910 the lease was terminated in 1950 although It was granted in 1941 for a period of 15 years, the termination radically affected and altered framework and whole structures of the company's business, inasmuch as, it put to end to the lease from which the company was deriving its income. That was the only source of income. It was held that it was not revenue receipt.
 
18. In Hari Kailash vs. CIT 22 ITR 195, AIR 1953 ALL 170 the dictum of Lord Moncrieff was considered where two classes of eases of compensation paid for termination was considered:
(i) a contract may be made by a trader, which is merely directed to a result of any trading profits being made;
(ii) a contract may be made by a trader, which is directed to regulate the condi­tions under which he is to carry on trade.
In the first class of cases, if the contract ii terminated and compensation is received, it might be treated as trading compensation. Hence revenue receipt. In a second class of cases, compensation received for the termina­tion of a business cannot be treated as trading profits as it was paid for their termination of the trade or business itself. This is capital receipt.
 
It is always difficult to say one way or the other as to the nature of the receipt on such vexed question whether such receipt is capital or revenue which has troubled various courts.
 
19. The Indian Supreme Court in Kettlewell Bullen Vs. C.I.T. AIR 1965 S.C. 65 consi­dered that the amount received by the assessee for surrendering his managing agency was not revenue receipt, inasmuch as, it was paid to compensate it for loss of a capital asset. In C.I.T. Vs. Chari & Chari Ltd. AIR 1966 S.C. 34 it was observed that it was for the revenue to establish that a particular receipt was In­come liable to tax Ordinarily compensation for loss of office or agency is regarded as a capital receipt but the rule is subject to an exception that payment recei­ved even for termination of agreement, where the agency in one of the many which the assessee holds and termination does not impair the profit-making structure of the assessee, but is within the framework of the business. It being a necessary incident of business that existing agencies may be ter­minated and fresh agencies may be taken, then it is revenue and not capital. This test was applied in the case Karam Chand Thapra 80 I.T.R. 167 to come to the conclusion that the amount received by the assessee was capi­tal receipt. In that case the Revenue failed to prove their case that the assessee received the amount as revenue.
 
In view of the above decisions it can be deduced:
  1. that the substance of the transaction is to be ascertained;
  2. if the agreement cancelled related only to some of the transaction carried on in the ordinary course of business of the assessee then the money received will be a revenue receipt;
  3. if the cancelled agreement was one of which the whole trade of the assessee had for all practical purposes been built, the cancellation of the agreement would mean the termination of the assessee’s business itself. Hence the compensation paid it capital receipt; and
  4. If the cancellation radically affected or altered the frame work or whole structure of the assessee’s business the compensa­tion paid will be capital receipt. 
20. Analysing the fact of the present case. It has been noticed that the assessee had many other businesses apart from agency business and out of many agency businesses again the one only the PRS had been prematurely determin­ed. In other words, the assessee is a business house; it is also a manufacturer; it has a trad­ing business as suppliers and it also acts as commission agent for various other concerns .The assessee received Tk. 1, 50,000/- as per Clause 5 of the agreement, which was terminated in 1967. But it has not brought the assessee business practically to a standstill nor that it destroyed the profit earning apparatus of the assessee. On the other hand, its income went up in the following year. The assessee has lost only one commission agency in course of its usual business. That will not be a capital rec­eipt. It will be a revenue receipt. This feat­ure was overlooked unfortunately by the High Court Division. On the fact, the law was correctly applied by the Income Tax Appellate Tribunal.
 
In the result, therefore, this appeal is allowed. The judgment and order of the High Court Division is set aside and that of the Tribunal is restored. There will be no order as to costs
 
Ed.