Madras H.C : The payment of Rs. 3,40,000 to the assessee made by the English company could not be regarded as a capital receipt but was income taxable for the asst. yr. 1971-72 ?

Counsel Appeared

Subbaraya Aiyar, Padmanabhan & Ramamani, for the Assessee : C.V. Rajan, for the Revenue.

SRINIVASAN, J.:

In this tax case, the Tribunal has made a reference to this Court for the opinion of this Court. The assessee is a public limited company carrying on business as exporters of tea and shipping insurance agents. The assessee entered into an agreement on 1st Nov., 1968, with the Estates & Agency Co. Ltd., London, England, which owns four estates in Coonoor. The agreement is appended as Annexure A to the statement of the case. Clause (1) of the agreement reads that the assessee is appointed as sole agent of the English company in India in regard to the management of the estates named therein. Clause (3) of the agreement states that in consideration of the services rendered by the agents under the agreement, the agents shall be paid by the company in respect of each financial year the remuneration specified therein. Clause (4) of the agreement provides that the board of directors of the English company shall decide all questions of policy and the agents shall manage the business in India subject to such decisions taken by the board. Clause (7) of the agreement provides that all moneys received by the agents from sales of produce or otherwise for the account of the company shall be paid into the company’s account with the National & Grindlays Bank Ltd., Madras. Clause (8) states that the principal place of business of the agents shall be situated at Coonoor. Clause (10) relates to the expenditure that would be incurred by the agents in the management of the estates. A procedure is prescribed by cl. (10) for preparation of proposals and sanction of the same by the board. It is not necessary to refer to the other clauses in the agreement.

The agency was terminated by the English company in 1970-71 and after some negotiations between the assessee and the English company, it was agreed that a sum of Rs. 3,40,000 should be paid by way of compensation to the assessee. The payments were made in three instalments, Rs. 1,50,000 in July, 1970, Rs. 1,15,000 in August, 1970, and Rs. 1,15,000 in September, 1970. The total of Rs. 3,80,000 included a sum of Rs. 40,000 paid as consultation fee. In the asst. yr. 1971-72, the ITO included the sum of Rs. 3,40,000 in the assessment of the assessee under s. 28 (ii)(b) of the IT Act, 1961. The assessee claimed that it was a capital receipt and, therefore, it was not liable to be included in the assessment under that section. That contention was negatived by the ITO. On appeal, the AAC took the view that the amount would fall under s. 28(ii)(c) of the Act, and, therefore, liable to be included in the assessment. The AAC held that s. 28(ii)(b) would not come into play.

On appeal, the Tribunal took the view that the amount would fall under both the sub-cls. (b) and (c) of s. 28(ii) of the Act and confirmed the orders of the authorities below.

4. Thereafter, the assessee prayed for a reference and the Tribunal referred the following question of law for the consideration of this Court :

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the payment of Rs. 3,40,000 to the assessee made by the English company could not be regarded as a capital receipt but was income taxable for the asst. yr. 1971-72 ?”

5. From the terms of the agreement referred to already, it is clear that this is a contract of agency and the amount received by the assessee was compensation for the termination of the agency. Sec. 28(ii)(c) of the IT Act reads thus : “(c) any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person at or in connection with the termination of the agency or the modification of the terms and conditions relating thereto;”

There can be no doubt that the amount in question will fall under sub-cl. (c) of s. 28(ii). Learned counsel for the assessee contends that sub-cl. (c) would come into play only when the agency relates to the business of a person and that such person should be a living person. According to him, in the present case, the agency relates to the business of a company in England and it could not be a person within the meaning of the section. This contention has to be stated only to be rejected. The definition of “person” in the IT Act is found in s. 2(31). It is seen that a person includes a company. Hence, the contention of learned counsel for the assessee has to be rejected.

In view of the fact that the amount will fall under sub-cl. (c) of s. 28(ii) of the Act, it is not necessary for us to consider whether it would fall under s. 28(ii)(b) of the Act. The question whether the assessee was managing wholly or substantially the affairs of any other company as required by sub-cl. (b) of s. 28(ii) of the Act does not arise as we are not considering the applicability of s. 28(ii)(b) of the Act.

In the result, the question referred to this Court is answered in the affirmative and against the assessee. The assessee will pay the costs of the Revenue. Counsel’s fee Rs. 500.

[Citation : 171 ITR 359]