COMMISSIONER OF INCOME TAX, MADRAS versus MESSRS. BEST & CO.

Citation: [1966] 2 S.C.R. 480 · Decided: 02-11-1965 · Supreme Court of India · Bench: K. SUBBA RAO · Disposal: Case Partly allowed

Cited by 1 judgment(s) · cites 3 · see the full citation network in Lexace

Judgment (excerpt)

COMMISSIONER OF INCOME TAX, MADRAS 
A 
v. 
MESSRS. BEST & CO. 
November 2, 1965 
[K. SUBBA RAO, J. C. SHAH AND S. M. S!KRI, JJ.] 
Income-tax Act (11 of 1922), s. 10-Assessee a 11111/ti-agency con-
cern-One of the agencies ter1ninated lVith a restrictive covenant not to 
carry on business-Co111pensation, lvhether capital or. revenue receipt. 
The respondent was a multi-agency concern. 
The principal of one 
of the agencies tern1inated that agency and paid the respondent certain 
amounts. 
When the amounts were sought to be assessed to income·tax, 
the respondent objected on the ground that the amounts represented only 
compensation received for termination 
of the 
agency business and 
as 
consideration for the restrictive covenant not to do business in the same 
line for a prescribed period. 
The Income-tax Officer, 
the Appellate 
Assistant Commissioner and the Appellate Tribunal held against the res-
pondent, but the High Court on a reference, held that by the termination of 
the agency, the respondent lost an earning asset and that the compensa• 
tion paid for the destruction of such an asset was a capital receipt not 
liable to tax. 
In appeal to this Court, 
HELD : While the income-tax authorities have to gather the relevant 
material to establish that the compensation 
given 
for the loss of the 
age:ncy was a taxable income, 
an adverse 
inference could 
be dra\\'n 
against the assessec if he had not produced evidence 
which was in his 
exclusive knowledge and keeping. The respondent 
gave up one of its 
innumerable agencies in different lines without any protest 
presumably 
because it was in the normal course of ils business, and continued to do 
business without any mishap. It did not place any material before the 
Department to establish the relative importance of the said agency in the 
frame work of tho earning apparatus of its business. 
The loss of the 
agency would therefore only be a normal trading loss, and the amount 
of compensation attributable to it would be a revenue receipt assessable 
under s. 10 of the Income-tax Act, 1922. [486 H; 487 A, C; 488 B-C] 
The restrictive covenant was one of the terms of the agreement re-
lating to consideration, and therefore the compensation paid, \Vas not only 
in lieu of the giving up of the agency but also for the respondent accept-
ing a restrictive covenant for a specific period. 
Since the covenant was 
an independent obligation which came into 
operation only 
after 
the 
agency was terminated and was wholly unconnected with it, that part 
of the compensation attributable to the restrictive covenant was a capi-
tal receipt not assessable to tax. [491 B, C, H; 492 Al 
Gillandars Arbuthnot & Co. Ltd. v. Conunissioner 
of 
lnco1ne-tax, 
Calcutta, [1964] 8 S.C.R. 121 and Commissioner of Income-tax Madra.v 
v. Chari and Chari [1965] 3 S.C.R. 692, followed. 
' 
B 
c 
D 
E 
F 
G 
The apportionment of the con1pcnsation has to be made on a reason-
H 
able basis between the loss of the agency in the usual course of business 
~nd the restrictive covenant by the assessing authority. The compensa-
tion was severable and any difficulty in apportionment 
cannot 
be 
a 
C.l.T. v. BEST & co. (Subba Rao, J.) 
481 
A 
g_round for rejecting the claim by the revenue and the assessee for appor-
uonment. [492 B-D] 
Wales (H. M. Inspector of Taxes) v. Tilley, (1942) 25 T.C. 136 
Carter v. Wadman (H. M. Inspector of Taxes) (1946) 28 T.C. 41 and 
T. Sadasivam v. Commissioner of Income-tax, (1954) 28 I.T.R. 435, re-
ferred to, 
B 
CIVIL APPELLATE JURISDICTION:, Civil Appeals Nos. 682 and 
, 
683 of 1964. 
n 
G 
H 
Appeals from the judgment and order dated July 24, 1961 
of the Madras High Court in Case Referred No. 29 of 1957. 
A. V. Viswanatha Sastri, R. Ganapathy Iyer, R. H. Dhebar 
and R. N. Sachthey, for the appellant. 
K. N. Rajagopa/a Sastri, G. C. Sanghi, B. R. Narwa/a and 
H. K. Puri, for the respondent. 
The Judgment of the Court was delivered by 
Sobba Rao, J. 
Messrs. Best & Co., Ltd., Madras, the respon-
dent herein, hereinafter called the ,Agency Company, is a private 
limited company carrying on business in innumerable lines. 
It 
is doing the business of importers, exporters, agents 
and sub-
agents of various shipping, insurance, and manufacturing com-
panies, in the course of which it acquired numerous agencies from 
manufacturers both in India 
and outside for sale in India of 
textiles, dairy products, engineering equipments, soaps, paints, 
toilet goods, etc. 

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