P. H. DIVECHA AND ANOTHER versus COMMISSIONER OF INCOME-TAX, BOMBAY I

Citation: [1963] SUPP. 2 S.C.R. 949 · Decided: 11-12-1962 · Supreme Court of India · Bench: S.K. DAS · Disposal: Appeal(s) allowed

Judgment (excerpt)

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~ --· 
2 S.C.R. 
SUPREME COURT REPORTS 
P. H. DIVECHA AND ANOTHER 
v. 
COMMISSIONER OF INCOME-TAX, 
BOMBAY I 
949 
(S. K. DAS, J. L. KAPUR, A. ·K. 
SARKAR, 
M. HIDAYATULLAH A.ND RAGHUBAR DAYAL, jj.) 
Income Tax-Firm of three partnera-Agrument with a 
company-Create& monopoly to aell and deliver company'• bulbs 
in favour of the firm-Undertaking by firm-To •ell only com-
pany'• bulb&-Agrument operate• 16 yNJra-Failure of negotia-
liona for renewal-Tranaition agreemtnt-Company agree. to pay 
Ra. 40,000/- per annum to each partner during 3 year<-A .. •••· 
ment year-Each partner reeeivea Ra. 10,000/- -Whether trading 
aaset or Capital Mseu-Gompensation or ex gratia paymtnl. 
The two appellants along with another were carrying on 
business in Electrical goods under the firm name Precious 
Electric Co. In 1938 this ·firm entered into an agreement with 
Mi•· Phillips Electrio. Co. (India) Ltd. The material terms of 
the agreement were the following. The llrm was to have an 
exclusive territory for sale of Phillips bulbs and undertook to 
sell only Phillips bulbs in the territory. The agreement allo-
wed the firm compensation if Phillips bulbs were sold in the 
territory by the company. The agreement was terminable by 
a three months notice on either side. . There was 110 stipula-
tion in the agrccmcnt as to the quantity or quality of bulbs to 
be ·bought by the firm, neither was it agreed that the firm was 
to act as an agent of the company. The agreement continued 
far 16 years. In 1954 negotiations for a fresh agreement were 
conducted but they were not successful. Since the company 
was taking over the business of selling the bulbs in the territory 
a working scheme for the transition period following the termi· 
nation of the agreement W8I reached. The most material term 
of the scheme was that the cx.mpany would pay Rs. 40,000/-
per annum as a gesture of goodwill in quarterly instalments to 
each of the partners during a period of three years from the date 
of the expiry of the existing agreement. In the assessment 
year each of the partncn received two quarterly payments of 
Rs. 10,000/· each. . This a-t was taxed by the Income Tax 
Officer in respect of the two appellant. under 1. JO (SA) of the 
Indian Income Tax Act, 1922. The appellants appealed 
without 11UCCC11 to the Auistant Commissioner. Thereupon 
1962 
D1"111Hr, 11. 
1962 
P.H. Dwecha 
•• 
Commiui()N1r of 
l•<otne·lax, Bombqy-1 
950 SUPREME GOUR T REPORTS [1963] SUPP. 
they appealed to the Tribunal contending that the amount aS!e-
ssed was compensation paid for the termination of the agree-
ment or it was an ex gratia payment. 
It was further contended 
that the payment made to the individual partner< did not consti-
tute a receipt of the firm's business. Alternatively it was 
argued that the said receipt was not liablr. to be included in 
the total income of the receipients by reason, of s. 4 (3)(VII) 
of the Income Tax Act. The Tribunal did not accept any of 
these contentions but it referred three questions for the deci-
sion of the High Court. These questions were whether the receipt 
in question was a taxable receipt, if so whether it was liable 
to be not included in the total income under s. 4 (3) (VII) 
and whether the said recdpt fell \\ithin s. IO (5A)(d). The 
High Court answered that the receipt was a taxable receipt and 
s. 4(3)VII did not exempt it from liability. The third question 
was left unanswered. The present appeal has arisen by way 
of a certificate granted by the High Court. 
The contentions were that the agreement was not a tra-
ding agreement; it constituted an asset on the termination of 
which compensation was paid lo make up for the Joss of this 
capital asset; in the alternative that even if it was not compen-
sation for loss of capital it was an ad hoc ex gratia payment in 
the nature of 'solalium' as described by the Privy Council in 
Income-tax Commissioner v. Shaw Wallace & Go. 
(1932) 
L. R. 59 I. A. 206. 
For the respondent it was contended 
that since there was no pre1nature termination of the agreement 
even if it is treated as capital, it has exhausted itself and there-
fore must be treated as revenue fiom 'other sourc:es' under s. 12 
of the Act. 
Held, that in determining whether a payment amounts 
to a return for loss of a capital asset or is income, profit or 
gain liable to income-tax, cne must have regard to the nature 
and quality of the payment. If the payment was not received 
to compensate for loss of prof

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