I. MAHMUD, J.-The following question has been referred to us by the Income-tax Appellate Tribunal (Karachi Bench), Karachi, under section 66(t) of the Income-tax Act, 1922 (hereinafter referred to as the Act) at the instance of the Commissioner of Income-tax (East) Karachi, relating to the assessm ent year 1964-65 :- "Whether on the facts and in the circumstances of the case, the Income---tax Appellate Tribunal was justified in holding that the sum of Rs. 60,000 paid to the assessee-Company by M/s. Exide Batteries of Pakistan Limited as compensation for loss of profits could not be treated as `income' and as such could not be legally taxed?"
2. The respondent, Forbes, Forbes Campbell & Company Ltd. Of Karachi was appointed the sole- selling agent and distributor of "Excide" batteries manufactured by Exide Batteries of Pakistan Limited on commission basis under an agreement, which provided for termination of the said agency by three months' native on either side. By letter dated 17-11-1962, the respondent's principals gave three months' notice of termination of the agency advising the respondent that it had been decided to change the existing method of distributing their "Exide" batteries by appointing several main dealers who would be required to sell the "Excide" batteries exclusively. 1t was also mentioned in the letter that the respondent's sole agency was being terminated with utmost reluctance, but, as it was not possible to continue to offer the respondent the old terms since these would be more favourable than these given to other main dealers, an amount of Rs.
60,000 was being offered as consideration of "loss of profits", provided the respondent accepted the offer to become a main dealer. The notice further stated that it was proposed to implement the new main dealer system immediately without waiting for the expiry of the three months' notice period and requested permission of the respondent to do so and undertook to pay full commission which the respon--dent would have earned on sales during the notice period. The offer was accepted by the respondent and, accordingly, the respondent received an amount of Rs. 60,000 as "loss of profits" and. Also another amount of Rs. 25,000 as the commissions earned for the notice period as agreed.
3. The respondent placed the amount of Rs. 60,000 to the Profit and Loss Appropriation Account and claimed it as capital receipt, while it con--ceded that the amount of Rs. 25,000 received by it as commission, was a revenue receipt and was taxable as income and, therefore, included this amount in the Profit and Loss Account. . The Income-tax Officer rejected the contention of the respondent that the amount of Rs. 60,000 received by it was a capital receipt and after adding back the amount to profits; taxed it as income under section 10 of the Act. The respondent preferred an appeal to the Income-tax Appellate Tribunal. The appeal of the respondent was allowed by a majority of two members of the Appellate Tribunal. The majority opinion was that the amount of Rs. 60,000 received by the respondent was compensation for loss of its sole- distributorship and sole-selling agency rights and also as a consideration for agreeing to become a main dealer. As such, it was a capital receipt. The opinion of the dissenting member of the Appellate Tribunal, on the other hand, was that the said amount was received solely for entering into a new commercial arrangement and was incidental to the respondent's acceptance of the new terms of appointment as one of the dealers. He further found that the respondent was carrying on several types of businesses, including a number of agencies and the acquisition or termination of agencies was a normal incidence of the respondent's business activities. He, therefore, held that the amount received by the respondent for termination of the agency agreement represented compensation for loss of future profits and as such, was a revenue receipt.
4. On the Commissioner's application for a reference to the High Court under section 66(1) of the Act, the above question has been referred to the High Court for opinion.
5. The main question for consideration is whether the amount of Rs. 60,000 received by the respondent is in the nature of a capital receipt or is taxable as income. In the absence of a definition of "Income" in the Act, the question has to be decided by a consideration of the true nature an purpose of the payment and the facts and circumstances of the case. There is no single or infallible test which can be applied to resolve the question. Neither the form of the transaction giving rise to the payment, nor the name, which is given to it, is relevant in determining the liability of tax. In general, it may be said that what is received for loss of capital is a capital receipt and what is received as profit in trading transaction, is taxable income. The question, therefore, is whether the amount received by the respondent was compensation for loss of a capital asset or represented loss of future profits in a trading transaction. A useful test for determining whether an amount received is a capital receipt or a revenue receipt, has been laid down in reported cases, which have been referred to in the order of the Appellate Tribunal. A particular reference may be made to the test laid down in a case decided by the Indian Supreme Court, reported in Kettlewell Bullen & Co. Ltd. v. Commissioner of Income-tax, Calcutta ((1965) 53 I T R 261), which was applied in Gillanders Arbuthnot & Co. Ltd. v. Commissioner of Income-tax, Calcutta ((1964) 53 I T R 283), and is as follows :- "On an analysis of these cases which fall on two sides of the dividing line, s satisfactory measure of consistency in principle is disclosed. Where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue; where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt."
6. The first submission of Mr. Mansoor Ahmad Khan, learned counsel for the Commissioner, is that the amount received by the respondent was not for loss of office but represented a voluntary payment as consideration for entering into a new trading transaction to become one of the main dealers of the Principal's "Exide" batteries and, therefore, it was an income receipt. According to counsel, the agency was terminable by three months' notice and the agreement did not provide for payment of any compensation for termina--petition of the agency. Therefore, it was submitted, the amount received by the respondent was not compensation for loss of office, which could be regarded as a capital receipt. This submission, in our opinion, has no force. On the facts as found, the respondent's sole-selling agency and exclusive distributor--ship rights were being terminated and in lieu thereof, the respondent was being offered appointment as one of the main dealers under terms, which were admittedly less favourable. In fact, the letter of termination stated that the Principal was unable to continue to offer the respondent "its present terms since these would be more favourable than those given to other main dealers". It is clear that the respondent was being offered the sum of Rs. 60,000 to compensate for the loss of this sole-selling agency right. The sole- selling agency right of the respondent was undoubtedly an income-yielding asset and a capital asset, compensation received for loss of a capital asset is a capital B receipt. It would not be correct to say that there was no loss of sole-selling agency rights, but only a "modification" or "variation" of it and that the amount of Rs. 60,000 was paid as an extra commission to the respondent for agreeing to accept the agency in a modified shape. It could not be denied that by accepting to become one of the main dealers, there was a distinct deterioration of an enduring nature. In Godrej & Co. v. Commissioner of Income-tax, Bombay City ((1959) 37 I T R 381), the appellant was appointed managing agent of a company under an agreement for a period of 30 years which provided for payment of a commission at the rate of 20 % on the not profits of the Company. As some of the shareholders and directors of the Company com--plained that the remuneration was extraordinarily excessive, the managing agent agreed to modification of the agency agreement by agreeing to accept a commission at the reduced flat rate of 10 % of the not annual profits of the Company and received a sum of Rs. 7,50,C00 as compensation for releasing the Company from the onerous terms as to remuneration contained in the agency agreement. It was held by the Indian Supreme Court that the amount was received not to make up for the difference between the original and the reduced remuneration but as compensation for deterioration of or injury to the manag--ing agency by release of its right to the original high remuneration and was therefore a capital receipt. We, therefore, agree with the majority view of the Tribunal that the parties had loosely described the compensation amount as "loss of profits". As stated earlier, the name given to the payment is irrelevant.
7. The respondent had other business activities and was earning profits therefrom. But, as rightly submitted by Mr. G. A. Qureshi for the respon--dent, the profits earned in those businesses were fruits of a different tree or crop of a different field, to use the expression of the Privy Council in Shaw Wallace's case below referred to.
8. There was no evidence on record to suggest that the respondent was acting as sole-distributor or selling agent of the products of other concerns as well, or that the termination of the agency in question did not affect the trading structure of the respondent's business, or deprive it of its source of income, freed from the contract terminated. The case of Gillanders Arbuthnot (above- mentioned) relied upon by Mr. Mansoor Ahmad Khan, is distinguish--able, because in that case, there was a finding of fact that the acquisition of agencies was in the normal course of business and termination of individual agencies, a normal incident not affecting or impairing the trading structure of the appellant. The account received by the appellant in that case for termination of the agency did not represent the price paid for loss of a capital asset and, therefore, it was held to be in the nature of income.
9. The next submission of Mr. Mansoor Ahmad Khan is that the payment of the amount of Rs. 60,000 the respondent being a voluntary pay--ment, to which the respondent had no legal right under the agreement, could not be treated as a capital receipt. This submission has not impressed us. It is also not supported by case-law. In Commissioner of Income-tax Bengal v. Shaw Wallace & Co. (AIR 1932 P C 138), there was no formal agreement of agency but the respondent acted as distributing agent in India of the products of two principals for several years. The agency was terminated and the principals paid sums of money to the agent voluntarily as compensation for loss of office and for cessation of the agency. The Privy Council held that the sums received by tile agent were by way of voluntary solatium and were capital receipts. To the same effect is the decision in the Commissioner of Income-tax, Hyderabad Deccan v. Wazir Sultan & Sons ((1959) 36 I T R 175). In that case also there was no written agreement of agency which was terminable at will. The respondent agent was dealer in cigarettes of the principal for the Hyderabad State, but later on the territory was extended to include territory outside that State. Some years later, the parties reverted to the original arrangement confining the distributor--ship to the Hyderabad State only and the respondent agent was paid a sum of money by way of compensation for loss of the agency rights for the territory outside the Hyderabad State. It was held by the Supreme Court of India that it was immaterial that the agency agreement was terminable at will and that the agent had no legal right to compensation. The sum received was held to be a capital receipt and not income.
10. The last submission of Mr. Mansoor Ahmad Khan was that the Appellate Tribunal erred in holding that the amount of Rs. 60,000 was paid to the respondent as consideration for agreeing not to compete with the principal in business. Counsel submitted that there was no categorical agreement to that effect and such agreement cannot be implied. It is not disputed that if the compensation was paid for agreeing not to compete with the principal's business, it would prima facie be a capital receipt. It is true that the letter of 17th November 1962, setting out the terms of the new arrangement did not categorically provide for compensation for refraining from competing with the principal. But, the sum of Rs. 60,000 was offered to the respondent on condition that it accepted the offer to become a main dealer. The letter also provided that each main dealer was to be exclusive dealer of "Exide" batteries within his own territory. Reading the two provisions together, there is no difficulty in holding that by agreeing to become one of the main and exclusive dealers, the respondent had agreed not to compete with the business of the principal. In the Gillanders Arbuthnot case, above-quoted, it has been held that compensation paid for agreeing to refrain from carrying on compe--titive business in the commodities in respect of the agency terminated is, prima facie, of the nature of a capital asset.
11. In the result, for the foregoing persons, we would answer the question referred to us in the affirmative. Theapplicant will bear the costs of the Reference.