Law: Income Tax Act, 1961

Section: 256(1)

Section 28(i) of the Income-tax Act 1961 - Business income - Chargeable as - Assessee firm was agent of 'HML' - It assigned its agency rights to 'P' which agreed to pay part of its profits subject to minimum sum per annum - Subsequently, by another agreement, assessee transferred its rights under assignments to 'O' for lump sum consideration - Whether by second agreement assessee had parted with its profits making apparatus and, therefore, amount recived by it from 'O' was capital receipt - Held, yes FACTS The assessee was appointed as agent of 'HML' in 1955. In 1960, the assessee entered into an agreement with 'P' according to which 'P' took over the business of the assessee and agreed to pay 31 per cent of its profits subject to a minimum of Rs. 25,000 per annum. Subsequently, by another agreement in 1962, the assessee transferred its rights under the agreement of 1960 for a consideration of Rs. 50,000 to 'O'. The ITO held the sum of Rs. 50,000 to be a revenue receipt of the assessee and taxed it as its income . The AAC maintained the addition in appeal. On further appeal, the Tribunal deleted the sum of Rs. 50,000 from the income of the assessee, holding that it was a capital receipt. On reference : HELD The agency agreement entered into by the assessee with 'HML' in the year 1955 was a capital asset; the whole of it was not destroyed, lost or parted when the assessee entered into an agreement with 'P' in the year 1960. It was merely an exploitation of the commercial assets in a different form. Till then, the recurring amount which the assessee was getting from 'P' was income. But by the arrangement arrived at on the basis of the second agreement, the whole of the profit-making apparatus of the assessee was parted with and lost. The question has presented some difficulty when the assessee gets some amount of compensation on termination of agency agreement from the principal itself. Sometimes, in a given case, such compensation, and especially with regard to the managing agency business, has been treated as revenue receipts. But, in the instant case, the type of agreement which the assessee entered into with 'O' even if it would have entered into with 'P' on…

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