My principal cancelled one of my many agencies and paid me compensation worked out on the commission I would have earned. Is that a capital receipt?
No, on these facts. The Supreme Court held the compensation was income. The company held agencies in a great many lines - paints, petroleum, cement, timber, metals, tea, engineering goods and much else - so acquiring agencies was a normal incident of its business and losing one did not impair its trading structure or cost it an enduring asset. The agency was terminable at will, the company had two years' notice, and the compensation was computed as a proportion of the commission on sales in its former territory. It merely lost a trading avenue and was free to carry on the rest of its business.
Decided by the Supreme Court (Supreme Court of India - J.C. Shah and S.M. Sikri, JJ (judgment delivered by Shah, J)) on 1964-05-01, reported as 1965 AIR 452; 1964 SCR (8) 121. It bears on section 66(1) of the Indian Income-tax Act, 1922, section 28, section 28(ii), section 4 of the Income Tax Act 1961, in Assessment & Scrutiny matters.
This is the case that applies the Kettlewell Bullen test to a multi-agency trading house, and it is the answer to any blanket claim that agency compensation is capital. The Court says there is no immutable principle that compensation on cancellation of an agency is always capital; each case turns on its circumstances. The features that decided it against the assessee are the ones to look for: many agencies in many lines, no fixed durations, termination at will, notice given well in advance, staff largely maintained at the principal's expense and afterwards absorbed elsewhere, and compensation measured by lost commission. It also shows how easily the capital arguments are lost for want of evidence - the claims that part of the money was for a non-compete undertaking and for goodwill both failed because nothing was put before the authorities to support them.
Binding on every court and authority in India.
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The appellant, a public limited company with its registered office at Calcutta and branches elsewhere, carried on business in seven broad lines: buying and selling on its own account, introducing customers to principals, managing agency, shipping agency, purchasing agency, acting as sole importer and distributor for United Kingdom principals with no Indian organisation, and acting as secretaries. It held agencies for paints, varnishes, petroleum, kerosene, medicines and toilet preparations, cement, timber, stationery, metals, tea, engineering goods, air-conditioning equipment and many other commodities. Since 1886 its predecessors, and then the company, had been sole agents and distributors in India of explosives made by Imperial Chemical Industries (Export) Ltd of Glasgow, under no written agreement and terminable at the principal's option. In May 1945 the principal said it meant to set up its own distribution organisation and that the agency might be cancelled in two or three years. By letter of 11 March 1947 it terminated the agency with effect from 1 April 1948 and offered compensation: for the first three post-transfer years, two-fifths of the commission accruing on actual sales in the appellant's former territory at the old rates, and in the third year in addition a sum equal to full commission on that year's sales. The letter asked for a formal undertaking not to sell or accept any competing agency and said a formal agreement would follow. No undertaking and no draft agreement ever materialised. The appellant received Rs 1,53,471, Rs 1,59,271 and Rs 6,20,131 in three years and credited them in its profit and loss account as commission, but claimed in assessment that they were capital. The Income-tax Officer taxed them; the Appellate Assistant Commissioner allowed the claim; the Tribunal restored the assessment; the Calcutta High Court answered all three referred questions against the company.
The appeals were dismissed with costs. Compensation for agreeing to refrain from competitive business, or for loss of goodwill, would prima facie be capital, but there was no evidence that any part of this payment was either. The undertaking was never given and both sides ignored the condition; the spread of payment over three years supported no inference the other way, since an undertaking would have operated permanently while the compensation ran out in three years, and had the principal attached importance to it, it would not have paid at all without a formal agreement. On goodwill, the point had never been raised before the Revenue authorities or the Tribunal, which recorded that it had no material on the basis of any valuation, and the correspondence contained not even an indirect reference to negotiation on that footing. On the main question the Court applied its recent decision in Kettlewell Bullen: where payment compensates for cancellation of a contract which does not affect the trading structure or deprive the recipient of what is in substance his source of income, termination being a normal incident of the business, the receipt is revenue; where the cancellation impairs the trading structure or takes away the source of income, it is normally capital. Here the acquisition of agencies was in the normal course of business and the determination of individual agencies a normal incident. There is no immutable principle that agency compensation must be capital.
The Court worked through the features of this particular business. The agency terminated was one of many, obtained at different times, none of them shown to be for a fixed duration, so it was reasonable to infer that some would be cancelled and fresh ones obtained. It was not even suggested that the trading structure was impaired. The argument that expert staff had been kept to handle explosives, a specialised commodity, was met by the facts: the appellant dealt in petroleum, kerosene, timber and other inflammable goods; eighty per cent of the staff of the Magazine Section was maintained at the principal's expense; and of the officers on the explosives business, five were taken over by the principal and six absorbed elsewhere in the appellant's organisation. Some temporary dislocation could be assumed, but there was no evidence that it could not be repaired in the ordinary course, or that an agency could not be obtained from another manufacturer; and even if it could not be replaced, that alone would not show the agency was independent of the rest of the business or that an enduring asset had been lost. The measure of the payment pointed the same way: it was worked out in terms of the profits the appellant would have earned during the period of notice, paid in the ordinary course to adjust relations between the parties, and so was not truly compensation for not carrying on business. The Court repeated its explanation in Kettlewell Bullen that the Judicial Committee in Shaw Wallace had not laid down that cancellation of an agency always means the loss of a source of revenue.
cancellation of the contract of agency did not affect the profit-making structure of the appellant, nor did it involve a loss of an enduring trading asset
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Handle my notice → Ask a CA on WhatsAppNo, on these facts. The Supreme Court held the compensation was income. The company held agencies in a great many lines - paints, petroleum, cement, timber, metals, tea, engineering goods and much else - so acquiring agencies was a normal incident of its business and losing one did not impair its trading structure or cost it an enduring asset. The agency was terminable at will, the company had two years' notice, and the compensation was computed as a proportion of the commission on sales in its former territory. It merely lost a trading avenue and was free to carry on the rest of its business. This was decided by the Supreme Court (Supreme Court of India - J.C. Shah and S.M. Sikri, JJ (judgment delivered by Shah, J)) and bears on section 66(1) of the Indian Income-tax Act, 1922, section 28, section 28(ii), section 4 of the Income Tax Act 1961. It is reported as 1965 AIR 452; 1964 SCR (8) 121. This is the case that applies the Kettlewell Bullen test to a multi-agency trading house, and it is the answer to any blanket claim that agency compensation is capital. The Court says there is no immutable principle that compensation on cancellation of an agency is always capital; each case turns on its circumstances. The features that decided it against the assessee are the ones to look for: many agencies in many lines, no fixed durations, termination at will, notice given well in advance, staff largely maintained at the principal's expense and afterwards absorbed elsewhere, and compensation measured by lost commission. It also shows how easily the capital arguments are lost for want of evidence - the claims that part of the money was for a non-compete undertaking and for goodwill both failed because nothing was put before the authorities to support them. If it applies to you, the first step is this: If you say part of the compensation is for a restrictive covenant, get the covenant executed and produce it; here the promised formal undertaking was never given and both sides ignored the condition.
The appellant, a public limited company with its registered office at Calcutta and branches elsewhere, carried on business in seven broad lines: buying and selling on its own account, introducing customers to principals, managing agency, shipping agency, purchasing agency, acting as sole importer and distributor for United Kingdom principals with no Indian organisation, and acting as secretaries. It held agencies for paints, varnishes, petroleum, kerosene, medicines and toilet preparations, cement, timber, stationery, metals, tea, engineering goods, air-conditioning equipment and many other commodities. Since 1886 its predecessors, and then the company, had been sole agents and distributors in India of explosives made by Imperial Chemical Industries (Export) Ltd of Glasgow, under no written agreement and terminable at the principal's option. In May 1945 the principal said it meant to set up its own distribution organisation and that the agency might be cancelled in two or three years. By letter of 11 March 1947 it terminated the agency with effect from 1 April 1948 and offered compensation: for the first three post-transfer years, two-fifths of the commission accruing on actual sales in the appellant's former territory at the old rates, and in the third year in addition a sum equal to full commission on that year's sales. The letter asked for a formal undertaking not to sell or accept any competing agency and said a formal agreement would follow. No undertaking and no draft agreement ever materialised. The appellant received Rs 1,53,471, Rs 1,59,271 and Rs 6,20,131 in three years and credited them in its profit and loss account as commission, but claimed in assessment that they were capital. The Income-tax Officer taxed them; the Appellate Assistant Commissioner allowed the claim; the Tribunal restored the assessment; the Calcutta High Court answered all three referred questions against the company. The matter was decided on 1964-05-01 by the Supreme Court (Supreme Court of India - J.C. Shah and S.M. Sikri, JJ (judgment delivered by Shah, J)). On those facts the Supreme Court held as follows. The appeals were dismissed with costs. Compensation for agreeing to refrain from competitive business, or for loss of goodwill, would prima facie be capital, but there was no evidence that any part of this payment was either. The undertaking was never given and both sides ignored the condition; the spread of payment over three years supported no inference the other way, since an undertaking would have operated permanently while the compensation ran out in three years, and had the principal attached importance to it, it would not have paid at all without a formal agreement. On goodwill, the point had never been raised before the Revenue authorities or the Tribunal, which recorded that it had no material on the basis of any valuation, and the correspondence contained not even an indirect reference to negotiation on that footing. On the main question the Court applied its recent decision in Kettlewell Bullen: where payment compensates for cancellation of a contract which does not affect the trading structure or deprive the recipient of what is in substance his source of income, termination being a normal incident of the business, the receipt is revenue; where the cancellation impairs the trading structure or takes away the source of income, it is normally capital. Here the acquisition of agencies was in the normal course of business and the determination of individual agencies a normal incident. There is no immutable principle that agency compensation must be capital.
The Court worked through the features of this particular business. The agency terminated was one of many, obtained at different times, none of them shown to be for a fixed duration, so it was reasonable to infer that some would be cancelled and fresh ones obtained. It was not even suggested that the trading structure was impaired. The argument that expert staff had been kept to handle explosives, a specialised commodity, was met by the facts: the appellant dealt in petroleum, kerosene, timber and other inflammable goods; eighty per cent of the staff of the Magazine Section was maintained at the principal's expense; and of the officers on the explosives business, five were taken over by the principal and six absorbed elsewhere in the appellant's organisation. Some temporary dislocation could be assumed, but there was no evidence that it could not be repaired in the ordinary course, or that an agency could not be obtained from another manufacturer; and even if it could not be replaced, that alone would not show the agency was independent of the rest of the business or that an enduring asset had been lost. The measure of the payment pointed the same way: it was worked out in terms of the profits the appellant would have earned during the period of notice, paid in the ordinary course to adjust relations between the parties, and so was not truly compensation for not carrying on business. The Court repeated its explanation in Kettlewell Bullen that the Judicial Committee in Shaw Wallace had not laid down that cancellation of an agency always means the loss of a source of revenue. In the words reproduced by the source cited on this page: "cancellation of the contract of agency did not affect the profit-making structure of the appellant, nor did it involve a loss of an enduring trading asset"
It was decided by the Supreme Court on 1964-05-01 and is reported as 1965 AIR 452; 1964 SCR (8) 121. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 66(1) of the Indian Income-tax Act, 1922, section 28, section 28(ii), section 4, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeals were dismissed with costs. Compensation for agreeing to refrain from competitive business, or for loss of goodwill, would prima facie be capital, but there was no evidence that any part of this payment was either. The undertaking was never given and both sides ignored the condition; the spread of payment over three years supported no inference the other way, since an undertaking would have operated permanently while the compensation ran out in three years, and had the principal attached importance to it, it would not have paid at all without a formal agreement. On goodwill, the point had never been raised before the Revenue authorities or the Tribunal, which recorded that it had no material on the basis of any valuation, and the correspondence contained not even an indirect reference to negotiation on that footing. On the main question the Court applied its recent decision in Kettlewell Bullen: where payment compensates for cancellation of a contract which does not affect the trading structure or deprive the recipient of what is in substance his source of income, termination being a normal incident of the business, the receipt is revenue; where the cancellation impairs the trading structure or takes away the source of income, it is normally capital. Here the acquisition of agencies was in the normal course of business and the determination of individual agencies a normal incident. There is no immutable principle that agency compensation must be capital. It arises in Assessment & Scrutiny matters, on section 66(1) of the Indian Income-tax Act, 1922, section 28, section 28(ii), section 4 of the Income Tax Act 1961, and was decided by Supreme Court of India - J.C. Shah and S.M. Sikri, JJ (judgment delivered by Shah, J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If you say part is for goodwill, lead evidence of the parties' intention and of the value - the Tribunal recorded that it had no material at all on the basis or the written down value of the goodwill. Show impairment of the trading structure, not just the loss of income: what could not be replaced, what organisation was dismantled, what could not be redeployed. Watch the measure of the payment; compensation computed as a share of the commission you would have earned points to a revenue receipt.
Still good law. Applies the test in Kettlewell Bullen, decided by the same Court shortly before, and the harvested page records it as relied on in Supreme Court decisions of 1966 and 1971. No later decision doubting it was read as part of this exercise. The 1961 Act now contains an express provision charging compensation on termination or modification of an agency, and specific provisions on receipts under non-compete agreements; none of these was before the Court. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Decided under the Indian Income-tax Act, 1922 and the Business Profits Tax Act; the judgment cites no charging section, the reference having been made under section 66(1), and the batch line's sections 4, 28 and 28(ii) of the 1961 Act are where the subject sits today rather than provisions the Court construed - section 28(ii) in particular did not exist in the same form. The Court did not decide what the position would be had the non-compete undertaking been given or had the goodwill claim been supported by evidence; both failed for want of material rather than on principle. It also assumed some dislocation of the organisation but found no evidence either way on whether a replacement agency could have been obtained. The harvested text at one point says the agency was cancelled with effect from 1 April 1945, which contradicts the rest of the judgment and is plainly a slip for 1948. The page names the bench in its citation line as Shah and Sikri, JJ while its bench block also lists K. Subba Rao, J; the two named in the citation line have been given. The reporter's headnote on the page has been ignored. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were dismissed with costs. Compensation for agreeing to refrain from competitive business, or for loss of goodwill, would prima facie be capital, but there was no evidence that any part of this payment was either. The undertaking was never given and both sides ignored the condition; the spread of payment over three years supported no inference the other way, since an undertaking would have operated permanently while the compensation ran out in three years, and had the principal attached importance to it, it would not have paid at all without a formal agreement. On goodwill, the point had never been raised before the Revenue authorities or the Tribunal, which recorded that it had no material on the basis of any valuation, and the correspondence contained not even an indirect reference to negotiation on that footing. On the main question the Court applied its recent decision in Kettlewell Bullen: where payment compensates for cancellation of a contract which does not affect the trading structure or deprive the recipient of what is in substance his source of income, termination being a normal incident of the business, the receipt is revenue; where the cancellation impairs the trading structure or takes away the source of income, it is normally capital. Here the acquisition of agencies was in the normal course of business and the determination of individual agencies a normal incident. There is no immutable principle that agency compensation must be capital.
TaxSphere, “Gillanders Arbuthnot & Co Ltd v CIT”, https://taxnotice.vittsphere.com/caselaw/case/gillanders-arbuthnot-co-ltd-v-cit/ (validity last checked 2026-08-29)
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