A two-judge bench of the Bombay High Court has held that mere reference of the term ‘agency’ in the agreement itself is not conclusive of the relationship between parties for attracting Section 28(ii)(c) of the Income Tax Act, 1961.
The assessee had entered into an agreement with US-based company Sealand Service Inc. by name. Under such agreement, the assessee was to solicit business on behalf of the said Sealand Service Inc. After some disputes between the parties, this contract was terminated pursuant to which, the assessee received compensation of Rs.2.25 crores during the period relevant to the assessment year in question.
According to the assessee, the receipt was capital in nature and therefore, not assessable to tax. The Assessment Officer, however, rejected such contention and held that it would be chargeable to tax in terms of section 28(ii)(c) of the Income Tax Act, 1961.
On the first appeal, the CIT(A) held that there was no principal-agent relationship between the parties and the contract was on principal to principal basis and therefore section 28(ii)(c) would not apply. Later, the Tribunal confirmed the said order on further appeal.
The department contended before the High Court that the agreement itself described the relationship between the parties as one of the agency.
Justices Akil Kureshi and Sarang V Kotwal rejected the contention and took a view that any such reference or the expression in the agreement.
The bench observed that “Section 28(ii)(c) of the Act makes any compensation or other payment due, the receipt of a person holding an agency in connection with the termination of the agency or the modification of the terms and conditions relating thereto, chargeable as profits and gains of business and profession. The essential requirement for application of section would therefore be that there was a correlation of agency principal between the assessee and the US based company.”
“The true character of the relationship from the agreement would have to be gathered from reading the document as a whole. This Court in case of Daruvala Bros. (P). Ltd. Vs. Commissioner of IncomeTax (Central), Bombay, reported in (1971) 80 ITR 213 had found that the agreement made between the parties, was of sole distribution and the agent was acting on his behalf and not on behalf of the principal. In that background, it was held that the agreement in question was not one of agency, though the document may have used such term to describe the relationship between the two sides,” the bench said.
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