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PETITIONER: MESSRS.  GODREJ & COMPANY, BOMBAY

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, BOMBAY

DATE OF JUDGMENT: 04/08/1959

BENCH: DAS, SUDHI RANJAN (CJ) BENCH: DAS, SUDHI RANJAN (CJ) BHAGWATI, NATWARLAL H. HIDAYATULLAH, M.

CITATION:  1959 AIR 1352            1960 SCR  (1) 527

ACT:        Income-tax--Capital or revenue receipt -Remuneration of  the        managing agent-Variation of terms of  agreement-Compensation        for   reduction  of  the  scale  of  remuneration  for   the        subsequent Period of agency-Capital expenditure.

HEADNOTE: Under  an  agreement dated December 8, 1933,  the  appellant firm was appointed managing agent of a limited company for a period  of thirty years from November 9, 1933.  Clause 2  of the agreement provided for the remuneration of the  managing agent.   Some  of  the shareholders  and  directors  of  the company  having felt that the scale of remuneration paid  to the   managing  agent  was  extraordinarily  excessive   and unusual,  negotiations were started for a reduction  of  the remuneration, and as a result the appellant and the  company entered  into a Supplementary Agreement on March  24,  1948, whereby in consideration of the company paying a sum of  Rs. 7,50,000  " as compensation for releasing the  company  from the  onerous  term as to remuneration ",  contained  in  the original  agreement, the managing agent agreed to accept  as remuneration  as from September i, 1946, for  the  remaining term of the managing agency ten per cent. of the net  annual profits  of the company as defined in S. 87C, sub-s. (3)  of the  Indian Companies Act, 1938 The sum of Rs. 7,50,000  was paid  by  the  company to the appellant in  1947.   For  the assessment  year I948-49 the Income-tax Officer treated  the aforesaid  sum  as  a revenue receipt in the  hands  of  the appellant and taxed it as such.  The appellant claimed  that the sum was a payment made by the company whole in discharge of  its contingent liability to pay the higher  remuneration and it was, therefore, a capital expenditure incurred by the company  and received by the appellant as a capital  receipt and  was,  as  such,  not liable  to  tax.   The  income-tax authorities  maintained (i) that though the payment  of  Rs. 7,50,000 had been described as compensation, the real object and  consideration  for  the payment was  the  reduction  of remuneration,  (2)  that  it  was  a  lump  sum  payment  in consideration  of the variation of the terms  of  employment and was, therefore, not a capital receipt but was a  revenue receipt,  and  (3)  that there was, in  fact,  no  break  in

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service  and  the  payment was made in  the  course  of  the continuation  of the service and, therefore,  represented  a revenue  receipt  of  the managing agency  business  of  the appellant. Held,  that the sum of Rs. 7,50,000 was paid by the  company for  securing  immunity  from the liability  to  pay  higher remuneration  to the appellant for the rest of the  term  of the managing 528 agency  and was, therefore, a capital expenditure ; and,  so far  as  the  appellant was concerned, it  was  received  as compensation for the deterioration or injury to the managing agency by reason of the release of its rights to get  higher remuneration and was, therefore, a capital receipt. The  Commissioner  of Income-tax v. Vazir  Sultan  and  Sons [1959] 36 I.T.R. 175; Hunter v. Dewhuyst, (1932) 16 Tax Cas. 605   and   Glenboig  Union  Fiyeclay  Co.   Ltd.   v.   The Commissioners  of  Inland Revenue, (1922) 12 Tax  Cas.  427, relied on. Assam Bengal Cement Co. Ltd. v. Commissioner of  Income-tax, [1955]  i  S.C.R. 972 ; The Commissioner of  Income-tax  and Excess Profits Tax v. The South India Pictures Ltd.,  [1956] S.C.R. 223; The Commissioner of Income-tax v. Jairam  Valji, [1959]  S.C.R. (Suppl.) 110 and The Commissioner of  Income- tax  v.  Shaw  Wallace  and CO. (1932)  L.R.  59  I.A.  206, considered.

JUDGMENT:        CIVIL APPELLATE JURISDICTION: Civil Appeal No. 183 of 1956.        Appeal from the judgment and order dated September 11, 1953,        of the Bombay High Court, in Income-tax Reference No. 23  of        1953.        A.   V.   Viswanatha  Sastri,  S.,  N.  Andley  and  J.   B.        Dadachanji, for the appellants.        M.   C.   Setalvad,  Attorney-General  for  -India,  K.   N.        Rajagopal Sastri, and D. Gupta, for the respondent.        1959.  August 4. The Judgment of the Court was delivered by        DAS  C. J.-This is an appeal from the judgment and order  of        the High Court of Bombay delivered on September 11, 1953, on        a reference made by the Income-tax Appellate Tribunal  under        s.  66  (1) of the Indian Income-tax Act, whereby  the  High        Court answered the referred question in the affirmative  and        directed the appellant to pay the costs of the respondent.        The appellant, which is a registered firm and is hereinafter        referred  to  as " the assessee firm ",  was  appointed  the        managing  agent of Godrej Soaps Limited (hereinafter  called        the  "  managed  company ").  It has been  working  as  such        managing  agent  since  October  1928  upon  the  terms  and        conditions recorded originally in an agreement dated October        28, 1928,        529        which  was  subsequently substituted  by  another  agreement        dated  December 8, 1933, (hereinafter referred to as  "  the        Principal  Agreement ").  Under the Principal Agreement  the        assessee  firm was appointed Managing Agent for a period  of        thirty  years  from  November 9, 1933.   Clause  2  of  that        Agreement provided as follows:-        " The Company shall during the subsistence of this agreement        pay  to the said firm and the said firm shall  receive  from        the company the following remuneration, that is to say:        (a)  A  commission during every year at the rate  of  twenty        per  cent.  on  the net profits of the  said  company  after        providing for interest on loans, advances and debentures (if

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      any), working expenses, repairs, outgoings and  depreciation        but  without  any deduction being made  for  income-tax  and        super-tax  and  for  expenditure on capital  account  or  on        account  of any sum which may be set aside in each year  out        of profits as reserved fund.        (b)  In case such net profits of the Company after providing        for  interest  on loans, advances and debentures  (if  any),        working  expenses, depreciation, repairs and  outgoings  and        after  deduction  therefrom the commission provided  for  by        sub-clause (a) shall during any year exceed a sum of  rupees        one lac the amount of such excess over rupees one lac up  to        a limit of rupees twenty four thousand.        (c)  In case such net profits of the Company after providing        for  interest  on loans, advances and debentures  (if  any),        working  expenses, depreciation, repairs and  outgoings  and        after  also deducting therefrom the commission provided  for        by  subclause  (a)  shall during any year exceed  a  sum  of        rupees  one  lac and twenty four thousand one half  of  such        excess over rupees one lac and twenty four thousand shall be        paid to the firm and the other half to the shareholders."        Some  of  the  shareholders and  directors  of  the  managed        company  felt  that the scale of remuneration  paid  to  the        assessee  firm under cl. (2) of the Principal Agreement  was        extraordinarily excessive and unusual and        530        should  be modified.  Accordingly negotiation  were  started        for  a  reduction  of  the  remuneration  and,  after   some        discussion,  the  assessee  firm  and  the  managed  company        arrived   at   certain  agreed  modifications   which   were        eventually  recorded in a special resolution passed  at  the        extraordinary general meeting of the managed company held on        October  22,  1946.  That, resolution was in  the  following        terms:-        "  Resolved  that  the  agreement  arrived  at  between  the        managing  agents on the one hand and the directors  of  your        Company  on  the other hand, that the  managing  agents,  in        consideration   of  the  Company  paying  Rs.  7,50,000   as        compensation,  for  releasing the Company from  the  onerous        term  as to remuneration contained in the  present  managing        agency  agreement  should  accept as  remuneration  for  the        remaining term of their managing agency ten per cent. of the        net annual profits of the Company as defined in S. 87C, Sub-        s.  (3)  of the Indian Companies Act in lieu of  the  higher        remuneration  to  which  they are  now  entitled  under  the        provisions of the existing managing agency agreement be  and        the same is hereby approved and confirmed.        Resolved that the Company and the managing agents do execute        the  necessary document modifying the terms of the  original        managing  agency  agreement  in accordance  with  the  above        agreement  arrived  at  between  them.   Such  document   be        prepared  by  the Company’s solicitors and approved  by  the        managing agents and the directors shall carry the same  into        effect  with  or without modification as  they  shall  think        fit."        The  agreed  modifications  were thereafter  embodied  in  a        Supplementary  Agreement made between the assessee firm  and        managed  company  on  March 24, 1948.   After  reciting  the        appointment of the assessee firm as the Managing Agent  upon        terms  contained  in  the Principal  Agreement  and  further        reciting  the agreement arrived at between the  parties  and        the resolution referred to above, it was agreed and declared        as follows        531        "  1. That the remuneration of the Managing Agents  as  from        the 1st day of September 1946 shall be ten per cent. of  the

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      net annual profits of the Company as defined in s. 87C, sub-        s.  (3)  of the Indian Companies Act, 1913, in lieu  of  the        higher remuneration as provided in the above recited cl. (2)        of the Principal Agreement.        2.   Subject  only  to the variations herein  contained  and        such  other  alterations  as may be necessary  to  make  the        Principal  Agreement  consistent  with  these  presents  the        principal  agreement shall remain in full force  and  effect        and shall be read and construed and be enforceable as if the        terms  of  these presents were inserted therein  by  way  of        substitution."        The sum of Rs. 7,50,000 was paid by the managed company  and        received  by  the assessee firm in the  calendar  year  1947        which was the accounting year for the assessment year  1948-        49.        In  the  course  of  the  assessment  proceedings  for   the        assessment   year   1948-49,  it  was   contended   by   the        departmental representative, (i) that though the payment  of        Rs.  7,50,000 had been described as compensation,  the  real        object  and consideration for the payment was the  reduction        of  remuneration, (ii) that being the character of  payment,        it was a lump sum payment in consideration of the  variation        of the terms of employment and was, therefore, not a capital        receipt but was a revenue receipt, and (iii) that there was,        in  fact,  no break in service and the payment was  made  in        course  of the continuation of the service  and,  therefore,        represented  a  revenue  receipt  of  the  managing   agency        business  of the assessee firm.  The assessee firm,  on  the        other  hand, maintained that the sum of Rs. 7,50,000  was  a        payment  made  by the managed company to the  assessee  firm        wholly  in discharge of its contingent liability to pay  the        higher  remuneration and in order to discharge itself of  an        onerous  contingent obligation to pay  higher_  remuneration        and it was, therefore, a capital expenditure incurred by the        managed  company  and  a capital  receipt  obtained  by  the        assessee firm and was as such not liable to tax.        532        The Income-tax Officer treated the sum of Rs. 7,50,000 as  a        revenue receipt in the hands of the assessee firm and  taxed        it  as such.  On appeal this decision was confirmed  by  the        Appellate Assistant Commissioner and thereafter, on  further        appeal,  was upheld by the Tribunal by its order dated  July        23,  1952.   At  the  instance  of  the  assessee-firm   the        Tribunal, under s. 66(1) of the Act, made a reference to the        High Court raising the following question of law:-        " Whether on the facts and in the circumstances of the  case        the sum of Rs. 7,50,000 is a revenue receipt liable to tax.        The  said reference was heard by the High Court and  by  its        judgment,  pronounced on September 11, 1953, the High  Court        answered  the  referred  question  in  the  affirmative  and        directed   the  assessee-firm  to  pay  the  costs  of   the        reference.   The High Court, however, gave to the  assessee-        firm a - certificate of fitness for appeal to this Court and        that is how the appeal has come before us.        As has been said by this Court in Commissioner of Income-tax        and  Excess Profits Tax, Madras v. The South India  Pictures        Ltd.(1),  "  it  is  not always easy  to  decide  whether  a        particular  payment  received by a person is his  income  or        whether  it  is  to be regarded  as  his  capital  receipt".        Eminent  Judges have observed that " income " is a  word  of        the  broadest  connotation  and that it  is  difficult,  and        perhaps  impossible,  to define it by  any  precise  general        formula.   Though  in  general the  distinction  between  an        income  and a capital receipt is well recognised,  cases  do        arise where the item lies on the borderline and the  problem

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      has  to be solved on the particular facts of each case.   No        infallible  criterion or test has been or can be  laid  down        and the decided cases are only helpful in that they indicate        the  kind of consideration which may relevantly be borne  in        mind  in approaching the problem.  The character of  payment        received may vary according to the circumstances.  Thus, the        amount  received as consideration for the sale of a plot  of        land  may ordinarily be capital; but if the business of  the        recipient is to        (1)  [1956] S.C.R. 223. 228.        533        buy  and  sell  lands, it may well be his  income.   It  is,        therefore, necessary to approach the problem keeping in view        the  particular  facts  and circumstances in  which  it  has        arisen.        There  can  be  no  doubt that by paying  this  sum  of  Rs.        7,50,000  the  managed  company has  secured  for  itself  a        release from the obligation to pay a higher remuneration  to        the  assesee  firm for the rest of the  period  of  managing        agency  covered  by the Principal Agreement.   Prima  facie,        this release from liability to pay a higher remuneration for        over  17  years must be an advantage gained by  the  managed        company  for  the benefit of its business and  the  immunity        thus obtained by the managed company may well be regarded as        the acquisition of an asset of enduring value by means of  a        capital outlay which will be a capital expenditure according        to the test laid down by Viscount Cave, L.C., in Atherton v.        British  Insulated and Helsby Cables Limited(1) referred  to        in  the  judgment of this Court in Assam Bengal  Cement  Co.        Ltd.  v. Commissioner of Income-tax (2).  If the sum of  Rs.        7,50,000  represented a capital expenditure incurred by  the        managed company, it should, according to learned counsel for        the assessee firm, be a capital receipt in the hands of  the        assessee firm, for the intrinsic characteristics of  capital        sums and revenue items respectively are essentially the same        for receipts as for expenditure. (See Simon’s Income-tax, II        Edn., Vol. 1, para. 44, p. 31).  But, as pointed out by  the        learned  author  in that very paragraph, this cannot  be  an        invariable proposition, for there is always the  possibility        of  a particular sum changing its quality according  as  the        circumstances of the payer or the recipient are in question.        Accordingly, the learned Attorney-General appearing for  the        respondent contends that we are not concerned in this appeal        with  the  problem, whether, from the point of view  of  the        managed  company, the sum represented a capital  expenditure        or not but that we are called upon to determine whether this        sum  represented  a  capital receipt in  the  hands  of  the        assessee firm.        (1)  (1925) 10 Tax Cas. 155.        (2) [19551 1 S.C.R. 972.        68        534        In the Resolution adopted by the managed company as well  as        in the recitals set out in the Supplementary Agreement  this        sum  has  been stated to be a payment "as  compensation  for        releasing   the  company  from  the  onerous  term   as   to        remuneration  contained" in the Principal Agreement.  It  is        true,  as  said by the High Court and as reiterated  by  the        learned  Attorney-General,  that the language  used  in  the        document  is  not  decisive  and  the  question  has  to  be        determined   by  a  consideration  of  all   the   attending        circumstances; nevertheless, the language cannot be  ignored        altogether  but must be taken into consideration along  with        other relevant circumstances.        This  sum of Rs. 7,50,000 has undoubtedly not been  paid  as

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      compensation  for  the  termination or  cancellation  of  an        ordinary business contract which is a part of the  stock-in-        trade of the assessee and cannot, therefore, be regarded  as        income,  as  the  amounts received by the  assessee  in  The        Commissioner  of  Income-tax and Excess Profits Tax  v.  The        South  India  Pictures Ltd. (1) and in The  Commissioner  of        Income-tax, Nagpur v. Rai Bahadur Jairam Valji (2) had  been        held  to be.  Nor can this amount be said to have been  paid        as  compensation  for the cancellation or cessation  of  the        managing  agency  of  the assessee firm,  for  the  managing        agency  continued  and,  therefore,  the  decision  of   the        Judicial Committee of the Privy Council in The  Commissioner        of Income-tax v. Shaw Wallace and Co.(1) cannot be  invoked.        It is, however, urged that for the purpose of rendering  the        sum  paid  as  compensation  to be  regarded  as  a  capital        receipt, it is not necessary that the entire managing agency        should be acquired.  If the amount was paid as the price for        the sterilisation of even a part of a capital asset which is        the  framework or entire structure of the assessee’s  profit        making apparatus, then the amount must also be regarded as a        capital  receipt, for, as said by Lord Wrenbury in  Glenboig        Union  Fireclay  Co.  Ltd. v. The  Commissioners  of  Inland        Revenue (4), "what is true of the whole must be equally true        of part "-a principle which has been adopted by        (1) [1956] S.C.R. 223, 228.  (3) (1932) L.R. 59 I.A. 206.        (2)  [1959] 35 I.T.R. 148; [1959] S.C.R. Supp.  110.        (4) [1922] 12 Tax Cas. 427.        535        this  Court  in The Commissioner of  Income-tax,  Hyderabad-        Deccan  v. Messrs.  Vazir Sultan and Sons(1).   The  learned        Attorney-General,  however, contends that this case  is  not        governed  by  the decisions in Shaw Wallace’s  case  (2)  or        Messrs.   Vazir  Sultan  and Sons’ case(1)  because  in  the        present case there was no acquisition of the entire managing        agency business or sterilisation of any part of the  capital        asset  and  the  business  structure  or  the  profit-making        apparatus, namely, the managing agency, remains  unaffected.        There is no destruction or sterilisation of any part of  the        business  structure.   The amount in question  was  paid  in        consideration  of the assessee firm agreeing to continue  to        serve  as the managing agent on a reduced remuneration  and,        therefore,   it  bears  the  same  character  as   that   of        remuneration  and, therefore, a revenue receipt.  We do  not        accept  this  contention.  If this  argument  were  correct,        then,  on  a parity of reasoning, our  decision  in  Messrs.        Vazir  Sultan and Sons’ case (1) would have been  different,        for,  there also the agency continued as before except  that        the  territories were reduced to their original extent.   In        that  case also the agent agreed to continue to  serve  with        the extent of his field of activity limited to the State  of        Hyderabad  only.   To  regard such an agreement  as  a  mere        variation  in  the terms of remuneration is only to  take  a        superficial  view of the matter and to ignore the effect  of        such  variation  on what has been called  the  profit-making        apparatus.   A  managing  agency  yielding  a   remuneration        calculated at the rate of 20 per cent. of the profits is not        the same thing as a managing agency yielding a  remuneration        calculated  at  10  per cent. of the profits.   There  is  a        distinct  deterioration in the character and quality of  the        managing agency viewed as a profit-making apparatus and this        deterioration   is  of  an  enduring  kind.    The   reduced        remuneration having been separately provided, the sum of Rs.        7,50,000   must   be  regarded  as  having  been   paid   as        compensation  for  this injury to or  deterioration  of  the        managing agency just as the amounts paid in Glenboig’s  case

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      (3)        (1) Civil Appeal NO. 346 of 1957, decided        (2) (1932) L.R. 59 I. A. 206. on March 20, 1959 ; [1959]  36        I.T.R. 175.        (3) (1922) 12 Tax Cas. 427.        536        or Messrs.  Vazir Sultan’s case(1) were held to be.  This is        also  very  nearly covered by the majority decision  of  the        English House of Lords in Hunter v. Dewhurst(2).  It is true        that in the later English cases of Prendergast v. Cameron(3)        and Wales Tilley (4), the decision in Hunter v.  Dewharst(2)        was  distinguished  as being of an exceptional  and  special        nature but those later decisions turned on the words used in        r. 1  of Sch.  E. to the English Act.  Further,  they  were        cases  of  continuation  of  personal  service  on   reduced        remuneration  simpliciter and not of acquisition, wholly  or        in  part, of any managing agency viewed as  a  profit-making        apparatus  and consequently the effect of the agreements  in        question  under which the payment was made upon  the  profit        making  apparatus, did not come under consideration at  all.        On  a  construction of the agreements it was held  that  the        payments  made  were  simply remuneration  paid  in  advance        representing  the  difference  between the  higher  rate  of        remuneration  -and  the reduced remuneration and as  such  a        revenue  receipt.   The  question of the  character  of  the        payment made for compensation for the acquisition, wholly or        in   part,   of  any  managing  agency  or  injury   to   or        deterioration  of  the managing agency  as  a  profit-making        apparatus is covered by our decisions hereinbefore  referred        to.  In the light of those decisions the sum of Rs. 7,50,000        was paid and received not to make up the difference. between        the higher remuneration and the reduced remieration but  was        in  reality paid and received as compensation for  releasing        the company- from the onerous terms as to remuneration as it        was in terms expressed to be.  In other words, so far as the        managed  company was concerned, it, was paid for  see-tiring        immunity  from the liability to pay highser remuneration  to        the  assessee firm for the rest of the term of the  managing        agency  and, therefore, a capital expenditure and so far  as        the assessee firm was concerned, it was received as  compen-        sation  for  the  deterioration or injury  to  the  managing        agency by reason of the release of its rights to get  higher        remuneration and, therefore, a capital receipt        (1)  Civil  Appeal  No. 346 of 1957. decided  on  March  20,        1959; [1959] 36 I.T.R. 175.        (2) (1932) 16 Tax Cas. 605.        (3)  (1940) 23 Tax Cas. 122.        (4)  (1943) 25 Tax Cas. 136..        537        within  the  decisions of this Court in  the  earlier  cases        referred to above.        In the light of the above discussion it follows,  therefore,        that  the answer to the referred question should by  in  the        negative.   The  result, therefore, is that this  appeal  is        allowed, the answer given by the High Court to the  question        is  set aside and the question is answered in the  negative.        The  appellant  must get the costs of the reference  in  the        High Court and in this Court.                                              Appeal allowed.