Messrs. Godrej & Company, Bombay Vs.
Commissioner of Income-Tax, Bombay  INSC 101 (4 August 1959)
DAS, SUDHI RANJAN (CJ) BHAGWATI, NATWARLAL H.
CITATION: 1959 AIR 1352 1960 SCR (1) 527
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.
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 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  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,  i S.C.R. 972 ; The Commissioner of Income-tax and Excess
Profits Tax v. The South India Pictures Ltd.,  S.C.R. 223; The
Commissioner of Income-tax v. Jairam Valji,  S.C.R. (Suppl.) 110 and The
Commissioner of Income- tax v. Shaw Wallace and CO. (1932) L.R. 59 I.A. 206,
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
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 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 there
from 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
there from 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 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
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
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 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)  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
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
(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 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)  S.C.R.
223, 228. (3) (1932) L.R. 59 I.A. 206.
(2)  35 I.T.R. 148;  S.C.R. Supp.
(4)  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,
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 (3) (1) Civil Appeal NO. 346 of 1957, decided (2) (1932) L.R. 59 I. A.
206. on March 20, 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;  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.