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 section 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
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 section 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 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 750000 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 section 87C Sub section 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 section 87C sub section 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
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 750000 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 750000 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 750000 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 750000 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 section 661 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 750000 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 vs The South India Pictures Ltd1  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  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 750000 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 LC in Atherton vs British Insulated and Helsby Cables Limited1 referred to in the judgment of this Court in Assam Bengal Cement Co Ltd vs Commissioner of Income tax 2
If the sum of Rs 750000 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 2 19551 1 SCR 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 750000 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 vs The South India Pictures Ltd 1 and in The Commissioner of Income tax Nagpur vs 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 vs Shaw Wallace and Co1 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 vs 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   228
3 1932 LR 59 IA 206
2  4 535 this Court in The Commissioner of Income tax Hyderabad Deccan vs Messrs Vazir Sultan and Sons1
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  case1 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 750000 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 LR 59 I A 206
on March 20 1959  3 536 or Messrs Vazir Sultan s case1 were held to be
This is also very nearly covered by the majority decision of the English House of Lords in Hunter vs Dewhurst2
It is true that in the later English cases of Prendergast vs Cameron3 and Wales Tilley 4 the decision in Hunter vs Dewharst2 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 750000 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 2 3 4  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


Summary:
The firm consisting of the appellant and another carrying on managing agency business was on March 31 1951 assessed to excess profits tax for the year 1942 and the broken period from January 1943 to March 4 1943
The prescribed notices were served not on the appellant but on the other partner who under the terms of the partnership deed was the managing partner
On March 4 1943 the managing partner gave notice of dissolution of the firm and thereupon the appellant sued him for dissolution from such date as might be specified by the court
The trial Court upheld the dissolution as and from the date notified by the managing partner but on appeal the High Court by its judgment rendered in 1953 fixed March 10 1949 as the date of the dissolution
An appeal taken to the Supreme Court from this decision of the High Court was still pending
The appellant challenged the validity of the order of assessment and the consequent proceedings for recovery of the tax assessed under article 226 of the Constitution on the grounds a that there was a dissolution of the firm on March 4 1943 and that notices served thereafter on the managing partner would not bind him b that there was no demand of the tax due from him under section 29 of the Indian Income tax Act and that consequently the tax could not be recovered from him under section 462 of the Act but the High Court dismissed his application
Held that the appellant could not be allowed to plead a prior dissolution and the assessment was binding on him
Even assuming that the partnership stood dissolved on the date of the assessment his position would not be different
Under the Excess Profits Tax Act 1940 the unit of assessment was not the firm but the business and an order of assessment passed after notice to the managing partner would be valid and binding on the appellant under section 44 of the Indian Income tax Act 1922 as modified by the Central Board of Revenue under section 21 of the Excess Profits Tax Act 1940
AG Pandu Rao vs Collector of Madras 1954 26 IT R 99 and Bose vs Manindra Lal Goswami  approved
789 No separate notice of demand under section 29 of the Indian Income tax Act specifically addressed to the appellant was necessary in order to recover the tax by the mode prescribed by section 462 of the Act
Under the proviso to section 21 of the Excess Profits Tax Act 1940 the appellant was an assessee within the meaning of section 29 of the Indian Income tax Act 1922 and the notice of demand served on the managing partner was notice to the appellant by virtue of section 63 of the latter Act made applicable by section 21 of the former