Case: Messrs. Godrej &amp; Company, Bombay Vs. Commissioner Of Income-Tax, Bombay

2. 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, 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, 1988. Clause 2 of that Agreement provided as followsCompany 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 reserve 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 sub-clause (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 theof 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 should be modified. Accordingly negotiations 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 had on October 22,That resolution was in the followingthat 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-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 Companys solicitors and approved by the managing agents and the directors shall way the same into effect with or without modification as they shall thinkagreed modifications were thereafter embodied in a Supplementary Agreement made between the assessee firm an the 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 followsThat 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 ofsum 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 1948-49.3. 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 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.4. 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.

Reasoning: It is, therefore, necessary to approach the problem keeping in view the particular facts and circumstances in which it hasis 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.8. 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 dock-in-trade of the assessee and cannot, therefore, be regarded as income, as the amounts received by the assessee in 1956 SCR 223: ( (S) AIR 1956 SC 492  ) (supra) and in Commr. of Income-tax, Nagpur v. Jairam Valji, 1959-35 ITR 148  : (AIR 1959 SC 291  ) 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 Commr. of Income-tax v. Shaw Wallace and Co., 59 Ind App 206: (AIR 1932 PC 138  ) cannot bethe 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 remuneration 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 securing immunity from the liability to pay higher 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 compensation 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 within the decisions of this Court in the earlier cases referred to above.9. In the light of the above discussion it follows, therefore, that the answer to the referred question should be in the negative.