1965 (4) TMI 16 - SC - Income Tax

Whether on the facts and in the circumstances of the case the disallowance of a sum of ₹ 19,796 out of the remuneration paid to Mr. T. M. Ayyadurai is justifiable ? Whether a sum of ₹ 17,346, which represented compensation received by the assessee for the loss of the managing agency of the Nellore Power and Light Company Ltd., is income liable to tax? Held that - It is true that if, on a consideration of the relevant materials, the Appellate Tribunal is of the opinion that a particular remuneration stipulated to be paid is not bona fide or is unreasonable, the High Court in exercising its advisory jurisdiction has no power to interfere with that opinion. But the material circumstances relating to the nature of the contract, the services to be performed and the nature of the duties by the employee were not at all taken into account by the Tribunal and the income-tax authorities. We, therefore, agree with the High Court that the first question should be answered in the negative. The High Court was of the opinion that compensation received for taking over the Nellore Power and Light Company Ltd. was a capital receipt not liable to be taxed, and on the materials placed before us, we are unable to disagree with the High Court on this question. Appeal dismissed.

Issues Involved:
1. Disallowance of a sum of Rs. 19,796 out of the remuneration paid to Mr. T. M. Ayyadurai.
2. Taxability of a sum of Rs. 17,346 received as compensation for the loss of the managing agency of the Nellore Power and Light Company Ltd.

Detailed Analysis:

Issue 1: Disallowance of Remuneration
The primary issue was whether the disallowance of Rs. 19,796 out of the remuneration paid to Mr. T. M. Ayyadurai was justifiable. The respondent company had appointed Mr. Ayyadurai in "special charge" for arranging purchases of tobacco on credit and supervising shipment, agreeing to pay him 30% of the net profit as remuneration. The Income-tax Officer allowed only 10% of the net profit for his services, disallowing Rs. 19,796.

The respondent argued that this expenditure was permissible under Section 10(2)(xv) of the Indian Income-tax Act, 1922, which allows deductions for any expenditure "laid out or expended wholly and exclusively for the purpose of such business." The court noted that the determination of whether an expenditure was laid out wholly and exclusively for business purposes must consider various factors, including the nature of the service, industry practices, and the qualifications of the employee.

The court observed that the contract with the Government of India required expert knowledge and constant supervision, and the management of the respondent bona fide regarded 30% of the net profits as reasonable remuneration. The Income-tax Officer's reduction of the rate to 10% was based on the relationship between Mr. Ayyadurai and another director, and the assumption that he was already bound to attend to all company activities as a director. However, there was no evidence that the remuneration agreement was motivated by non-business considerations or that Mr. Ayyadurai's duties as a director included the special contract.

The court concluded that the revenue authorities were not justified in reducing the rate of remuneration, agreeing with the High Court that the disallowance was not justified.

Issue 2: Taxability of Compensation for Loss of Managing Agency
The second issue was whether the compensation of Rs. 17,346 received for the premature termination of the managing agency of the Nellore Power and Light Company Ltd. was liable to tax. The managing agency agreement was terminated due to the compulsory acquisition of the electricity undertaking by the Government of Madras. The respondent received compensation under Section 15 of the Electrical Undertakings Acquisition Act, 1949.

The court noted that compensation for the loss of a capital asset is generally a capital receipt. The revenue argued that the respondent was in the business of managing agencies and that the termination of one agency did not impair its business structure. However, the court emphasized that it is the revenue's burden to establish that a receipt is taxable income. The court found insufficient evidence to show that the termination of the managing agency did not impair the respondent's business structure or involve the loss of an enduring asset.

The court referred to the judgment in Kettlewell Bullen and Company Ltd. v. Commissioner of Income-tax, which distinguished between compensation for loss of a source of income and profit in a trading transaction. The court concluded that the compensation received was a capital receipt, as there was no evidence that the termination of the agency did not affect the respondent's business structure.

The court agreed with the High Court that the compensation was not liable to tax.

Conclusion
The appeal was dismissed, with the court upholding the High Court's decision on both issues. The disallowance of Rs. 19,796 out of the remuneration paid to Mr. T. M. Ayyadurai was not justified, and the compensation of Rs. 17,346 received for the loss of the managing agency was a capital receipt not liable to tax. The appeal was dismissed with costs.

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