1959 (8) TMI 2 - SC - Income Tax

Whether on the facts and in the circumstances of the case the sum of ₹ 7,50,000 is a revenue receipt liable to tax? Held that - The answer to the referred question should be 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. Appeal allowed.

Summary

Issues Involved:

1. Nature of the sum of Rs. 7,50,000 received by the assessee firm: whether it is a capital receipt or a revenue receipt liable to tax.

Issue-wise Detailed Analysis:

1. Nature of the sum of Rs. 7,50,000 received by the assessee firm:

The central issue in this case is whether the sum of Rs. 7,50,000 received by the assessee firm from the managed company is a capital receipt or a revenue receipt liable to tax.

Background and Agreements:

The assessee firm was appointed as the managing agent of the managed company under an agreement dated October 28, 1928, which was later substituted by another agreement dated December 8, 1933 (referred to as "the principal agreement"). Under this principal agreement, the assessee firm was to receive a commission based on the net profits of the managed company. However, due to concerns from some shareholders and directors that the remuneration was excessively high, negotiations were initiated to reduce it. These negotiations culminated in a special resolution passed on October 22, 1946, whereby the managed company agreed to pay Rs. 7,50,000 as compensation to the assessee firm for releasing the company from its obligation to pay the higher remuneration. This agreement was formalized in a supplementary agreement dated March 24, 1948.

Contentions of the Parties:

During the assessment proceedings for the assessment year 1948-49, the departmental representative argued that the payment of Rs. 7,50,000, although described as compensation, was essentially a lump sum payment for the reduction of remuneration and should be treated as a revenue receipt. The assessee firm, on the other hand, contended that this sum was paid to discharge the managed company from its contingent liability to pay higher remuneration and therefore was a capital receipt, not liable to tax.

Decisions of Lower Authorities:

The Income-tax Officer treated the sum as a revenue receipt and taxed it accordingly. This decision was upheld by the Appellate Assistant Commissioner and later by the Tribunal. The Tribunal then referred the question of law to the High Court, which answered it in the affirmative, implying that the sum was a revenue receipt liable to tax. However, the High Court granted a certificate of fitness for appeal to the Supreme Court.

Supreme Court's Analysis:

The Supreme Court noted that distinguishing between income and capital receipt is often challenging and context-dependent. The Court emphasized that the character of a payment could vary based on circumstances and that the intrinsic characteristics of capital sums and revenue items are essentially the same for receipts as for expenditure.

The Court observed that the sum of Rs. 7,50,000 was paid by the managed company to secure a release from the obligation to pay higher remuneration for the remaining term of the managing agency. This release from liability was considered an advantage gained by the managed company, benefiting its business and acquiring an asset of enduring value, thus constituting a capital expenditure.

Key Considerations:

- The Court highlighted that the payment was not for the termination or cancellation of the managing agency, which continued, but for the release from onerous terms as to remuneration.
- The Court rejected the argument that the payment was merely for a variation in remuneration terms, noting that the managing agency's profit-making apparatus had deteriorated in quality and character due to the reduced remuneration.
- The Court drew parallels with previous decisions, particularly the case of Commissioner of Income-tax v. Vazir Sultan and Sons, where a similar reduction in the scope of an agency was considered a capital receipt.

Conclusion:

The Supreme Court concluded that the sum of Rs. 7,50,000 was paid and received as compensation for releasing the managed company from the onerous terms of remuneration, resulting in a deterioration of the managing agency's profit-making apparatus. Thus, it was a capital receipt and not liable to tax.

Judgment:

The Supreme Court allowed the appeal, setting aside the High Court's answer and ruling that the sum of Rs. 7,50,000 was a capital receipt. The appellant was awarded the costs of the reference in both the High Court and the Supreme Court.

Appeal allowed.