'

S.C.R. SUPREME COURT REPORTS 527

MESSRS. GODREJ & COMPANY, BOMBAY

v.

COMMISSIONER OF INCOME-TAX, BOMBAY

(S. R. DAS, C .• J., N. H. BHAGWATI and

M. HIDA.YATULLAH, JJ.)

Income-tax-Capital or revenue receipt-Remuneration of the

managing agent-Variation of terms of agreemcnt-C ompensation

for red11ction of the scale of remuneration for the subscque11t period of

agency-Capital expendifare.

Under an agreement dated December 8, r933, the appellant

firm was appointed managing agent

of a limited company for a

period

of thirty years from

November g, r933. 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

Agree­

ment on March 24, r948, 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 managiug agent agreed to accept

as remuneration as from September r,

1946, for the remaining

term of the managing agency ten

per cent. of the net annual

profits

of the company as defined in s.

SjC, sub-s. (3) of the Indian

Companies Act, 1913. The sum of Rs. 7,50,000 was paid by the

company

to the appellant in

1947· For the assessment year

1948-49 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 maJe by the

company wholly in discharge

of its

contingt•nt liability to pay the

higher remuneration and

it was,

tht~refore, 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 (1) 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 remuner­

ation, (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, represent­

ed 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

remunera·

tion to the appellant for the rest of the term of the managing

i959

August 4.

I959

Godrej & Cv.

v.

Conimissioner

of Income·t4X •

DasC.j.

528 SUPREME COUl'tT REPORTS [1960(1))

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 n1anaging agency by reason of

the release of its rights to get higher remuneration and was,

therefore, a capital receipt.

1'he (,~otn1nissioner uj lacouie.-tax v. Vaz·ir Sultan ... and ."ions,

(1959] 36 I.T.R. 175; Himter v. De,,•hurst, (1932) 16 Tax Cas. 605

and Glenboig Union Fireclay Co. Ltd. v. The Commissioners of

Inland Reven1te, (1922) 12 Tax Cas. 427, relied on.

Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax,

(1955] 1 S.C.R. 972 ; The Commissioner of Income-tax and Excess

Profits

Tax v. The

South India l'ictflres Ltd., (1956] S.C.R. 223;

Tho Commissioner of Income-tax v. ]airam Valji, [1459] S.C.R.

(Suppl.)

IIO

and Th,: Commissioner of Income-tax v. Shaw Wallace

and Co. (1932) L.R. 59 I.A. 206, considered.

CIVIL APPELLATE .JURISDICTION: Civil Appeal No.

183 of 1956.

Appeal from the judgment and order dated Septem­

ber 11, l 953, of the Bombay High Court, in Income-tax

Reference No. 23 of 1953.

A. V. Viswanatha Sastri, 8. N. Andley and ,/, B.

Dadacluinj i, for the appellants.

1'd. C. Setalwd, Atlorney-Ge.nernl for Indict, K. N.

Rajagopal Sa8tri, and D. Gupta., for the respondi;nt.

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 f;eptembcr 11, 1953, on a reference made by the

Income-tax Appellate Tribunal under s. 66(1) of the

Indian Income-tax Act, whernby the High Court an­

swered the referred question in the affirmative and

directed the appellant to pay the costs of the res­

pondent.

The appellant, which is a registered firm and is

hereinafter referred to as " the assessee firm ", was

appointed the managing agent of Godrej Soaps Limi­

ted (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 agree!llent dated

October 28, 1928,

S.C.R. SUPREME COURT REPORTS 529

which was subsequently substituted by another agree­

ment 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 exce8S 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 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 Agree­

ment was extraordinarily excessive and unusual and

I959

Godrej & Co.

v.

Co1nniissione,.­

of lttcome-tax

Dase.].

'959

Godrej & Co.

v.

Ccmimissiomr

of Income·ta~

Das C.J.

530 SUPREME COURT REPORTS (1960(1))

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 apecial resolution

passed

at the extraordinary general meeting of the

managed company held on

October 22, 1946. That

resolution was in the following terms :-

" l'tesolved that the agreement arrived at bet­

ween the managing agents on the one ha.nd and the

directors of your Company on the other hand, that

the managing agents, in consideration of the Com­

pany paying P..s. 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 mmual profit.s of the Com­

pany as defined in S. 87C, Suh-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 he and

the same is hereby approved and con!irmerl.

Resolved that the Company and the managing

agents do execute the necessary document modify.

ing the terms of the original nmnaging agency

agreement

in acc:ordance 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 modific.

ation as they shall think fit."

The agreed modification~ were thereafter embodied in

a Supplementary Agreement made between the asses­

see 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 agree­

ment arrived at between the parties and the resolution

referred

to above, it was agreed and declared as

follows:

$.C.R. SUPREME COURT REPORTS 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 ot the

Company as defined ins. 87C, sub-s. (3) of the Indian

Companies Act, 1913, in lieu of the higher remunera­

tion as prov.ided 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

rema~

in full force and effect and shall be read and con­

strued and be enforceable as if the terms of these

presents were inserted therein by way

of

substi­

tution."

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

pay­

ment of Rs. 7,50,000 had been despribed as compensa­

tion, the real object and consideratien 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, n:ot a capital receipt

but was a revenue receipt, and (iii) that there was, in

fact, no break in service and the payment was ma.de 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 ma.de by the managed company to

1jhe a.ssessee firm wholly in discharge of its contingent

lia.bili.ty 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.

I959

Godrej .S. Co

v.

Commissioner

of Income·ltJK

Das C. J.

r959

Godrej (5. Co.

v.

Commissioner

of Income-tax

Das C. ].

532 SUPREME COURT REPORTS [1960(1)]

The Income-tax Officer treated the sum of Rs. 7,50,000

!LS 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 t.he 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.

As

has been said by this

Court in Commissioner of

Income-tax and Excess Profits Tax, Madra;; 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 cap­

ital 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 ease. No infal­

lible 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 a.mount received as con­

sideration for

the

sale of a. plot of land may ordinarily

be capital; but if the business o'f the recipient is to

(I) [1956] S.C.R. 223, 228,

-

S.C.R. SUPREME COURT REPORTS 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 perio:l of managing agency covered by the Principal

Agreement. Prima f acie, 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 ~st laid down by Viscount Cave, L.C.,

in Atherton v. British Insu"lated and Helsby Cables

Limited(i) 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

receip~s as for expenditure. (See Simon's Income­

tax, II Edn., Vol. I, 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

con­

tends that we are not concerned in this appeal with the

problem, whether, from the point of view of the

managed company, the snm 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)

11925) 10 Tax Cas. 155.

68

(2) (1955) 1 S.C.R. 972.

r959

Godrej &Co,

v.

Commission1r of

I n&ome-twt

Das C.j.

Godrej &Co.

v.

Commissioner of

Jm;ome-tu

Das C.J.

534 SUPREME COURT REPORTS [1960(1)]

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 aud the

que,stion 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 cancel­

lation of an ordinary business contract which is a part

of the stock-in-trade of the assessee and cannot, there­

fore, 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.(')

and in The Commissioner of Income-tax, Nagpur v.

Rai Bahadur Jairam Valji(•) had been held to be. Nor

can this amount be said to have been paid as compen­

sation 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 Cummissioner

of Income-tax v. Shaw Wallace and Co.(') canhot be in­

voked.

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 Firecl,ay Co. Ltd. v. The Commissioners of Inland

Revenue('), "what is true of the whole must be equally

true of part "-a principle which has been adopted by

(1) [1956) s.c.R. 223, 228. (3) (1932)L.R. 59 I.A. 2o6.

(2) [1959] 35 I.T.R. 148: [1959) S.C.R. Supp. 110. (4)[1922) 12 Tax Cas.427.

-

S.C.R. SUPREME COURT REPORTS 535

this Court in The Commissioner of Income.tax, Hydera.

bad-Deccan v. Messrs. Vazir Sultan and Sons(

1

}. The

learned Attorney-General, however, contends tha~ this

case is not governed by the decisions in Shaw Wallace's

case(~) or Messrs. Vgzir 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,

remains unaffected. There is no destruction or sterilisa­

tion

,of any part of the business structure. The amount

in question was paid in condsideration 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 manag­

ing 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 deteriora­

tion 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

(

8

)

(r) Civil Appeal No. 346 of 1957, decided -(2) (1932) L.R. 59 I.A. 2o6.

on l\larch 20, 1959 ; [1959] 36 I.T.R. 175. (3) (1922) 12 Tax Cas. 427.

I959

Godrej &Co.

v.

Commissione1 of

Income-tax

Das C.].

'959

Godrej&Co.

v.

Comn1issioner of

lmome·tu.x

Das C.J.

536 SUPREME COURT REPOI:'l'S [1960(l)J

or Messrs. Vazir Sultan's case(•) were held to be. This

is also very nearly covered by the majority decision of

the English House of Lords in Hunter v. Dewhurst(').

It is true that in the later English eases of Prendergast

v. Oarneron(

3

) and Wales Tilley('), the decision in

H>unter v. Dewhurst(') was distinguished as being of a.n

exceptional and special nature but those later decisions

turned on the words used in r. I of Sch. E. to the

English Act. .Further, they were cases of continuation

of pernona.l service on reduced remuneration simpliciter

and not of acquisition, wholly or in part, of any manag­

ing agency viewed as a profit-making a ppa.ratus and

consequently the effoct 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 remunera;tion 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 tht• 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

a.s 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. capita.I expenditure and so far as the

assessee firm was concerned, it was received as compen­

sation for the deterioration or injury to the ma.na.ging

agency

by reason of the release of its rights to get

higher remuneration and, therefore, a ea.pita! receipt

(1) Civil Appeal No. 346 of

1957. decided (3) (1940) 23 Tax Cas. I2Z.

on March·~· 1959; [1959] 36 l.T.R. 175. (4) (1943)25 Tax C... 136,

(•) (1931) 16 Tu; Cu. 6o5.

S.C.R. SUPREME COURT REPORTS 537

within the decisions of this Court in the earlier cases

referred

to above.

In the light of the above discussion it follows,

there­

fore, 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 asicfo aDd the question is answer­

ed in the negative. The appelli1nt must get the costs

of the reference in the High Court and in this Court.

A ppe,al allowed.

THE STATE O:F SAURASHTRA

v.

MEMON HAJI ISMAIL HAJl

(S. R. DAs, C.J., N. H. BHAGWATI and

M. HIDAYATULLAH, JJ.)

Act of State-Taking over of administration of Junagadh Staie

by Domi;, o"on of India-Resumption of property by Administi;ator

before completion of such act-If an act of State not justiciable in

municipal Co14Tts.

The suit, out of which the present appeal arose, was one

originally brought by the respondent against the State of

Junagadh, later

on substituted by the State of

Saurathtra, for a

declaration

that the Administrator's order dated

October r, 1948,

resuming the immQveable property in suit was illegal, unjust and

against all canons

of natural justice. The.suit was decreed by

the

Civil Judge and the decree was affirmed by the High Court

in appeal. The only point for determination in this appeal was

whether the act

of resumption by the Administrator was an act

of State performed on behalf

of the Government of India and

involved

an alien outside the State and was not, therefore,

justiciable in the municipal

Courts. With the passing of the

Indian Independence Act 1947, and lapse of paramountcy by

reason

of s. 7 thereof, the Nawab of Junagadh became sovereign,

but instead of acceding to the new Dominion he left for Pakistan.

It appeared from the White

Paper on Indian States that the

Government of India took over the administration of the State

on November 9, 1947• at the request of the Nawab's Council, but

did not formally annex it till January 20, 1949• and during that

period the Administrator maintained law and order and carried

on the administration.

Held, that there could be no doubt thaf the act of the

Dominion of India in assuming the administration

of Junagadh

State was an act

of State pure and simple and the resumption in

I959

Godrej &Co

v.

Commissioner of

I n&ome-tax

Das C.J.

I959

August 4.