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Commissioner of Income-tax, Bombay City-ii Vs. Patel Bros. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 18 of 1962
Judge
Reported in[1966]61ITR685(Bom)
ActsIncome Tax Act, 1922 - Sections 10(2)
AppellantCommissioner of Income-tax, Bombay City-ii
RespondentPatel Bros.
Appellant AdvocateG.N. Joshi, Adv.
Respondent AdvocateF.N. Kaka, Adv.
Excerpt:
.....sterilization of his profit-making apparatus or as a compensation received for deterioration or injury to the assessee's capital asset. from the said article sprang up rights as well as liabilities on either side. it is well settled that, although remuneration for services rendered is undoubtedly an income received, a compensation paid for the destruction of a contract of service or loss or termination of service is a payment of a capital nature......that the payment received by the assessee was a payment for deterioration of or an injury to the assessee's right to receive remuneration and as there was complete extinction of that right it was a capital receipt in the assessee's hands. according to the tribunal it was not possible to treat the amount as for conciliation of a counteract in the course of trade or business and consequently could not be treated as a revenue receipt. thereafter at the instance of the department it has drawn up a statement of the case and referred to this court a question of law, which we have already set out. 2. mr. joshi, the learned counsel appearing for the department, has argued that the real nature of the receipt in the present case has to be determined having regard to the contents of article 29 of.....
Judgment:

V.S. Desai, J.

1. The question arising for consideration in this reference under section 66(1) of the Indian Income-tax Act, 1922, is 'Whether, on the facts and in the circumstances of the case, the sum of Rs. 1 lakh received by the assessee by surrendering his right to the special remuneration in terms of article 29 of the articles of association of the company is a capital or revenue receipt.' The assessee is a proprietary concern belonging to one A. C. Patel. A. C. Patel was the promoter of a company called the Ideal Pictures Ltd., which was started in the year 1936. all the shares of this company were held by A. C. Patel and two others, who were the three directors of the company. Since the commencement of the company. A. C. Patel was also appointed a managing director of the company on a monthly salary of Rs. 750. In addition to this salary, under article 29 of the articles of association of the company, he was paid a sum equal to 1/10th of the surplus of the profits of the company remaining after paying dividend at the rate of 6% per annum on the capital paid up on all the ordinary shares of the company. In terms of article 29 this payment to A. C. Patel was 'in consideration of the services rendered and to be rendered by him to the company in connection with the promotion of the company and the obtaining of films form the various distributing agents in India of the foreign producers of the films for showing by the company in India.' During the year 1952, which is the relevant accounting year for the assessment year 1953-54 with which we are concerned in the present case, the three directors including A. C. Patel of the Ideal Pictures Ltd., entered into negotiations with certain three persons including one Giri Versingh for the sale of all their shares of the Ideal Pictures Ltd. On the 25th October, 1952, during the course of these negotiations, it was agreed to between A. C. Patel and Giri Versingh that in case the latter was able to purchase all the shares of the company, the former will cease to render service to the company as mentioned in article 29 of the articles of association and will gorge his right to receive the share in the profits of the company as mentioned in the said article and in consideration of this the latter will pay him a sum of Rs. 1 lakh. It was also further agreed that immediately on the execution of the transfer forms of all the shareholders of the said company, A. C. Patel will execute a proper document releasing his rights under the said article. On 1st November, 1952, A. C. Patel passed a receipt for having received a sum of Rs. 1 lakh in pursuance of the said agreement. In the assessment of the assessee for the assessment year 1953-54, this sum was taxed by the Income-tax Officer on the basis that it was a revenue receipt. According to the Income-tax Officer, it was a capitalise sum of the remuneration, which the assessee would have received in further in terms of the agreement contained in article 29 of the articles of association and therefore liable to be treated as a revenue receipt. The assessee appealed against this decision of the Income-tax Officer to the Appellate Assistant Commissioner, who held that the payment received by the assessee was a simple capital receipt received form a third party for transfer of his right to share a special remuneration provided in the articles of association of the company. According to him, the assessee had parted with his right and had thus debarred himself for all time to come form exploiting the said right and it constituted an injury inflicted on his capital asset and it was not a payment received by him under a trading contract in the course of carrying out the normal business activities. In the second appeal, which was taken to the Income-tax Appellant Tribunal by the department, it upheld the decision of the Appellate Tribunal by the department, it upheld the decision of the Appellate Assistant commissioner holding that the payment received by the assessee was a payment for deterioration of or an injury to the assessee's right to receive remuneration and as there was complete extinction of that right it was a capital receipt in the assessee's hands. According to the Tribunal it was not possible to treat the amount as for conciliation of a counteract in the course of trade or business and consequently could not be treated as a revenue receipt. Thereafter at the instance of the department it has drawn up a statement of the case and referred to this court a question of law, which we have already set out.

2. Mr. Joshi, the learned counsel appearing for the department, has argued that the real nature of the receipt in the present case has to be determined having regard to the contents of article 29 of the articles of association and the terms of the agreement between the assessee and Giri Versingh, in pursuance of which the payment has been made. According to the learned counsel, it is clear in terms of article 29 of the articles of association that A. C. Patel was to be paid 1/10th of the surplus profits of the company in consideration of certain services to be rendered by him. In other words, the payment contemplated under article 29 was a remuneration of services, which A. C. Patel was under an obligation to render. Under the agreement it was provided that will cases to render the services and thus get rid of the obligation to serve and for the remuneration that be was entitled to receive under article 29 he would be paid a lump sum of Rs. 1 lakh. According to the learned counsel, therefore, the payment of Rs. 1 lakh, which was promised to A. C. Patel under the agreement was a lump sum capitalization of the remuneration which under article 29 of the articles of association he was entitled to receive annually. The learned counsel therefore has contended that the view that the Income-tax Officer has taken of the matter is the correct view and the payment in question is a payment in lieu of remuneration and by obtaining the said payment the assessee has merely filled a hole in the income which he was to get. The learned counsel has complained that the Tribunal present case, has looked upon the payment received by the assessee as destruction or sterilization of his profit-making apparatus or as a compensation received for deterioration or injury to the assessee's capital asset. The cases considered by the Tribunal, says the learned counsel, are cases of business where the payments received could be considered as affecting injuriously the business treated as a profit-making apparatus. In the present case, says the learned counsel, what we are concerned with is a matter of personal service. Considerations, therefore, of sterilization of part of whole of the business apparatus or injurious affection of capital assets of business are not material to be considered in the present case. What the assessee has received in the present case is what he was agreeable to receive in lieu of the periodical remuneration under the article 29 of the articles of association and the real nature of the payment received by the assessee therefore, is a remuneration for service and, therefore, a revenue receipt.

3. We do not find it possible to agree with the submissions advanced by the learned counsel for the revenue. It is true, as he says, that the real nature of the receipt in the present case has got to be determined with reference to the facts and circumstances of the case and particularly the contents of article 29 of the articles of association and the agreement between the assessee and Giri Versingh. The assessee was a promoter and one of the three directors of the Ideal Pictures Ltd., and he was also its managing director. As managing director he was receiving a monthly salary or Rs. 750 and in addition it was agreed to under the article 29 that he would get for the duration of the life of the company a 1/10th share of the surplus profits in consideration of the services rendered by him in promoting the company and to be rendered in future by way of obtaining films for exhibition for the company. Under the said article the assessee had a right, on his rendering such services as were specified therein, to obtain a 1/10th share in the profits of the company. Mr. Joshi says, on a construction of this article, that he had undertaken an obligation to render services for the company for its duration. We do not think that the effect of the said article was merely to create an obligation on the assessee to serve. From the said article sprang up rights as well as liabilities on either side. There was a right in the assessee to be entitled to profits on the rendering of services. There was undoubtedly an obligation to serve, but a contract of service, though it always involves an obligation on the party centering into service to serve, it not concerned only with the matter of obligation but involves a right to the service and the remuneration which the rendering of services is to bring. There was, therefore, not only an obligation to serve but also, considered from the opposite point of view, a right to the service in favour of the assessee. There was, on the other hand, an obligation on the company on services rendered by the assessee, which he was entitled to render, to give him a share of profit as specified in the said article. Mr. Joshi, says that the right to receive profits was dependent only on services having been rendered and if no services were rendered by the assessee, there was no obligation on the part of the company to permit him to share in the profits. Consequently, what was being agreed to under this article was that the company would allow him to share in the profits in the event of his having rendered services and, therefore, there was no right to service as such created under the article. In is impossible to agree with its contention. If the assessee was willing to serve and prepared to serve, it was not possible for the company to say 'You do not serve and we will not pay you anything.' The terms of article 29 do not envisage such a position. If the assessee were not to render the services, which he was expected to render under the article, the company might have been able to resist making the payment to him as stipulates. But that does not mean that if the assessee was willing to render services the company could prevent him from so doing and absolve itself of the obligation to pay him a share in the profits. It is clear from the terms of this article, according to us, that the company had agreed to continue A. C. Patel to go on rendering services to it and had promised to remunerate him by paying a tenth of its surplus profits all throughout its life. Under these terms A. C. Patel had a right to the rendering off services and to be entitled to the remuneration as stipulated. That a right of a lasting and enduring nature was created in favour of the A. C. Patal under the said article is clear form the subsequent agreement. If there was no right to service created under the article, there was no reason whatsoever why a payment of Rs. 1 lakh should have been offered for releasing that right. It is impossible to regard this payment of Rs. 1 lakh as remuneration for services, because no services were to be rendered. The payment was being made as a matter of fact for ceasing to render services and giving up the right to serve and receive payment. It is impossible, therefore, in our opinion, to regard the payment made in the present case as a capitalised payment for remuneration. It was a payment for forgoing the right, which the assessee had under article 29 of the articles of association and which entitled him to have a 1/10th share of the profits of the company for the entire duration of the life of the company on the rendering of services. It is well settled that, although remuneration for services rendered is undoubtedly an income received, a compensation paid for the destruction of a contract of service or loss or termination of service is a payment of a capital nature. In the present case the payment made to A. C. Patel was for the extinction of the contract of service, which he had under article 29 of the articles of association to serve the company for the duration of its loft and receive remuneration at the rate of 1/10th of its surplus profits. Mr. Joshi has argued that a compensation paid for compulsory or forcible termination or destruction of a contract of service may amount to a capital receipt, but where a contract of service is put an end to voluntarily by both the parties to the contract, the payment made to the employee by the employer cannot be a capital payment but will only have the nature of a capitalised payment for remuneration, the right to which is forgone by the employee. We are not inclined to agree with this submission of the learned counsel. We do not find it necessary to discuss it in great detail in the present case, because in our opinion there is an element of compulsion or forcible extinction of the contract of service of A. C. Patel in the present case. A. C. Patel and the other two directors were inclined to dispose of the shares held by them in the Indal Pictures Ltd. In the negotiation for the sale of these shares, one of the intending purchasers made it a part of the bargain that if he purchased the whole lot, A. C. Patel will cease to render services and have the benefit of article 29 of the articles of association. In other words, giving up the right under article 29 of the articles of association was an important and vital condition of the sale of the shares. It was not, therefore, the A. C. Patel was voluntarily agreeing to for go his rights, but he was doing it as a part of the bargain for which he was being compensated by the payment that was being made to him.

4. In our opinion, therefore, the Tribunal was right in holding that the amount of Rs. 1 lakh was not taxable as a revenue receipt. Our answer to the question accordingly is that the sum of Rs. 1 lakh received by the assessee by surrendering his right to the special remuneration under article 29 of the articles of association of the company was a capital and not a revenue receipt.

5. The Commissioner will pay the costs of the assessee.


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