1. This is an appeal from the judgment and order of the High Court of Bombay delivered on September 11, 1953, on a reference made by the Income-tax Appellate Tribunal under section 66(1) of the Indian Income-tax Act, whereby the High Court answered the referred question in the affirmative and directed the appellant to pay the costs of the respondent.
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, 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 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 of the commission provided for by sub-clause (a) shall during any year exceed a sum of rupees one lakh the amount of such excess over rupees one lakh 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 lakh and twenty-four thousand one half of such excess over rupees one lakh and twenty-four thousand shall be paid to the firm and the other half to the shareholders.'
3. Some of the shareholders and directors of the managed company felt that the scale of remuneration paid to the assessee firm under clause (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 held on October 22, 1946. That resolution was in the following terms :
'Resolved that 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 section 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 company's solicitors and approved by the managing agents and the directors shall carry the same into effect with or without modification as they shall think fit.'
4. The agreed modifications were thereafter embodied in a supplementary agreement made between the assessee firm and 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 follows :
'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 of the company as defined in section 87C, sub-section (3), of the Indian Companies Act, 1913, in lieu of the higher remuneration as provided in the above recited clause (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 or substitution.'
5. 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.
6. 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 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.
7. 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 section 66(1) of the Act, made a reference to the High Court raising the following question of law :
'Whether on then facts and in the circumstances of the case the sum of Rs. 7,50,000 is a revenue receipt liable to tax.'
8. 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.
9. As has been said by this court in Commissioner of Income-tax v. South India Pictures Ltd., '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 capital receipt is well recognised, cases do arise where the item lies on the border-line and the problem has to be solved on the particular facts of each case. No infallible 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 amount received as consideration for the sale of a plot of land may ordinarily be capital; but if the business of the recipient is to 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.
10. 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 assessee firm for the rest of the period of managing agency covered by the principal agreement. Prima facie, 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 test laid down by Viscount Cave, L. C., in Atherton v. British Insulated and Helsby Cables Ltd., referred to in the judgment of this court in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax. 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 receipts as for expenditure. (See Simon's Income Tax, II Edition, Vol. I, para. 44, page 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 contends that we are not concerned in this appeals with the problem, whether, from the point of view of the managed company, the sum 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.
11. 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 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.
12. This sum of Rs. 7,50,000 has undoubtedly not been as compensation for the termination or cancellation of an ordinary business contract which is a part of the stock-in-trade of the assessee and cannot, therefore, be regarded as income, as the amounts received by the assessee in Commissioner of Income-tax v. South India Pictures Ltd. and in Commissioner of Income-tax v. Rai Bahadur Jairam Valji had been held to be. Nor can this amount be said to have 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 Commissioner of Income-tax v. Shaw Wallace and Co., cannot be invoked. 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 Wrenbur in Glenboig Union Fireclay Co. Ltd. v. Commissioners of Inland Revenue, 'what is true of the whole must be equally true of part' - a principle which has been adopted by this court in Commissioner of Income-tax v. Vazir Sultan and Sons. The learned Attorney-General, however, contends that this case is not governed by the decisions in Shaw Wallace's case, or Vazir Sultan and Sons' case, 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 sterilisation of any part of the business structure. The amount in question was paid in consideration 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 Vazir Sultan and Sons' case, 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 managing 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 deterioration 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 or Vazir Sultan's case were held to be. This case 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 cases of Prendergast v. Cameron and Wales v. Tilley, the decision in Hunter v. Dewhurst was distinguished as being of an exceptional and special nature but those later decisions turned on the words used in rule 1 of Schedule E to the English Act. Further, they were cases of continuation of personal service on reduced remuneration simpliciter and not of acquisition, wholly or in part, of any managing agency viewed as a profit-making apparatus and consequently the effect 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 remuneration paid in advance representing the difference between the higher rate of remuneration and the reduced remuneration and as such as 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 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.
13. In the light of the above discussion it follows, therefore, 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. The appellant must get the costs of the reference in the High Court and in this court.
14. Appeal allowed.