Das, C. J. - (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 S. 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, 1988. 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 the commission provided for by sub-clause (a) shall during any year exceed a sum of rupees one lac the amount of such excess 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 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 had 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 S. 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 way the same into effect with or without modification as they shall think fit." The agreed modifications were thereafter embodied in a Supplementary Agreement made between the assessee firm an 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 S. 87C, sub-s. (3) of the Indian Companies Act, 1913 in lieu of the higher remuneration as provided 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 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 of substitution." 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.
(3.) 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 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 (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.;