MESSRS. GODREJ & COMPANY, BOMBAY vs. COMMISSIONER OF INCOME-TAX, BOMBAY

CIVIL APPEAL No. 183/1956Supreme Court[1960] 1 S.C.R. 52704 August 1959Bench: 3 JudgesAuthor: SUDHI RANJAN DAS, NATWARLAL HARILAL BHAGWATI, M. HIDAYATULLAH S.C.R. SUPREME COURT REPORTS11 pages
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What did the Supreme Court hold?

The Tribunal held that the sum of Rs. 7,50,000 was paid by the company to secure immunity from the liability to pay higher remuneration for the remainder of the managing agency term. Consequently, it was a capital expenditure for the company. For the appellant, it was received as compensation for the deterioration or injury to the managing agency business due to the release of its rights to higher remuneration. Therefore, it was a capital receipt. The Tribunal relied on the principles laid down in Commissioner of Income-tax v. Vazir Sultan & Sons, Hunter v. Dewhurst, and Glenboig Union Fireclay Co. Ltd. v. The Commissioners of Inland Revenue. The High Court's affirmative answer to the referred question was set aside, and the question was answered in the negative. The appeal was allowed, with costs awarded to the appellant.

What were the facts?

The appellant, Godrej & Company, was the managing agent of Godrej Soaps Limited under an agreement dated December 8, 1933, for a period of thirty years from November 9, 1933. The agreement stipulated a remuneration of 20% of net profits, with additional percentages for profits exceeding certain thresholds. Due to concerns about the remuneration being excessive, a Supplementary Agreement was executed on March 24, 1948. Under this, the company paid Rs. 7,50,000 to the appellant as compensation for releasing the company from the onerous terms regarding remuneration. The appellant agreed to accept 10% of net profits as remuneration from September 1, 1946, for the remaining term. The Income-Tax Officer treated the Rs. 7,50,000 as a revenue receipt for the assessment year 1948-49, which the appellant contested, claiming it was a capital receipt.

What were the issues?

1. Whether the sum of Rs. 7,50,000 received by the appellant was a capital receipt or a revenue receipt, in light of Section 4 of the Indian Income-tax Act, 1922. Assessee's contentions: The sum was a payment made wholly in discharge of a contingent liability to pay higher remuneration. Therefore, it constituted capital expenditure for the company and a capital receipt for the appellant, not liable to tax. Revenue's contentions: (1) Although described as compensation, the real object was the reduction of remuneration. (2) It was a lump sum payment for varying employment terms, thus a revenue receipt, not capital. (3) There was no break in service, and the payment was made in the course of continuing service, representing a revenue receipt of the managing agency business.

Which sections of the Income-tax Act were involved?

Section 4

AI-generated summary — verify with the full judgment below

' 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 age

The order continues below.

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