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

Citation: [1960] 1 S.C.R. 527 · Decided: 04-08-1959 · Supreme Court of India · Bench: SUDHI RANJAN DAS · Disposal: Appeal(s) allowed

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Judgment (excerpt)

' 
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

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