THE COMMISSIONER OF INCOME-TAX, MADRAS versus CHARI AND CHARI LTD.

Citation: [1965] 3 S.C.R. 692 · Decided: 09-04-1965 · Supreme Court of India · Bench: K. SUBBA RAO · Disposal: Dismissed

Cited by 1 judgment(s) · see the full citation network in Lexace

Judgment (excerpt)

THE COMMISSIONER OF INCOME-TAX, MADRAS 
v. 
CHARI AND CHARI LTD. 
April 9, 1965 
!K. SUBBA RAO, J. C. SHAH AND S. M. SIKRI, J.J.J 
. Income' Tax Act, 1922, s. 10(2)(xv)-Deduct'on claimed by asses-
see of commission paid to director for special duties-Rate of com-
mission bona fide determined 'by assessee-Whether open to revenue 
to review such rate. 
Managing Agency-Compensation for termination of-Circum-
.stance.! in which such compensation is revenue. 
The respondent, a private limited company, carried on business 
in tol:acco and other commodities and also acted as managing agents 
for the N company and for two other companies. It had three direc-
tors, all oI whom ""re paid a fixed remuneration for attending to 
the business of the company. On June, 21, 1951, the respondent com-
pany was appointed an agent of the Central Government for buying, 
checking, leaf dcying, and retaining and reselling tobacco under, and 
in accordance with, directions issued from time to time. On June 
22, 1951, the respondent passed a resolution 
placing one of the 
directors, A, in "special charge" of all the work under the contract 
with the Central Government and agreed to pay him 30 per cent of 
the net profits from the contract. Under this arrangement, for the 
year ended 31st March 1952, commission at 30 per cent was calculat-
ed and paid to A and was claimed in the assessment year 1952-53 as 
a permissible deduction under s. 10(2)(xv) of the Income-tax Act, 
1922. The Income-tax Officer allowed only 10 per cent of the net 
pcofit for the services rendered by A and disallowed the balance 
amount claimed by the respondent. 
The managing agency agreement of the respondent with the N 
Company was terminated in September 1951, when the State Govern-
ment acquired the undertaking of that company, and the respoQdent 
was paid Rs. 17,346 as compensation for premature termination of 
its agency. This amount \Vas taken into account by the Income-tax 
Officer in comput~ng the respondent's income for the year ended 
March 31, 1952. 
Appeals against the order of the Income-tax Officer to the Appellate 
Asoistant Commissioner and to the Tribunal challenging the disallow-
ance of part of the commission and inclusion of the compensation 
for termination of the managing agency were unsuccessful. On a 
reference on both these points, the High Court decided them in the 
respondent's favour. 
HELD: (i) The contract -.vi th the Government was, for 'the res-
pondent, an important contract requiring special attention by a 
person well acquainted with the practical details of the business. 
If for such special services the management as prudent business men 
for advancing the interest of respondent bona 'fide regarded 30 per 
cent o! the net profits as reasonable remW>eration the revenue 
authorities were not justified in reviewing that opinion'. and reducing 
the rate of remuneration. [697B, CJ 
· 
611e 
A 
B 
c 
D 
E 
p 
G 
R 
A 
B 
0 
D 
E 
C.I.T. V. 
CHARI AND CHARI (Shah,' J.) 
Where on a consideration of the relevant materials the Appel-
late Tribu~al is of the opinion that a particular remuneration is not 
bona fide or is unreasonable, the High Court, in exercising its 
advisory 'jurisdiction, has no power to interfere with that opinion; 
but in the present case, material circumstances relating to the nature 
of the contract and the special services to be performed were not 
at all taken into account by the revenue authorities. [697C-E] 
(ii) Ordinarily, 
compensation 
for loss of office or agency is 
regarded as a capital receipt; but this rule is subject to an exception 
that payment received even for termination of an agency agreement, 
where the agency is one of many which the assessee holds, and the 
termination of the agency does not impafr the profit-making structure 
of the assessee, but is within the frame-work of the busiriess, it being 
a necessary incident of the business that existing agencies may be 
terminated and fresh agencies may be taken, is revenue and not 
capital. However, in the absence of evidence as to what effect the 
determination of the managing agency of the N company had upon 
the business of the respondent, the mere circumstance that the res-
pondent had managing agencies of two other companies without more 
would not bring the present case within the exception [698H; 699 
A-CJ 
Kelsal Parsons & Co. v. Co1nmissioners of Inland Re11enue, 21T.C. 
and Kettlewell Bullen & Co. v. C.I.T. Calcutta, [19641 8 S.C.R. 93 ex-

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