TMI Blog1953 (9) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... r, 1933. The agreement fixed the remuneration that was to be paid to the managing agency firm, and the remuneration fixed was that it was to get every year 20 per cent, on the net profits of the company. There was also a provision that if during any year the net profits exceeded a sum of ₹ 1,00,000, the amount of such excess over ₹ 1,00,000 upto a limit of ₹ 24,000 was to be paid to the managing agents as their remuneration, and it was further provided that if the profits exceeded ₹ 1,24,000 half of such excess over ₹ 1,24,000 shall be paid to the managing agents. Pursuant to this agreement the assessee company worked as the managing agents of the managed company. On the 26th of July, 1946, Mr. T. M. Kajiji, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agency agreement. It is further pointed out that under the managing agency agreement there were onerous terms imposed upon the managed company. The managed company got itself released from these onerous terms and in order to be so released it paid a sum of ₹ 7,50,000 to the assessee firm. On the other hand, the assessee firm gave up valuable rights which it had under the agreement and received the sum as compensation for the same. Now, it is undoubtedly true that if the transaction which was effected was of the nature suggested by Mr. Palkhiwala, then the payment of ₹ 7,50,000 would be a capital receipt. If this sum was paid as a compensation in consideration of the assessee firm releasing its valuable rights under the agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid to the assessee company in advance. Now, it is very significant to note that the agreement that was arrived at was nothing more than and nothing less than the modification of the original managing agency agreement. The only modification was that instead of the assessee company continuing to serve the managed company as managing agents on the remuneration fixed under the original agreement, the assessee company agreed to serve the managed company on a reduced salary and it received ₹ 7,50,000 for agreeing to the reduction of its remuneration in accordance with the terms fixed under the original agreement. The pivotal point of the agreement is the obligation cast upon the assesses company to continue to serve as managing agents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the original agreement. Therefore ₹ 7,50,000 does not represent the source of the income of the assessee but it represents the income which the assessee would have received under the original agreement. The source remained the same. The source was the service to be rendered by the assessee as the managing agents. Instead of that source giving to the assessee remuneration as fixed under the original agreement it gave the assessee a sum of ₹ 7,50,000. If the transaction is looked at in that light, it is clear that the receipt of ₹ 7,50,000 was a revenue receipt and not a capital receipt. Two cases were relied upon by Mr. Palkhiwala, both English cases. The first is a decision of the House of Lords in Henry ( H. M. Inspe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t) Therefore, it would have been impossible for the House of Lords to have said in this case that 10,000 represented reduction of remuneration for services to be rendered by Dewhurst. He was under no obligation to serve and it might be said that when this agreement was arrived at the source was literally dried up because the agreement to serve as a director was no longer there. If Dewhurst served at all, it would be at his own option, and 10,000 did not represent the income from that particular source. In the case before us, as already pointed out, under the modified agreement there was an obligation upon the assessee to continue to serve for the remaining period of the managing agency agreement and his right to accept remuneration con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 years. A subsequent agreement was arrived at and the company was released from its obligation to pay to the assessee the pension as agreed to and also it was agreed that the assessee should accept a reduced salary of 2,000 instead of 6,000 a year and in consideration of the assessee agreeing to these modified terms the company undertook to pay 40,000 in two instalments of 20,000 each, and the question was whether this source of 40,000 represented a revenue or a capital receipt. The House of Lords decided this case on the basis that different principles applied to the release of the company from its prospective obligation to pay pension and the amount received by the assessee as consideration for agreeing to serve the company in f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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