9911796707
TMI Blog1975 (9) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement executed in favour of Juggilal Kamlapat and the said managing agents readily accepted the offer made by the appellant as a result of which a deed of release was executed by the managing agents, Juggilal Kamlapat, on September 28, 1943. Under the release the appellant agreed to pay a sum of Rs. 2,50,000 to the outgoing managing agents by way of compensation for terminating the agreement much earlier than stipulated under the original contract. The appellant, however, employed another firm, namely, J. K. Commercial Corporation as their new managing agents and executed an agreement in their favour on September 30, 1943. The action of the company was approved by the board of directors. The dispute in the instant case centres round the question as to whether the compensation of Rs. 2,50,000 paid to the outgoing managing agents was a capital or a revenue expenditure incurred by the appellant. The stand taken by the assessee before the revenue was that as the expenses were incurred wholly and exclusively for the purpose of carrying on the business of the company it would fall under section 10(2)(xv) of the Income-tax Act, 1922, which is the same as section 37(1) of the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, it was submitted that the High Court was in error in not correctly applying the decision of this Court in Godrej & Co. v. Commissioner of Income-tax. The learned counsel for the appellant has adumbrated four propositions before us for consideration : (1) Where a payment is made by the payer-company to the payee-company in lieu of termination of its agency, it does not follow that the said payment which was made for the purpose of business must ipso facto be considered to be capital expenditure in the hands of the payer-company. (2) So far as the payee-company is concerned, the law is that generally any compensation received by it must be considered as capital receipt. (3) So far as the payer-company is concerned, if payment is for the purpose of business, the mere fact that it has, by virtue of the payment, increased its profits and reduced its expenses, should not be regarded as expenditure of capital nature but would be one in the course of business unless some oblique or gratuitous purpose is involved. (4) The principles laid down in Godrej & Co.'s case would have to be read as laying down only a proposition that the payer-company, namely, the managed company, was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s had refused to reduce their commission if that was the only ground for changing hands of the managing agency. (3) This is not a case where the appellant reduced its expenditure by doing away with the middleman's profit, e.g., to get rid of the managing agency and taking the managing agency itself. It is only a question of substituting one managing agents for another. (4) That although a compensation of Rs. 2,50,000 was paid by the appellant to the outgoing managing agents, yet by employing the new managing agents a net profit of Rs. 30,000 was made by the company which was in the nature of a recurring benefit, apart from other facilities. (5) That constitution of the two managing agents, namely, outgoing and the incoming managing agents, shows that the Singhania family (the appellant) had major interest in both of them. These facts have been clearly proved by the additional documents filed in this court which were the annexures filed by the Tribunal in the statement of the case sent to the High Court along with the reference. Annexure " G " at page 69 of the paper book shows that at the time of terminating the agency of Juggilal Kamlapat high compliments were paid to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows : " In the light of those decisions the sum of Rs. 7,50,000 was paid and received not to make up the difference between the higher remuneration and the reduced remuneration but was in reality paid and received as compensation for releasing the company from the onerous terms as to remuneration as it was in terms expressed to be. In other words, so far as the managed company was concerned, it was paid for securing immunity from the liability to pay higher remuneration to the assessee-firm for the rest of the term of the managing agency and, therefore, a capital expenditure and so far as the assessee-firm was concerned, it was received as compensation for the deterioration or injury to the managing agency by reason of the release of its rights to get higher remuneration and, therefore, a capital receipt within the decisions of this court in the earlier cases referred to above. " Mr. Asoke Sen tried to distinguish this case on the ground that the court was concerned in the Godrej & Co.'s case only with the nature of the payment in the hands of the payee-company and any observations made as to what would be the nature of the payment in the hands of the payer-company would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sian Oil Co. (India) Ltd.'s case does not appear to be of any assistance to the assessee. Reliance was also placed in a decision in Commissioner of Income-tax v. Shaw Wallace and Co., in which case the judicial Committee of the Privy Council merely affirmed the finding of the High Court that the sums received by the respondents were not income, profits or gains within the meaning of the Act though they gave different reasons for that conclusion. It may be noticed that Shaw Wallace and Co.'s case turned upon the facts and circumstances of the case and the nature of the payment made to the company. While affirming the finding of the High Court their Lordships observed as follows : " The question was, however, re-stated by the learned Chief Justice in more precise terms, namely, ' whether these sums are income, profits or gains within the meaning of the Act at all,' and for the reasons stated in his judgment he came to the conclusion that they were not. Their Lordships think that his conclusion was right though they arrive at this result by a slightly different road. Reliance was also placed on a decision of this court in Karam Chand Thapar and Bros. P. Ltd. v. Commissioner of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction with the business does not come within the meaning of section 10(2)(xv) of the Act." This case also is distinguishable from the facts of the present case, inasmuch as in Turner Morrison & Co.'s case there was no question of termination of any managing agency but what had happened was that two directors had retired and in their place an expert director was appointed to manage the affairs of the company. On the facts of that case this court held that the expenditure was incurred for commercial expediency in order to facilitate business. In the instant case, as we have already pointed out, termination of the managing agency of the outgoing agents was a voluntary act not caused by any negligence or inefficiency by the outgoing managing agents. In these circumstances, on the facts and circumstances, we would not consider whether it was commercially expedient in order to facilitate business that the managing agency of the outgoing agents should have been terminated. Learned counsel for the appellant also referred us to the decision of the Bombay High Court in Greaves Cotton & Co. Ltd. v. Commissioner of Income-tax, where the Bombay High Court observed as follows : We have alr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. There is no basis for holding that by terminating the managing agency, the company acquired any enduring benefit or any income-yielding asset. It is true that by terminating services of the managing agents the company not only saved the expense that it would have had to incur in the relevant previous year but also for few more years to come. It will not be correct to say that by avoiding certain business expenditure, the company can be said to have acquired enduring benefits or acquired any income-yielding asset." It may be seen that in that case there was a finding of fact that the termination of the managing agency was purely on business considerations and as a matter of commercial expediency and that no enduring benefits were acquired by the company. Similarly in M. K. Brothers (P.) Ltd. v. Commissioner of Income-tax my brother, Khanna J., speaking for the court, indicated the real tests to determine whether an amount is of a capital nature. In this connection the court observed as follows : " The answer to the question as to whether the money paid is a revenue expenditure or capital expenditure depends not so much upon the fact as to whether the amount paid is large or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lord Haldane in John Smith & Son v. Moore has aptly and adroitly explained the terms " fixed capital " and " circulating capital " thus : " Fixed capital is what the assessee turns into profit by keeping it in his own possession and circulating capital is what he makes profit of by parting with it and letting it change masters. " (3) Expenditure relating to framework of business is generally capital expenditure. (4) Another important and safe test that may be laid down particularly in cases where the managing agency is terminated would be to find out whether the termination of the agency is in terrorem or purely voluntary for obtaining substantial benefits. In other words, the decisive test to determine whether or not termination of the agency is in terrorem would be to find out if in such a case commercial expediency requires that the agency should be terminated as it had become onerous or it was creating difficulties or the agents were guilty of negligence, etc. It will also include payments for retrenchment compensation or conferment of benefits on employees or termination of other disadvantages or onerous relationships. These are some of the instances which I have give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sity to terminate the managing agency of Juggilal Kamlapat only two years after the appellant entered into agreement with them. There was no complaint that the agents had in any way caused any loss or damage to the appellant or to their reputation, nor was there anything to show that the outgoing agents were guilty of negligence, laches, fraud or inefficiency. In these circumstances, therefore, the only irresistible inference that could be drawn is that the assessee wanted to benefit both the firms, namely, incoming agents and the outgoing agents, which belonged to the Singhania family as found by the Tribunal and not disputed before us. The outgoing agents were benefited because an amount of Rs. 2,50,000 was paid to them and the incoming agents were benefited because they were given the managing agency of the company and as found by the Tribunal the appellant had pledged their goods in lieu of advance. (2) That it is the admitted case of the appellant that by virtue of the fact that the incoming agents had agreed to charge only 2% commission, the appellant got a benefit of Rs. 30,000 per annum. This amount is a recurring benefit to the appellant and can safely be regarded as an ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
