9911796707
TMI Blog1966 (2) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... g to one A. C. Patel. A. C. Patel was the promoter of a company called the Ideal Pictures Ltd., which was started in the year 1936. All the shares of this company were held by A.C. Patel and two others, who were the three directors of the company. Since the commencement of the company, A.C. Patel was also appointed a managing director of the company on a monthly salary of Rs. 750. In addition to this salary, under article 29 of the articles of association of the company, he was paid a sum equal to 1/10th of the surplus of the profits of the company remaining after paying dividend at the rate of 6% per annum on the capital paid up on all the ordinary shares of the company. In terms of article 29 this payment to A. C. Patel was " in considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment year 1953-54, this sum was taxed by the Income-tax Officer on the basis that it was a revenue receipt. According to the Income-tax Officer, it was a capitalised sum of the remuneration, which the assessee would have received in future in terms of the agreement contained in article 29 of the articles of association and therefore liable to be treated as a revenue receipt. The assessee appealed against this decision of the Income-tax Officer to the Appellate Assistant Commissioner, who held that the payment received by the assessee was a simple capital receipt received from a third party for transfer of his right to share a special remuneration provided in the articles of association of the company. According to him, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that A. C. Patel was to be paid 1/10th of the surplus profits of the company in consideration of certain services to be rendered by him. In other words, the payment contemplated under article 29 was a remuneration for services, which A. C. Patel was under an obligation to render. Under the agreement it was provided that he will cease to render the services and thus get rid of the obligation to serve and for the remuneration that he was entitled to receive under article 29 he would be paid a lump sum of Rs. 1 lakh. According to the learned counsel, therefore, the payment of Rs. 1 lakh, which was promised to A. C. Patel under the agreement was a lump sum capitalization of the remuneration which under article 29 of the articles of association ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipt. We do not find it possible to agree with the submissions advanced by the learned counsel for the revenue. It is true, as he says, that the real nature of the receipt in the present case has got to be determined with reference to the facts and circumstances of the case and particularly the contents of article 29 of the articles of association and the agreement between the assessee and Giri Versingh. The assessee was a promoter and one of the three directors of the Ideal Pictures Ltd., and he was also its managing director. As managing director he was receiving a monthly salary of Rs. 750 and in addition it was agreed to under article 29 that he would get for the duration of the life of the company a 1/10th share of the surplus prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been rendered and if no services were rendered by the assessee, there was no obligation on the part of the company to permit him to share in the profits. Consequently, what was being agreed to under this article was that the company would allow him to share in the profits in the event of his having rendered services and, therefore, there was no right to service as such created under the article. It is impossible to agree with this contention. If the assessee was willing to serve and prepared to serve, it was not possible for the company to say " You do not serve and we will not pay you anything. " The terms of article 29 do not envisage such a position. If the assessee were not to render the services, which he was expected to render under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... him to have a 1/10th share of the profits of the company for the entire duration of the life of the company on the rendering of services. It is well settled that, although remuneration for services rendered is undoubtedly an income received, a compensation paid for the destruction of a contract of service or loss or termination of service is a payment of a capital nature. In the present case the payment made to A . C. Patel was for the extinction of the contract of service, which he had under article 29 of the articles of association to serve the company for the duration of its life and receive remuneration at the rate of 1/10 of its surplus profits. Mr. Joshi has argued that a compensation paid for compulsory or forcible termination or des ..... X X X X Extracts X X X X X X X X Extracts X X X X
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