COMMISSIONER OF INCOME TAX Vs. PATEL BROS

JUDGEMENT

(1.) THE question arising for consideration in this reference under section 66(1) of the Indian Income -tax Act, 1922, is 'Whether, on the facts and in the circumstances of the case, the sum of Rs. 1 lakh received by the assessee by surrendering his right to the special remuneration in terms of article 29 of the articles of association of the company is a capital or revenue receipt.' The assessee is a proprietary concern belonging 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 consideration of the services rendered and to be rendered by him to the company in connection with the promotion of the company and the obtaining of films form the various distributing agents in India of the foreign producers of the films for showing by the company in India.' During the year 1952, which is the relevant accounting year for the assessment year 1953 -54 with which we are concerned in the present case, the three directors including A. C. Patel of the Ideal Pictures Ltd., entered into negotiations with certain three persons including one Giri Versingh for the sale of all their shares of the Ideal Pictures Ltd. On the 25th October, 1952, during the course of these negotiations, it was agreed to between A. C. Patel and Giri Versingh that in case the latter was able to purchase all the shares of the company, the former will cease to render service to the company as mentioned in article 29 of the articles of association and will gorge his right to receive the share in the profits of the company as mentioned in the said article and in consideration of this the latter will pay him a sum of Rs. 1 lakh. It was also further agreed that immediately on the execution of the transfer forms of all the shareholders of the said company, A. C. Patel will execute a proper document releasing his rights under the said article. On 1st November, 1952, A. C. Patel passed a receipt for having received a sum of Rs. 1 lakh in pursuance of the said agreement. In the assessment of the assessee for the 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 capitalise sum of the remuneration, which the assessee would have received in further 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 form 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 had parted with his right and had thus debarred himself for all time to come form exploiting the said right and it constituted an injury inflicted on his capital asset and it was not a payment received by him under a trading contract in the course of carrying out the normal business activities. In the second appeal, which was taken to the Income -tax Appellant Tribunal by the department, it upheld the decision of the Appellate Tribunal by the department, it upheld the decision of the Appellate Assistant commissioner holding that the payment received by the assessee was a payment for deterioration of or an injury to the assessee's right to receive remuneration and as there was complete extinction of that right it was a capital receipt in the assessee's hands. According to the Tribunal it was not possible to treat the amount as for conciliation of a counteract in the course of trade or business and consequently could not be treated as a revenue receipt. Thereafter at the instance of the department it has drawn up a statement of the case and referred to this court a question of law, which we have already set out.

(2.) MR . Joshi, the learned counsel appearing for the department, has argued that the real nature of the receipt in the present case has to be determined having regard to the contents of article 29 of the articles of association and the terms of the agreement between the assessee and Giri Versingh, in pursuance of which the payment has been made. According to the learned counsel, it is clear in terms of article 29 of the articles of association 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 of services, which A. C. Patel was under an obligation to render. Under the agreement it was provided that will cases to render the services and thus get rid of the obligation to serve and for the remuneration that be 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 he was entitled to receive annually. The learned counsel therefore has contended that the view that the Income -tax Officer has taken of the matter is the correct view and the payment in question is a payment in lieu of remuneration and by obtaining the said payment the assessee has merely filled a hole in the income which he was to get. The learned counsel has complained that the Tribunal present case, has looked upon the payment received by the assessee as destruction or sterilization of his profit -making apparatus or as a compensation received for deterioration or injury to the assessee's capital asset. The cases considered by the Tribunal, says the learned counsel, are cases of business where the payments received could be considered as affecting injuriously the business treated as a profit -making apparatus. In the present case, says the learned counsel, what we are concerned with is a matter of personal service. Considerations, therefore, of sterilization of part of whole of the business apparatus or injurious affection of capital assets of business are not material to be considered in the present case. What the assessee has received in the present case is what he was agreeable to receive in lieu of the periodical remuneration under the article 29 of the articles of association and the real nature of the payment received by the assessee therefore, is a remuneration for service and, therefore, a revenue receipt.

(3.) IN our opinion, therefore, the Tribunal was right in holding that the amount of Rs. 1 lakh was not taxable as a revenue receipt. Our answer to the question accordingly is that the sum of Rs. 1 lakh received by the assessee by surrendering his right to the special remuneration under article 29 of the articles of association of the company was a capital and not a revenue receipt.