Law: Income Tax Act, 1922

Section: 3,4

Income tax Act (XI of 1922)--Ss. 3, 4 Income or capital¬ Managing agents of company entitled to remuneration of 20 per cent. of net profits Agreement reducing remuneration to 10 per cent. of net profits Lump sum received by managing agents to release company from onerous terms as to remuneration Whether income or capital. Under an agreement dated November 9, 1933, the assessee firm was appointed the managing agent of a company for a period of 30 years and under clause 2 of the agreement it was entitled to a commission at the rate of 20 per cent. on the net profits of the company to be ascertained as mentioned therein and certain further share in the profits of the company if they exceeded certain specified figures. As some of the shareholders and directors of the company felt that the remuneration was extraordinarily excessive, negotiations were conducted and certain modifications were agreed upon which were eventually recorded in a special resolution of the company held on October 22, 1946, in the following terms : "Resolved that the agreement arrived at between the managing agents on the one hand and the directors of your company on the other hand, that the managing agents, in consideration of the company paying Rs. 7,50,000 as compen¬sation, for releasing the company from the onerous term as to remuneration contained in the present managing agency agreement, should accept as remuneration for the remaining term of their managing agency ten per cent of the net annual profits of the company as defined in section 87 C, subsection (3), of the Indian Companies Act in lieu of the higher remuneration to which they are now entitled under the provisions of the existing managing agency agreement be and the same is hereby approved and confirmed." The agreed modifications were embodied in the original agreement to the effect that as from September 1, 1946, the remuneration of the managing agent shall be 10 per cent. of the net annual profits of the company as defined in section 87 C 3 of the Indian Companies Act. 1913, in lien, of the higher remuneration provided in clause 2 of the original agreement. The assessee firm received the sum of Rs. 7,50,000 in the year 1947…

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