TMI Blog1985 (12) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... all expenses involved in the establishment and maintenance of the sales organisation. The agreement did not provide for any particular period and it was intended to be a permanent agreement and it came into force on and from 20th June, 1947. For some reason or the other, the drug company wanted to terminate this agreement and a termination agreement was entered into on the 2nd of July, 1949, and the original agreement was terminated with effect from 1st of July 1949. In consideration of the assessee agreeing to the termination of the contract, the drug company agreed to pay compensation to the assessee. The compensation provided was a commission of 5 percent. of the gross turnover of the drug company for a period 10 years as and from 1st of July, 1949. The commission is to be calculated and paid monthly, according to the English calendar month commencing from 1st of July, 1949, each month's commission being payable on or before the 15th day of the succeeding month. The termination agreement further provided that if within the period of 10 years as provided above, the drug company ceased to manufacture pharmaceuticals, or transferred the whole or any part of its business or goodwi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e accounting year 1957-58, Rs. 30,839.96 during the accounting year 1958-59, Rs. 18,600.05 during the accounting year 1960.61, Rs. 5,087.54 during the accounting year 1961-62 and Rs. 1,163.68 during the accounting year 1962-63. It appears that the assessment had been made on the assessee up to the assessment year 1953-54 and thereafter no assessment was made since it had been reported that the assessee-company had not earned any income after the accounting year relevant to the assessment year 1953-54. On the basis of the receipt of Rs. 43,078.66 during the assessment year 1958-59 relevant to the accounting year 1957-58, the Income-tax Officer proceeded to assess the assessee in the view that the entire sum of Rs. 43,078.66 rounded of as Rs. 43,079 has accrued during the relevant accounting year. The assessee preferred an appeal to the Appellate Assistant Commissioner contending that the amounts received by the assessee were only capital receipts and hence not taxable. The Appellate Assistant Commissioner accepted the above contention. In the appeal filed by the Department before the Tribunal, the Revenue relied on section 10(5A) of the Indian Income-tax Act, 1922, and the corresp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arious amounts had accrued to the assessee on July 2, 1949." The Tribunal was also of the view that the compromise decree also quantified the amount due for the various years and that showed that the right to receive the amount in relation to any particular accounting year accrued to the assessee only at the end of such accounting year. At the instance of the assessee, the following question has been referred : "Whether, on the facts and circumstances of the case, compensation payable to the assessee-company by M/s. Associated Drug Company in pursuance of the compromise decree dated August 23, 1957, for the period from April 1, 1957, to March 31, 1958, is assessable under section 10(5A) of the Indian Income-tax Act, 1922, for the assessment year 1958-59 ?" It may be seen from the facts stated above that the original sales organisation agreement did not provide for any period during which it was to subsist. The parties intended probably that it may have to subsist so long as both of them wanted it to continue. However, by mutual agreement, the termination was effected with effect from July 1, 1949, under the termination agreement dated July 2, 1949. Clause 2 of the termination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end of each month. All these alterations, in our opinion, have no effect on the position that the income had accrued to the assessee only during the assessment years and it did not accrue on July 2, 1949, when the termination agreement was entered into. A somewhat similar question came up for consideration in F. E. Hardcastle Co. (Private) Ltd. v. CIT [1963] 47 ITR 394 (Bom). In that case, the managing agency of a company, which the assessee held was terminated under an agreement dated September 29, 1953, with effect from December 1, 1952. The agreement provided that the compensation amounting to Rs. 96,000 would be paid to the assessee in half-yearly instalments of Rs. 6,000 commencing from July 1, 1953. It appears that the assessee had debited in its account the entire amount of Rs. 96,000 to the principal company and was adjusting against the same the instalments as and when received. Under the agreement, the assessee received a sum of Rs. 12,000 in the financial year 1955-56 and the Income-tax Officer taxed this amount in the assessment year 1956-57 as profits under section 10(5A) of the Act. The contention of the assessee was that the entire compensation amount of Rs. 96, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision in CIT v. Sir Chunilal V. Mehta Sons Private Ltd. [1967] 65 ITR 50 (Bom), which was affirmed by the Supreme Court in [1971] 82 ITR 54, relied on by the assessee, cannot help the assessee in this case. In that case, the managing agency agreement itself provided that the managing agents shall be paid a minimum monthly remuneration of Rs. 6,000 subject to a total remuneration equal to 10 per cent. of the gross profits of the company and that the managing agency agreement is to be in force for a period of 21 years. The deed also provided that if the managing agents were deprived of their office before 21 years, they would be entitled to receive from the company as compensation or liquidated damages for loss of office a sum equal to not less than the monthly salary of Rs. 6,000 which they would have been entitled to receive for the whole of the unexpired period of 21 years. The managing agency agreement was terminated even before the expiry of the 21 years period. The amount payable as liquidated damages as per the terms of the managing agency agreement at the rate of Rs. 6,000 minimum guaranteed came to Rs. 2,34,000, but the assessee was claiming Rs. 28,00,000 as compens ..... 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