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Issues involved: Interpretation of section 10(5A)(a) of the Indian Income-tax Act, 1922 regarding the taxability of compensation received by managing agents in connection with the termination of their managing agency agreement.
Summary: The High Court of Bombay addressed a reference under section 256(1) of the Income-tax Act, 1961, concerning the tax treatment of two sums received by the assessees as compensation for the termination of their managing agency agreement. The Income-tax Appellate Tribunal had questioned whether these sums were taxable under section 10(5A)(a) of the Indian Income-tax Act, 1922. The dispute arose from the termination of the managing agency agreement between the assessees and a company, leading to arbitration and subsequent compensation payments. The Income Tax Officer (ITO) treated these amounts as taxable income, a decision upheld by the Appellate Assistant Commissioner (AAC) initially. However, the Tribunal later ruled in favor of the assessees, stating that the payments did not qualify as taxable income under section 10(5A)(a). The Court analyzed the provisions of section 10(5A)(a), which deem compensation received by managing agents upon termination of their agreement as taxable income. Despite arguments that the termination was not bona fide, the Court found that the undisputed facts supported the applicability of section 10(5A)(a) to the received compensation. The assessees' contention, based on an extract from their account books, claiming the termination was without consideration, was dismissed by the Court. The Court emphasized that the actual receipt of compensation for the termination of the agency agreement fell within the scope of section 10(5A)(a), regardless of the circumstances surrounding the termination. Ultimately, the Court ruled in favor of the Revenue, holding that the received amounts were indeed taxable under section 10(5A)(a) of the Indian Income-tax Act, 1922. The assessees were directed to pay the costs to the Revenue.
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