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TMI Blog1971 (8) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... is removed from office by the managed-company. During the period of 21 years stipulated in the agreement, the managed-company had no right to remove the managing firm from its office except for reasons mentioned in the agreement. During the period the assessee continued to act as the managing agents, the agreement provided that the managing agents will get a minimum remuneration of Rs. 6,000 a month and if its remuneration is found at the close of the year to be less than 10 per cent. of the gross profit of the company, the managing agents were to be paid a further additional sum to make the aggregate remuneration received by it equal to 10 per cent. of the gross profit of the company for that year. The agreement further provided that if the managing agents' services were terminated before the period of 21 years stipulated in the agreement except for reasons mentioned in clause 15 of the agreement, the managing agents would be entitled to receive from the managed-company as compensation or liquidated damages for the loss of office the sum mentioned in clause 14 of the agreement. In about April, 1951, a large holding of the managed-company was acquired by a group of shareholders w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee included the said amount as the profits of the business of the assessee during the previous year. Admittedly, the assessee maintained its accounts according to the mercantile system of accountancy. The assessee's contention before the Income-tax Officer that the receipt in question cannot be brought to tax in the assessment year 1956-57 as it became due in 1951, was rejected by the Income-tax Officer. In appeal, the Appellate Assistant Commissioner agreed with the view taken by the Income-tax Officer. He opined that the amount became due to the assessee only when it was decreed by the High Court on November 17, 1955, and, therefore, it was assessable in the assessment year 1956-57. But, on a further appeal the Tribunal held that, on the facts and in the circumstances of the case, the compensation in question became due to the assessee on April 23, 1951, and, therefore, it could not be brought to tax in the assessment year 1956-57. At the instance of the Commissioner, the Tribunal submitted under section 66(1) of the Act, the following two questions of law for the opinion of the High Court: " (1) Whether, on the facts and in the circumstances of this case, the compensati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause 10 of the agreement which provided for the payment of remuneration to the managing agents during the continuance of the managing agency agreement or whether the compensation payable should be determined solely on the basis of clause 14. Relying on the expression " not less than Rs. 6,000 ". in clause 14, the assessee contended that Rs. 6,000 referred to in the clause is merely the minimum but the actual compensation should be determined in the manner provided in clause 10, The High Court rejected that contention. According to the High Court, clause 14 not only provided for the payment of damages for improper termination of the services of the managing agents but it also stipulated the damages to which they were entitled. In its opinion, that clause had quantified the damages to which the managing agents were entitled. It opined that the damages payable to the assessee-firm were liquidated damages. The High Court further held that the expression " not less than Rs. 6,000 " means a definite sum of Rs. 6,000, neither more nor less. We are in entire agreement with the view taken by the High Court in that suit. It is plain from the language of clause 14 of the agreement that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Officer proceeds to include a particular income in the assessment, he should ask himself, inter alia, two questions, namely: (1) what is the system of accountancy adopted by the assessee, and (ii) if it is the mercantile system, subject to the deeming provisions, when has the right to receive accrued ? If he comes to the conclusion that such a right accrued or arose to the assessee in a particular accounting year, he should include the said income in the assessment of the succeeding assessment year." Herein also we have to ask ourselves the question, bearing in mind the fact that the system of accountancy adopted by the assessee is the mercantile system, as to when the assessee's right to get the compensation arose. We have already held that it arose in April, 1951. It was urged on behalf of the department that, as the assessee disputed the quantum of compensation to which it was entitled, we must hold that its right to get the amount arose when that dispute was determined by the High Court. We are unable to accede to this contention. As mentioned earlier, the right of the assessee to get compensation for unlawful termination of its services and the quantum of compe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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