TMI Blog1967 (3) TMI 117X X X X Extracts X X X X X X X X Extracts X X X X ..... eive a regular monthly remuneration of ₹ 6,000 and if the said remuneration was found to be less than 10 per cent. of the gross profits of the company at the close of the year, the managing agents were to be paid a further additional sum to make the total aggregate remuneration received by them equal to 10 per cent. of the gross profits of the company in that year. Provision was also made in the agreement as to what would happen in case the managing agency came to an end before the period of 21 years had run out. It was provided in clause (14) of the agreement that except for the four special cases specified in clause (15), if the managing agents were deprived of the office of the agents of the company for any reason or cause whatsoever, they would be entitled to receive from the company as compensation or liquidated damages for the loss of their office a sum equal to the aggregate amount of the monthly salary of not less than ₹ 6,000, which they would have been entitled to receive from the company for and during the whole of the then unexpired portion of the said period of 21 years. Now under the special cases specified in clause (15) of the agreement, termination of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was convened and held on the 23rd May, 1951, and at the said meeting a resolution was passed terminating the employment of the assessee-company as the managing agents of the managed company. The assessee-company thereupon complained that the action of the managed company in terminating the managing agency agreement was illegal and unwarranted and claimed a sum of ₹ 50 lakhs as damages and called upon the managed company to pay the same within 7 days. The claim for ₹ 50 lakhs was, however, denied by the managed company and they pointed out that the most that the assessee-company would be entitled to claim by way of compensation or liquidated damages for loss of their appointment would be a sum equal to the aggregate amount of the monthly salary of ₹ 6,000 for the duration of the whole of the unexpired portion of the period of 21 years from the 1st July, 1933. It was pointed out that the said unexpired period came to 3 years 2 months and 7 days and the compensation calculated at the rate of ₹ 6,000 per month for the said period together with a sum of ₹ 4,600 as remuneration for the 23 days of the month of April, 1951, would come to a sum of ₹ 2,34 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for ₹ 2,34,000 with interest thereon at 4 per cent. per annum from the date of the suit till judgment, costs and interest on judgment at 4 per cent. The assessee-company received this amount of ₹ 2,68,738 some time in December, 1955, and included it in its profit and loss account for the accounting year which was the calendar year 1955, but in its return for the assessment year 1956-57, which was the relevant assessment year for the calendar year 1955 (which was the accounting year of the assessee-company), it showed this amount in Section D of the return on the basis that it was not liable to tax as it had accrued not in the year of account but on the 23rd April, 1951, on the termination of its managing agency. Now, .for the assessment year 1956-57, section 10(5A), which had been introduced by the Finance Act of 1955, had become applicable and under the said provision any compensation or other payment due to or received by a managing agent of an Indian company at or in connection with the termination or modification of the managing agency agreement with the company was to be deemed to be profits and gains of business carried on by the managing agent and was liable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee-company in the later year because its method of accounting was mercantile. It was sought to be contended before the Tribunal that the amount of ₹ 2,68,738, which the assessee had received in the year 1955, was not the income of the old business of the managing agency for which the mercantile basis of accounting was adopted but it was the income of a new business which, by reason of the legal fiction, brought in by section 10(5A), must be deemed to be in existence in the year 1955, and since the receipt of this income was shown by the assessee in his profit and loss account for the year 1955, it must be regarded that for this new business of which the amount was an income, the assessee had not adopted the old method but a new method of accounting on receipt basis. It was also sought to be argued that under section 10(5A) the amount specified therein becomes inclusive as income either when it is due or received and since in the present case it was received in the year .1955, it became inclusive in the income of that year by reason of the provisions contained in section 10(5A) irrespective of any method of accounting maintained or adopted by the assessee. The Tribunal negat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxable under section 10(5A) of the Income-tax Act in the assessment year 1956-57? On the point of law raised by the first question Mr. Joshi, learned counsel for the department, has argued that the compensation accrued to the assessee not on the 23rd April, 1951, when the managing agency agreement was terminated but on the 17th November, 1955, when in the suit filed by the assessee-company to recover compensation or damages a decree was made by the High Court in favour of the assessee-company in the sum of ₹ 2,34,000 with interest thereon from the date of suit and interest on judgment. Mr. Joshi argues that the termination of the managing agency gave a right to the assessee to claim damages or compensation but no claim or damages could be said to have accrued to the assessee until his right was adjudicated upon and held to be enforceable by the court and damages were calculated and awarded in enforcement of the said right. It is argued by the learned counsel that the mere assertion of a claim is not sufficient to treat what is claimed as having accrued to the person asserting the claim. The assessee demanded compensation of over ₹ 50 lakhs, the managed company de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compensation due in enforcement of the said right. The circumstance, however, that the parties went to litigation cannot be sufficient to hold that the position was not clear on the terms of the agreement and intervention of the court was necessary. It sometimes happens that even when the position is very clear parties are not satisfied until the clarity is pronounced by the court. As is seen from the appellate judgment in the appeal which the assessee-company took from the judgment of the trial judge of this court, the appellate bench has pointed out that the matter as to the right of the assessee to receive the compensation and the amount thereof was so clear under the agreement that there could not be any doubt about the same. The assessee-company was relying on the expression not less than ₹ 6,000 per month mentioned in the clause for the purpose of putting forward its claim to a larger amount and this court pointed out that the expression not less than ₹ 6,000 was employed only to emphasise that the compensation that would be paid would be at the rate of ₹ 6,000 per month and not a rupee less nor a rupee more. On the facts and circumstances of the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness, a business. Termination of managing agency business cannot be the carrying on of the managing agency business. The legal fiction, however, makes such termination itself as a business producing what is paid as compensation in respect thereof as the income of the business. This business, says the learned counsel, therefore, is not the business of the managing agency but a new business and the payment received is an income of the new business. Considered in that light the income, which has been received by this business, which must be deemed to have been carried on at the point of time when the income is received in December, 1955, is, therefore, an income of the said business in the year 1955, liable to be taxed in the assessment year 1956-57. He points out in this connection that in the profit and loss account of the assessee for the calendar year 1955 this amount is included. The inclusion of this amount in the profit and loss account of the business carried on by the assessee in the year 1955 would indicate, says Mr. Joshi, that for this new business the assessee has not adopted the mercantile system but the cash system of accounting. Thirdly, Mr. Joshi argues that sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gularly employed by the assessee. Section 10 contains the rules for computation of the income from business. Section 10(5A) having merely created a fictional item as an item of income from business has not in any further way interfered with the method of the computation of the said item but left it to be computed according to the usual provisions contained in the Act. The expression due to or received by the assessee is not intended to provide for a special mode or method of computation or inclusion of the income in the assessment of the assessee. The expression due to or received by the assessee is descriptive of the item and not indicative of the point of time when the income is deemed to have been accrued or received. That is left to be determined according to the rules contained in section 13. Thus, for instance, after section 10(5A) came on the statute book, the compensation or other payment, which may be due to or received by the managing agent at the termination or in relation to the managing agency agreement brought to an end thereafter, became taxable in the case of managing agents adopting a mercantile basis of accounting on the date of accrual and in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es that even if it is held that the compensation amount is not taxable under section 10(5A) on the ground that it had not accrued to the assessee in the year 1955, but only in 1951, the interest amount at any rate must be held to be taxable because that interest was awarded only by the decree of the court on the 17th November, 1955. He argues that on the view that we have taken, the amount which was determined by the operation of clause (14) and which could, therefore, be taken to have accrued to the assessee on the 23rd April, 1951, was the amount of compensation calculated at the rate of ₹ 6,000 per month for the unexpired period of the contract of managing agency. There was no provision in the said clause for payment of any interest and no amount by way of interest could, therefore, be said to have accrued to the assessee on the said date. The interest, no doubt, he says, is related to the compensation payable to the assessee but this interest accrued only when it was awarded because it was in the discretion of the court and the court may as well have refused it. It appears to us that there is substance in this argument of Mr. Joshi and the amount which the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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