Civil Appeal No 360 of 1971
From the Judgment and order dated the 2729 1 1965 of the Bombay High Court in Income Tax Reference No 75 of 1961
section C Manchanda K J John and J B Dadachanji for the Appellant
section T Desai Girish Chandra and M N Shroff for the Respondent
The Judgment of the Court was delivered by GUPTA J
The appellant is a private limited company
The assessment year is 1955 56 for which the relevant previous year ended on June 30 1954
The shareholders of the appellant company arc Mulraj Kersondas members of his family allied concerns and nominees only
In 1944 the appellant purchased the managing agency of the Elphinston Spinning and Weaving Mills Ltd for Rupees six lakhs and thereafter entered into a separate managing agency agreement with the managed company for a period of seventeen years
The appellant s only source of income was this managing agency in the relevant year
Mulraj and his group also held among themselves 25000 ordinary and 10000 preference shares of the Elphinston Spinning and Weaving Mills Ltd Mulraj entered into an agreement for sale of these shares with K D Jalan of Calcutta for a consideration of Rupees forty five lakhs one of the terms of the agreement was that Mulraj would have the managing agency of the appellant company terminated
In implementation of this agreement Mulraj wrote to the appellant company on October 21 1953 asking the company to give up the managing agency on receipt of a sum of Rupees ten lakhs as compensation which he promised to pay
On the same day the appellant company passed a resolution accepting Mulraj s offer and 775 wrote to the managed company Elphinston Spinning and Weaving Mills Ltd tendering resignation of its office as managing agents
The resignation was in due course accepted
The assessee received from Mulraj a sum of Rs 995000 as compensation for premature termination of the managing agency Rs 5000 having been paid by Mulraj as brokerage to one Dhirajlal Maganlal
The amount received was credited to the Capital Reserve Account in the appellant s books for the year ending on June 30 1954 described as compensation for loss of office
In the assessment year 1955 56 for which the appellant s previous year ended on June 30 1954 the Income tax officer assessed the entire amount of Rupees ten lakhs in the hands of the appellant company under section 105A of the Income Tax Act 1922
Section 101 of the Income Tax Act 1922 states that the tax shall be C payable by an assessee under the head Profits and gains of business profession or vocation in respect of the profit or gains of any business profession or vocation carried on by him Sub section 5A was inserted in section 10 by the Finance Act 1955 with effect from April 1 1955 the relevant part of which is in these terms 5A Any compensation or other payment due to or received by a a managing agent of an Indian company at or in connection with the termination or modification of his managing agency agreement with the company b a manager of an Indian company at or in connection with the termination of his office or modification of the terms and conditions relating thereto c any person by whatever name called managing the whole or substantially the whole affairs of any other company in the taxable territories at or in connection with the termination of his office or the modification of the terms and conditions relating thereto d any person by whatever name called holding an agency in the taxable territories for any part of the activities relating to the business of any other person at or in connection with the termination of his agency or the modification of the terms and conditions relating thereto shall be deemed to be profits and gains of a business carried on by the managing agent manager or other person as the case may be and shall be liable to tax accordingly The company preferred an appeal to the Appellate Assistant Commissioner against the order of the Income tax officer
The Appellate Assistant Commissioner allowed the appeal holding that section 105A created a new source of income for which the previous year was not the previous year for the managing agency business which ended on June 30 1954 that the compensation of Rupees 776 ten lakhs which the appellant received in October 1953 fell in the financial year 1953 54 which would be the previous year for this income for which the assessment year was 1954 55 which was before sub section 5A of section 10 was enacted and the fact that the appellant had entered the amount in its books for the year that ended on June 30 1954 could not be taken as an exercise of option by the assessee accepting the said year as the previous year in respect of the receipt
The Appellate Assistant Commissioner further held that if at all the amount was taxable in the assessment year 1955 56 the assessee was entitled to a deduction of Rupees six lakhs paid for acquiring the managing agency
The Department took an appeal to the Tribunal against the order of the Appellate Assistant Commissioner
The Tribunal was of opinion that section 105A only regards the compensation received by the managing agent as profits and gains of a business and does not create a fresh source therefore and as the amount in question in this case was received in the accounting year relevant to the assessment year 1955 56 it was taxable in the assessment year 1955 56
The Tribunal however agreed with the Appellate Assistant Commissioner that the assessee was entitled to a deduction of Rupees six lakhs which the assessee had paid for acquiring the managing agency and allowed the appeal partly holding that the assessee was liable to pay tax on the sum of Rs 395000 
At the instance of the parties the Tribunal referred the following two questions to the High Court under section 661 i Whether the sum of Rs 10 lakhs is income assess able in the year 1955 56 by virtue of Section 10 5A  ii If the answer is in the affirmative whether the initial cost of acquisition of the Managing Agency of Rs 6 lakhs and Rs 5000 paid as brokerage on sale are deductible  The first question was referred at the instance of the assessee and the second at the instance of the Department
The High Court overruled the contention of the assessee that the amount in question was income from a new source for which the previous year was 1953 54 and answered the first question in the affirmative and in favour on the revenue
As regards the second question the High Court answered it in favour of the assessee and upheld the order of the Tribunal
In the present appeal brought on a certificate under section 66A2 the assessee challenges the correctness of the answer given by the High Court to the first question
Previous year is defined in section 211 of the Income Tax Act 1922 and the relevant part of the definition is as follows 11 Previous year  means in respect of any separate source of income profits and gains a the twelve months ending on the 31st day of March next preceding the year for which the assessment is to be made or if the accounts of the assessee have 777 been made up to a date within the said twelve months in respect of a year ending on any date other than the said 31st day of March then at the option of the assessee the year ending on the day to which his accounts have so been made up  As stated already sub section 5A of section 10 came into force on April 1 1955
Therefore the amount in question if received by the assessee during the previous year for the assessment year 1955 56 would be taxable under that sub section
By a legal fiction introduced by sub section 5A any amount received by a managing agent as compensation for the termination of his managing agency agreement which would otherwise have been a capital receipt is to be deemed as profits and gains of a business carried on by the managing agent
The appellant contends that sub section SA indicates that this deemed income is to be treated as receipt from a New source and that being so the relevant previous year for this income would not necessarily be the year ending on June 30 1954 which was the previous year for the managing agency business and the assessee should have been given an opportunity to choose the previous year in respect for the receipt in question if the financial year 1953 54 is taken as the previous year for this income from a new source the argument proceeds then the amount would not be taxable in the assessment year 1955 56
It is further argued that the amount received as compensation could not be profits and gains of the managing agency business because the business itself was being terminated
The words of the sub section according to learned counsel for the appellant indicate that the receipt is to be treated as income from a new and independent source
Sub section 5A states inter alia that any compensation or other payment received by a managing agent in connection with the termination of his managing agency agreement shall be deemed to be profits and gains of a business carried on by the managing agent
The use of the indefinite article before the word business  it is submitted makes it plain that the income is not relatable to the managing agency business but to a new and separate source
We are unable to accept the contention
The fiction introduced by sub section 5A regards the capital receipt as income and does not extend to treating the termination of managing agency itself as a business
The amount received by the appellant was a payment for the termination of the managing agency business and as such the receipt is obviously related to that business
It is of course true that the amount was not earned in carrying on the business of managing agency hut it is clear that the source of the receipt was the managing agency business itself
It cannot therefore be said that the receipt was income from a new and independent source
In our opinion the High Court was right in holding that in enacting sub section 5A the legislature was concerned only with providing a head under which the receipt which has been deemed to be income could be brought to tax and was not concerned with creating a new source for that deemed income
Two decisions cited on behalf of the respondent one of the Bombay High Court Commissioner of Income tax Bombay vs Sir 778 Chunilal vs Mehta  Sons Private Ltd and the other of the Madras High Court R V Lakshmiah Naidu and Co vs Commissioner of Income Tax Kerala and Coimbatore have both held that the compensation paid for the termination of a managing agency business is a payment in relation to the said business and therefore the previous year relevant to that receipt would be the same as the previous year for the managing agency business itself
In our view these two decisions state the law on the point correctly
The appeal fails and is dismissed with costs
SR Appeal dismissed


Summary:
The assessee appellant received in October 1953 a sum of Rs 995000 out of Rs 1000000 compensation for the premature termination of its managing agency business a sum of Rs 5000  having been deducted towards brokerage
The said amount was credited to the Capital Reserve Account in its books for the year ending on June 30 1954 described as compensation for loss of office
In the assessment year 1955 56 for which the appellant s previous year ended on June 30 1954 the Income Tax Officer assessed the entire amount of Rs 1000000 in the hands of the appellant company under section 10 5A
The Company preferred an appeal to the Appellate Assistant Commissioner who allowed the appeal holding that i section 105A created a new source of income for which the previous year was not the previous year for the managing agency business ending on June 30 1954 ii the compensation of Rs 10000000 which the assessee received in October 1953 fell in the financial year 1953 54  which would be the previous year for this income for which the assessment year was 1954 55 which was before the enactment of sub section SA of section 10 iii the fact that the appellant had entered the amount in its books for the year that ended on June 30 1954 could not be taken as an exercise of option by the assessee accepting the said year as the previous year in respect of the receipt and iv if at all the amount was taxable in the assessment year 1955 56 the assessee was entitled to a deduction of Rs 600000 paid for acquiring the managing agency
The appeal preferred by the Department was partly allowed
Tho Tribunal agreed with the Appellate Assistant Commissioner that the assessee was entitled to a deduction of Rs which the assessee had paid for acquiring the managing agency business
The Tribunal however held that Sec 10 5A does not increase a fresh source of income that since tho amount in question was received in the accounting year relevant to the assessment year 1955 56 it was taxable in the assessment year 1955 56 The High Court on a reference under section 661 of the Act on the two questions namely i Whether the sum of Rs 10 lakhs is income assessable in the year 1955 56 by virtue of Section 105A and ii If the answer is in the affirmative whether the initial cost of acquisition of the Mananging Agency of Rs 6 lakhs and Rs 5 thousands paid as brokerage on sale are deductible  agreed with the views of the Tribunal
On appeal by certificate under section 66A2 and dismissing the appeal the Court  HELD 1 Since sub section 5A of section 10 came into force on April 1 1955 the amount in question if received by the assessee during the previous year for the assessment year 1955 56 would be taxable under that sub section
By 774 a legal fiction introduced by the sub section any amount received by a managing agent as compensation for the termination of his managing agency agreement which would otherwise have been a capital receipt is to be deemed as profit and gains of a business carried on by the managing agent
The fiction regards the capital receipt as income and does not extend to treating the termination of managing agency itself as a business
The amount received by the appellant was the payment for the termination of the managing agency business and as such the receipt is obviously related to that business
Though the amount was not earned in carrying on the business of managing agency yet the source of the receipt was the mananing agency business itself it is not therefore correct to say that the receipt was income from a new and independent source 2 The High Court was right in holding that in enacting sub section 5A the Legislature was concerned only with providing a head under which the or receipt which has been deemed to be income could be brought to tax and was not concerned with creating a new source fur that deemed income
777G 3 The compensation paid for the termination of a managing agency business is a payment in relation to the said business and therefore the previous year relevant to that receipt would be the same as the previous year for the managing agency business itself
778A Commissioner of Income Tax Bombay vs Sir Chunilal V Metha  Sons Private Ltd  and R V Lakshmiah Naidu and Co vs Commissioner of Income Tax Kerala and Coimbatore  relied on