Judgment Case ID: 3367

Judgment:
Civil Appeal No. 360 of 1971. From the Judgment and order dated the 27/29 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 25	000 ordinary and 10	000 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. 9	95	000/ as compensation for premature termination of the managing agency	 Rs. 5	000/ 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 10(5A) of the Income Tax Act	 1922. Section 10(1) 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 10(5A) 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 10(5A) 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. 3	95	000/ . At the instance of the parties the Tribunal referred the following two questions to the High Court under section 66(1): "(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 66A(2)	 the assessee challenges the correctness of the answer given by the High Court to the first question. "Previous year" is defined in section 2(11) 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. S.R. Appeal dismissed.

Summary:
The assessee appellant received in October	 1953	 a sum of Rs	 9	95	000/ out of Rs. 10	00	000 compensation for the premature termination of its managing agency business	 a sum of Rs. 5	000/ 	 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. 10	00	000 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 10(5A) 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. 10	00	0000 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. 6	00	000/ 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 66(1) 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 10(5A)? 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 66A(2) 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