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PETITIONER: M/S. CHIDAMBARAM MULRAK & CO. PVT. LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, BOMBAY CITY I

DATE OF JUDGMENT21/11/1975

BENCH: GUPTA, A.C. BENCH: GUPTA, A.C. KRISHNAIYER, V.R.

CITATION:  1976 AIR  342            1976 SCR  (2) 773  1976 SCC  (1) 341

ACT:      Indian  Income   Tax  Act,   1922-Subs.  5A  of  s.  10 introduced by  the Finance  Act of  1955-Interpretation  of- Compensation paid for the termination of a managing business is a  payment in relation to the said business-Previous year relevant to  that receipt  is the  same as the previous year for the managing agency business itself.

HEADNOTE:      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 s. 10 (5A).      The  Company  preferred  an  appeal  to  the  Appellate Assistant Commissioner  who allowed  the appeal holding that (i) s.  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  s.  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.  6,OO,000/- which the assessee had paid for acquiring the managing agency business. The Tribunal however held that

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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 s. 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 s. 66A(2) and dismissing the appeal, the Court, ^      HELD: (1) Since sub-section 5A of s. 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 v. Sir Chunilal V. Metha &  Sons Private  Ltd., (1967)  65 I.T.R. 50; and R. V. Lakshmiah Naidu  and Co.  v.  Commissioner  of  Income  Tax, Kerala and Coimbatore. (1963) 48 I.T.R. 661, relied on

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: 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.      S. C.  Manchanda, K.  J. John  and J. B. Dadachanji for the Appellant.      S. T.  Desai, Girish  Chandra and  M. N. Shroff for the

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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

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              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

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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

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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 v. Sir 778 Chunilal v.  Mehta &  Sons Private  Ltd and the other of the Madras  High  Court,  R.  V.  Lakshmiah  Naidu  and  Co.  v. 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. 779