1967 (3) TMI 117 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of compensation received by the assessee-company under section 10(5A) of the Income-tax Act.
2. Determination of the accrual date for the compensation.
3. Taxability of interest awarded on the compensation.

Detailed Analysis:

1. Taxability of Compensation Received by the Assessee-Company under Section 10(5A):
The primary issue concerns the taxability of Rs. 2,34,000 received by the assessee-company as compensation for the termination of its managing agency agreement. The Income-tax Officer and the Appellate Assistant Commissioner held that this amount was taxable under section 10(5A) of the Income-tax Act for the assessment year 1956-57. However, the Tribunal disagreed, concluding that the compensation accrued to the assessee on 23rd April 1951, the date of termination, and thus should be taxed in the relevant assessment year for 1951.

2. Determination of the Accrual Date for the Compensation:
The court examined whether the compensation accrued on 23rd April 1951, when the managing agency was terminated, or on 17th November 1955, when the High Court decreed the compensation. The court held that the compensation accrued on 23rd April 1951, as the managing agency agreement's clause (14) provided a clear method for calculating the compensation due upon termination. The court emphasized that the clarity of the agreement terms meant that the compensation became due and enforceable immediately upon termination, despite subsequent litigation.

3. Taxability of Interest Awarded on the Compensation:
The interest amounting to Rs. 34,738, awarded by the court on 17th November 1955, was considered separately. The court agreed with the department's argument that this interest accrued only when awarded by the court, as it was at the court's discretion. Therefore, the interest was taxable in the assessment year 1956-57, as it was neither provided for in the original agreement nor accrued until the court's decree.

Conclusion:
- Issue 1: The compensation of Rs. 2,34,000 received by the assessee-company was not taxable under section 10(5A) for the assessment year 1956-57, as it accrued on 23rd April 1951.
- Issue 2: The compensation accrued on 23rd April 1951, based on the terms of the managing agency agreement.
- Issue 3: The interest of Rs. 34,738 on the compensation was taxable under section 10(5A) for the assessment year 1956-57, as it accrued only upon the court's decree on 17th November 1955.

The court's final decision was to answer the first question in the affirmative, indicating that the compensation accrued on 23rd April 1951. For the second question, the court held that the compensation amount was not taxable in the assessment year 1956-57, but the interest amount was taxable. The department was ordered to pay the costs of the assessee.