1967 (7) TMI 21 - HC - Income Tax

Compensation is paid on the cessation of the business - it shall be deemed to be the income even after the termination of managing agency - Tribunal was right in holding that the compensation was taxable profit within the meaning of section 10(5A) of the IT Act, 1922

Issues Involved:
1. Taxability of compensation received for termination of managing agency.
2. Interpretation of "termination" under section 10(5A) of the Indian Income-tax Act, 1922.
3. Applicability of section 10(5A) to compensation received due to State Government's takeover.
4. Determination of the amount to be included in taxable income.

Issue-wise Detailed Analysis:

1. Taxability of Compensation Received for Termination of Managing Agency:
The assessee, a limited company managing Gauhati Electric Supply Corporation (1927) Ltd., received Rs. 92,690 as compensation for the termination of its managing agency agreement. The assessee argued that this compensation was a capital receipt and not taxable. The Income-tax Officer included the entire amount in the taxable income, which was upheld by the Appellate Tribunal. The Tribunal stated that section 10(5A) of the Income-tax Act deems such compensation as income, thus taxable as business profits.

2. Interpretation of "Termination" under Section 10(5A) of the Indian Income-tax Act, 1922:
The assessee contended that "termination" in section 10(5A) should mean termination by an act of parties, not by an act of State. The Tribunal rejected this argument, stating that section 10(5A) covers any termination, including compulsory acquisition or cessation of business. The Tribunal emphasized that the provision is clear and unambiguous, deeming compensation received upon termination as business income.

3. Applicability of Section 10(5A) to Compensation Received Due to State Government's Takeover:
The assessee argued that the compensation received due to the State Government's takeover should not fall under section 10(5A). The Tribunal dismissed this argument, explaining that the section was introduced to prevent abuse of managing agency agreements being terminated with huge compensations. The Tribunal held that the compensation received, even if due to State takeover, falls within the scope of section 10(5A) and is taxable as business income.

4. Determination of the Amount to be Included in Taxable Income:
The assessee included only Rs. 11,500 in its income tax return, arguing that the balance amount of Rs. 81,119 was not received and hence not taxable. The Appellate Assistant Commissioner found that Rs. 13,486 was actually received and included this amount in the taxable income, deleting Rs. 79,204. However, the Tribunal overruled this, stating that the entire amount of Rs. 92,690 should be included in the taxable income as per the mercantile system of accounting followed by the assessee.

Conclusion:
The High Court upheld the Tribunal's decision, affirming that the entire compensation amount of Rs. 92,690 was taxable under section 10(5A) of the Indian Income-tax Act, 1922. The Court rejected the assessee's arguments regarding the interpretation of "termination" and the applicability of section 10(5A) to the compensation received due to the State Government's takeover. The Court concluded that the compensation received was indeed business income and should be included in the taxable income for the assessment year 1960-61. The Commissioner was entitled to costs.

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