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TMI Blog1971 (8) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... e partnership firm had entered into a managing agency agreement on June 15, 193 3, with a public limited company called "The Century Spinning and Manufacturing Co. Ltd." Under the said agreement, the assessee was to continue as managing agents for a minimum period of 21 years, and, thereafter, until that firm chose to resign its office or is removed from office by the managed-company. During the period of 21 years stipulated in the agreement, the managed-company had no right to remove the managing firm from its office except for reasons mentioned in the agreement. During the period the assessee continued to act as the managing agents, the agreement provided that the managing agents will get a minimum remuneration of Rs. 6,000 a month and if its remuneration is found at the close of the year to be less than 10 per cent. of the gross profit of the company, the managing agents were to be paid a further additional sum to make the aggregate remuneration received by it equal to 10 per cent. of the gross profit of the company for that year. The agreement further provided that if the managing agents' services were terminated before the period of 21 years stipulated in the agreement except ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness carried on by the managing agent, and shall be liable to tax accordingly. This provision is not retrospective in operation. As seen earlier, the compensation with which we are concerned in this case was received by the assessee in December, 1955. In the assessment year 1956-57, the Income-tax Officer overruling the objections of the assessee included the said amount as the profits of the business of the assessee during the previous year. Admittedly, the assessee maintained its accounts according to the mercantile system of accountancy. The assessee's contention before the Income-tax Officer that the receipt in question cannot be brought to tax in the assessment year 1956-57 as it became due in 1951, was rejected by the Income-tax Officer. In appeal, the Appellate Assistant Commissioner agreed with the view taken by the Income-tax Officer. He opined that the amount became due to the assessee only when it was decreed by the High Court on November 17, 1955, and, therefore, it was assessable in the assessment year 1956-57. But, on a further appeal the Tribunal held that, on the facts and in the circumstances of the case, the compensation in question became due to the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve been entitled to receive from the company for and during the whole of the then unexpired portion of the said period of twenty-one years if the said agency of the firm had not been determined." In the suit filed by the assessee against the managed-company, the only controversy between the parties was whether that clause should be read along with clause 10 of the agreement which provided for the payment of remuneration to the managing agents during the continuance of the managing agency agreement or whether the compensation payable should be determined solely on the basis of clause 14. Relying on the expression " not less than Rs. 6,000 ". in clause 14, the assessee contended that Rs. 6,000 referred to in the clause is merely the minimum but the actual compensation should be determined in the manner provided in clause 10, The High Court rejected that contention. According to the High Court, clause 14 not only provided for the payment of damages for improper termination of the services of the managing agents but it also stipulated the damages to which they were entitled. In its opinion, that clause had quantified the damages to which the managing agents were entitled. It opined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s clear that the expression " due to " in that section refers to those assessees who maintain their accounts according to the mercantile system of accountancy and the expression " received by " applies to those assessees who adopt the cash system of accountancy. As observed by this court in Commissioner of Income-tax v. A. Gajapathy Naidu : " When an Income-tax Officer proceeds to include a particular income in the assessment, he should ask himself, inter alia, two questions, namely: (1) what is the system of accountancy adopted by the assessee, and (ii) if it is the mercantile system, subject to the deeming provisions, when has the right to receive accrued ? If he comes to the conclusion that such a right accrued or arose to the assessee in a particular accounting year, he should include the said income in the assessment of the succeeding assessment year." Herein also we have to ask ourselves the question, bearing in mind the fact that the system of accountancy adopted by the assessee is the mercantile system, as to when the assessee's right to get the compensation arose. We have already held that it arose in April, 1951. It was urged on behalf of the department that, as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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