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TMI Blog1977 (10) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Rs. 93,515 was assessable in the assessment year 1963-64, despite the fact that the assessee employed the mercantile system of accountancy ? " The assessee is a firm called M/s. J. R. Kimtee Sons, Hyderabad. A joint stock company by name Taj Glass Works Ltd., hereinafter referred to as " the company ", was incorporated in the erstwhile State of Hyderabad under the Hyderabad Companies Act in the year 1940. This company was managed originally by a firm called " Taj Brothers ". On account of losses incurred by the company during their management, the Industrial Trust Fund took over its management under a managing agency agreement dated 18th February, 1949, for a period of twenty years. In view of the further losses and deterioration in the working of the company, the Industrial Trust Fund, which will be referred to hereafter as I.T.F., for the sake of brevity, transferred the managing agency of the company to the assessee-firm by an agreement dated February 25, 1953. On the approval of the general body of the managed company for the transfer of the managing agency by the I.T.F. to the assessee-firm, the I.T.F. also executed an assignment deed in favour of the assessee-firm o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re went into the claims and the counter-claims. The umpire found that the assessee-firm would be entitled to a balance amount of Rs. 93,515 as damages towards compensation for the loss of their managing agency commission after excluding an amount of Rs. 62,000, which the assessee-firm had already received and accordingly passed an award dated October 10, 1960, for payment of that amount by the I.T.F. to the assessee-firm. This award was later ratified by the court. The Income-tax Officer came to the conclusion that the amount awarded to the assessee-firm is compensation for the loss of commission which the assessee-firm would have otherwise earned, but for the breach of the terms of the agreement and brought to tax the amount of Rs. 93,515 for the assessment year 1963-64 on the basis that it is a revenue receipt. According to the Income-tax Officer the mere fact that the commission was paid to the assessee-firm in one lump sum as a result of the award in the arbitration proceedings would not change its basic character as a revenue receipt. Contending that the sum of Rs. 93,515 received was a capital receipt and, therefore, not chargeable to income-tax, the assessee-firm prefe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anaging agency, and, therefore, a capital receipt, the liability to tax would still be attracted on account of the provision contained in section 28(ii) of the Income-tax Act, 1961. On the question of the assessee-firm's accounting being of mercantile system and, therefore, it should be held that the amount received by the assessee-firm should be attributable to respective years on accrual basis, the Tribunal held that the amount received cannot be apportioned in the manner in which the assessee-firm sought. Thus, the Tribunal dismissed the appeal holding against the assessee-firm on all the points. On behalf of the assessee-firm one of its partners appeared in person and submitted his arguments raising the same contentions as those raised before the Income-tax Appellate Tribunal. On behalf of the revenue, Sri Rama Rao, standing counsel for the revenue, has submitted arguments supporting the conclusions arrived at by the Income-tax Appellate Tribunal. In the award proceedings, the assessee-firm claimed damages as shown below : "(a) Towards the loss of commission for the years Rs. 1954-55 and 1955-56 after deducting the remuneration received already, approximately 29, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual profits of the managed company at Rs. 2,33,869 and worked out the probable loss of commission at Rs. 23,387 per year on the basis of 10 per cent. of the profits and held that the assessee-firm would be entitled to their annual commission at that rate. The umpire, however, found that the assessee-firm would not be entitled to any commission for the year 1954-55, i.e., up to August 25, 1955, on the ground that their claim of commission for the said period is barred by time. The umpire also found that the assessee-firm is not entitled to claim any damages towards loss of commission for the period subsequent to August 14, 1960, on the ground that under section 330 of the Companies Act, the managing agency of the assessee-firm any way would automatically have ceased to exist and the possibility of its renewal under the circumstances being doubtful, the claim for damages beyond August 15, 1960, would be too remote. Accordingly, the umpire disallowed the claim of the assessee-firm for damages for the period subsequent to August 14, 1960. The umpire also disallowed the claims of the assessee-firm for damages under heads (d) to (i) which were referred to above. Thus, the umpire allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve by it or that loss would be capital in nature. It was also generally held by courts that lump sum amounts received by managing agents towards termination of their managing agency agreements are capital in nature. In Godrej Co. v. Commissioner of Income-tax [1959] 37 ITR 381 (SC), the facts are that the assessee-firm was appointed as the managing agents of a company for a period of thirty years. Under the terms of the agreement it was entitled to a commission, towards their remuneration, at the rate of 20 per cent. on the net profits of the company. As some of the shareholders and directors of the company felt that the remuneration was extraordinarily excessive, after some negotiations some agreement was entered into between the assessee-firm and the company. According to the agreement in consideration of the company paying a sum of Rs. 7,50,000 as compensation to the assessee-firm, the latter agreed to accept as remuneration for the remaining term of their managing agency ten per cent. of the net annual profits of the company instead of 20 per cent. The Supreme Court held that the assessee-firm received the amount as compensation for the deterioration or injury to the managi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is customers, and the work of the agent is only to bring about that business. What he does is not the business itself but something which is intimately and directly linked up with it. The agency may, therefore, be viewed as the apparatus which leads to the business rather than the business itself. Considered in this light the agency right can be held to be of the nature of a capital asset invested in business. But this cannot be said of a contract entered into in the ordinary course of business. Such a contract is part of the business itself, not anything outside it as is the agency and any receipt on account of such a contract can only be a trading receipt. In the present case, it is not possible to say that the agreement entered into between the assessee-firm and the I.T.F. under which the assessee-firm acquired the managing agency of the company was a contract, entered into in the ordinary course of business or a trading contract. Sri Rama Rao has, however, placed reliance on the following decisions : Gillanders Arbuthnot Co. v. Commissioner of Income-tax [1964] 53 ITR 283 (SC) is a case where the assessee-company carried on business in diverse matters, besides acting as m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in nature, none the less it is to be treated as "profits and gains of business " as provided under section 10(5A) of the Indian Income-tax Act of 1922 arid section 28(ii) of the Income-tax Act, 1961. Sub-section (5A) of section 10 came into force on 1st April, 1955, and it reads, so far as it is relevant for our present case, thus : " (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 ...... 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...... " Similar is the provision contained in section 28(ii) of the Income-tax Act, 1961. Therefore, the amount awarded to the assessee-firm towards compensation for loss of the managing agency, though a capital receipt, shall be deemed to be profits and gains of business carried on by the assessee-firm, and, therefore, it is income liable to tax. In Chidambaram Mulraj Co. P. Ltd. v. Commissioner of Income-tax [1976] 102 ITR 7, the Supreme Court held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration received from a third party. The question arose whether the amount of Rs. 2,24,000 received by the assessee was assessable to tax under section 10(5A) of the Indian Income-tax Act, 1922. The Madras High Court took the view that it was not necessary that the managing agency agreement should have been terminated by the managed company itself and it is enough if the amount was received in connection with the termination of the managing agency, and if that is so, the amount was taxable under section 10(5A). Therefore, the amount of Rs. 93,515 awarded to the assessee-firm must be deemed as profits and gains of business carried on by it and, therefore, it is income liable to tax. Then remains the question whether the entire amount of Rs. 93,515 was assessable to tax in the assessment year 1963-64 despite the fact that the assessee-firm maintained the mercantile system of accountancy. The question is when the amount of Rs. 93,515 can be said to have accrued to the assessee-firm. According to the revenue, it accrued when the amount was awarded to the assessee-firm by the umpire in the award proceedings while according to the assessee-firm it must be deemed to have accrued durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income-tax v. Smt. Sankari Manickyamma [1976] 105 ITR 172 (AP), also a decision rendered by this court, the lands of the assessee were acquired by the Government under the Land Acquisition Act in the year 1933, and as the compensation determined as payable by the Collector was inadequate, the matter was taken to the court and finally the proceedings ended in a compromise decree being passed on May 9,1963, enhancing the compensation to Rs. 22,904. It was also agreed that the Government should pay interest of Rs. 31,659 at the rate of 6 per cent. on the enhanced amount of compensation for the period during which the extra compensation remained due to the assessee. The assessee received the enhanced compensation as well as the interest amount of Rs. 31,659 on March 11, 1964. Holding that the entire interest of Rs. 31,659 was received during the year relevant for the assessment year 1964-65, the Income-tax Officer levied tax on the entire amount. The Income-tax Appellate Tribunal allowed the claim of the assessee. The High Court, however, reversed that finding and held that the interest on the enhanced compensation accrued to the assessee only when the compromise decree was passed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. The managed company was prepared to pay a sum of Rs. 2,34,000 as compensation calculated at Rs. 6,000 per month, but the respondent refused to accept that amount and instituted a suit claiming Rs. 28,00,000 as compensation for unlawful termination of the managing agency. The suit was decreed only for a sum of Rs. 2,34,000. The respondent received the amount in December, 1955, and credited it in its profit and loss account of the year 1955. The question that arose was whether the amount accrued to the respondent, which had maintained its accounts on the mercantile system, on April 23, 1951, or whether it was liable to tax for the assessment year 1956-57. The Supreme Court held that the respondent was entitled to a definite sum as liquidated damages and that sum became due to the respondent in April, 1951, though it was actually received by the respondent in December, 1955. The fact that the respondent was claiming an exorbitant sum to which it was not entitled did not convert its right into a contingent right. The respondent's right to get compensation arose in April, 1951. The fact that the respondent had included the receipt in question in its profit and loss account in the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X
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