COMMISSIONER OF INCOME TAX BOMBAY CITY versus CHUNILAL V. MEHTA AND SONS (P) LTD.

Citation: [1972] 1 S.C.R. 117 · Decided: 11-08-1971 · Supreme Court of India · Bench: K.S. HEGDE · Disposal: Dismissed

Judgment (excerpt)

117 
A 
COMMISSIONER OF INCOME TAX BOMBAY 
CITY 
v. 
CHUNILAL V. MEHTA AND SONS (P) LTD. 
B 
August 11, 1971 
[K. s. HEGDE and A. N. GROVER, JJ.] 
Income-tax Act, 1922, s. 10 (5-A)-Compensation received on ter-
mination of n1anaging agency taxable under section-Section enacted 
by Finance Act, 1955--Managing Agency terminated on April 23, 1951-
Suit for compensation under agreement filed by managing agcnts-
C 
Compensation amount as determined by High Court received b,r managing 
agents in December 1955-Managing agents maintaining acco1111ts on 
mercantile basis-Compensation amount when falls due? -Wltether 
taxable in assessment year 1956-57. ' 
D 
E 
F 
G 
H 
The assessee held the managing agency of a public lirr,ited company 
Under the agreement the assessee was to continue as managing agents 
for a minimum period of 21 years. 
On April 23, 1951 the Directors of 
the managed company passed a resolution te1minating the sci vices of 
the assessee as managing agents. This resolution was affi1med by the 
shareholders at their extraordinary general meeting held 
on May 23, 
1951. There was dispute about the compensation payable to 
the 
assessee. 
Jn a suit filed by the latter the trial judge as well as the Appel-
late Bench of the Bombay High Court held that under the terms of 
the agreement the assessee was only entitled to liquidated damages at 
the rate of Rs. 6000 per month for the unexpired period of the agency 
namely 3 years 2 months and 7 days. The suit was decreed for Rs. 
2,34,000 on November 17, 1955 and the .assessee received the amount 
in December 1955. The 
assessee contended 
before the lncbme-tax 
Officer that as it maintained accounts on the mercantile system and the 
amount had become due in 1951 the same could not be taxed in the 
assessment year 1956-57 under s. IO (5A) of the Income-tax Act, 1922. 
Before the said section was introduced into the Act by the Finance Act, 
1955 compensation received on termination of a managing agency was 
treated as a capital receipt; after its enactment such 
compensation 
became taxable as income. The 
section 
was not retrospective, 
so 
that if the assessee's 
plea that the compensation amount accrued in 
1951 was accepted it could not be treated as income at all. The Income-
tax Officer and the Appellate Assistant Commissioner rejected 
the 
plea. The Tribunal however held that on the facts and circumstances 
of the case the compensation became due to th.e assessee on April 23, 
1951 and therefore it could not be brought to tax in the assessment 
year 1956-57. The High Court in reference held that the amount was 
not taxable but the interest thereon could be taxed in 1956-57. The 
Revenue appealed. 
HELD: (i) It was rightly held by the High Court .that the assessee 
was entitled under the agreement to liquidated damages at the rate of 
Rs. 6,000 per month for the unexpired period of the managing agency. 
118 
SUPREME COURT REPORTS 
(1972) 1 S.C.R. 
As such the assessee's right to get the compensation arose on April 
23, 1951 
when the resolution terminating the managing agency was 
passed. 
[123A-B] 
(ii) Section 10 (SA) refers to 'payment due or received'. 
The 
expression 'due to' 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. 
Since the assessee in the present case maintained the 
mercantile system of accounting the relevant assessment year for the 
compensation accruing on April 23, 1951 was the succeeding assessment 
year. [123 C-D, HJ 
Commissioner of Income-lax, Ma1ras V. A. 
Gaj1pa1hy Naidu, 53 
l.T.R. 114, applied. 
(iii) Th, plea on b'hilf of the Revenue that the right to get the amount 
aro;' wh'n the quantum of comp,nsation was determined 
by the 
High Court, could not be accepted. The fact that the assessec was 
claiming an exorbitant sum to which it was not entitled would not 
convert its right into a contingent right. [124 E-G] 
Thiagaraja Cheltiar & Co. v. Commissioner of Income-lax, Madras, 
51 l.T.R. 393 and F. E. Hardosst!e & Co. (P) Lid. v. Commissioner of 
Income-ta,x, Bombay City I, 47 l.T.R. 394, approved. 
(iv) The plain and unambiguous words of s. 10 (5A) 
which had 
become an integral part of the Act, lent no support to the plea that by 
a legal fiction the compensation must be deemed to have accrued to the 
assessee in December 1955. The faot that the assessee included 
the 

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