LexM/S. CHIDAMBARAM MULRAJ & CO. PVT. LTD. versus COMMISSIONER OF INCOME TAX, BOMBAY CITY I
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1 •. 'I/ - ,. - • • .I 'I• M/S. CHJD~MBARAM MULRAJ & CO. PVT-. LTD. \.' .. COMMISSIONER OF INCOME TAX, BOMBAY CITY I N 01•ember 21, 197 5 (V. R. KRISHNA IYER AND A. C. GUPTA, JJ.] 773 Indian Income Tax Act, 1922-Sub-s. SA of s. 10 introduced by the Finance Act of 1955-Interpretation of-Compensation paid fdr the terminotion of a managing busi11e:u is a payment in relation to the said busi11ess-Previous year relevant to that receipt is the same as the previous year for the managing agency business itself. . The assessee-appellant received in October, 1953, a sum of Rs. 9,95,000/- out of Rs. 10,00,000 /- compensation for the premature termination of its manag- ing agency business, a sum of Rs. 5,000/-, having been deducted towards broke- rage. The said amount was credited to the Capital Reserve Account in its books for the year ending on June 30, 1954 described as "compensation for Joss of office". In the assessment year 1955-56, for which the appellant's previous year ended on June 30, 1954, the Income Tax Officer assessed the entire amount of Rs. I 0,00,000/ - in the hands of the appellant company under s. 10 (5A). The Company preferred an aPPeal to the Appellate Assistant Commissioner who allowed the appeal holding that (i) s. 10(5A) created a new source of income for which the previous year was not the previous year for. the managing agency busines. ending on June 30, 1954; (ii) the compensation of Rs. 10,00,000/- whichi the assessee received in October, 1953 fell in the financial year 19·53-54 which would be the previous year for this income for which the assessment year was 1954-55, which was before the enactment of.sub-section 5A of s. JO; (iii) the fact that the appellant had entered the amount in its books for the year that ended on June 30, 1954. could not be taken as an exercise of option by the assessee, accepting the said year as the previous year in respect of the receipt; and (iv) if at ali the amount was taxable in the assessment year 1955-56, the assessee was entitled to a deduction of Rs. 6,00,000 /- paid for acquiring the managing agency. The appeal preferred by the Department was partly allowed. The Tribunal agreed with the Appellate Assistant Commissioner that the assessee was entitled to a deduction of Rs. 6,00,000/ .. which the assessee had paid for acquiring the managing agency busiiress. The Tribunal however held that Sec. 10 (5A) does not increase a fresh source of income that since the amount in question was received in the accounting year relevant to the assessment year 1955-56, it was taX'able in the assessment ye<!r 1955-56. The High Cm1rt on a reference under s. 66 (1) of the Act on the two questions namely, (i) Whether the sum of Rs. 10 Iakhs is income assessable in the year 1955-56 by virtue of Section 10(5A) ? and (ii) If the answer is in the affirmative,· whether the initial cost of acquisition of the Managing Agency of: Rs. 6 Iakhs and Rs. 5 thousands paid as brokerage on sale are deductible ? agreed with the views of the Tribunal. On appeal by certificate under s. 66A(2) and dismissing the appeal, the Court, HELD: ~I) Since; sub;s~ctiory 5A of s. 10 came into f?rce on April 1, 1955, the amount m question 1f received by the assessee durmg ~the previous year for the assessment year 1955-56, would be taxable under that sub-section. BY 8-L159SCJ ji6 A B c D E F G H A B c D 774 SUPREME COURT REPORTS [1976J 2 ·s.C.R. a' legal fiction introduced by the sub-section, any amount rece_ived by a manag- ing agent as compensation for the termination _of his '!1an':'gmg agency agre~: ment which would otherwise h~ve been a capital rece1J?t i_s to be deemed. as profits and gains of a business carried on by the managing agenL Tbe fiction regards the capital receipt as income and does not extend to trealmf? the termi- nation of managing agency itself as a business. The am01.~nt received by_ the appellant was the payment for the termination of tile ma·nagmg agency busmc55 and as such, the receipt is obviously related to that busmess. Though_ the am~uot was not earned in cauying on· the busines~ of ~anagn:~g _agency, yet th~ source of the receipt was tJ)e managing agency business itsel~, 11 Is not therefo1 c·orrect to say thar the receipt was income from a new and independent source. . ·· [777B, PG] (2) The High Court was right in ~aiding _that in enacting sub-section SA, the Legislature was concerned only with p
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