Accrual and capital receipt principles: consultancy compensation for contract termination was not taxable under agency-based provisions.

Additional remuneration did not accrue for tax purposes until the profits were finally ascertained and approved, so it was not assessable in the relevant assessment year. Compensation for premature termination of the consultancy contract was treated as capital receipt because it impaired the assessee's profit-making structure and represented loss of a source of income, not ordinary remuneration for services. The amount was also outside section 28(ii)(c) because the arrangement was a consultancy contract on a principal-to-principal basis, not an agency relationship. The Department failed on all three questions and the assessee succeeded on the substantive tax issues.

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Issues: (i) Whether additional remuneration became taxable in the assessment year 1970-71 on accrual basis; (ii) Whether compensation received on termination of the consultancy contract was a capital receipt; (iii) Whether the compensation was chargeable under section 28(ii)(c) of the Income-tax Act, 1961.

Issue (i): Whether additional remuneration became taxable in the assessment year 1970-71 on accrual basis.

Analysis: The agreements provided for minimum remuneration payable periodically, but the additional remuneration depended on the profits finally ascertained after the audited balance-sheet and profit and loss account were placed before and approved by the general body. The contract did not specify that the additional amount became due at the close of the accounting year, and the departmental practice in earlier years had accepted taxation only on approval. On the facts found, the income could not be said to have accrued on or before the end of the relevant accounting year.

Conclusion: The additional remuneration was not assessable in the assessment year 1970-71 and the finding was in favour of the assessee on this issue.

Issue (ii): Whether compensation received on termination of the consultancy contract was a capital receipt.

Analysis: The agreement was for ten years, and on termination about five years remained unexpired. The termination was found to have impaired the assessee's profit-making structure and affected an enduring trading asset, rather than merely altering an incident of ordinary business. The payment was not treated as consideration for past services or as ordinary remuneration, but as compensation for cancellation of the contract and loss of the source of income.

Conclusion: The compensation was a capital receipt and the finding was in favour of the assessee on this issue.

Issue (iii): Whether the compensation was chargeable under section 28(ii)(c) of the Income-tax Act, 1961.

Analysis: The provision applies only where compensation is received by a person holding an agency in India for part of the activities relating to another's business, on termination or modification of that agency. On the Tribunal's unchallenged finding, the agreement was one for consultancy services on a principal-to-principal basis and not an agency agreement. In the absence of an agency relationship, the statutory condition for applying the provision was not satisfied.

Conclusion: The compensation was not taxable under section 28(ii)(c) of the Income-tax Act, 1961 and the finding was in favour of the assessee on this issue.

Final Conclusion: The reference was answered against the Department on all questions, and the assessee succeeded on the substantive tax issues decided.

Ratio Decidendi: Income accrues only when the assessee acquires an enforceable right to receive it, and compensation for termination of a contract is taxable under section 28(ii)(c) only if it is received in connection with the termination of an agency relationship.

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