1965 (1) TMI 70 - HC - Income Tax

Managing agency compensation taxable under Indian Income-tax Act; deductions allowed.

CHIDAMBARAM MULRAJ & CO. PVT. LTD., BOMBAY Versus COMMISSIONER OF INCOME-TAX, BOMBAY CITY I.

The court held that the sum of Rs. 10 lakhs received as compensation for resigning from the managing agency is taxable under Section 10(5A) of the Indian ... - Issues Involved:1. Taxability of the compensation amount under Section 10(5A) of the Indian Income-tax Act, 1922.2. Deductibility of the initial cost of acquisition and brokerage fees from the compensation amount.Detailed Analysis:1. Taxability of the Compensation Amount under Section 10(5A):The first issue revolves around whether the sum of Rs. 10 lakhs received by the assessee as compensation for resigning from the managing agency is taxable under Section 10(5A). The assessee argued that the amount was received from a third party (Mulraj) and not from the managed company, and thus should not be taxable under Section 10(5A). Additionally, the assessee contended that the amount was received for tendering resignation and not as compensation for termination or modification of the managing agency.The court held that Section 10(5A) covers not only compensation but also 'other payments' received in connection with the termination or modification of the managing agency agreement. The emphasis is on the connection between the payment and the termination or modification of the agreement, not on the person from whom the payment is received. Since the payment of Rs. 10 lakhs was directly connected to the termination of the managing agency, it falls within the ambit of Section 10(5A).The court also addressed the argument that Section 10(5A) enacts two fictions: deeming the compensation as profits and gains of a business, and creating a new source for this income. The court concluded that Section 10(5A) does not create a new source of income but merely converts what was previously a capital receipt into a revenue receipt taxable as profits and gains of a business.Thus, the court answered the first question in the affirmative, holding that the sum of Rs. 10 lakhs is income assessable in the year 1955-56 by virtue of Section 10(5A).2. Deductibility of the Initial Cost of Acquisition and Brokerage Fees:The second issue concerns whether the initial cost of Rs. 6 lakhs paid for acquiring the managing agency and Rs. 5,000 paid as brokerage are deductible from the compensation amount.The court held that Section 10(5A) is not a charging section but merely deems the compensation as profits and gains of a business. The computation of these profits and gains must be done in accordance with Section 10 of the Act, which allows for deductions of expenses incurred in the ordinary course of business.Since the assessee had paid Rs. 6 lakhs for acquiring the managing agency and Rs. 5,000 as brokerage, these amounts are deductible. The court noted that the assessee received Rs. 9,95,000 after deducting Rs. 5,000 paid to the broker, and the net amount to be taxed should be Rs. 3,95,000 after deducting the initial cost of Rs. 6 lakhs.Thus, the court answered the second question in the affirmative, allowing the deduction of Rs. 6 lakhs and Rs. 5,000 from the compensation amount.Conclusion:- The sum of Rs. 10 lakhs received as compensation is taxable in the assessment year 1955-56 under Section 10(5A).- The initial cost of Rs. 6 lakhs and Rs. 5,000 paid as brokerage are deductible from the compensation amount, making the taxable amount Rs. 3,95,000.