Contingent termination compensation accrues only when turnover-linked sales occur, not on the compromise decree date.

Compensation under a termination compromise decree remained contingent on the sales organisation's annual turnover, so it was not a lump sum immediately due on termination. The decree only altered the rate and minimum guarantee; it did not change the basic character of the liability. Applying the mercantile system, the right to receive income arose year by year when sales were effected, and accrual did not occur on the date of the termination agreement or decree. The compensation was therefore assessable in the relevant assessment year under section 10(5A), and the question was answered against the assessee.

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Issues: Whether compensation payable under the compromise decree for termination of the sales organisation agreement was assessable under section 10(5A) of the Indian Income-tax Act, 1922, for the assessment year 1958-59, and whether the amount accrued only when sales were effected in the relevant year.

Analysis: The compensation stipulated under the termination arrangement was not a lump sum for breach but a turnover-linked payment dependent on the drug company's sales in each relevant year. The compromise decree only modified the rate and minimum guarantee and did not change the basic character of the liability, which remained contingent on annual turnover and therefore became enforceable only as and when sales took place. On the mercantile system, income accrued when the right to receive it arose, and here that right arose yearly, not on the date of the termination agreement or the decree. Authorities dealing with agreements that themselves fixed liquidated damages on termination were distinguishable because, in the present case, the amount was not immediately due on termination.

Conclusion: The compensation was assessable under section 10(5A) in the relevant assessment year, and the question was answered in the affirmative against the assessee.

Ratio Decidendi: Where compensation for termination of a contract is contingent on future turnover or sales, income accrues only when the contingent right to receive it arises in the relevant accounting year, not on the date of the termination agreement or compromise decree.

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