Accrual of managing agency compensation and decree interest determined taxability under deemed business income rules.
Compensation for wrongful termination of a managing agency accrued when the agency was terminated, because the agreement itself fixed a complete formula for compensation and the existence of litigation did not defer accrual. Section 10(5A) treated specified compensation as business income, but it did not displace the ordinary computation rules or the assessee's regular method of accounting. As the compensation had accrued in 1951, it was not taxable in assessment year 1956-57; however, interest awarded by decree arose only on the decree and was taxable in that year.
Issues: (i) Whether compensation for wrongful termination of the managing agency accrued to the assessee on 23 April 1951 when the agency was terminated; (ii) Whether the compensation of Rs. 2,34,000 and the interest thereon were taxable under section 10(5A) of the Indian Income-tax Act in the assessment year 1956-57.
Issue (i): Whether compensation for wrongful termination of the managing agency accrued to the assessee on 23 April 1951 when the agency was terminated.
Analysis: Clause (14) of the managing agency agreement itself provided a complete formula for compensation on deprivation of office, and the right to compensation became crystallised when the termination occurred. The existence of litigation did not postpone accrual where the contractual consequence was already fixed and ascertainable on the happening of the terminating event.
Conclusion: The compensation accrued to the assessee on 23 April 1951 and not on the date of the decree.
Issue (ii): Whether the compensation of Rs. 2,34,000 and the interest thereon were taxable under section 10(5A) of the Indian Income-tax Act in the assessment year 1956-57.
Analysis: Section 10(5A) created a legal fiction only to treat specified compensation as business income; it did not create a new source of income or alter the ordinary rules of computation. Under section 13, the timing of inclusion continued to depend on the method of accounting regularly employed by the assessee. The compensation, having accrued in 1951, was not taxable in 1956-57 under section 10(5A), but the interest awarded by the court arose only on the decree and was therefore a taxable item for that year.
Conclusion: The compensation of Rs. 2,34,000 was not taxable under section 10(5A) in assessment year 1956-57, but the interest thereon was taxable in that year.
Final Conclusion: The assessee succeeded on the principal compensation issue, while the revenue succeeded only on the taxability of the interest component.
Ratio Decidendi: Section 10(5A) deems specified compensation to be business income, but its incidence and year of taxability remain governed by the ordinary computation provisions and the assessee's regular method of accounting; interest awarded by decree accrues only when awarded.
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