1962 (3) TMI 118 - HC - Income Tax

Managing agent's receipt deemed taxable under Income-tax Act; Assessment year clarified

The court held that the sum of Rs. 2,24,000 received by the assessee was taxable under Section 10(5A) of the Income-tax Act as it was deemed profits and ... - Issues Involved:1. Applicability of Section 10(5A) of the Income-tax Act to the sum of Rs. 2,24,000 received by the assessee.2. Determination of the relevant assessment year for the sum received.Issue-wise Detailed Analysis:1. Applicability of Section 10(5A) of the Income-tax Act to the sum of Rs. 2,24,000 received by the assessee:The primary issue was whether the sum of Rs. 2,24,000 received by the assessee from Chidambaram Chettiar in connection with the termination of the managing agency agreement was taxable under Section 10(5A) of the Income-tax Act. The court noted that Section 10(5A) deems any compensation or other payment received by the managing agent at or in connection with the termination or modification of his managing agency agreement as profits and gains of a business carried on by the managing agent and, hence, taxable.The assessee argued that the amount did not represent compensation as it was not paid by the managed company but by a third party, and that it was not a recompense for any injury sustained. The court, however, interpreted the term 'compensation' broadly, stating that it includes any equivalent or recompense for a loss or privation. The court also noted that the relevant section encompasses both compensation and other payments received at or in connection with the termination of the managing agency agreement, regardless of whether the payment was made by the managed company or a third party.The court concluded that the sum of Rs. 2,24,000 was received by the assessee 'in respect of the resignation' of the managing agency, falling squarely within the scope of Section 10(5A). The court rejected the argument that the Finance Act's applicability from April 1, 1955, implied that transactions before that date were excluded, stating that the Finance Act applies to the income of the previous year unless specifically excluded by the legislature.2. Determination of the relevant assessment year for the sum received:The second issue was whether the sum of Rs. 2,24,000 could be brought to tax in the assessment year 1955-56. The assessee's previous year was the calendar year, and the amount was received on January 8, 1955, which would ordinarily make it relevant to the assessment year 1956-57. The department argued that each separate source of income could have a different previous year and that the source of this receipt was not the managing agency business.The court examined the definition of 'previous year' under Section 2(11) and acknowledged that different sources of income under the same head could have different previous years. However, the court held that the receipt was derived from the managing agency business, and Section 10(5A) deemed it to be profits and gains of a business carried on by the managing agent. The court emphasized that the source of the receipt was the managing agency itself, and therefore, the previous year relevant to this receipt should be the same as that for the managing agency business.The court also addressed the argument that the sum was received for two obligations: resigning the managing agency and procuring 2,500 shares for Chidambaram Chettiar. The court found no evidence supporting this claim, as the agreement specifically stated that the sum was for the resignation of the managing agency.Conclusion:The court held that the sum of Rs. 2,24,000 was rightly includible in the taxable income of the assessee under Section 10(5A) but could not be brought to assessment in the assessment year 1955-56. The relevant assessment year for this receipt was 1956-57, corresponding to the calendar year 1955, which was the assessee's previous year. The court concluded with no order as to costs.