Taxability of instalment compensation on managing agency termination upheld where amounts accrued only as each instalment became payable.

Instalment compensation received on termination of managing agency agreements was held to be taxable under section 10(5A) of the Indian Income-tax Act, 1922. The agreements made payment conditional on compliance with restrictive covenants and allowed the principal to stop future instalments on breach, so the full compensation did not accrue on execution. The amounts became due only when each instalment fell payable, and their receipt was connected with termination of the managing agency. The reference was answered in the affirmative, and the unpaid balance described as outstanding indemnities supported the character of the sums as compensation rather than repayment of an existing debt.

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Issues: Whether the instalment amounts received by the assessee as compensation for termination of managing agency agreements were taxable under section 10(5A) of the Indian Income-tax Act, 1922, or whether the whole compensation had accrued on execution of the agreements and the later instalments were merely repayment of a debt.

Analysis: The compensation payable under the agreements was made subject to observance of restrictive covenants and the right of the principal to stop future instalments in case of breach. On a true construction of the agreements, the entire compensation did not become due on the date of execution. The amounts fell due only as the instalments became payable and were received in connection with the termination of the managing agencies. The description of the unpaid balance as outstanding indemnities reinforced the character of the payments as compensation and not repayment of a pre-existing debt.

Conclusion: The instalment amounts were taxable under section 10(5A) of the Indian Income-tax Act, 1922, and the answer to the referred question was in the affirmative.

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