Compensation for termination of managing agency under section 10(5A) is business income; instalment payments held taxable.

Whether payments under managing agency agreements are taxable under section 10(5A) turned on construction of the deeds: the contractual scheme made payments contingent on observance of restrictive clauses and allowed withholding as outstanding indemnities, so sums did not accrue unconditionally on agreement date but became due only as instalments. Applying the principle that compensation received in connection with termination of a managing agency constitutes business profits, the instalment receipts of Rs.12,000 and Rs.6,000 were held taxable under section 10(5A); decision favours Revenue.

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Issues: Whether the sums of Rs. 12,000 and Rs. 6,000 received in the previous year under agreements dated 29 September 1953 are taxable under section 10(5A) of the Income-tax Act?

Analysis: Section 10(5A) treats compensation received at or in connection with termination of a managing agency as profits and gains of business and liable to tax. The agreements provided for payment of specified amounts by periodic six-monthly instalments and expressly made payments "subject to observance" of restrictive clauses and reserved a right to withhold outstanding indemnities on breach. The contractual scheme therefore made payment contingent on observance of conditions and identified unpaid instalments as outstanding indemnities rather than an unconditional debt. The factual construction of the deeds shows that the entire contractual sums did not accrue unconditionally on the agreement date but became due only as and when instalments fell due, subject to the contractually stipulated conditions.

Conclusion: The amounts of Rs. 12,000 and Rs. 6,000 received by way of instalments are taxable under section 10(5A) of the Income-tax Act; decision is in favour of Revenue.

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