Taxability of compensation on termination of managing agency turns on actual receipt linked to termination, even if not bona fide

Compensation received by a managing agent on termination of a managing agency agreement falls within section 10(5A)(a) of the Indian Income-tax Act, 1922 when the termination and receipt of compensation are in fact established. The prior finding that the termination was not bona fide did not negate the existence of termination or the character of the payment as compensation connected with that termination. As the agreement was terminated, arbitration fixed compensation, and the amounts were actually received, the receipts were held taxable under the statutory provision.

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Issues: Whether the sums received by the managing agents as compensation for termination of the managing agency agreement were taxable under section 10(5A)(a) of the Indian Income-tax Act, 1922.

Analysis: The relevant statutory provision brought to tax any compensation or other payment due to or received by a managing agent at or in connection with the termination of the managing agency agreement. The termination of the agreement was an admitted fact, arbitration had fixed compensation for that termination, and the assessees had actually received the amounts by instalments. The earlier finding that the termination was not bona fide did not amount to a finding that there was no termination, no payment, or a sham transaction without consideration. The actual receipt of compensation in connection with termination brought the amounts within the statutory language.

Conclusion: The receipts were taxable under section 10(5A)(a) and the answer was against the assessee and in favour of the Revenue.

Ratio Decidendi: Compensation received by a managing agent at or in connection with the termination of the managing agency is taxable under section 10(5A)(a) of the Indian Income-tax Act, 1922, even if the termination is found not to be bona fide, so long as the termination and receipt of compensation are in fact established.

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