Accrual of compensation under the mercantile system governed taxability; interest remained taxable separately on agency termination.

Compensation payable on termination of a managing agency accrued when the agency was terminated, because the agreement fixed the amount as liquidated damages for the unexpired term and no further contingency affected the right to receive it. Under the mercantile system, income accrues when the right to receive arises, so later civil adjudication did not shift the accrual date. Section 10(5A) applied to compensation due to or received by a managing agent, but the accrued compensation was not taxable in the relevant assessment year merely because it was actually received after the provision was inserted. The interest component was treated separately and was taxable.

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Issues: (i) Whether the compensation for termination of the managing agency accrued to the assessee on 23 April 1951; (ii) Whether the compensation of Rs. 2,34,000 and interest thereon was taxable under section 10(5A) of the Indian Income-tax Act, 1922 in the assessment year 1956-57.

Issue (i): Whether the compensation for termination of the managing agency accrued to the assessee on 23 April 1951.

Analysis: The managing agency agreement itself quantified the compensation payable on premature termination, excluding the cases covered by the forfeiture clause. The amount payable was fixed as liquidated damages for the unexpired term and did not depend on any further contingency. The assessee's right to receive compensation arose when the agency was terminated, even though the amount was later disputed and adjudicated in civil proceedings. Under the mercantile system, income accrues when the right to receive arises.

Conclusion: The compensation accrued to the assessee on 23 April 1951, in favour of the Revenue on this issue.

Issue (ii): Whether the compensation of Rs. 2,34,000 and interest thereon was taxable under section 10(5A) of the Indian Income-tax Act, 1922 in the assessment year 1956-57.

Analysis: Section 10(5A) applied to compensation due to or received by a managing agent on termination of the agency. The expression "due to" was held to govern assessees following the mercantile system, while "received by" applied to assessees following the cash system. As the assessee followed the mercantile system and the right to compensation had accrued in 1951, the amount could not be brought to tax merely because it was actually received after the provision was inserted. The interest component was treated separately and was taxable.

Conclusion: The compensation of Rs. 2,34,000 was not taxable in the assessment year 1956-57, though the interest thereon was taxable under section 10(5A).

Final Conclusion: The appeal failed and the answers returned by the High Court were affirmed, with the principal compensation escaping tax in the relevant assessment year.

Ratio Decidendi: Under the mercantile system, compensation payable on termination accrues when the right to receive it arises, and a later statutory deeming provision does not shift that accrual date for taxability where the right had already vested.

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