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Issues: (i) Whether compensation received on termination of a managing agency after takeover of the managed company by the State Government fell within section 10(5A) of the Income-tax Act, 1922; (ii) whether such compensation was taxable as business income even though the managing agency business had ceased by the time of payment.
Issue (i): Whether compensation received on termination of a managing agency after takeover of the managed company by the State Government fell within section 10(5A) of the Income-tax Act, 1922.
Analysis: The expression "termination" in section 10(5A) was held to cover cessation of the agency by the principal under the contract and not merely termination by mutual act of parties. A managing agency is a contractual agency, and its termination may occur in the modes recognised by the law of agency, including revocation and cessation by operation of law. On the facts, the takeover did not itself end the managing agency; the agreement was later terminated by resolution of the managed company, and the compensation was payable under the contractual clause linked with such termination.
Conclusion: The compensation fell within section 10(5A) and was covered by the deeming provision.
Issue (ii): Whether such compensation was taxable as business income even though the managing agency business had ceased by the time of payment.
Analysis: Section 10(5A) deeming compensation received by a managing agent on termination or in connection with termination of the managing agency to be profits and gains of business. The provision operates notwithstanding that the receipt may otherwise be capital in character or that the exact managing agency activity had ceased when the amount was credited or received. The statutory fiction extends the taxability of the compensation as business income for the relevant assessment year.
Conclusion: The compensation was taxable as business income under section 10(5A).
Final Conclusion: The reference was answered against the assessee and the compensation was held chargeable to tax as business income under the deeming provision.
Ratio Decidendi: Compensation payable to a managing agent on termination of a managing agency agreement is taxable as deemed business income under section 10(5A), and the term "termination" includes cessation of the agency under the contractual and legal modes by which an agency may end.
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