# [1976] 2 S.C.R. 773

- **Citation:** [1976] 2 S.C.R. 773
- **Court:** Supreme Court of India
- **Decided:** 1976
- **Case number:** Civil Appeal No. 360 of 1971
- **Bench:** V. R. Krishna Iyer, A. C. Gupta
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/1976-2-s-c-r-773-6550
- **Pages:** 6

## Headnote

773
Indian Income Tax Act, 1922-Sub-s. SA of s. 10 introduced by the Finance
Act of 1955-Interpretation of-Compensation paid fdr the terminotion of a
managing busi11e:u is a payment in relation to the said busi11ess-Previous year
relevant to that receipt is the same as the previous year for the managing agency
business itself.
.
The assessee-appellant received in October, 1953, a sum of Rs. 9,95,000/-
out of Rs. 10,00,000 /- compensation for the premature termination of its managing agency business, a sum of Rs. 5,000/-, having been deducted towards brokerage. The said amount was credited to the Capital Reserve Account in its
books for the year ending on June 30, 1954 described as "compensation for
Joss of office".
In the assessment year 1955-56, for which the appellant's
previous year ended on June 30, 1954, the Income Tax Officer assessed
the
entire amount of Rs. I 0,00,000/ - in the hands of the appellant company under
s. 10 (5A).
The Company preferred an aPPeal to the Appellate Assistant Commissioner
who allowed the appeal holding that (i) s. 10(5A) created a new source of
income for which the previous year was not the previous year for. the managing
agency busines. ending on June 30, 1954; (ii) the compensation of Rs. 10,00,000/-
whichi the assessee received in October, 1953 fell in the financial year 19·53-54
which would be the previous year for this income for which the assessment
year was 1954-55, which was before the enactment of.sub-section 5A of s. JO;
(iii) the fact that the appellant had entered the amount in its books for the
year that ended on June 30, 1954. could not be taken as an exercise of option
by the assessee, accepting the said year as the previous year in respect of the
receipt; and (iv) if at ali the amount was taxable in the assessment year 1955-56,
the assessee was entitled to a deduction of Rs. 6,00,000 /- paid for acquiring
the managing agency.
The appeal preferred by the Department was partly allowed.
The Tribunal
agreed with the Appellate Assistant Commissioner that the assessee was entitled
to a deduction of Rs. 6,00,000/ .. which the assessee had paid for acquiring the
managing agency busiiress. The Tribunal however held that Sec. 10 (5A) does
not increase a fresh source of income that since the amount in question was
received in the accounting year relevant to the assessment year 1955-56, it was
taX'able in the assessment ye<!r 1955-56.
The High Cm1rt on a reference under s. 66 (1) of the Act on the two questions
namely,
(i) Whether the sum of Rs. 10 Iakhs is income assessable in the
year 1955-56 by virtue of Section 10(5A) ? and
(ii) If the answer is in the affirmative,· whether the initial cost of
acquisition of the Managing Agency of: Rs. 6 Iakhs and Rs.
5
thousands paid as brokerage on sale are deductible ?
agreed with the views of the Tribunal.
On appeal by certificate under s. 66A(2) and dismissing the appeal, the
Court,
HELD: ~I) Since; sub;s~ctiory 5A of s. 10 came into f?rce on April 1, 1955,
the amount m question 1f received by the assessee durmg ~the previous year
for the assessment year 1955-56, would be taxable under that sub-section.
BY
8-L159SCJ ji6
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774
SUPREME COURT REPORTS
[1976J 2 ·s.C.R.
a' legal fiction introduced by the sub-section, any amount rece_ived by a managing agent as compensation for the termination _of his '!1an':'gmg agency agre~:
ment which would otherwise h~ve been a capital rece1J?t i_s to be deemed. as
profits and gains of a business carried on by the managing agenL
Tbe fiction
regards the capital receipt as income and does not extend to trealmf? the termination of managing agency itself as a business. The am01.~nt received by_ the
appellant was the payment for the termination of tile ma·nagmg agency busmc55
and as such, the receipt is obviously related to that busmess.
Though_ the
am~uot was not earned in cauying on· the busines~ of ~anagn:~g _agency, yet th~
source of the receipt was tJ)e managing agency business itsel~, 11 Is not

## Text

1
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'I/
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'I•
M/S. CHJD~MBARAM MULRAJ & CO. PVT-. LTD.
\.' ..
COMMISSIONER OF INCOME TAX, BOMBAY CITY I
N 01•ember 21, 197 5
(V. R. KRISHNA IYER AND A. C. GUPTA, JJ.]
773
Indian Income Tax Act, 1922-Sub-s. SA of s. 10 introduced by the Finance
Act of 1955-Interpretation of-Compensation paid fdr the terminotion of a
managing busi11e:u is a payment in relation to the said busi11ess-Previous year
relevant to that receipt is the same as the previous year for the managing agency
business itself.
.
The assessee-appellant received in October, 1953, a sum of Rs. 9,95,000/-
out of Rs. 10,00,000 /- compensation for the premature termination of its managing agency business, a sum of Rs. 5,000/-, having been deducted towards brokerage. The said amount was credited to the Capital Reserve Account in its
books for the year ending on June 30, 1954 described as "compensation for
Joss of office".
In the assessment year 1955-56, for which the appellant's
previous year ended on June 30, 1954, the Income Tax Officer assessed
the
entire amount of Rs. I 0,00,000/ - in the hands of the appellant company under
s. 10 (5A).
The Company preferred an aPPeal to the Appellate Assistant Commissioner
who allowed the appeal holding that (i) s. 10(5A) created a new source of
income for which the previous year was not the previous year for. the managing
agency busines. ending on June 30, 1954; (ii) the compensation of Rs. 10,00,000/-
whichi the assessee received in October, 1953 fell in the financial year 19·53-54
which would be the previous year for this income for which the assessment
year was 1954-55, which was before the enactment of.sub-section 5A of s. JO;
(iii) the fact that the appellant had entered the amount in its books for the
year that ended on June 30, 1954. could not be taken as an exercise of option
by the assessee, accepting the said year as the previous year in respect of the
receipt; and (iv) if at ali the amount was taxable in the assessment year 1955-56,
the assessee was entitled to a deduction of Rs. 6,00,000 /- paid for acquiring
the managing agency.
The appeal preferred by the Department was partly allowed.
The Tribunal
agreed with the Appellate Assistant Commissioner that the assessee was entitled
to a deduction of Rs. 6,00,000/ .. which the assessee had paid for acquiring the
managing agency busiiress. The Tribunal however held that Sec. 10 (5A) does
not increase a fresh source of income that since the amount in question was
received in the accounting year relevant to the assessment year 1955-56, it was
taX'able in the assessment ye<!r 1955-56.
The High Cm1rt on a reference under s. 66 (1) of the Act on the two questions
namely,
(i) Whether the sum of Rs. 10 Iakhs is income assessable in the
year 1955-56 by virtue of Section 10(5A) ? and
(ii) If the answer is in the affirmative,· whether the initial cost of
acquisition of the Managing Agency of: Rs. 6 Iakhs and Rs.
5
thousands paid as brokerage on sale are deductible ?
agreed with the views of the Tribunal.
On appeal by certificate under s. 66A(2) and dismissing the appeal, the
Court,
HELD: ~I) Since; sub;s~ctiory 5A of s. 10 came into f?rce on April 1, 1955,
the amount m question 1f received by the assessee durmg ~the previous year
for the assessment year 1955-56, would be taxable under that sub-section.
BY
8-L159SCJ ji6
A
B
c
D
E
F
G
H
A
B
c
D
774
SUPREME COURT REPORTS
[1976J 2 ·s.C.R.
a' legal fiction introduced by the sub-section, any amount rece_ived by a managing agent as compensation for the termination _of his '!1an':'gmg agency agre~:
ment which would otherwise h~ve been a capital rece1J?t i_s to be deemed. as
profits and gains of a business carried on by the managing agenL
Tbe fiction
regards the capital receipt as income and does not extend to trealmf? the termination of managing agency itself as a business. The am01.~nt received by_ the
appellant was the payment for the termination of tile ma·nagmg agency busmc55
and as such, the receipt is obviously related to that busmess.
Though_ the
am~uot was not earned in cauying on· the busines~ of ~anagn:~g _agency, yet th~
source of the receipt was tJ)e managing agency business itsel~, 11 Is not therefo1
c·orrect to say thar the receipt was income from a new and independent source.
.
··
[777B, PG]
(2) The High Court was right in ~aiding _that in enacting sub-section SA,
the Legislature was concerned only with providmg a head under which
the
receipt which has been d_eemed to be income could be bro~ght to tax and was
not concerned with creatmg a new source for that deemed mcome.
[777GJ
(3) The compensation paid for the termination of a managing agency business is a payment in relation to . the said business and, there~ore, the previous
year relevant to that receipt would be the same as the previous year for the
managing agency business itself.
[778A]
Commissioner of Income Tax, Bombay v. Sir Chunilal V. Mehta & Sons
Private Ltd., (1967) 65 J.T.R. 50; and R. V. Lakshmiah Naidu and Co. v.
Cnmmissi'oner of Income Tax, Kera/a and Coimbc~ore, ( 1963) 48 I.T.R. 661,
relied on.
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 360 of 1971.
...
From the Judgment and Order _dated lhe 27/29-1-1965
of the
• •
B9mbay High Court in Income Tax Reference No. 75 of 1961.
S. C. Manchanda, K. J .. John and J. B. Dadachanji for the AppelE
!ant.
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S. T. Desai, Girish Chandra and M. N. Shroff for the Respondent.
The Judgment of the Court was delivered by
GUPTA, J. The appellant is a
private
limited
company.
The
assessment year is 1955-56 for which the relevant previous year ended
on June 30, 1954.
The shareholders of the appellant company arc
Mulraj Kersondas, members of his family, allied concerns and nominees only.
ln 1944 the appellant purchased the managing agency of
the Elphinstoa Spinning and Weaving Mills Ltd. for Rupees six lakhs
and thereafter entered into a separate man-aging agency
agreement
with the man::ged c9mpany for a
period of seventeen
years.
The
appellant's only source of income was this managing agency in
the
relevant year.
Mulraj and his group
also held
among
themselves
25,000 ordinary and 10,000 preference shares of the Elphinston Spinning and Weaving Mills Ltd.
Mulraj entered into an agreement for
sale of these shares with K. D. Jalan of Calcutta for a consideration
of Rupees forty-five lakhs; one of the terms of the agreement was that
Mulraj would have the managing agency of the
appcllant company
terminated.
In implementation of this agreement Mulraj
wrote
to
the appellanl company on October 21, 1953 asking the company to
give up the managing agency on receipt of a sum of Rupees ten lakhs
as compensation which he promised to pay.
On the same day the
appellant company passed a resolution accepting Mulraj's offer
and
...
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c. MULRAJ & co. v. C.I.T. (Gupta, /.)
775
A
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wrote to the managed company, Elphinston
Spinning and
Weaving
Mills Ltd., tendering resigm,tion of its office as managing agents. The
resignation was in due course accepted.
The assessee received from
Mulraj a sum cof Rs. 9,95-,000/- as compensation for premature termination of the managing agency, Rs. 5,000/- having been paid by
Mulraj as brokerage to one Dhirajlal Maganlal. The amouncreceived
was credited to the Capital Reserve Account in the appellant's books
for the year ending on June 30, 1954 described as "compensation for
loss of -office".
'
In ·the··assessment year 1955-56 for which the
appellant's
previous year ended on )unc 30, 1954, the Income-tax Officer assessed
the entire amount of Rupees ten lakhs in the hands of the appellant
•
company unde; section 10(5A) of the Income-Tax Act, 1922.
Section IO(J) of the Income-Tax Act, 1922 states that the "tax shall be
-payable by -an assessee under the head "Profits and gains of business,
profession or vocation" in respect of the profit or gains of any business, profession or vocation carried on by him."
Sub-section (SA)
was inserted in section 10 by the Finance Act, 1955 with effect from
April 1, 1955, the relevant part of which is in these terms:
B
c
"(SA) Any compensation or other payment due to or
D
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)
received by,-
(a) a managing agent of an Indian
company at
or in
connection with the termination or modification of
his managing agency agreement with the company;
(b) a manager of an Indian company at or in
connection with the termination of his
office or modificaE
tion of the terms and conditions relating th6reto;
(c) any person, by whatever name called, ma.naging the
whole or substantially the whole affairs of any other
company in the taxable territories, at or in connee-
-
tion with the termination of his office or the modification of the terms and conditions relating thereto;
(d) any person, by whatever name called,
holding
an
agency in the t•axable territories for any part of the
activities relating to the business of any other person,
at or in connection with
the
termination
of his
agency or the modification of the terms and conditie>nt. relating thereto;
shaJl be deemed to be profits and gains of a business carried
on by the managing agent, manager or other person, as the
case may be, and shall be liable to tax accordingly;"
The company preferred an
appeal to
the Appellate
Ass!stant
Commissioner against the order
of the
Income-tax
Officer.
The
Appellate Assistant Commissioner allowed the appeal
holding
that
section 10(5A) created a new source of income for which the previous . year was not the previous year for the managing agency business which ended on June 30, 1954, that the compensation of Rupees
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776
SUPREME COURT REPORTS
( 197 6] 2 'S.C.R.
ten lakhs which the appellant received in October,
1953 fell in the
financial year 1953-54 which would be the previous year for
this
income for which the assessment year was 1954-55 w!Jich was before
sub-section (SA) of section 10 was enacted, and ti,e fact that the
appellant had entered the amount in its books for the year that ended
on June 30, 1954 could not be taken as an exercise of option by the ...-"'
assessee accepting the said year as the previous year in respect of the
receipt.
The Appellate Assistant Commissioner further held that if
at all the amount was taxable in the assessment year 1955-56;
the
assessce was entitled to a deduction of Rupees six
lakhs
paid
for
acquiring the managing agency .. The Department took an appeal to
the Tribunal against the order of the
Appellaie
Assistant Commis-
"
sioner.
The Tribunal was of opinion that section
10(5A) only regards the compensation received by the managing agent as profits and .,
gains of a business and does not create a fresh source theretor, and as
the amount in question in this case was received in the accounting
year relevant to the assessment year 1955-56, it was ta¥able in the
assessment year 1955-56. The Tribunal however agreed
with
the
Appellate Assistant Commissioner that the assessee was entitled to a
deduction of Rupees s.ix lakhs which the assessee had paid for
acquiring the managing agency, and allowed the appeal partly holding
that the assessee was liable to pay tax on the sum of Rs. 3,95,000/-.
At the instance of the parties the Tribunal referred the following two
questions to the High Court under section 66(1) :
"(i) Whether the sum of Rs. 10 lakhs is income assessable in the year 1955-56 by virtue of Section 10
(SA)?
., '
(ii) If the answer is in the affirmative, whether the initial
cost of acquisition of
the
Managing Agency
of
Rs. 6 lakhs and Rs. 5000/- piid as brokerage on
sale are deductible ?"
The first question was referred at the instance of the assessee and the
second at the instance of the Department. The High Court overruled the contention of the assessee that the amount in question was
income from a new source for which the previous year was 1953-54,
and answered the first question in the affirmative and in favour of the I
revenue.
As regards fhe second question, the High Court answered
it in favour of the assei;see and upheld the order of the Tribunal. In
the present appeal brought on a certificate under section
66A (2),
the assessee challenges the correctness of the answer given by the High
Court to the first qvestion.
"Previous year" is defined in section 2 ( 11) of the
Income-Tax:
Act, 1922 and the relevant part of the definition is as follows :-
" ( 11) 'Previous year' means in respect of any separate
source of income, profits and gains-
( a) the twelve months ending on the 31st day of March
next preceding the year for which -the assessment is
to be made, or, if the accounts of the assessee have
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c. MULRAJ & co. v. C.I.T. (Gupta, J.)
777
been made up to a date within the said twelve
months in respect of a year ending on any date other
than the said 31st day of March, then at the option
of the assessee the year ending on the day to which
his accounts have so been made up ;"
As stated already, sub-section (SA) of section 10 came into force
<Jn April 1, 19SS.
Therefore, the amount, in question, if received by
the assessec during the previous year for the assessment year 19SS56, would be taxable unc;Ier that sub-section. By a legal fiction introduced by sub-section (SA) any amount received by a managing agent
as compensation for the termination of his managing agency
agree-
~ mcnt which would otherwise have _been a capital receipt is to
be
deemed as profits and gains of a business carried on by the managing
agent.
The appellant contends that ·sub-section (SA) indicates that
this deemed income is to be treated as receipt from a new source and,
that being so, the relevant previous year for this income would not
necessarily be the year ending on June 30, 19S4 which was the previous year for the managing agency business, and the assessee should
h•ave been given an opportunity to choose the previous year in respect
of the receipt in question; if the financial year 19S3-54 is taken as the
previous year for. this income from a new source, the argument proceeds, then the amount would not be taxable in the assessment year
195S-S6. It is further argued that the amount received as compensation could not be profits and gains of the managing agency business
because the busine;;s itself was being terminated.
The words of the
sub-section, according to learned counsel for. the appellant,
indicate
that the receipt is to be treated as income from a new and independent
source.
Sub-section (SA) states, inter alia, that any compensation
or other payment received by a managing agent in c_onnection
with
the termination of his managing agency agreement shall be deemed
to be profits and gains of "a business" carried on by the managing
agent.
The use of the indefinite article before the word 'business', it
is submitted, makes it plain that the income is not
~latable to the
managing agency business but to a new and separate source.
\
> '
We are unable to accept the contention.
The fiction
introduced
by sub-section (5A) regards the capital re~ipt as income and does
not extend to treating the termination of managing agency itself as a
business.
The amount received by the appellant was l! .. payment for
the termination of the managing agency business ana, as such,
the
receipt is obviously related to that business. It· is of course true that
the amount was not earned in carrying on the business of managing
agency, but it is clear that the source of the receipt was the managing
agency business itself.
It cannot therefore be said that the receipt
was income from a new and independent source.
In our opinion the
Higl1 Court was right in holding that in enacting sub-section (SA)
the legislature was concerned only with providing a head under which
the receipt which has bei:;n deemed to be income could be .!Jrought to
tax and was not concerned with creating a new source for that deemed
income.
Two decisions cited on behalf of the respondent, one of the
Bombay High Court, Commissioner of Income-tax,
Bombay v. Sir
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SUPREME COURT REPORTS
[19/76] 2 S.C.R.
Clmni/ul v. Mehta & Sons Private Ltd.(I) and the other of the Madras High Court, R. V. Lakshmiah Naidu and Co. v. Commissioner of
Income-Tax, Kerala and Coimbatore( 2), have both held that the compensation paid for the termination of a managing agency business is
a payment in relation to the said business, and, therefore, the previous r""'
year relevant to that receipt would be the same as the previous year
for the managing agency business itself. In our view these two decisions state the law on the point correctly.
The appeal fails and i~ dismissed with costs.
S.R.
' '
(1) (1967) 65 l.T.R. 50.
(2) (1963) 48 T.T.R. 66!.
Appeal dismissed.
..