# COMMISSIONER OF INCOME TAX BOMBAY CITY v. CHUNILAL V. MEHTA AND SONS (P) LTD

- **Citation:** [1972] 1 S.C.R. 117
- **Court:** Supreme Court of India
- **Decided:** 1971-08-11
- **Case number:** Civil Appeal No. 1535 of 1968
- **Bench:** K. s. HEGDE, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-bombay-city-v-chunilal-v-mehta-and-sons-p-ltd-5335
- **Pages:** 10

## Headnote

Income-tax Act, 1922, s. 10 (5-A)-Compensation received on termination of n1anaging agency taxable under section-Section enacted
by Finance Act, 1955--Managing Agency terminated on April 23, 1951Suit for compensation under agreement filed by managing agcntsC
Compensation amount as determined by High Court received b,r managing
agents in December 1955-Managing agents maintaining acco1111ts on
mercantile basis-Compensation amount when falls due? -Wltether
taxable in assessment year 1956-57. '
D
E
F
G
H
The assessee held the managing agency of a public lirr,ited company
Under the agreement the assessee was to continue as managing agents
for a minimum period of 21 years.
On April 23, 1951 the Directors of
the managed company passed a resolution te1minating the sci vices of
the assessee as managing agents. This resolution was affi1med by the
shareholders at their extraordinary general meeting held
on May 23,
1951. There was dispute about the compensation payable to
the
assessee.
Jn a suit filed by the latter the trial judge as well as the Appellate Bench of the Bombay High Court held that under the terms of
the agreement the assessee was only entitled to liquidated damages at
the rate of Rs. 6000 per month for the unexpired period of the agency
namely 3 years 2 months and 7 days. The suit was decreed for Rs.
2,34,000 on November 17, 1955 and the .assessee received the amount
in December 1955. The
assessee contended
before the lncbme-tax
Officer that as it maintained accounts on the mercantile system and the
amount had become due in 1951 the same could not be taxed in the
assessment year 1956-57 under s. IO (5A) of the Income-tax Act, 1922.
Before the said section was introduced into the Act by the Finance Act,
1955 compensation received on termination of a managing agency was
treated as a capital receipt; after its enactment such
compensation
became taxable as income. The
section
was not retrospective,
so
that if the assessee's
plea that the compensation amount accrued in
1951 was accepted it could not be treated as income at all. The Incometax Officer and the Appellate Assistant Commissioner rejected
the
plea. The Tribunal however held that on the facts and circumstances
of the case the compensation became due to th.e assessee on April 23,
1951 and therefore it could not be brought to tax in the assessment
year 1956-57. The High Court in reference held that the amount was
not taxable but the interest thereon could be taxed in 1956-57. The
Revenue appealed.
HELD: (i) It was rightly held by the High Court .that the assessee
was entitled under the agreement to liquidated damages at the rate of
Rs. 6,000 per month for the unexpired period of the managing agency.
118
SUPREME COURT REPORTS
(1972) 1 S.C.R.
As such the assessee's right to get the compensation arose on April
23, 1951
when the resolution terminating the managing agency was
passed.
[123A-B]
(ii) Section 10 (SA) refers to 'payment due or received'.
The
expression 'due to' refers to those assessees who maintain their accounts
according to the mercantile system of accountancy and the expression
'received by' applies to those assessees who adopt the cash system of
accountancy.
Since the assessee in the present case maintained the
mercantile system of accounting the relevant assessment year for the
compensation accruing on April 23, 1951 was the succeeding assessment
year. [123 C-D, HJ
Commissioner of Income-lax, Ma1ras V. A.
Gaj1pa1hy Naidu, 53
l.T.R. 114, applied.
(iii) Th, plea on b'hilf of the Revenue that the right to get the amount
aro;' wh'n the quantum of comp,nsation was determined
by the
High Court, could not be accepted. The fact that the assessec was
claiming an exorbitant sum to which it was not entitled would not
convert its right into a contingent right. [124 E-G]
Thiagaraja Cheltiar & Co. v. Commissioner of Income-lax, Madras,
51 l.T.R. 393 and F. E. Hardosst!e & Co. (P) Lid. v. Commissioner of
Income-ta,x, Bombay City I, 47 l.T.R. 394, approved.
(iv) The plain a

## Text

117
A
COMMISSIONER OF INCOME TAX BOMBAY
CITY
v.
CHUNILAL V. MEHTA AND SONS (P) LTD.
B
August 11, 1971
[K. s. HEGDE and A. N. GROVER, JJ.]
Income-tax Act, 1922, s. 10 (5-A)-Compensation received on termination of n1anaging agency taxable under section-Section enacted
by Finance Act, 1955--Managing Agency terminated on April 23, 1951Suit for compensation under agreement filed by managing agcntsC
Compensation amount as determined by High Court received b,r managing
agents in December 1955-Managing agents maintaining acco1111ts on
mercantile basis-Compensation amount when falls due? -Wltether
taxable in assessment year 1956-57. '
D
E
F
G
H
The assessee held the managing agency of a public lirr,ited company
Under the agreement the assessee was to continue as managing agents
for a minimum period of 21 years.
On April 23, 1951 the Directors of
the managed company passed a resolution te1minating the sci vices of
the assessee as managing agents. This resolution was affi1med by the
shareholders at their extraordinary general meeting held
on May 23,
1951. There was dispute about the compensation payable to
the
assessee.
Jn a suit filed by the latter the trial judge as well as the Appellate Bench of the Bombay High Court held that under the terms of
the agreement the assessee was only entitled to liquidated damages at
the rate of Rs. 6000 per month for the unexpired period of the agency
namely 3 years 2 months and 7 days. The suit was decreed for Rs.
2,34,000 on November 17, 1955 and the .assessee received the amount
in December 1955. The
assessee contended
before the lncbme-tax
Officer that as it maintained accounts on the mercantile system and the
amount had become due in 1951 the same could not be taxed in the
assessment year 1956-57 under s. IO (5A) of the Income-tax Act, 1922.
Before the said section was introduced into the Act by the Finance Act,
1955 compensation received on termination of a managing agency was
treated as a capital receipt; after its enactment such
compensation
became taxable as income. The
section
was not retrospective,
so
that if the assessee's
plea that the compensation amount accrued in
1951 was accepted it could not be treated as income at all. The Incometax Officer and the Appellate Assistant Commissioner rejected
the
plea. The Tribunal however held that on the facts and circumstances
of the case the compensation became due to th.e assessee on April 23,
1951 and therefore it could not be brought to tax in the assessment
year 1956-57. The High Court in reference held that the amount was
not taxable but the interest thereon could be taxed in 1956-57. The
Revenue appealed.
HELD: (i) It was rightly held by the High Court .that the assessee
was entitled under the agreement to liquidated damages at the rate of
Rs. 6,000 per month for the unexpired period of the managing agency.
118
SUPREME COURT REPORTS
(1972) 1 S.C.R.
As such the assessee's right to get the compensation arose on April
23, 1951
when the resolution terminating the managing agency was
passed.
[123A-B]
(ii) Section 10 (SA) refers to 'payment due or received'.
The
expression 'due to' refers to those assessees who maintain their accounts
according to the mercantile system of accountancy and the expression
'received by' applies to those assessees who adopt the cash system of
accountancy.
Since the assessee in the present case maintained the
mercantile system of accounting the relevant assessment year for the
compensation accruing on April 23, 1951 was the succeeding assessment
year. [123 C-D, HJ
Commissioner of Income-lax, Ma1ras V. A.
Gaj1pa1hy Naidu, 53
l.T.R. 114, applied.
(iii) Th, plea on b'hilf of the Revenue that the right to get the amount
aro;' wh'n the quantum of comp,nsation was determined
by the
High Court, could not be accepted. The fact that the assessec was
claiming an exorbitant sum to which it was not entitled would not
convert its right into a contingent right. [124 E-G]
Thiagaraja Cheltiar & Co. v. Commissioner of Income-lax, Madras,
51 l.T.R. 393 and F. E. Hardosst!e & Co. (P) Lid. v. Commissioner of
Income-ta,x, Bombay City I, 47 l.T.R. 394, approved.
(iv) The plain and unambiguous words of s. 10 (5A)
which had
become an integral part of the Act, lent no support to the plea that by
a legal fiction the compensation must be deemed to have accrued to the
assessee in December 1955. The faot that the assessee included
the
receipt in question in its profit and loss account in the year 1955 was
a wholly immaterial circumstances. That circumstance did not afford
any basis for the argument that for this particular receipt the assessee
adopted a different system of accountancy.
Obviously the entry was
delayed because of the dispute. What is relevant
is the method of
accounting and not the actual entries. [125E-G]
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
1535 of 1968.
Appeal by special leave from the judgment and order
dated March 1, 1967 of the Bombay High Court in Incometax Reference No. 52 of 1962.
.R. H. Dhebar, J. Ramamurthi and R. N. Sachthey,
for the appellant.
M. C. Chagla, A. K. Verma, J. B. Dadachanji, 0. C.
Mathur and Ravinder Narain, for the respondent.
The Judgment of the Court was delivered by
I:Iegde, J. In this appeal by special leave, the questions
that arise for decision relate to the taxability under s. 10
A
B
c
D
E
F
G
H
,.
•
C.I.T. l'. CHUNILAL (Hegde, !.)
I I 9
A (5A) of the Indian Income-tax Act, 1922 (iii brief 'the Act')
of a certain amount received by the assessee firm as compensation on the termination of its managing agency.
The assessee is a Private Limited Company and at the
relevant time, it was under voluntary liquidation. lt was
B incorporated in June 1945 by converting an erstwhile
partnership firm into a Private Limited Company. The
partnership firm had entered into a managing agency
agreement on June 15, 1933 with a Public Limited Company
called ''The Century Spinning and Manufacturing Co.
Ltd.'' Under the said agreement, the assessee was to
c continue as managing agents for a minimum period of
2 I years and thereafter until thaf firm chose to resign its
office or is removed from office by the managed company.
Durif!g the period of 21 years stipulated in the agreement,
the managed company had no right to remove the managing
firm from its office except for reasons mentioned in the
D agreement. During the period the assessee continued to
act as the managing agents the agreement provided, that
the managing agents will get a minimum remuneration of
Rs. 6,000!- a month and if its remuneration is found at the
close of the year to be less than 10 per cent of the gross
profit of the company, the managing agents were to be
E
paid a further additional sum to make the aggregate remuneration received by it equal to IO percent of the gross
profit of the company for that year. The agreement further
provided that if the managing agents' services were terminated before the period of 21 years stipulated in the agreeF ment except for reasons mentioned in clause 15 of the
agreement the managing agents would be entitled to receive
from the managed company as compensation or liquidated
damages for the loss of office the sum mentioned in clause
14 of the agreement.
fn about April 1951, a large holding of the managed
G company was acquired by a group of shareholders who
were hostile to the managing agents. Thereafter the
relationship between the managing agents and the managed
company became strained. On April 23, 1951, the Directors of the managed company passed a resolution terminating the services of the assessee firm as managing agents.
H This resolution was affirmed by the shareholders at their
extraordinary general meeting held on May 23, 1951.
In
9-Ml245 SupCl'71
120
SUPREME COURT REPORTS
[1972] 1 S.C.R.
pursuance of the resolution, the Board ofDirectors on April
A
23, 19Sl, a notice of termination of the managing ~gency
was issued to the managing agents. In reply the as~ssee
claimed compensation of Rs. SO lacs for the unlawful
termination of its services. But the managed company
was prepared to pay Rs. 2,34,000/- as compensation calcu8
Jating the compensation at Rs. 6,000/- a month for the
~
unexpired period of the agency i.e. 3 years 2 ·months and
r
7 days and Rs. 4600/- as remuneration for the 23 days of
April 19Sl. The assessee refused to accept that amount.
Thereafter the assessee sued the managed company
on the original side of the Bombay High Court claiming c
a sum of Rs. 28 lakhs as compensation for the unlawful
termination of its services. The managed company resisted
that suit. The suit was decreed on November 17, 19S5
in the sum of Rs. 2,34,000/- and that decree was affirmed
in appeal. The trial judge as well as the appellate Bench
held that under the terms of the agreement the assessee :0
was only entitled to liquidated damages at the rate of
Rs. 6,000/- per month for the unexpired term of its agency.
The assessee received the amount decreed in December,
19SS.
Till the insertion of s. 10 (SA) into the Act by the
E
Finance Act of 19SS (Act lS of 19SS), compensation received by a managing agent for the termination of his
agency was considered as a capital receipt, but s. 10 (SA)
provided that any compensation or other payment due to
or received by a managing agent of an Indian Company
at or in connection with the termination or modification of F
his managing agency agreement with the company shall be
deemed to be profits and gains of a business carried on by
the managing agent, and shall be liable to tax accordingly.
This provision is not retrospective in operation.
As seen earlier, the compensation with which we are
G
concerned in this case was received by assessee in December,
19SS. In the assessment year 19S6-S7, the Income-tax
Officer overruling the objections of the assessee included the
said amount as the profits of the business of the assessee
during the previous year. Admittedly the assessee maintained its accounts according to mercantile system of H
accountancy. The assessee's contention before the Incometax Officer that the receipt in question cannot be brought
A
C.I.T. V. CHUN!LAL (Hegde, !.)
121
to tax in the assessment year 19S6-S7 as it became due in
19S 1 was rejected by the Income-tax Officer. In appeal
the Appellate Assistant Commissioner agreed with the
view taken by the Income-tax Officer. He opined that the
amount became due to the assessee only when it was deB creed by the High Court on November 17, 19SS and therefore it was assessable in the assessment year 19S6-S7.
But on a further appeal, the Tribunal held that on the facts
and in the circumstances of the case, the compensation in
question became due to the assessee on April 23, 1951 and
therefore it could not be brought to tax in the assessment
C year 19S6-S7. At the instance of the Commissioner, the
Tribunal submitted under s. 66 (1) of the Act, the following
two questions of law for the opinion of the High Court :
D
E
"!. Whether on the facts and in the circumstances
of this case the compensation for termination
of the managing agency accrued to
the
assessee on 23rd April 19Sl?
2. Whether on the facts and in the circumstances
of this case the compensation of Rs. 2,34,000/-
and interest thereon was taxable under s.
10 (SA) of the Indian Income-tax Act, in the
assessment year 19S6-S7 ?"
The High Court answered the first question in the
affirmative and the second question as follows :
The amount of compensation of Rs. 2,34,000/- 11·ill not
F be liable to tax, but the amount of interest thereon will
be taxable under s. 10 (SA) in the assessment year 19S6-S7
Aggrieved by that decision, the Commissioner of Incometax, Bombay City has brought this appeal.
We shall first address ourselves to the question as to
G whether on the facts and in the circumstances of this case,
the compensation for termination of the managing agency
accrued to the assessee on April 23, 19Sl? The answer to
this question depends upon the true effect of the terms of
the agreement between the managing agents and the managed company. There is no dispute that the termination
H of the managing agency did not fall within the scope of
clause 1 S of the agreement which provides that the managing
agent shall not be entitled to receive from the company
122
SUPREME COURT REPORTS
[1972J 1 S.C.R
any compensation for the loss of the office of Agents to
A
the company if such loss arises from any of the causes
mentioned therein. It is c:lear-that was also the view
taken by the High Court in the suit filed by the assessee
against the managed company-that the assessee was
entitled to get compensation under clause 14 of the agree8
ment. That clause provides :
"In case the firm shall be deprived of the office
of Agents of the company for any reason or cause
other than or except those reasons or causes
specified in clause fifteen of these presents the
firm shall be entitled to receive from the Company
as compensation or liquidated damages for the
loss of such appointment a sum equal to the
aggregate amount of the monthly salary of not
less than Rupees six thousand which the Firm
would have been entitled to receive from the
company for and during the whole of the then
unexpired portion of the said period of twentyone
years if the said Agency of the FiTm had not
been determined."
In the suit filed by the assessee against the 'managed
company, the only controversy between the parties was
whether that clause should be read alongwith clause IO
of the agreement which provided for the payment of remuneration to the managing agents during the continuance
of the Managing agency agreement or whether the compensation payable should be determined solely on the
basis of clause 14. Replying on the expression "not less
than Rs. 6000/-" in clause 14, the assessee contended that
c
D
E
F
Rs. 6,000/- referred to in the clause is merely the minimum
but the actual comnensation should be determined in the
manner provided in clause 10. The High Court rejected G
that contention. According to the High Court clause 14
not only provided for the payment of damages for improper
termination of the services of the managing agents but it
also stipulated the damages to which they were entitled to.
In its opinion that clause had quantified the damages to
which the managing agents were entitled to. It opined H
that the damages payable to the assessee firm were liquidated damages. The High Court further held that the
J',.
<C.I.T. v. CHUN!LAL (Hegde, J.)
123
A ' expression "not less than Rs. 6,000/-" means a definite
sum of Rs. 6,000(-, neither more nor less. We are in entire
agreement with the view taken by the High Court in that
suit. It is plain from the language of clause 14 of the
:agreement that the assessee was entitled to a definite sum
8 under tnat clause. In other words it was entitled to liquidated damages.. Hence we agree wi~h the answer given by
the High Oou!t to the first question referred to earlier.
Now coming to the second question, the answer to
the same depends upon the interpretation to be placed
c on s. 10 (SA). Earlier we have set out that provision to
the extent necessary for our present purpose. That section
takes in "payment due to or received". In the matter of
payments, there are two aspects viz. (1) payments due and
(2) payments received. The mercantile system of accountancy takes note of "payments due" whereas cash system
D of accountancy recognises only payments received. Mercantile system of accountancy, a double entry system is
maintained on the basis of accrual of rights to receive or
liability to pay a certain sum of money, unlike is the case
of cash system of accountancy which merely takes note of
actual receipts or disbursements.
E
We have earlier come to the conclusion that the compensation with which we are concerned in this case became
due to the assessee in April 19Sl though it was actually
received by the assessee in December 19SS. Now arises
the question to what circumstance the expression "due to"
F in s. 10 (SA) applies and to what circumstance the expression "received" therein is applicable? They do not mean
the same thing. Our income-tax law is familiar with these
two expressions. That law permits an assessee to adopt
his own system of accountancy subject to certain conditions
and his tax liability is determined on the basis of the system
G of accountancy adopted by him.
In other words, the Act
permits the assessee to adopt either the mercantile system
of accountancy or the cash system of the accountancv and
the system adopted by him would be the basis on \1 h[ch he
should be assessed.
It is not necessary in this case to deal
with the exceptions to that rule.
We have to read s. IO
H (SA) alongwith the other provisions in the Act. If so
read, it is clear that the expression "due to" in that section
refers to those assessees who maintain their accounts
124
SUPREME COURT REPORTS
[1972] I S.C.R.
A
according to the mercantile system of accountancy and
the expression "received by" applies to those assessees
who adopt the cash system of accountancy. As observed
by this Court in Commissioner of Income-tax, Madras
v. A. Gajapathy Naidu (1):
"When an Income-tax Officer proceeds to include a
particular income in the assessment, he should
ask himself, inter alia, two questions, namely:
(I) what is the system of accountancy adopted
by the assessee, and (ii) if it is the mercantile
system, subject to the deeming provisions, when
has the right to receive accrued. If he comes to
the conclusion that such a right accrued or arose
to the assessee in a particular accounting year,
he should include the said income in the assessment of the succeeding assessment year."
B
c
Herein also we have to ask ourselves the question•
D
bearing in mind the fact that the system of accountancy
adopted by the assessee is the mercantile system, as to when
the assessee's right to get the compensation arose. We
have already held that it arose in April 1951.
It was urged on behalf of the Department that as the
E
assessee disputed the quantum of compensation to which
it was entitled, we must hold that its right to get the amount
arose when that dispute was determined by the High Court.
We are unable to accede to this contention. As mentioned
earlier, the right of the assessee to get compensation for
F
unlawful termination of its services and the quantum of
compensation to which it was entitled were clearly pres•
cribed in the agreement. It was also s~ held by the High
Court in the suit between the assessee and the managed
company. The fact that the assessee was claiming an exorbitant sum to which it was not entitled to will not
G
convert its right into a contingent right. In Thiagaraja
Chettiar & Co. v. Commissioner of Income-tax, Madras(2)
the High Court of Madras held that where a managing
agent is entitled under the terms of the managing agency
agreement to remuneration at a certain percentage on theannual net profits of the company, the remuneration pay-
~
able to the managing agent accrued when the 11et profits
{l) 53 l.T.R. 114.
12) 51. l.T.R. 393.
C.l.T. v. CHUNILAL \Hegde, !. )
125
A of the company for the year are ascertained. The mere
fact that owing to disputes between the company and the
managing agent the company had not credited the managing agent with the remuneration due to the latter in its
accounts, would not entitle the managing agent to claim
B that the remuneration due to him had not accrued and
should not be assessed to income-tax until the company
had credited him in its accounts with the amount of commission due to him. We are in agreem~nt with the ratio
of that decision and that ratio governs the facts of the
p.re~ent case.
c
The ratio of the decision of the Bombay High Cuurt in
F. E. Hardosstle & Co. (Private) Ltd. v. Commissioner of
Income Tax, Bombay City-I (1), is also to the same effect.
D
It was next urged on behalf of the Department that
s.10 (5A) is a code in itself and in applying the provisions
therein, no reliance should be placed on the system of
accountancy which the assessee generally adopts. It was
further urged that as the liability under s. 10 (5A) is a new
liability and as the receipt with which we are concerned
E was received in December, 1955, after s. 10 (5A) was
incorporated into the Act, we must by a legal fiction deem
that the amount became due only in December, 1955.
We see no basis for this argument. The language of
s.10· (5A) is plain and unambiguous. That provision has
now become an integral pi>rt of the Act. Therefore the
F deemed payment under that provision stands on the same
footing as any other payment. The fact that the assessee
included the receipt in question in its profit and loss account
in the year 1955 is a wholly immaterial circumstance. That
circumstance does not afford any basis for the argument
that for this particular receipt, the assessee adopted a
G different system of accountancy. Obviously because of
the dispute between the assessee and the managed company, the assessee did not enter the amount in questicn iP ,
the year in which it became due. Method of maintaininl!
accounts is one thing and the actual entries in the account,
H maintained is a different thing. What is relevant is · ,,
method of accountancy and not the actual entries.
(I) 47 l.T.R. 394.
126
SUP:REMB COUllT :R.EP~-!t4S
,
(1972) l S.C.R.
f.or the reasons mentioned abqve, we agree with the A
answers given by the High Court .to tqe questions of law
referred tq it. This appeal is 'accordingly dismissed with
costs.
..
B
G.C.
Appeal dismissed.