Skip to content


Chidambaram Mulraj and Co. Pvt. Ltd., Bombay Vs. Commissioner of Income-tax, Bombay City-i - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 75 of 1961
Judge
Reported in[1965]58ITR206(Bom)
ActsIncome Tax Act, 1922 - Sections 10(5A)
AppellantChidambaram Mulraj and Co. Pvt. Ltd., Bombay
RespondentCommissioner of Income-tax, Bombay City-i
Appellant AdvocateS.P. Mehta, Adv.
Respondent AdvocateG.N. Joshi, Adv.
Excerpt:
direct taxation - compensation - section 10 (5a) of income tax act, 1922 - assessee purchased managing agency of company for consideration of rs. 6 lakhs - later assessee resign from the office of managing agents on request of x - assessee received sum of rs. 10 lakhs as compensation for loss of office - brokerage of rs. 5000 paid to broker for bringing about bargain between assessee and x - compensation fall under section 10 (5a) (a) - assessee has received in hands only sum of rs. 395000 - only rs. 395000 liable to be taxed in hands of assessee under section 10 (5a). - maharashtra scheduled castes, scheduled tribes, de-notified tribes (vimukta jatis), nomadic tribes, other backward classes and special backward category (regulation of issuance and verification of) caste certificate.....tambe, j.1. this is a joint reference under sub-section (1) of section 66 of the indian income-tax act, 1922, wherein two questions of law have been referred to us - one at the instance of the assessee, and the other at the instance of the commissioner of income-tax. 2. the assessee before us is one m/s. chidambaram mulraj & co. pvt. ltd., and the assessment year with which we are concerned is the assessment year 1955-56, the relevant accounting year being one commencing from 1st july, 1953, and ending with 30th june, 1954. the assessee's only source of income for the relevant year was the managing agency of elphinstone spinning and weaving mills limited. it was acquired by the assessee in 1944 from e. d. sassoon and co. ltd., for a consideration of rs. 6 lakhs. after acquiring it from e......
Judgment:

Tambe, J.

1. This is a joint reference under sub-section (1) of section 66 of the Indian Income-tax Act, 1922, wherein two questions of law have been referred to us - one at the instance of the assessee, and the other at the instance of the Commissioner of Income-tax.

2. The assessee before us is one M/s. Chidambaram Mulraj & Co. Pvt. Ltd., and the assessment year with which we are concerned is the assessment year 1955-56, the relevant accounting year being one commencing from 1st July, 1953, and ending with 30th June, 1954. The assessee's only source of income for the relevant year was the managing agency of Elphinstone Spinning and Weaving Mills Limited. It was acquired by the assessee in 1944 from E. D. Sassoon and Co. Ltd., for a consideration of Rs. 6 lakhs. After acquiring it from E. D. Sassoon, the assessee entered into a separate managing agency agreement with the managed company for a period of 17 years from the date of the said agreement. The price paid by the assessee-company was debited by it to the 'goodwill account' in its books of account. In the year ended June 30, 1951 and 1952, Rs. 1 1/2 lakhs in all, out of this, has been written off and the balance carried forward under goodwill account in the subsequent year was at Rs. 4 1/2 lakhs.

3. One Mulraj and his group held among themselves 25,000 ordinary and 10,000 preference shares of the Elphinstone Co. Mulraj negotiated for the sale of these shares with E. D. Jalan of Calcutta on behalf of the Howrah Trading Co. Ltd. By his letter of 25th September, 1953, annexure 'A' to the statement of the case, Mulraj made a firm offer to Jalan for the sale of the said 25,000 ordinary shares and 10,000 preference shares, for a consideration of Rs. 45 lakhs. In this letter he further agreed that on the offer being accepted, he will transfer those shares to Jalan or his nominees, that he shall procure the resignation of the present directors, and shall get appointed persons of Jalan's choice as directors of the company, and that he shall also get the resignation of the present managing agency, M/s. Chidambaram Mulraj & Co. This offer was accepted by Jalan.

4. In implementation of his agreement, Mulraj on 21st October, 1953, wrote a letter to the assessee-company informing them about the agreement, and therein he also requested the assessee-company to resign the office as the managing agents of Elphinstone Spinning & Weaving Mills, in consideration whereof, he (Mulraj) agreed to pay to the assessee-company a sum of Rs. 10,00,000 (ten lakhs) as compensation for the loss of office. A meeting of the board of directors of the assessee-company was held on the same day, i.e., 21st October, 1953, at which the assessee-company passed a resolution accepting the sum of Rs. 10 lakhs from Mulraj as compensation on account of the loss of office, and on the same day the assessee-company wrote a letter to Elphinstone Spinning & Weaving Mills, tendering their resignation of the managing agency. The resignation of the assessee-company was in due course accepted. The amount received by the assessee-company as compensation for tendering their resignation of the managing agency from Mulraj was Rs. 9,95,000, Mulraj having deducted from the total consideration of Rs. 10 lakhs, Rs. 5,000 which he had paid to a broker, Dhirajlal Maganlal, as his brokerage for bringing about the bargain. The said amount of Rs. 9,95,000 has been credited in the books of account of the assessee-company and has been shown as capital reserve in the balance-sheet as on 30th June, 1954. The two questions which are referred to us relate to the taxability of the said amount of Rs. 10 lakhs paid by Mulraj to the assessee-company in consideration of the assessee-company resigning their office as managing agents of Elphinstone Spinning & Weaving Mills. The Income-tax Officer sought to tax the entire amount of Rs. 10 lakhs under section 10(5A). The assessee-company denied its liability to pay any tax on the said amount of Rs. 10 lakhs, inter alia, on the grounds that the consideration having been received from a third party and not from the managed company was not taxable under section 10(5A); that the consideration was for tendering the termination of modification of the managing agency, and, therefore, not taxable under section 10(5A). In the alternative, it was contended that, at any rate, on a true construction of section 10(5A), the amount received, though it may be income, was not income for the account year ended with 30th June, 1954, but was the income of the financial year 1953-54. Section 10(5A) came into force on 1st April, 1955, and, therefore, the entire amount was not taxable. In the further alternative, it was contended that, at any rate, the amount taxable would be Rs. 3,95,000 the amount of Rs. 6 lakhs paid to E. D. Sassoon for acquiring the managing agency, and the amount of Rs. 5,000 paid to the broker, being deductible from the said amount of Rs. 10 lakhs. The Income-tax Officer negatived all the contentions raised on behalf of the assessee, and held that the entire amount of Rs. 10 lakhs was liable to be taxed in the hands of the assessee.

5. The assessee-company took an appeal to the Appellate Assistant Commissioner. To state briefly, the view taken by him was that section 10(5A) created a new source of income; the income, therefore, cannot be income of the financial year, 1953-54, and, therefore, not assessable in the assessment year 1955-56; that the fact that the company had shown the receipt of the amount in its balance-sheet on 30th June, 1954, cannot amount to conscious exercise of the option of the year of account within the meaning of section 2(11)(c). In this view of the matter, he allowed the appeal. The Appellate Assistant Commissioner also recorded a finding that if at all the amounts are taxable as in the year 1955-56, the assessee would be entitled to deduction of Rs. 6 lakhs which it had paid to E. D. Sassoon for acquiring the managing agency. Against these two orders of the Appellate Assistant Commissioners the department took a further appeal to the Tribunal, and it was, inter alia, contended before the Tribunal that the aforesaid view taken by the Appellate Assistant Commissioner that the amount of Rs. 10 lakhs received by the assessee represents compensation relating to the financial year ended March 31, 1954, and was, therefore, not assessable in 1955-56 was erroneous. It was also contended that the view taken by the Appellate Assistant Commissioner that from the said amount of Rs. 10 lakhs a sum of Rs. 6 lakhs was deductible was erroneous. The assessee, on the other hand, contended that section 10(5A) enacted a two-fold fiction. In the first instance, what was not income had been deemed to be income by way of profits and gains of a business carried on. The business of which the said compensation is deemed to be income is not the old business of managing agency, but is a new business. The section therefore also has enacted another fiction of creating a new source of this income. The accounting year for the income in absence of exercise of option by the assessee would be the financial year ended 31st March, 1954. All the aforesaid contentions raised before the Income-tax Officer were also pressed before the Tribunal. The Tribunal held that section 10(5A) deems only the receipt of compensation as profits and gains of a business and does not create a fresh source therefor. It was received in the accounting year relevant to the assessment year 1955-56 and was so received by the assessee in its books of account. It was, therefore, taxable in the assessment year 1955-56. The amount received, however, was taxable as profits and gains from a business under section 10 of the Act, and in computation of the income under section 10, the assessee was entitled for deduction of the cost of Rs. 6 lakhs paid by it for acquiring the managing agency and Rs. 5,000 which it had paid as brokerage under section 10(1). In this view of the matter, the Tribunal partly allowed the appeal and held that the assessee was liable to pay tax on the sum of Rs. 3,95,000. On applications made by both the parties this joint reference has been made by the Tribunal, referring to us the following two question :

'(1) Whether the sum of Rs. 10 lakhs is income assessable in the year 1955-56 by virtue of section 10(5A)

(2) If the answer is in the affirmative, whether the initial cost of the acquisition of the managing agency of Rs. 6 lakhs and Rs. 5,000 paid as brokerage on the sale are deductible ?'

6. The first question is referred at the instance of the assessee, and the second question is referred at the instance of the department. We would proceed to deal with the first question.

7. The contention raised by Mr. Mehta, learned counsel for the assessee, is two-fold. In the first instance, he contends that on a true construction of section 10(5A), the amount which is rendered taxable is only the amount received by the managing agents from the managed company on or in connection with termination or modification of the managing agency agreement with the company. The amount received by the assessee was not from the managed company, but was from Mulraj. Further, the amount was not received by the assessee-company in connection with the termination or modification of its managing agency, but, on the other hand, received as consideration for tendering its registration of the managing agency. The amount was, therefore, not taxable under section 10(5A) of the Act. In the alternative, it is contended that section 10(5A) enacts two fiction : Receipts which are not income have been deemed to be income as profits and gains of a business. The amount is received in connection with the termination of the business. The receipt thus is not receipt of the business of the managing agency, but is the receipt from a new source. The amount, therefore, in the absence of any option having been exercised by the assessee would be taxable in the financial year 1953-54, i.e., assessment year 1954-55, and not in the assessment year 1955-56. The argument advanced relates to the construction of section 10(5A) read together with the definition of 'previous year' in section 2(11) of the Act. It would, therefore, be convenient at this stage to read the relevant part of these two provisions. Section 10 relates to the tax payable by an assessee under the head 'Profits and gains of business' in respect of the profits and gains of any business, profession or vocation carried on by him. Sub-section (5A) read :

'(5A) Any compensation or other payment due to or 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 modification of the terms and conditions relating thereto;

(c) any person, by whatever name called, managing the whole or substantially the whole affairs of any other company in the taxable territories, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto;

(d) any person, by whatever name called, holding any agency in the taxable 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 conditions relating thereto;

shall 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;......'

8. Before we read the definition of 'previous year', it would be convenient to deal with the first part of the contention of Mr. Mehta. It is the argument of Mr. Mehta that what has been made taxable under this provision is the amount of compensation received either by a managing agent of an Indian company, or manager of an Indian company, or by a person managing the whole or substantially the whole affairs of any other company, or any person holding an agency relating to the business of any other person, received by them in connection with the termination or modification of the terms and conditions relating to their respective agreements. The only person, who could terminate or modify their respective agreements are the persons with whom they have entered into agreements, namely, the managed company in the case of managing agents, or a company which has employed its manager, or the person who has allowed his business to be carried on by another person. The managed company has not here terminated the agreement, but, on the other hand, the assessee has received the amount from a third person, namely, Mulraj, in consideration of the assessee having agreed to tender the resignation of their managing agency. The amount, therefore, is not taxable. In our opinion, the argument has not been well made. What has been made taxable under section 10(5A) is not only 'compensation received at or in connection with the termination or modification of the managing agency', but, on the other hand, what has been brought to tax is compensation as well as 'other payment' received by managing agents at or in connection with the termination or modification of his managing agency agreement. The amount thus brought to tax is not only what is received as compensation, but also other payment, provided of course the payment has been received at or in connection with the termination or modification of the managing agency. It may be possible to argue that if what has been made taxable was only the amount of compensation at or in connection with the termination or modification of the managing agency agreement, then the amount would be taxable only in the event it had been received from the managed company which alone were competent to terminate or modify the agreement and was, therefore, liable to pay compensation to the managing agents. The legislature, however, has not stopped at that, but has further provided and brought to tax with 'any other payment' received by the managing agents in connection with termination or modification of the managing agency agreement. The payment as contradistinguished from compensation may proceed from any person whomsoever. It would none the less fall under sub-section (5A) provided the payment is received by the managing agents in connection with the termination or modification of the managing agency agreement. Reading sub-section (5A) as a whole, it appears that what has been brought to tax is the amount received by the persons falling under the aforesaid four categories in connection with the termination or modification of their respective agreements. The emphasis is not on the person from whom the amount is received, but the emphasis is on the connection between the payment and the termination of the respective agreements or their modification. If the receipt has a direct nexus with the termination or modification of the respective agreements, then the amount received, whether it be by way of compensation or otherwise, falls within the meaning of section 10(5A) of the Act. Now, here the amount of Rs. 10 lakhs was offered by Mulraj to the assessee-company in consideration of the assessee-company tendering the resignation of its office as managing agents of the said Elphinstone Spinning and Weaving Mills. This offer of Mulraj has been accepted by the assessee-company, and the board of directors of the assessee-company in its meeting held on the same day passed a resolution accepting the offer. The assessee-company had also an the same day tendered its resignation of their managing agency to the managed company. The amount has been received from Mulraj, after having tendered resignation, and has been shown in its books of account and in the balance-sheet as at 30th June, 1954. The receipt has been shown under the head 'Capital Reserve' as 'compensation for loss of office'. There can hardly be any doubt that it is the payment received by the assessee-company (managing agents) of an Indian company in connection with the termination of its managing agency agreement with the company (Elphinstone Spinning and Weaving Company). The receipt, therefore, in our opinion, clearly falls under clause (a) of sub-section (5A) of section 10. This part of the contention raised by Mr. Mehta, therefore, in our opinion, should fail.

9. Before we deal with the alternate contention of Mr. Mehta, it is necessary to read the relevant portion of section 2(11), which defines a 'previous year :

'(11) 'previous year' means -

(i) 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 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 date to which his accounts have been so made u :...'

10. This definition provides that in the absence of exercise of the option by an assessee, the relevant assessment year for every separate source of income, profits and gains, which is termed as 'previous year' would be a period of 12 months ending with 31st day of March next preceding the assessment year. However, it is open to an assessee to have the accounting year ending with any date other than 31st day of March within the period of twelve months next preceding the year of assessment, provided that its yearly accounts are made up in respect of the said income ending on any date other than 31st day of March next preceding the assessment year. It is not in dispute that it is open to the assessee to take a different account year for each separate source of income, profits and gains other than the financial year. Now, the second aspect of Mr. Mehta's argument relates to the relevant assessment year in which the said amount of Rs. 10 lakhs could by brought to tax. It is the argument of Mr. Mehta that ordinarily the payment received by way of compensation or otherwise in connection with the termination or modification of the managing agency agreement could not be said to be income received from the business carried on by the managing agents. On the other hand, it would be the amount received as consideration for terminating the business, or part of its activities, and would, therefore, be a capital receipt. The legislature, however, by enacting two fictions in section 10(5A) has brought this amount to tax. The first fiction which is enacted is that what was not income in its real sense but was capital receipt has been deemed to be profits and gains of a business; and the second fiction enacted is that it is the profits and gains of a business carried on by the managing agent, manager or other persons. The amount received in connection with the termination of the managing agency business is not an income received as a result of carrying on the managing agency business. Obviously, therefore, the legislature has enacted another fiction of creating a new source for this income. This part of argument is sought to be reinforced by Mr. Mehta by referring to clause (b), and then referring to the words 'a business' carried on by the managing agents, manager and other persons. Referring to clause (b), Mr. Mehta argues that a person who is a manager of an Indian company, cannot be said to be carrying on any business as such during the time he held the office of a manager of an Indian company. The legislature has yet enacted that the amount received by him in connection with the termination of his office or modification of the terms and conditions relating thereto, shall be deemed to be profits and gains of a business carried on by him. The legislature thus has notionally brought into existence a new business which never existed prior to the time of the receipt of the amount as a source for the said income. Mr. Mehta further argues that the legislature has used an indefinite article 'a' and not the definite article 'the'. Had the legislature intended to make the said amount as income of business already carried on, the legislature would have certainly used the expression 'the business' and not the expression 'a business'.

11. Mr. Joshi, learned counsel for the revenue, on the other hand, argues that no doubt section 10(5A) enacts a fiction, but, all that has been stated in that section is what had been up to that time a capital receipt has been converted into a revenue receipt. The receipt which was formerly a capital receipt was a receipt of the business till then carried on by the assessee. The only thing is that it was not taxable that time as a revenue receipt, and now it has been made taxable under section 10(5A). Section 10(5A) does not enact any further fiction of creating a new source of income. According to Mr. Joshi, the capital receipt of a business has only been turned into a revenue receipt by reason of the provisions of the Act without creating any source for it. In support of his contention, he drew our attention to the definition of 'income' contained in section 2(6C) of the Act. Mr. Joshi also argued that the manager of an Indian company referred to in clause (b) of section 10(5A) is not a person who is merely an employee on salary to do the work of manager of an Indian company. Such a person, according to Mr. Joshi, would fall under section 7 read together with the second Explanation thereto. The manager of an Indian company, according to Mr. Joshi, is a person who in fact is the managing agent of the company. It is not possible for us to accept in their entirety the arguments advanced on behalf of both the parties.

12. The argument advanced by Mr. Mehta virtually amounts to reading something more than what is contained in section 10(5A). The crux of the argument is that the compensation or payment received by these persons falling under the four categories is income from a new source. In other words, what Mr. Mehta wants us to do is to read the word 'new' between the words 'a' and 'business' occurring in the clause 'shall be deemed to be profits and gains of a business carried on by managing agents........'. It is not permissible for us to do so. It is well settled that legal fictions are limited to the purpose for which they are created, and should not be extended beyond their legitimate field : Commissioner of Income-tax v. Amarchand N. Shroff. The position in law prior to enacting section 10(5A) was that the amount received by way of compensation for termination of the managing agency agreements was not revenue receipt but a capital receipt, and was, therefore, not taxable, as laid down by their Lordships of the Privy Council in Commissioner of Income-tax v. Shaw Wallace and Company. The facts in that case wer : Shaw Wallace & Co. carried on business in India as merchants and as agents for various companies. For several years prior to the relevant year, they acted as distribution agents in India for two oil companies. The two oil companies combined and decided to make other arrangements for distribution of oil. Each of the oil companies, therefore, terminated the agency agreement with the assessee company, and paid them compensation for its cessation. The claim on behalf of the revenue was that the remuneration received by the assessee-company was taxable as income from its business. The claim of the revenue was negatived by the High Court. The matter was taken by the Commissioner of Income-tax to the Privy Council. Their Lordships held that the sums so received by the assessee-company were not taxable income under section 6(iv) (profits and gains of business, profession or vocation) because they were not the produce, nor the result, of carrying on the agencies of the oil companies in the year in which they were received; nor under section 6(vi) (other sources) for the same reason. It has been pointed out by the Supreme Court in Commissioner of Income-tax and Excess Profits Tax v. South India Pictures Ltd., that one of the objects of enacting section 10(5A) was to nullify the application of the decision in Shaw Wallace's case. At page 919, it has been observe :

'That sub-section [10(5A)] was obviously introduced to prevent the abuse of managing agency agreements being terminated on payment of huge compensation and to nullify the application of the decision in Shaw Wallace's case to such cases.'

13. The definite purpose for enacting section 10(5A) is thus to bring to tax the amount received by way of compensation for termination of agreements as income, and that is the legitimate field within which the fiction enacted in sub-section (5A) operates. The fiction, as already stated, is that the compensation or other payments due to or received by the aforesaid four categories of persons for termination of their respective agreements are 'deemed to be profits and gains of a business carried on by..........' Thus the fiction created is what has not been a revenue receipt has been made a revenue receipt by way of profits and gains of a business carried on, though, in fact, the amounts received for termination of business or an agreement cannot be termed as a receipt resulting from carrying on a business. The legislature was concerned with only providing a head under which the receipt which has been deemed to be income could be brought to tax. the legislature was not concerned with creating a new source for that deemed income. In our opinion, therefore, it is not possible for us to hold that the legislature has enacted in section 10(5A) that the said amount of compensation or other payment for termination of the said agreement would necessarily be income from a new source. Mr. Mehta further argues that it could be said that the persons falling under clauses (a), (c) and (d) were carrying on a business during the continuance of their respective agreements, but, in no event, it could be said that the persons falling under clause (b), who were merely managers of an Indian company, were carrying on any business as such. None the less the amount of compensation or other payment received by a manager at or in connection with the termination of his office is deemed to be profits and gains of a business carried on by him. Clearly, the source for this deemed income is a new source. It would necessarily follow that the receipt which has been brought to tax under clauses (a), (c) and (d) as deemed profits and gains of a business carried on, must also be deemed to be income from a new source. The fiction enacted must be taken to its logical end. It is true that the fiction enacted by a statute must be taken to its logical end, but that only means that it must be taken to its logical end, but that only means that it must be taken to its logical end in application of that fiction to the facts which the court has to consider. It does not mean that because in the application of the said fiction to a certain set of facts a certain result follows, the court must necessarily hold that a similar result should also follow in different set of facts; nor does it entitle a court to read in the provisions of law any other fiction which has not been enacted. The decision of the House of Lords in East End Dwellings Co. Ltd. v. Finsbury Borough Council fully illustrates the principle. The case related to the quantum of damages to which a dwelling company was entitled to in law in respect of their property having been compulsorily acquired by a Borough Council. In 1944, the dwelling company owned a block of working class dwellings, and the these dwellings were let out to tenants at rents controlled by the Rent Restrictions Acts. This block of working class dwellings was later completely demolished by enemy action. No rebuilding of the block was done. The local authority by virtue of its compulsory purchase order served order served the claimants with a notice to treat. In respect of the fixation of price or damages, the war damage committee directed that the appropriate compensation payable under the War Damage Act, 1943, would be a payment of cost of works. According to the claimants, they were entitled to damages on the basis that at the time the notice to treat was given, the demolished block dwellings had been fully rebuilt at that time. So imagined, the building will be not subject to the provisions of the Rent Control Act, and on that basis, they were entitled to get damages. On the other hand, the claim of the Borough Council was that the buildings assumed to have been rebuilt must be taken to be subject to the provisions of the Rent Control Act, as it originally was and on that basis, compensation must be arrived at. The question related to the construction of the fiction enacted relating to the assessment of the value of notionally rebuilt buildings which had at one time been destroyed by enemy action. The matter has been very succinctly put by Lord Asquith of Bishopstone, in the oft quoted passage at page, in the following term :

'If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it. One of these in this case is emancipation from the 1939 level of rents. The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs.'

14. The principle that a legal fiction must be carried to its logical end comes into play when the legal fiction has to be applied to a given set of facts. Here, the claim for compensation was in respect of compulsory acquisition of land on which had stood the buildings which were completely destroyed in was by enemy action. Applying the legal fiction to this state to affairs and imagining as if the dwellings stood rebuilt on the eve of acquisition, the necessary result that flowed from it was that the buildings became free from the restrictions of the Rent Control Act, and, therefore, the company was entitled to get compensation on that basis. Had the acquisition been at other times, when the Rent Control Act itself was in force, the position would have been entirely different.

15. What the court has, therefore, to do so take a legal fiction as it stands in section 10(5A) and has to apply it to the set of facts, to which it has been called upon to do so. The result that flows naturally therefrom is to be given effect to. If it results in the deemed income being an income from a new source, the court will have to give effect thereto. May be, in certain other given set of facts, the income need not necessarily be an income from a new source but may have reference to or may be related to a business already carried on.

16. We are also not impressed by the argument of Mr. Joshi that the income falling under section 10(5A) is an income without any source. The argument, in our opinion, runs entirely counter to the scheme of the Act. Section 3 which is the charging section brings to tax the total income of the previous year of a person in accordance with the provisions of the Income-tax Act, and the range of the total income is as given in section 4 of the Act. The preamble of sub-section (1) thereof provide :

'Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived...'

17. The income, thus, which can enter into the total income which is charged to tax, is to flow from a source. Section 6 enumerates heads of income chargeable to tax. These heads are taken to the sources, the income derived from which alone is taxable. Accidental wind fall though it is receipt in the hands of a receiver, is not an income which can enter the total income, it not being an income under any of the said heads. The position has been made clear by their Lordships of the Privy Council in the Shaw Wallace's case. At page 212, it has been observe :

'The object of the Indian Act is to tax 'income', a term which it does not define. It is expanded, no doubt, into 'income, profits and gains', but the expansion is more a matter of words than of substance. Income, their Lordships think, in this Act connotes a periodical monetary return 'coming in' with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere wind fall. Thus income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something which is often loosely spoken of as 'capital. But capital, though possibly the source in the case of income from securities, is in most cases hardly more than an element in the process of production.

18. Mr. Joshi has referred us in this connection to the various items which have been included in the definition of 'income' in section 2(6C), and according to him, these various amounts which are included in the definition of 'income' are receipts received by a person without there being any source. One of such items is 'compensation or payment mentioned in section 10(5A) is an income without there being a source. It is not necessary to elaborate the matter. In our opinion, the argument is not well-founded. The first item that is included in 'income' is dividend. Normally, a share is the source from which it is derived. Item (vii) i : 'the profits and gains of any business of insurance carried on by a mutual insurance association'. Business of insurance is a source of the profits and gains of the business which has been brought to tax in accordance with rule 9 of the Schedule. It is also not possible to accept the other argument of Mr. Joshi that a manager of an Indian company referred to in clause (b) of section 10(5A) is a person who is also carrying on the business of managing agency of an Indian company. According to Mr. Joshi, the case of a manager simpliciter who is drawing a salary would fall under the second Explanation of sub-section (1) of section of 7 the Act, which relates to the head 'salary'. Clause (1) of the second Explanation provide : 'For the purposes of this section, 'profits in lieu of salary' include : (i) the amount of any compensation due to or received by an assessee from his employer or former employer at, or in connection with, the termination of his employment, whether solely as compensation for loss of employment or for any other consideration'. Mr. Joshi points out that section 7 in the present form has been substituted by the Finance Act of 1955, which also brought on record section 10(5A). He, therefore, contends that the manager of an Indian company, who was receiving a salary up to the time of his employment, would be governed by the first clause of Explanation 2 of section 7(1). We must, therefore, necessarily construe that the manager of an Indian company referred to in clause (b) of section 10(5A) is a person similarly situate as the managing agents or the persons falling under clauses (c) and (d) doing agency business. Now, section 7 is a general provision relating to the persons who are receiving salary or wages, annuity, pension or gratuity, etc. Section 10(5A) is a special provision relating to managers who are managing an Indian company or other companies or managing the business of some other persons. The section relates only to this limited class of persons. It is a well settled principle of law that when there is a general provision and a special provision, it is special provision which prevails over the general provision. It would, therefore, follow that even if it may be that some of the persons falling under clause (b) of section 10(5A) also fall under the second Explanation of section 7(1), they would be governed by the special provision contained in section 10(5A) and not by section 7.

19. As already stated, we are here concerned with the application of the fiction enacted in section 10(5A) to the facts of the case. The previous year relevant to the assessment year 1955-56 is the year commencing from 1st July, 1953, and ended on June 30, 1954. The assessee-company had passed a resolution on 21st October, 1953, accepting the sum of Rs. 10 lakhs from Mulraj as compensation for tendering the resignation of its managing agency to the managed company, Elphinstone Spinning & Weaving Mills. On the same day, the assessee-company also tendered its resignation. It is not in dispute that the amount of Rs. 9,95,000 had been paid on or about that time by Mulraj to the assessee-company, and the said amount has also been shown in the balance-sheet of the assessee company as at 30th June, 1954. The payment received by the assessee-company clearly is a compensation or at any rate a payment in connection with the termination of its managing agency. By reason of the fiction enacted in section 10(5A), the amount is deemed to be a profits and gains of business carried on by the assessee company. The question to be considered is what was that business. It is the income of altogether a new business, or a new source as contended for by Mr. Mehta. It is not in dispute that the business of the managing agency was carried on by the assessee-company for a part of the said previous year. There can be no doubt that the amount received is referable to or related to the said business of managing agency carried on by the assessee-company. It is the amount received as compensation in connection with the termination of that business. It is the receipt of that business carried on in that year. But for section 10(5A), it would have been a capital receipt of that business. But on account of the fiction enacted in section 10(5A), this receipt is to be deemed as profits and gains of the business carried on by the assessee. In these circumstances, it would be profits and gains of the said business of managing agency. It is not in dispute that the receipt has been in the accounting year of the said business of managing agency, and the income, therefore, was assessable in the assessment year 1955-56, under section 10(5A) of the Act.

20. We are also not impressed by Mr. Mehta's argument that the use of the indefinite article 'a' indicates that receipt of compensation and payment under section 10(5A) is to be taken as income from a new source. We have already pointed out that the legislature was dealing with cases falling under the four categories. It was dealing with case where the activity carried on by the assessee was business, as well as with case of assessees whose activity was not that of carrying on business. The compensation or payment received by all these assessees in connection with the termination or modification of their agreements has been brought to tax as profits and gains of a business and it is in the these circumstances that the indefinite article 'a' has been used, which neither indicates a new source nor expressly states that the former business carried on by the assessee is the source of this income.

21. The answer to the first question, therefore, will have to be in favour of the department and against the assessee. The view taken by us finds support in Lakshmiah Naidu & Co. v. Commissioner of Income-tax.

22. On the view taken by us, it is not necessary to consider another argument which has been advanced on behalf of the revenue that even assuming that the amount was not income of the business of the managing agency, the assessee has chosen the same accounting year for this income by showing the receipt of the said amount in the balance-sheet as at 30th June, 1954, and, therefore, the same is taxable in the assessment year 1955-56.

23. As already stated, the Tribunal has held that in computing these profits, the amount of Rs. 6 lakhs which the assessed had paid for acquiring the managing agency, and the sum of Rs. 5,000 paid to the broker, have to be deducted, and deducting them, has held that the amount that could be brought to tax out of the said amount of Rs. 9,95,000 would be only Rs. 3,90,000. Mr. Joshi contends that the entire amount of Rs. 10 lakhs is taxable, and the assessee is not entitled to deduct from that either the said amount of Rs. 6 lakhs or the said amount of Rs. 5,000. The argument is founded on the expression 'and shall be liable to be taxed accordingly' occurring in the following clause : 'Any compensation or other payment due to or received by (a).......(b)........(c).......(d)........shall be deemed to be profits and gains of a business carried on by the managing agent......and shall be liable to be taxed accordingly.' It is the argument of Mr. Joshi that on the plain language used in the aforesaid clause, the entire amount of compensation or payment is deemed to be profits, and the legislature tells us that the said amount of compensation or payment shall be taxed accordingly. It is not possible to agree with this argument. Section 10(5A) is not a charging section; but the clause 'shall be liable to be taxed accordingly' governs the 'profits and gains of a business'. All that the legislature has told is that the said amounts of compensation or payments are to be deemed as profits and gains, and they have to be brought to tax as profits and gains in accordance with the provisions of the Act. The manner in which the profits and gains of a business are to be computed is given in section 10 of the Act, and it is well settled that the profits and gains which are brought to tax under section 10 are the profits as understood in the commercial sense. Here, the assessee has paid Rs. 6 lakhs for acquiring the rights of managing agency. The assessee has lost that right of managing agency for ever, and it is for giving up that right that he has received a sum of Rs. 9,95,000. Understanding the dealing in the commercial sense, what the assessee has gained is only the balance, viz., Rs. 4 lakhs. It is found as a fact that Rs. 5,000 have been paid to the broker for bringing about this deal. Paying the amount of the broker is in ordinary course of business. The assessee has received in its hand only a sum of Rs. 3,95,000. In these circumstances, in our opinion to tax in the hands of the assessee under section 10(5A) was only Rs. 3,95,000, and not the entire amount of Rs. 10 lakhs.

24. The answer to the second question would, therefore, have to be in favour of the assessee and against the department.

25. In the result, our answer to the first question is in the affirmative, and our answer to the second question also is in the affirmative. In the circumstances, we make no order as to costs.

26. Questions answered in the affirmative.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //