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Commissioner of Income-tax (Central), Bombay Vs. Seksaria Sons (Private) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 204 of 1971
Judge
Reported in(1981)25CTR(Bom)148; [1982]138ITR419(Bom)
ActsIncome Tax Act, 1922 - Sections 10(5A); Income Tax Act, 1961
AppellantCommissioner of Income-tax (Central), Bombay
RespondentSeksaria Sons (Private) Ltd.
Excerpt:
direct taxation - termination of managing agency - section 10 (5a) of income-tax act, 1922 and income tax act, 1961 - petitioner was managing agent - managing agency terminated due to certain reasons - matter went to arbitration - arbitrator allowed amount in lieu of termination - as per section 10 (5a) amount paid in lieu of termination of managing agency is taxable - department imposed tax on amount - petitioner contended that amount allowed by arbitrator does not attract section 10 (5a) and not taxable - extract of entries in book of accounts of managed company showed that amount was paid in lieu of termination - held, amount attracts section 10 (5a) and taxable. - - the said undisputed facts, therefore, would clearly being the said amounts within the purview of the said s......which the managing agents shall be managing agents, be less than seven years.'4. the said managing agency agreement came to be terminated by the managed company on 22nd december, 1954, and the matter was referred to arbitration, there being dispute as to the compensation payable to the assessees far the termination of the agreement. in the said arbitration, by an award dated 31st december, 1954, a sum of rs. 8,81,000 was awarded to the assesses payable by certain installments. the first installment of rs. 81,000 of such compensation received by the assesses on 15th february, 1956, was shown in the return of the assessee for the assessment year 1957-58, while the second installment of rs. 2,00,000 received by the assessee on 31st july, 1957, was shown in the assessee's return for the.....
Judgment:

Rege, J.

1. In this reference under s. 256(1) of the I.T. Act, 1961, the following question by the Income-tax Appellate Tribunal, Bench C, Bombay, has been referred to us for out opinion :

'Whether, on the facts and in the circumstances of the case, it has been rightly held that the sums of Rs. 81,000 and Rs. 2,00,000 were not income within the meanings of section 10(5A)(a) of the Indian Income-tax Act, 1922 ?'

2. We are concerned with two sums of Rs. 81,000 and Rs. 2,00,000 received by the assessees on 15th February, 1956 and 31st July, 1956, respectively, by way of two installments of compensation in connection with the termination of their managing agency under an award, which were treated by the ITO as income in the hands of the assessees liable for tax under s. 10(5A)(a) of the Indian I.T. Act, 1922, in their assessment orders for the assessment years 1957-58 and 1958-59.

3. There was an agreement of managing agency between the assessees, Seksaria Sons (Private) Ltd. and Seksaria Cotton Mills Ltd. (hereinafter referred to as 'the managed company'), under which the assessees were appointed as managing agents of the managed company for a period of twenty years from 17th April, 1948. Clause 12 of the said agreement provided :

'12. In the event of the termination of the agreement or of the appointment of the managing agents as such managing agents, from any cause whatsoever other than a willful breach of the terms of this agreement by the managing agents, the managing agents without prejudice to any other remedy or right which they may have under the agreement shall be entitled to receive out of the assets of the company a sum equal to the total remuneration earned by the managing agents during the period of seven years immediately preceding such termination or a sum equal to seven times annual remuneration as aforesaid earned by the managing agents, if the period proceeding such termination, for which the managing agents shall be managing agents, be less than seven years.'

4. The said managing agency agreement came to be terminated by the managed company on 22nd December, 1954, and the matter was referred to arbitration, there being dispute as to the compensation payable to the assessees far the termination of the agreement. In the said arbitration, by an award dated 31st December, 1954, a sum of Rs. 8,81,000 was awarded to the assesses payable by certain installments. The first installment of Rs. 81,000 of such compensation received by the assesses on 15th February, 1956, was shown in the return of the assessee for the assessment year 1957-58, while the second installment of Rs. 2,00,000 received by the assessee on 31st July, 1957, was shown in the assessee's return for the assessment year 1958-59. However, it was contended by the assessees that they were not liable for tax, as the said amounts in the hands of the managed company were also not taxed. According to the assessees, in the circumstances of the case, the provisions of s. 10(5A)(a) of the Indian I.T. Act, 1922, were not applicable and the said amounts should not be treated as income liable to tax. The ITO by his two orders for the said two years rejected the said contention of the assessees and taxed the said amounts in the hands of the assessees.

5. Against the said orders of the ITO, in appeal filed to the AAC, the same contentions, were raised. However, the AAC, by his two separate orders, also came to reject the said contentions of the assessees, and confirmed the ITO's orders. Before the AAC the assessees relied on the earlier order of the Tribunal dated 3rd January, 1962, in the managed company's assessment for the assessment year 1955-56, wherein the Tribunal, relying on certain circumstances stated there, had held that the termination of the managing agency agreement by the managed company was not bona fide and had disallowed the said amounts as deduction. The AAC, however, rejected the contention of the assessees and subjected the said two sums of tax in their hands.

6. In appeal against the said order of the AAC, the Tribunal also relying on the said order of the Tribunal in the managed company's assessment, held that the said amounts were not liable to tax in the hands of the assessees. In holding so the Tribunal observed, relying on the findings of the Tribunal in its order in the managed company's assessment, that even if the payment by the managed company is proved and even if the receipt by the managing agents, namely, the assessee, is admitted, it is neither compensation nor other payment due to or received by the assessees at or in connection with the termination of their managing agency agreement.

7. The very same contention has been raised before us by the learned counsel for the assessees.

8. Section 10(5A)(a) of the Indian I.T. Act, 1922, provides :

'10. (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;....

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;...'

9. It is clear that under the said provisions managing agents of an Indian company were liable to pay tax on any compensation or payment received by them at or in connection with the termination of their managing agency agreement.

10. In this case there is not dispute as to the facts that the managing agency agreement with the assessees was in fact terminated by the managed company, that for fixation of compensation for such a termination the dispute was referred to arbitration, that the arbitrators by their award had fixed an amount of Rs. 8,81,000 as the compensation by the managed company to the assessees in connection with the termination of the managing agency agreement payable by certain instalments, and that accordingly the managed company had paid and the assessees had received the first instalment of Rs. 81,000 and the second instalment of Rs. 2,00,000 on 15th February, 1956, and 31st July, 1966, respectively. The said undisputed facts, therefore, would clearly being the said amounts within the purview of the said s. 10(5A)(a) so as to liable to be taxed in the hands of the assessees.

11. The question, however, is whether there was anything in the order of the Tribunal dated 3rd January, 1962, in the case of the managed company's assessment for the assessment year 1955-56, on which the Tribunal in its order in this case had laid great reliance, to take away the effect of the said provisions of s. 10(5A)(a) in respect of the said amounts in the hands of the assessees.

12. The learned counsel for the assessees had contended that, according to the said order of the Tribunal in the managed company's assessment for the year 1955-56, the termination of the managing agency agreement had been held to be a sham transaction with no consideration passed between the parties. On a reading of the said order of the Tribunal in managed company's assessment, we find that the Tribunal had, on various circumstances mentioned by it in its order, found that the termination of the managing agency agreement by the managed company was not bona fide that is, being brought for some ulterior purpose. The said conclusion presupposed that factually the managing agency agreement was terminated. Nowhere in the said order the Tribunal had held that factually there was no termination, or that the termination was sham or without consideration, or that the amounts, said to have been paid by the managed company to the assessees towards the compensation for the termination of the managing agency agreement, were in fact not paid but were merely book entries. The observations of the Tribunal in its order in that case that, when the Tribunal in its order in the managed company's assessment held that the transaction was not bona fide, it really meant that there was no actual consideration for which the payment was made or the amount was received, were not borne out by the order itself and do not appear to be correct. The transaction which is not bona fide does not necessarily become a sham transaction or a transaction without consideration.

13. In support of his said contention the learned counsel for the assessees relied on a copy of an extract from the assessees' books of account relating the entries regarding the said two amounts. The said extract showed the assessees having received by cheques from the managed company the said two sums on their respective dates as instalments of compensation payable in connection with the termination of the managing agency agreement. It also showed that on the same dates two similar amounts were paid by the assessees to the managed company towards the assessees' then existing liability to the managed company. The order of the Tribunal in the managed company's assessment shows that in the balance-sheet of the managed company for the calendar year 1954 an amount of Rs. 16,99,090 was shown as due from the assessees to the managed company. According to the learned counsel for the assessees. therefore, the receipt of the said amounts by the assessees from the managed company and the repayment of the similar amounts on the same day by the assessees to the managed company would go to show that the termination of the managing agency agreement by the managed company, under which the compensation was alleged to have been paid to the assessees, was a transaction with our consideration and therefore, sham. Firstly, this court cannot consider in this reference for the first time the effect of the said extract of the entries in the account books of the assessees. That part, it is also difficult to see how the said entries would held the learned counsel in his contention, when the entries disclosed actual receipt of payment by the assessees towards compensation for termination of the agency. It is also difficult to see how the transaction becomes without consideration, even if the same amounts were paid back on the same day by the assessees to the managed company towards the existing liability. The said connection of the learned counsel, therefore, cannot be accepted.

14. If, therefore, in this case factually the assessees have received the said two amounts towards compensation in connection with the termination of the managing agency agreement, then in that case the said amounts in the hands of the assessees would be covered by the provisions of the said 10(5A)(a) of the Indian I.T. Act, 1922. In our view, the language of the said section was wide enough to cover such payments received by the assessees, even if they were purported to have been made towards compensation in connection with the termination of the managing agency, which was found not to be bona fide. In that view of the matter, we answer the question as under :

The question is answered in the negative and in favour of the Revenue. The assessees to pay the costs to the Revenue.


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