Ramachandra Raju, J.
1. This is a reference made by the Income-tax Appellate Tribunal, Hyderabad Bench-A, under Section 256(1) of the Income-tax Act, 1961, at the instance of the assessee.
2. The questions of law which are referred for the opinion of the High Court are :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the amount of Rs. 93,515 was a revenue receipt liable to tax for the assessment year 1963-64 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the amount of Rs. 93,515 can be treated as profits and gains of a business under Section 28 of the Income-tax Act, 1961?
3. Without prejudice to the questions Nos. 1 and 2 above, whether the Tribunal is right in holding that the entire amount of Rs. 93,515 was assessable in the assessment year 1963-64, despite the fact that the assessee employed the mercantile system of accountancy '
3. The assessee is a firm called M/s. J. R. Kimtee & Sons, Hyderabad. A joint stock company by name Taj Glass Works Ltd., hereinafter referred to as 'the company', was incorporated in the erstwhile State of Hyderabad under the Hyderabad Companies Act in the year 1940. This company was managed originally by a firm called 'Taj Brothers'. On account of losses incurred by the company during their management, the Industrial Trust Fund took over its management under a managing agency agreement dated 18th February, 1949, for a period of twenty years. In view of the further losses and deterioration in the working of the company, the Industrial Trust Fund, which will be referred to hereafter as I.T.F., for the sake of brevity, transferred the managing agency of the company to the assessee-firm by an agreement dated February 25, 1953. On the approval of the general body of the managed company for the transfer of the managing agency by the I.T.F. to the assessee-firm, the I.T.F. also executed an assignment deed in favour of the assessee-firm on February 25, 1954. On the very day of the execution of the agreement dated February 25, 1953, the assessee-firm took over the management of the company in pursuance of the general power of attorney executed by the I.T.F. in its favour. The Government of India accorded its sanction to the transfer of the managing agency on the condition that the term of the managing agency should not exceed a period of ten years and the remuneration of the managing agents should not be more than 10 per cent. of the profits. But in the event of absence of or inadequacy of profits, the assessee-firm was entitled to a minimum payment of Rs. 1,286.18 per mensem towards their remuneration for managing the company. During the three years that followed the execution of the agreement dated February 25, 1953, the business of the managed company suffered as a result of frequent strikes and lock-outs. The assessee-firm made a serious allegation against the I.T.F. alleging that it stood in the way of the assessee-firm obtaining the necessary working funds through borrowals from bankers. The disputes between the assessee-firm and the I.T.F., though appeared to have been patched up for a short while, revived again. Ultimately, the I.T.F. asked the assessee-firm to resign from the office of managing agency. The assessee-firm, without agreeing to it, served a notice dated March 24, 1958, informing the I.T.F. of its choice of arbitration for resolving their disputes. The matter was ultimately referred to arbitrators under the terms of the agreement, who on account of differences of opinion, referred the matter to an umpire.
4. The allegations, inter alia, made by the assessee-firm before the arbitrators and the umpire were that, the I.T.F. was bound under the terms of the agreement dated February 25, 1953, to extend unstinted support and co-operation to the assessee-firm. The I.T.F. failed to do so. On account of acts of commission and omission by the I.T.F. in breach of the agreement entered into with it, the assessee-firm could not proceed with the management of the company after October 6, 1956, and that resulted in, enormous losses to the assessee-firm and as well as to the managed company. Before the arbitrators the assessee-firm made a claim for damages and compensation to the tune of Rs. 28,50,500 under various heads. The I.T.F. denied all these allegations. The arbitrators and the umpire went into the claims and the counter-claims. The umpire found that the assessee-firm would be entitled to a balance amount of Rs. 93,515 as damages towards compensation for the loss of their managing agency commission after excluding an amount of Rs. 62,000, which the assessee-firm had already received and accordingly passed an award dated October 10, 1960, for payment of that amount by the I.T.F. to the assessee-firm. This award was later ratified by the court.
5. The Income-tax Officer came to the conclusion that the amount awarded to the assessee-firm is compensation for the loss of commission which the assessee-firm would have otherwise earned, but for the breach of the terms of the agreement and brought to tax the amount of Rs. 93,515 for the assessment year 1963-64 on the basis that it is a revenue receipt. According to the Income-tax Officer the mere fact that the commission was paid to the assessee-firm in one lump sum as a result of the award in the arbitration proceedings would not change its basic character as a revenue receipt.
6. Contending that the sum of Rs. 93,515 received was a capital receipt and, therefore, not chargeable to income-tax, the assessee-firm preferred an appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner came to the conclusion that the sum of Rs. 93,515 received under the award was properly brought to tax as revenue receipt. Even if the amount received is said to be a capital receipt, the Appellate Assistant Commissioner held that the receipt was caught within the coils of Section 28(ii) of the Income-tax Act, 1961, and, therefore, chargeable to income-tax as 'profits and gains' by reason of that provision.
7. In the further appeal before the Income-tax Appellate Tribunal, the assessee-firm also raised the same contention that the amount received as damages under the award was not an income, but it is a capital receipt and, therefore, not chargeable to tax. The further contention raised by the assessee-firm was that the amount awarded was with reference to the loss of commission suffered by the assessee-firm, which it would have received during the relevant years, but for the breach of the terms of the agreement, the Income-tax Officer brought the entire amount of Rs. 93,515 to tax on the basis that it was paid to the assessee-firm in one lump sum during the assessment year; the assessee-firm was maintaining mercantile system of accounting and the amount should be apportioned to each year of accrual on the basis of which the amount was awarded in the arbitration proceedings. It was also argued by the assessee-firm before the Income-tax Appellate Tribunal that the amount awarded was not as compensation for the breach of the agreement entered into between the assessee-firm and the managed company, but for the breach of the agreement entered into between the assessee-firm and the I.T.F. and, therefore, Section 28(ii) of the Income-tax Act is not attracted to the receipt.
8. The Income-tax Appellate Tribunal came to the conclusion that the amount received as damages by the assessee-firm under the award was 'income' and it did not possess the character of a capital receipt not chargeable to tax. The Tribunal also negatived the contention of the assessee-firm that it did not receive the compensation from the managed company, but from a third party, I.T.F. and that would make all the difference in the nature of the receipt. Accordingly, the Tribunal held that even assuming, for the sake of argument, that the compensation is for extinction of a capital asset, viz., the managing agency, and, therefore, a capital receipt, the liability to tax would still be attracted on account of the provision contained in Section 28(ii) of (he Income-tax Act, 1961. On the question of the assessee-firm's accounting being of mercantile system and, therefore, it should be held that the amount received by the assessee-firm should be attributable to respective years on accrual basis, the Tribunal held that the amount received cannot be apportioned in the manner in which the assessee-firm sought. Thus, the Tribunal dismissed the appeal holding against the assessee-firm on all the points.
9. On behalf of the assessee-firm one of its partners appeared in person and submitted his arguments raising the same contentions as those raised before the Income-tax Appellate Tribunal. On behalf of the revenue, Sri Rama Rao, standing counsel for the revenue, has submitted arguments supporting the conclusions arrived at by the Income-tax Appellate Tribunal.
10. In the award proceedings, the assessee-firm claimed damages as shown below :
Rs.(a)Towards the loss of commission for the years1954-55 and 1955-56 after deducting the remunerationreceived already, approximately
29,000.00(b)Towards the loss of commission for years1956-57 and 1957-58 after deducting the remunerationreceived already
69,000.00(c)Towards the loss of commission for the years1958-59 to 1966
4,80,000.00(d)Towards the loss of credit, business, reputation,name and prestige and mental and physical torture
3,00,000.00(e)Towards general loss and damages2,00,000.00(f)(i) The amount due to Saifubhoy Sidahpurwalawith interest
4,51,832.17 (ii) The amount relating to other liabilities withinterest
52,304.52(g)The amount advanced by the plaintiffs which hadnot been insured by the respondent, approx. with interest
1,50,000.00(h)The plaintiffs and the company to be absolvedof the responsibility to pay to the Hyderabad State Bankin view of the defaults of the respondent, but for whichthis liability would have been discharged by the plaintiffs
1,20,460.12(i)The losses suffered by the company from 1stMarch, 1953, to 31st March, 1958, approx.9,97,912.10
11. Under heads (a), (h) and (c), the assessee-firm claimed damages of a total amount of Rs. 5,78,000 towards loss of managing agency commission for the years 1954 to 1966. The first period covers the years 1954-55 and 1955-56. For these years, the assessee-firm calculated the loss of their commission at Rs. 60,000, at the rate of Rs. 30,000 per year estimating Rs. 3,00,000 as the profits of the managed company for each year. After deducting the amount of Rs. 31,000 which they had already received, the assessee-firm claimed the balance of Rs. 29,000 for these two years. The second period covers the years 1956-57 and 1957-58. The assessee-firm estimated the profits of the managed company at Rs. 5,00,000 per year and calculated their commission at Rs. 1,00,000, at the rate of Rs. 50,000 per year. After deducting Rs. 31,000 said to be the amount which it had already received, the balance amount of Rs. 69,000 was claimed by the assessee-firm for these two years. The third period covers the years 1958 to 1966. Estimating the profit of the managed company at Rs, 6,00,000 per year, the assessee-firm claimed a total amount of Rs. 4,80,000 towards their loss of commission at the rate of Rs. 60,000 per year for this period.
12. The umpire, who gave the award, estimated the annual profits of the managed company at Rs. 2,33,869 and worked out the probable loss of commission at Rs. 23,387 per year on the basis of 10 per cent. of the profits and held that the assessee-firm would be entitled to their annual commission at that rate. The umpire, however, found that the assessee-firm would not be entitled to any commission for the year 1954-55, i.e., up to August 25, 1955, on the ground that their claim of commission for the said period is barred by time. The umpire also found that the assessee-firm is not entitled to claim any damages towards loss of commission for the period subsequent to August 14, 1960, on the ground that under Section 330 of the Companies Act, the managing agency of the assessee-firm any way would automatically have ceased to exist and the possibility of its renewal under the circumstances being doubtful, the claim for damages beyond August 15, 1960, would be too remote. Accordingly, the umpire disallowed the claim of the assessee-firm for damages for the period subsequent to August 14, 1960. The umpire also disallowed the claims of the assessee-firm for damages under beads (d) to (i) which were referred to above. Thus, the umpire allowed damages to the assessee-firm towards loss of commission for five years and worked them put at Rs. 1,55,515. The assessee-firm realised some amounts at the rate of Rs. 1,286 per month towards their minimum remuneration and the total of those amounts came to Rs. 62,000. Deducting that amount from Rs. 1,55,515, the umpire gave the award for the balance of Rs. 93,515 which is the amount now under consideration.
13. Now, coming to the questions to be answered, the first question is whether the amount awarded to the assessee-firm can be said to be a revenue receipt or a capital receipt.
14. Courts have always recognised that whether a receipt is of capital or revenue in nature often presents difficulties and largely it depends upon the facts of each case and it is not possible to formulate any exhaustive or infallible tests capable of universal application. In Commissioner of Income-tax v. Rai Bahadur Jairam Valji : 35ITR148(SC) the Supreme Court observed thus :
'In the determination of the question whether a receipt is capital or income, it is not possible to lay down any single test as infallible or any single criterion as decisive. The question must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. That, however, is not to say that the question is one of fact, for these questions between capital and income, trading profit or no trading profit, are questions which, though they may depend to a very great extent on the particular facts of each case, do involve a conclusion of law to be drawn from those facts.'
15. There is difference between compensation or damages paid or received for non-performance of a contract entered into in the ordinary course of business and compensation or damages paid for discontinuance of the business itself. The former only is treated as income, but not so with regard to the latter. In the present case, it is the case of the assessee-firm and it is not disputed that the firm itself was formed solely for the purpose of managing the company (Taj Glass Works) by entering into the agreement in question with the I.T.F. and there was no other business for it. If that is so, when on account of the loss of the managing agency the assessee-firm lost its business itself, the compensation received by it for that Joss would be capital in nature. It was also generally held by courts that lump sum amounts received by managing agents towards termination of their managing agency agreements are capital in nature.
16. In Godrej & Co. v. Commissioner of Income-tax : 37ITR381(SC) , the facts are that the assessee-firm was appointed as the managing agents of a company for a period of thirty years. Under the terms of the agreement it was entitled to a commission, towards their remuneration, at the rate of 20 per cent. on the net profits of the company. As some of the shareholders and directors of the company felt that the remuneration was extraordinarily excessive, after some negotiations some agreement was entered into between the assessee-firm and the company. According to the agreement in consideration of the company paying a sum of Rs. 7,50,000 as compensation to the assessee-firm, the latter agreed to accept as remuneration for the remaining term of their managing agency ten per cent. of the net annual profits of the company instead of 20 per cent. The Supreme Court held that the assessee-firm received the amount as compensation for the deterioration or injury to the managing agency by reason of the release of its rights to get higher remuneration and, therefore, a capital receipt.
17. In Commissioner of Income-tax v. Vazir Sultan & Sons : 36ITR175(SC) , the assessee-firm was appointed as sole selling agents and sole distributors for the Hyderabad State for the cigarettes manufactured by the company and they were allowed a discount of 2 per cent. on the gross selling price. In 1939, another arrangement was arrived at between the assessee-firm and the company whereby the assessee-firm was given a discount of 2 per cent. not only on the goods sold in the Hyderabad State but also on the goods sold outside the Hyderabad State. In 1950, the assessee-firm and the company reverted to the old arrangement confining the sole agency of the assessee to the Hyderabad State and the assessee was paid a sum of Rs. 2,19,343 by way of compensation for the loss of the agency in the territory outside the Hyderabad State. The question arose whether the sum of money thus received by the assessee was a revenue receipt assessable to income-tax or a capital receipt not so assessable. The Supreme Court held that the contracts entered into by the assessee formed part of the fixed capital of the assessee's business and was not the circulating capital or stock-in-trade of their business and the payment made by the company for terminating or cancelling the agreement was a capital receipt in the hands of the assessee. The Supreme Court further held that the fact that the agreement was terminable at will and was not of an enduring character was immaterial and it was also immaterial that only one of the agency agreements was cancelled by the company.
18. In Commissioner of Income-tax v. Rai Bahadur Jairam Valji : 35ITR148(SC) the Supreme Court held that when once it is found that the contract was entered into in the ordinary course of business, any compensation received for its termination would be a revenue receipt, irrespective of whether its performance was to consist of a single act or a series of acts spread over a period. There was a difference between a payment made as compensation for the termination of an agency contract and an amount paid as solatium for the cancellation of a contract entered into by a businessman in the ordinary course of business. In an agency contract the actual business consists in the dealings between the principal and his customers, and the work of the agent is only to bring about that business. What he does is not the business itself but something which is intimately and directly linked up with it. The agency may, therefore, be viewed as the apparatus which leads to the business rather than the business itself. Considered in this light the agency right can be held to be of the nature of a capital asset invested in business. But this cannot be said of a contract entered into in the ordinary course of business. Such a contract is part of the business itself, not anything outside it as is the agency and any receipt on account of such a contract can only be a trading receipt.
19. In the present case, it is not possible to say that the agreement entered into between the assessee-firm and the I.T.F. under which the assessee-firm acquired the managing agency of the company was a contract, entered into in the ordinary course of business or a trading contract.
20. Sri Rama Rao has, however, placed reliance on the following decisions : Gillanders Arbuthnot & Co. v. Commissioner of Income-tax, : 53ITR283(SC) is a case where the assessee-company carried on business in diverse matters, besides acting as managing agents, shipping agents, purchasing agents and importers. The company also acted as importers and distributors on behalf of foreign principals and bought and sold on its own account. Under an agreement, the assessee acted as sole agents and distributors of explosives manufactured by the Imperial Chemical Industries (Export) Ltd. That agency was terminated and by way of compensation for the first three years after the termination of the agency two-fifths of the commission accrued on its sales in the territory of the assessee's agency computed at the rates at which the assessee had formerly been paid was paid. The question was whether the amounts received by the appellant for those three years were of the nature of capital or revenue. The Supreme Court held that the receipts were of revenue nature on the ground that the acquisition of agencies by the assessee-company was in the normal course of business and determination of individual agencies a normal incident not affecting or impairing its trading structure. Therefore, the facts in that case are different.
21. In Kettlewell Bullen & Co. v. Commissioner of Income-tax : 53ITR261(SC) the Supreme Court had to deal with a case of the assessee having several managing agencies and the assessee receiving a sum of Rs. 3,50,000 after tendering resignation of one of the managing agencies. The compensation was paid though under the terms of managing agency agreement the managed company was not obliged to pay any compensation to the appellant (assessee) for voluntary resignation of the managing agency. The question that arose there was whether the amount received by the assessee was a revenue receipt liable to tax. The Supreme Court held that the receipt was not in the nature of a trading transaction, but was one in which the assessee parted with an asset of an enduring value and what the assessee was paid was to compensate it for the loss of a capital asset and was not, therefore, in the nature of a revenue receipt. The Supreme Court has further held that it mattered little whether the assessee continued to conduct the remaining managing agencies after the determination of the agency in question.
22. It follows from the above discussion that the amount of Rs. 93,515 awarded to the assessee-firm is a capital receipt and not a revenue receipt liable to tax.
23. Though the amount awarded to the assessee-firm is capital in nature, none the less it is to be treated as 'profits and gains of business' as provided under Section 10(5A) of the Indian Income-tax Act of 1922 and Section 28(ii) of the Income-tax Act, 1961. Sub-section (5A) of Section 10 came into force on 1st April, 1955, and it reads, so far as it is relevant for our present case, thus :
'(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...... '
24. Similar is the provision contained in Section 28(ii) of the Income-tax Act, 1961. Therefore, the amount awarded to the assessee-firm, towards compensation for loss of the managing agency, though a capital receipt, shall be deemed to be profits and gains of business carried on by the assessee-firm, and, therefore, it is income liable to tax. In Chidambaram Mulraj & Co. P. Ltd. v. Commissioner of Income-tax : 102ITR7(SC) the Supreme Court held that by legal fiction introduced by Sub-section (5A) of Section 10 any amount received by a managing agent as compensation for the termination of his managing agency agreement which would otherwise have been a capital receipt is to be deemed as profits and gains of business carried on by the managing agent.
25. It was, however, argued on behalf of the assessee-firm that either Section 10(5A) of the Indian Income-tax Act of 1922 or Section 28(ii) of the Income-tax Act, 1961, cannot be attracted to the receipt in question for the reason that it is not an amount awarded as compensation for the termination of the managing agency agreement. According to this argument, the compensation was awarded only on account of the breach of the agreement entered into between the assessee-firm and the I.T.F. and not for any breach of the agreement entered into between the assessee-firm and the managed company. It is true that the assessee-firm did not enter into any agreement directly with the managed company. It is only the I.T.F. which entered into the managing agency agreement with the managed company. But as per the terms of the agreement entered into between the I.T.F. and the assessee-firm, the I.T.F. assigned its rights under the managing agency agreement to the assessee-firm. The managed company also passed a resolution ratifying the assignment. The umpire awarded damages to the assessee-firm for its loss of managing agency commission, which the assessee-firm would have otherwise been entitled to, but for the breach of the agreement. It is only on the basis of the managing agency commission which the assessee-firm would have received and estimating it, the umpire awarded the damages to the assessee-firm. It was also argued on behalf of the assessee-firm that for attracting the provisions contained in Section 10(5A) of the Indian Income-tax Act, 1922, or Section 28(ii) of the Income-tax Act, 1961, the compensation must have been payable by the managed company and not by a third party like the I.T.F. We do not think so. What is, relevant is whether the amount received is towards compensation for termination of the managing agency agreement or not. It matters little who pays the amount. A similar view was taken by the Madras High Court in R.V. Lakshmiah Naidu & Co. v. Commissioner of Income-tax : 48ITR661(Mad) . In that case the managing agents retired voluntarily for a consideration received from a third party. The question arose whether the amount of Rs. 2,24,000 received by the assessee was assessable to tax under Section 10(5A) of the Indian Income-tax Act, 1922. The Madras High Court took the view that it was not necessary that the managing agency agreement should have been terminated by the managed company itself and it is enough if the amount was received in connection with the termination of the managing agency, and if that is so, the amount was taxable under Section 10(5A). Therefore, the amount of Rs. 93,515 awarded to the assessee-firm must be deemed as profits and gains of business carried on by it and, therefore, it is income liable to tax.
26. Then remains the question whether the entire amount of Rs. 93,515 was assessable to tax in the assessment year 1963-64 despite the fact that the assessee-firm maintained the mercantile system of accountancy. The question is when the amount of Rs. 93,515 can be said to have accrued to the assessee-firm. According to the revenue, it accrued when the amount was awarded to the assessee-firm by the umpire in the award proceedings while according to the assessee-firm it must be deemed to have accrued during the years 1955-56 (beginning from August 25, 1955), 1956-57, 1957-58, 1958-59 and 1959-60 (up to August 14, 1960). According to the argument submitted on behalf of the assessee-firm, the umpire determined the amount of Rs. 93,515 as compensation by estimating the amount of commission which the assessee-firm would have received for each of those five years had there been no breach of the agreement and since the amount of Rs. 93,515 was arrived at only by aggregation of the amounts which in the opinion of the umpire the assessee-firm would have received for those five years, it must be deemed that the amounts as calculated by the umpire, accrued to the assessee-firm during those years.
27. In this connection, Sri Rama Rao has placed reliance on some decisions. In Commissioner of Income-tax v. Gajapathy Naidu : 53ITR114(SC) , the facts are that the assessee who supplied bread to a Government hospital under a contract during the period April 1, 1948, to March 31, 1949, made certain representations to the Government after the close of the year that he had incurred loss. The Government directed payment of the sum of Rs. 12,447 to the assessee by way of compensation for the loss sustained in respect of the supply of bread. That amount was received by the assessee in the year 1950-51. The Supreme Court held that the amount ought to be included in the profits of the year 1950-51, relevant to the assessment year 1951-52, and could not be related back to the earlier year during which the assessee actually supplied bread to the hospital.
28. In Khan Bahadur Ahmed Alladin & Sons v. Commissioner of Income-tax : 74ITR651(AP) the question that arose before the Andhra Pradesh High Court was when the additional compensation paid in the land acquisition case as per the court decree in 1956 can be said to have accrued. The question was in which assessment year the additional compensation was assessable, the assessee's claim being that it was taxable for the assessment year 1957-58, as the compensation was awarded in the accounting year ended with September 30, 1956. According to the revenue, the income accrued when possession of the land was taken over by the Government on June 23, 1954. This court held that the enhanced compensation accrued to the assessee only when the court accepted the claim and not when the land was taken over by the Government.
29. In Commissioner of Income-tax v. Smt. Sankari Manickyamma : 105ITR172(AP) , also a decision rendered by this court, the lands of the assessee were acquired by the Government under the Land Acquisition Act in the year 1933, and as the compensation determined as payable by the Collector was inadequate, the matter was taken to the court and finally the proceedings ended in a compromise decree being passed on May 9, 1963, enhancing the compensation to Rs. 22,904. It was also agreed that the Government should pay interest of Rs. 31,659 at the rate of 6 per cent. on the enhanced amount of compensation for the period during which the extra compensation remained due to the assessee. The assessee received the enhanced compensation as well as the interest amount of Rs. 31,659 on March 1, 1964. Holding that the entire interest of Rs. 31,659 was received during the year relevant for the assessment year 1964-65, the Income-tax Officer levied tax on the entire amount. The Income-tax Appellate Tribunal allowed the claim of the assessee. The High Court, however, reversed that finding and held that the interest on the enhanced compensation accrued to the assessee only when the compromise decree was passed by the High Court on May 9, 1963, since the awarding of interest on enhanced compensation is in the discretion of the court.
30. In Thiagaraja Chettiar & Co. v. Commissioner of Income-tax : 51ITR393(Mad) the facts are that the managing agent was entitled under the terms of the managing agency agreement to remuneration at a certain percentage on the annual net profits of the company, the remuneration payable to the managing agents accrued when the net profits of the company for the year are ascertained. Owing to some disputes between the company and the managing agent, the company did not credit the managing agent with the remuneration due to the latter in its accounts. The Madras High Court held that 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 would not disentitle the managing agent to claim remuneration and, therefore, the remuneration had accrued to it and it did not cease to accrue to it until the company has credited to it in its accounts the amounts of commission due to it.
31. We think that Commissioner of Income-tax v. Chunilal V. Mehta & Sons P. Ltd. : 82ITR54(SC) is more in point and nearer to the facts of our case. There, the facts are that the respondent, a private company, was originally a firm prior to its incorporation in June, 1945. It was the managing agent of a company. Under the agreement of managing agency, it was to continue as managing agent for 21 years. During the period of the managing agency, it was entitled to a minimum remuneration of Rs. 6,000 per month and if at the end of a year its remuneration was less than 10 per cent. of the gross profit of the company, it was entitled to an additional sum to make up the difference. Under one of the terms of the agreement, it was provided that if it was deprived of its managing agency for any reasons other than those specified therein, it was entitled to receive as compensation or liquidated damages a sum equal to the aggregate monthly salary of not less than Rs. 6,000 for the unexpired period of the managing agency. In April, 1951, the shares of the managed company were acquired by a group of shareholders hostile to the respondent and, pursuant to a resolution dated April 23, 1951, of the board of directors of the managed company the respondent's managing agency was terminated. The managed company was prepared to pay a sum of Rs. 2,34,000 as compensation calculated at Rs. 6,000 per month, but the respondent refused to accept that amount and instituted a suit claiming Rs. 28,00,000 as compensation for unlawful termination of the managing agency, the suit was decreed only for a sum of Rs. 2,34,000. The respondent received the amount in December, 1955, and credited it in its profit and loss account of the year 1955. The question that arose was whether the amount accrued to the respondent, which had maintained its accounts on the mercantile system, on April 23, 1951, or whether it was liable to tax for the assessment year 1956-57. The Supreme Court held that the respondent was entitled to a definite sum as liquidated damages and that sum became due to the respondent in April, 1951, though it was actually received by the respondent in December, 1955. The fact that the respondent was claiming an exorbitant sum to which it was not entitled did not convert its right into a contingent right. The respondent's right to get compensation arose in April, 1951. The fact that the respondent had included the receipt in question in its profit and loss account in the year 1955 was a wholly immaterial circumstance. The method of maintaining the accounts was one thing and the actual entries in the accounts maintained was a different thing. What was relevant was the method of accountancy and not the actual entries.
32. In the present case also, the assessee-firm was entitled to a minimum monthly remuneration of Rs. 1,286. Though some quantification was also involved in arriving at the actual damages, the compensation was awarded to the assessee-firm on the basis of the remuneration of so much per year as having accrued to it during the relevant years 1955-56 (beginning from August 25, 1955), 1956-57, 1957-58, 1958-59 and 1959-60 (up to August 14, 1960). It is on that basis estimation of the damages was made by the umpire in the arbitration proceedings in awarding the compensation. As the assessee-firm employed the mercantile system of accountancy the relevant amounts as estimated by the umpire in the award must be deemed to have accrued to the assessee-firm during the relevant years.
33. Accordingly, we answer the first question in the negative and in favour of the assessee-firm, the second question in the affirmative and in favour of the revenue, and the third question in the negative and in favour of the assessee-firm. In the circumstances, we direct the parties to bear their respective costs. Advocate's fee Rs. 250.