1. This is a reference under Section 66(1) of the Indian Income-tax Act, 1922. The assessment year involved is 1960-61 and the relevant previous year is the year ended on August 31, 1959.
2. The circumstances in which this reference has been made are hereinafter related in brief The assessee is a limited company which keeps its accounts according to the mercantile system. One of the obiects with which the assessee was formed was to take over the managing agency of an electricity supply concern, known as Gauhati Electric Supply Corporation (1927) Ltd. Pursuant to that object, the assessee company took over the management of Gauhati Electric Supply Corporation (1927) Ltd., and, under the terms of the managing agency agreement, because entitled to remuneration at varying percentages depending upon the magnitude of the net profits of the managed company. After the passing of the Companies Act, in the year 1956, there was a fresh agreement entered into between the assessee and the Gauhati Electric Supply Corporation (1927) Ltd., on June 4, 1957, for a term of 10 years, from January 15, 1957, and clause 9 of the agreement was to the following effect:
'In the event of the Company, being taken over by the State Government, Local Authority, or the State Electricity Board, as the case mav be, before the expiry of the period of ten years from 15th January 1957. the Managing Agents shall be entitled to compensation by the Company for loss of office as provided in Section' 366 of the Companies Act, 1956.'
Subsequent events show that there was some purpose for the managing agents to have Clause 9 incorporated in the fresh managing agency agreement, because, about three weeks after the execution of the fresh agreement, the managed company was taken over by the State Government, on or about June 25, 1957. A little over two years after the take over, Gauhati Electric Supply Corporation (1927) Ltd. passed a resolution, at its Annual General Meeting held on September 28 1959, to the following effect:
'Resolved that the managing agency agreement with Messrs. Development of Industries (India) Private limited be and is hereby terminated with effect from the 25th day of June, 1957, upon payment by the company to the said managing agents compensation for loss of office, such compensation being calculated in accordance with the provisions of Section 366 of the Companies Act, 1956.'
The above resolution, as is apparent, was passed in terms of Clause 9 of the managing agency agreement, dated June 4, 1957 Under the aforesaid resolution, a sum of Rs. 92.619, which was equivalent to two years' profits of the managed company, was credited by the managed company in favour of the assessee The assessee also in its turn credited the said sum to its profit and loss account during the year which ended on October 31, 1959
3. In the Income tax return filed by the assessee, there was included a sum of Rs. 11,500/- only, by way of receipt of compensation during the previous year. By a subsequent letter, dated October 21, 1961, which the assessee addressed to the Income tax Officer, it was explained that no part of the sum of Rs. 92 619/-, out of which only Rs. 11,500/- was included in the return, was taxable in the hands of the assessee. According to the assessee, it was a capital receipt for termination of its managing agency. Alternatively, according to the assessee, since the balance namely, Rs. 81,119 had not been received, it was no part of the year's income and, therefore, ought not to be assessed in the year of assessment with which we are concerned.
4. The Income tax Officer overruled the contentions made by the assessee and included the entire sum of Rs. 92,619 in the income of the assessee and imposed tax thereon.
5. The assessee appealed before the Appellate Assistant Commissioner and raised the following contentions: (a) that the managing agency having been terminated by an act of State, the compensation received for such termination would not fall within the mischief of Section 10 (5A) of the Income tax Act and (b) since the receipt was not in the course of services rendered by the assessee to the managed company, the payment would not come within the Managing Agency Agreement and accordingly would not be an income from business. The Appellate Commissioner, however, found that there was no evidence to show that the payment had been made at a time when the assessee had ceased to act as the managing agent of Gauhati Electric Supply Corporation (1927) Limited. He also found that the provisions of Section 10(5A) were attracted to the payment made to the assessee under the resolution dated September 28. 1959, Although of that view, he held that only the amount actually received by the assessee during the accounting year should be the amount of income taxable during the year. The assessee had mentioned in the return that it received only a sum of Rs. 11,500/-during the year of assessment. The Appellate Assistant Commissioner, however, found from the company's balance sheet that the amount actually received by the assessee was Rs. 13,486/-. Accordingly he included the sum of Rs. 13,486/- in the income of the assessee and deleted sum of Rs. 79,204/-from the assessment.
6. Aggrieved by the order the assessee and the Revenue both appealed before the Appellate Tribunal. The Tribunal allowed the appeal preferred by the Revenue with the following observation:--
'We must say that the assessee itself having credited the entire sum of Rs. 92,692/ to its profit and loss account, in the manner in keeping with the system of its accounting which was mercantile, no jurisdiction vested in the Appellate Assistant Commissioner to change it. As a matter of fact upon the facts stated above, it would be seen that both the managed company and the managing agents were fully aware of their assets and liabilities in respect of this amount. The managed company had treated itself to be a debtor to the managing agents for the said amount of Rs. 92,690 and similarly the assessee company had credited itself with the same amount as being receivable from the managed company. Under these circumstances we must hold that the Appellate Assistant Commissioner was not correct in holding that the amount to be assessed as the income for the year in question should be the amount which had been actually received by the assessee from the managed company.'
7. The Tribunal dismissed the appeal preferred by the assessee being of the opinion that Section 10(5A), which was introduced in the Income Tax Act by the Finance Act of 1955, had a purpose behind it. That, purpose was to prevent the abuse of managing agency agreement being terminated on payment of huge compensation and to nullify the application of the decision by the Privy Council in Shaw Wallace's case to such cases. The Appellate Tribunal held that by introduction of this section two fictions were created, firstly, that the compensation or other payment which would otherwise be a capital receipt, as in in this case, is to be deemed to be income and taxable as such and, secondly, even if the activities of the recipient did not amount to carrying on of business nevertheless the compensation or other payment should be deemed to be profits of business and be chargeable under Section 10 only as business income.
8. The Tribunal overruled the argument, advanced on behalf of the assessee, that the word 'termination' used in Section 10(5A) meant a conscious act of determination or act of ending and did not mean an extinguishment or cessation of the managing agency by reason of the taking over of the managed company by the State Government. In repelling the argument the Tribunal observed:
'We must say that the provision of Section 10 (5A) do not admit of any ambiguity so as to need any clarification. Although the provision of Section 10 (5A) is that if there was a termination, may be for any reason whether by compulsory acquisition or compulsory cessation of the business, it would be tantamount to termination and any compensation or offered payment whether it is deemed to be received or is received shall be deemed to be the profits on account of business. We, therefore, do not think that this reason is valid enough to take the case out of the mischief of the provision of Section 10 (5A)'.
9. The Tribunal was not also satisfied with the other argument, advanced on behalf of the assessee, that the intention which lay behind the introduction of Section 10 (5A) in the statute did not include compensation payable to the managing agent by reason of compulsory acquisition of the managed company by the State Government. The Tribunal repelled the argument with the following observation:
'As a matter of fact, the question of intention as is sought to be raised has itself no worth in this case inasmuch as we have no materials before us to judge the intention * * * * Apart from it since the provisions of Section 10 (5A) are clear and unambiguous in Its terms, we do not find any justification in the learned counsel's demand that we should go behind its provision to find out the object and scope of the enactment.'
10. The Tribunal also repelled the argument advanced on behalf of the assessee that the receipt should be treated as capital receipt with the observation that the Tribunal might have agreed with the contention that it had not been for the introduction of Section 10 (5A) in the Income-tax Act in the year 1955.
11. Thereupon the assessee induced the Tribunal to refer the following question of law to this Court:--
'Whether, on the facts and in the circumstances of the case the Tribunal was right in holding that the compensation amounting to Rs. 92, 690/- was taxable profit within the meaning of Section 10 (6-A) of the Income-tax Act, 1922?'.
12. Mr. S. Mitter, learned counsel for the assessee, reminded us of the language of Section 10 (5A), which reads as follows:-
'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) * * * * *
(c) * * * * * *
(d) * * * * *shall be deemed to be profits and gains ofbusiness carried on by the managing agent,manager or other person as the case may be, and shall be liable to tax accordingly * * * *'
and submitted that the word 'termination' must mean termination by act of parties and not extinguishment by act of State or by operation of law. Since, in the instant case, the termination of the managing agency was not caused by an act of parties but was imposed by an act of State, there was no termination within the meaning of Section 10 (5A) and the compensation received by the assessee should not be deemed to be profits or gains of business carried on by the assessee. We believe we have correctly summarised the argument of Mr. Mitter, although at times his argument appeared to be somewhat elusive to ourselves Mr. Mitter draws inspiration for this argument particularly from the judgment of the Supreme Court in Commissioner of Income-tax and Excess Profits Tax. Madras v. South India Pictures Ltd. Karaikudi : 29ITR910b(SC) , which relates the circumstances under which the sub-section came to be incorporated in the Statute. The relevant portion on which Mr Mitter relied reads as follows:
'That a sub-section 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, (1932) 59 I. A. 206 to such cases. But that sub-section does not necessarily imply that if that sub-section were not there the kind of payment referred to therein would have been treated as capital receipts in all cases.'
We do not find anything contained in the judgment of the Supreme Court, which goes to support the argument of Mr. Mitter that termination, in the context of Section 10 (5A), must mean termination by act of parties and not any other kind of termination. In our view, a contract of managing agency is basically a creature of the Contract Act, although in many respects controlled by the special provisions in the Companies Act. A managing agency contract is a contract of agency in pith and substance. Now, Section 201 of the Contract Act deals with termination of agency agreements in the following language:
'An agency is terminated by the principal revoking his authority, or by the agent renouncing the business of the agency; or by the business of the agency being completed; or by either the principal or agent dying or becoming of unsound mind; or by the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insolvent debtors.'
13. If we analyse the Section, we find that there are several methods of termination of agency. An agency may be terminated (a) by an act of parties, namely, by revocation of authority by the principal and by renunciation of the business of the agency by the agent, (b) by the business of the agency being completed or by the principal being adjudicated an insolvent, (c) by impossibility of performance or frustration as in the case of the principal or agent dying or becoming of unsound mind and (d) by operation of law. Section 201 of the Contract Act does not appear to us to be exhaustive. There may be other circumstances in which a contract of agency may be terminated, for example, by breach of contract, by destruction of the subject matter of the agreement and so on and so forth. Since a managing agency is a creature of contract and since its formation, operation and termination are all to be governed by the provisions of the Contract Act, in so far as they apply, we do not find any force in the contention that a managing agency contract can be terminated only by act of parties and in no other manner. The words 'termination * * * * of his managing agency agreement' as used in Section 10 (5A), in our opinion, contemplate termination of the agency agreement, in the several manners contemplated under the Contract Act and by other statutes, and means cessation of the mutual rights and obligations of either party under the agency agreement. That being our view, we do not find any force in the proposition contended for by Mr. Mitter. Then again, we find that in the facts of the instant case, the taking over of the Electric Supply business of the managed company by the State Government did not, by itself, occasion termination of the managing agency. The take-over took place on June 25, 1957. The take-over did not occasion immediate liquidation of the managed company. On September 28. 1959, more than two years after the date of the takeover, the managed company passed a resolution therein stating that the managing agency agreement with the assessee 'be and is hereby terminated with effect from the 25th day of June 1957 upon payment bv the company to the said Managing Agents compensation for loss of office'. Therefore, even after the take-over the managing agency of the assessee was continuing for about two years and had to be terminated by a resolution, although the resolution in 1959 was made retrospective with effect from the date of the take over. If the managing agency agreement of the assessee would not have been terminated by the resolution, as it was purported, what would have happened we do not know but in the facts of this case we find that the managed company terminated the managing agency agreement by resolution and this was a case of termination of agency by the principal revoking the authority of the agent. In our opinion such a resolution was required to be passed because unless compensation was paid to the assessee under the terms of clause 9 of the agreement it might not have left or be relieved (sic) the managing company, although it would not have anything to manage.
14. In the view that we take we do not find any substance in the first branch of the argument of Mr Mitter
15. We now turn to the other branch of the argument of Mr. Mitter. He submitted that in the year 1959 the assesse was not carrying on the managing agency business of Gauhati Electric Supply Corporation (1927) Limited if that was so, the income was not an income within the meaning of Section 10 (1) which provides:
'10 (1) The tax shall be payable by an assessee under the head profits and gains of business profession of vocation in respect of the profits or gains of any business profession or avocation carried on by him '
16. The short answer to this question is - business of the assessee is to carry on managing agency business multiple in nature There is no material to show that the assessee was not carrying on such business after the State Government had taken over Gauhati Electric Supply Corporation (1927) Limited Mr. Mitter, however asked us to read business in restricted sense and to take into consideration only that business to which the compensation related. We find it difficult so to do. Even if we do so, we cannot lose sight of the fact that Section 10 (5A) speaks of compensation being due to or received by a managing agent to be deemed to be profits and gains of a business carried on by the managing agent Since such compensation is paid or becomes payable on the cessation of the business, the Section provides that it shall be deemed to be the income even after the termination. Further Clause (a) of Section 10(5A) speaks not jonly of compensation due or received on termination of managing agency but in confection with the termination of the managing agency This widens the circumstance of payment and the compensation may be deemed to be profits and gains of business during the assessment year.
17. In the view that wt take we find no substance in the argument advanced by Mr. Mitter and we answer the question in the affirmative and against the assessee.
18. The Commissioner is entitled to costs.
19. K.L. Roy, J.: I agree.