Find a Lawyer

Income‑tax Reference No. 204 of 1971, decided on 31st August 1981.

‑‑‑‑‑S. 10 (5‑A) (a) ‑‑Income‑Termination of managing agency‑ Compensation awarded to assesses‑Compensation, held, liable to tax in hands of assessee, even if transaction not found to be bona fide.

R. J. Joshi with S. V. Naik and L. K. Chatterjee for Appellant.

R. J. Kolah with D. H. Dwarkadas instructed by Haridas & Co. for Respondent.

. ‑In this reference under section 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 our 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 meaning of section 10 (5‑A) (a) of the Indian Income‑tax Act, 1922 "

We are concerned with two sums of Rs. 81,000 and Rs. 2,00,000 received by the assessee on 15th February, 1956, and 31st July, 1957, respectively, by way of two instalments of compensation in connection with the termina tion of their managing agency under an award, which were treated by the 1, T. O. as income in the hands of the assessee liable for tax under section 10 (SA) (a) of the Indian 1. T. Act, 1922, in their assessment order for the assessment years 1957‑58 and 1958‑59.

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 assessee 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 this agreement or of the appointment of the managing agents as such managing agents, from any cause whatsoever other than a wilful 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 the average annual remuneration as aforesaid the managing agents, if the period preceding such for which the managing agents shall be managing be less than seven years."

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 a dispute as to the compensation payable to the assessees for 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 assessees payable by certain instalments. The first instalment of Rs. 81,000 of such compensation received by the assessee on 15th Feb ruary, 1956, was shown in the return of the assessees for the assessment year 1957‑58, while the second instalment pf Rs. 2,00,000 received by the assessees on 31st July, 1958, was shown in the assessees' 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 section 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 I.T.O. 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. .

Against the said orders of the I.T.O. in appeal filed to the A.A.C. the same contentions were raised. However, the A.A.C. by his two separate orders, also came to reject the said contentions of the assessees, and confirmed the I.O.T. s orders. Before the A.A.C. the assessees relied on the earlier order of the Tribunal dated 3rd January, 1962, in she managed com pany's assessment for the assessment year 1955‑56, wherein the Tribunal, relying or, certain circumstances stated therein, had held that the termina tion of the managing agency agreement by the managed Company was not bona fide and had disallowed the said amounts as deduction. The A.A.C. however, reject the contention of the assessees and subjected the said two sums to tax in their hands.

In appeal against the said order of the A. A. C. the Tribunal, also relying on the said order of the Tribunal in the managed com pany's assessment, held that the said amounts were not liable to tax in the hands of the assessees. In holding so the Tribunal observed, re tying 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 it the receipt by the managing agents, namely, the assessees is admit ted, it is neither compensation nor ether payment due to or received by the assessees at or in connection with the termination of their managing agency agreement.

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

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

"10. (5‑A) 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 ; ..." (Underlining supplied).

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.

In this case there is no dispute as to the facts that the managing agency agreement with the assessees was in fact terminated by the managed Com pany, that for fixation of compensation for such a termination the dispute was referred to arbitration, that the arbitrators by their award had fixed a 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 man aged 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, 1957, respectively. The said undisputed facts, there fore, would clearly bring the said amounts within the purview of the said section 10 (5A) (a) so as to be liable to be taxed in the hands of the assessees.

The question, however, is whether there was anything in the order of the Tribunal dated 3rd January, 1962, in the case of the managed com pany's assessment for the assessment year 1955‑50, on which the Tribunal its order in this case had laid great reliance, to take away the effect of the said provisions of section 10 (5A) (a) in respect of the said amounts in the hands of the assessees.

The learned counsel for the assessees has 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 the 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 about for some ulterior purpose. The said conclu sions presupposed that factually the managing agency agreement was ter minated. 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 man aged Company to the assessees towards the compensation for the termina tion of the managing agency agreement, were in fact not paid but were merely book entries. The observations of the Tribunal in its order in this case that, when the Tribunal in its order in the managed company's assessment held that the transaction was not bona fide, is 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 consi deration.

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 relat ing to the entries regarding the said two amounts. The said extract showed the assessees having received by cheques from the managed Com pany 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 transation without con sideration and, therefore, sham. Firstly, this Court cannot consider in this reference for the first time the effect of the said extract of the en tries in the account books of the assessees. That apart, it is also difficult to see how the said entries would help the learned counsel in his contention, when the entries disclose 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 contention of the learned counsel, therefore, cannot be accepted.

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 section 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 payment received by the assessees, even if they were purported to have been mad 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.

M. Z. M. Question answered in the negative.

Find a Lawyer Near You

Dealing with a matter like this? Connect with a verified advocate in your city — free on SJP Lawyers Directory.