Law: Income Tax Act, 1961

Section: 28(ii)

Section 28(ii) of the Income-tax Act, 1961 [Corresponding to section 10(5A) of the Indian Income-tax Act, 1922] - Business income - Compensation - Assessment year 1955-56 - Whether compensation paid for termination of a managing agency business is a payment in relation to said business; as such said receipt was obviously related to that business and was not or income from a new and independent source and, therefore, previous year relevant to that receipt would be same as previous year for managing agency business itself - Held, yes FACTS The assessee was a private limited company. In 1944, the assessee purchased the managing agency of certain company for Rs. 6 lakhs and thereafter entered into a separate managing agency agreement with the managed company for a period of seventeen years. The assessee's only source of income was this managing agency in the relevant year. M, one of the shareholders of the assessee, and his group also held among themselves 25,000 ordinary and 10,000 preference shares of that company. M entered into an agreement for sale of these shares with one 'K' for a consideration of Rs. 45 lakhs; one of the terms of the agreement was that M would have the managing agency of the assessee terminated. In implementation of this agreement, M wrote to the assessee on 21-10-1953, asking it to give up the managing agency in lieu of Rs. 10 lakhs as compensation. The assessee accepted M's offer and tendered its resignation of its office as managing agents. The assessee credited the amount of compensation in its capital reserve account. In the assessment year 1955-56, the ITO assessed the entire amount of Rs. 10 lakhs in the hands of the assessee under section 10(5A). On appeal, the AAC held that section 10(5A) of the 1922 Act created a new source of income for which the previous year was not the previous year for the managing agency business which ended on 30-6-1954, that the compensation of Rs. 10 lakhs which the assessee received in October, 1953, fell in the financial year 1953-54, which would be the previous year for this income for which the assessment year was 1954-55, which was before sub-section (5A) of section 10 of the 1922 Act was enacted,…

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