JUDGMENT
V. Ramaswami, J.
1. The assessee is a private limited Company. It entered into an agreement with one Associated Drug Company Ltd., Yercaud, hereinafter called the Drug Company, on June 28, 1947. Under that agreement, the drug company nominated, constituted and appointed the assessee as sales organisers for the whole of India, Burmah and Ceylon, for their products. The assessee, under this agreement, shall have to organise the sales of the drug company’s products over the territories mentioned above. As such sales organisation, the agreement further provided, that the assessee shall been titled to a commission of 45 per cent. on the listed prices for original sales packing and 25 per cent. on all bulk packing. Out of this commissioner, the assessee has to pay the dealer’s commission, distributor’s discount, salaries, allowances, commission payable to propagandists, office staff, rent, etc., i.e., all expenses involved in the establishment and maintenance of the sales organisation. The agreement did not provide for any particular period and it was intended to be a permanent agreement and it came into force on and from 20th June, 1947.
2. For some reason or the other, the drug company wanted to terminate this agreement and a termination agreement was entered into on the 2nd of July, 1949, and the original agreement was terminated with effect from 1st of July, 1949. In consideration of the assessee agreeing to the termination of the contract, the drug company agreed to pay compensation to the assessee. The compensation provided was a commission of 5 per cent. of the gross turnover of the drug company for a period 10 years as and from 1st of July, 1949. The commission is to be calculated and paid monthly, according to the English calendar month commencing from 1st of July, 1949, each months commission being payable on or before the 15th day of the succeeding month. The termination agreement further provided that if within the period of 10 years as provided above, the drug company ceased to manufacture pharmaceuticals, or transferred the whole of any part of its business or goodwill to any other concern, the drug company shall pay compensation to the assessee for the loss sustained by reason thereof. It appears that the drug company was paying the compensation for the terminations as agree to in accordance with the termination agreement for some time, but later it became irregular. Thereafter, the assessee filed C. S. No. 223 of 1953 on the file of this court for the recovery of the arrears under the termination agreement. The drug company, in turn, instituted C. S. No. 355 of 1953 for declaration that the agreement dated July 2, 1949, was illegal, void and unenforceable. The suit instituted by the assessee-company was decreed and that by the drug company was dismissed. The drug company thereupon preferred O. S. Appeal No. 85 of 1955 on the file of this court. During the pendency of the appeal, a compromise was entered into between the assessee and the drug company and a decree was passed by a Division Bench of the court in terms of the compromise on August 23, 1957. Under the terms of the compromise, the parties agreed that there shall be a decree declaring that the agreement dated July 2, 1949, shall be valid and binding between the parties and that as and from 1st March, 1953, the terms of the agreement shall stand modified as stated in the memorandum and that the modified terms shall be deemed to have come into effect on and from July 2, 1949. Shortly stated, the compromise memo provided that instead of 5 per cent. commission on the gross turnover as compensation, a commission of 2 per cent. on the gross turnover subject to a minimum of Rs. 18,000 shall be paid for the period from July 1, 1949, till June 30, 1959. They also determined on the basis of this clause that a total sum of Rs. 79,500 was payable for the period up to July 31, 1957, a and after deducting a sum of Rs. 25,000 paid during the pendency of the appeal, for the balance of Rs. 54,500 a decree shall be made against the drug company with a liability to pay the same together with interest thereon at the rate 2 per cent. per annum from the date of the decree, namely, August 23, 1957. A decree in terms of the memo of compromise was made, as already stated. Since the other terms of the decree are not very material for the purpose of this case, they are not necessary to be noted.
3. As per the decree, the drug company paid to the assessee a sum of Rs. 43,078.66 during the accounting year 1957-58, Rs. 30,839.96 the accounting year 1958-59, Rs. 18,600.05 during the accounting year 1960-61, Rs. 5,087.54 during the accounting year 1961-62 and Rs. 1,163.68 during the accounting year 1962-63.
4. It appear as that the assessment had been made on the assessee up to the assessment year 1953-54 and thereafter no assessment was made since it had been reported that the assessee-company had not earned any income after the accounting year relevant to the assessment year 1953-54. On the basis of the receipt of Rs. 43,078.66 during the assessment year 1958-59 relevant to the accounting year 1957-58, the Income-tax Officer proceeded to assess the assessee in the view that the entire sum of Rs. 43,078.66 rounded of as Rs. 43,079 has accrued during the relevant accounting year. The assessee preferred an appeal to the Appellate Assistant Commissioner contending that the amounts received by the assessee were only capital receipts and hence not taxable. The Appellate Assistant Commissioner accepted the above contention. In the appeal filed by the Department before the Tribunal, the Revenue relied on section 10(5A) of the Indian Income-tax Act, 1922, and the corresponding section 28(ii) of the Income-tax Act, 1961, and contended that the compensation received by the assessed shall be deemed to be profits and gains of business carried on and shall be liable to tax accordingly. In answer to this contention, the assessee contended that the provisions of section 10(5A) came into force only with effect from April 1, 1955, and that provision is not applicable to the instant case. That was on the ground that though the amount was received during the assessment year 1958-59, the income shall be deemed to have accrued to the assessee during the assessment year 1956-57, and that, therefore, section 10(5A) could not be invoked. It may be mentioned at this stage that the assessee was maintaining his accounts following the mercantile system. The Tribunal did not deal with this question but remanded the matter to the Appellate Assistant Commissioner as the applicability of section 10(5A) was raised for the first time before the Tribunal and the Tribunal wanted the Appellate Assistant Commissioner to consider that question first. The Appellate Assistant Commissioner, in the fresh hearing, held that the amounts became receivable by the assessee only by virtue of the order dated August 23, 1957, and that, therefore, section 10(5A) would be applicable. However, for the assessment year 1958-59, the Appellate Assistant Commissioner held that only a sum of Rs. 6,000 and not Rs. 43,079 which would be assessed. It is not clear as to how this amount of Rs. 6,000 was determined. Suffice it, however, to say that there was not a dispute before the Tribunal that the amount that could be included for assessment is only Rs. 6,000 and that the quantum is also not a subject-matter of reference to this court.
5. The assessee preferred an appeal to the Tribunal. The Tribunal confirmed the view of the Appellate Assistant Commissioner. In confirming that view, the Tribunal actually observed :
“Thus, the assessee-company acquired a right in substitution of what it had agreed earlier under the agency agreement. The right under the termination agreement was to receive from the drug company an amount equal to 5% of the turnover of the drug company for the various years. Obviously, the amount could be demanded and payment thereon could be enforced only after the end of each year. Such being the position, it is not correct to say that the right to receive the various amounts had accrued to the assessee on July 2, 1949.”
6. The Tribunal was also of the view that the compromise decree also quantified the amount due for the various years and that showed that the year right to receive the amount in relation to any particular accounting year accrued to the assessee only at the end of such accounting year.
7. At the instance of the assessee, the following question has been referred :
“Whether, on the facts and circumstances of the case, compensation payable to the assessee-company by M/s. Associated Drug Company in pursuance of the compromise decree dated August 23, 1957, for the period from April 1, 1957, to March 31, 1958, is assessable under section 10(5A) of the Indian Income-tax Act, 1922, for the assessment year 1958-59 ?”
8. It may be seen from the facts stated above that the original sales organisation agreement did not provide for any period during which it was to subsist. The parties intended probably that it may have to subsist so long as both of them wanted it to continue. However, by mutual agreement, the termination was effected with effect from July 1, 1949, under the termination agreement dated July 2, 1949. Clause 2 of the termination agreement specifically stated that in consideration of the “premises” which means the termination of the agreement provided in clause 1, the drug company agreed to pay the assessee as and for such compensation a commission of 5 per cent. of their gross turnover for a period of 10 years from July 1, 1949. The other portion of the same clause also stated that the commission shall be calculated and paid monthly, according to the English calendar month commencing from July 1, 1949, each month’s commission being payable on or before the 15th day of the succeeding month. The compensation payable, therefore, is not in the nature of liquidated damages for breach of contract. The agreement itself should be taken as one determining the rights of parties in consequence of their agreeing to terminate the original sales organisation agreement. Apart from the original contract not having provided for any liquidated damages for breach of contract the termination agreement also does not provide any lump sum payment for the termination of the agreement. The compensation payable is linked to the turnover of the drug company in each year and the right to receive the money itself depends on such turnover. At the time when they entered into this termination agreement, there was not even a minimum guarantee. The right to receive compensation, therefore, could be said to arise only as and when the drug company effect sales and that will, be in the relevant assessment years in which the sales were effected. The income, therefore, could not have accrued to the assessee earlier than the transaction of sale in the respective years. The compromise decree, in our opinion, does not make any difference in this regard. Instead of 5 per cent. as already stated, it provided 2 per cent. and the terms of the decree are to take effect from July 1, 1949, itself. The only difference that is made in the decree is that there is a minimum guarantee for each year which was fixed at Rs. 18,000. If, for any, reason, in any particular year the commission of 2 per cent. on the basis of the gross turnover falls below that Rs. 18,000, the assessee would be entitled for payment of that amount. The other difference that may be probably considered is that the amount is not payable every month but with reference to the turnover in each year, though there is a minimum payment of Rs. 1,500 to be made at the end of each month. All these alterations, in our opinion, have no effect on the position that the income had accrued to the assessee only during the assessment years and it did not accrue on July 2, 1949, when the termination agreement was entered into.
9. A somewhat similar question came up for consideration in F. E. Hardcastle & Co. (Private) Ltd. v. CIT [1963] 47 ITR 394 (Bom). In that case, the managing agency of a company, which the assessee held, was terminated under an agreement dated September 29, 1953, with effect from December 1, 1952. The agreement provided that the compensation amounting to Rs. 96,000 would be paid to the assessee in half-yearly instalments of Rs. 6,000 commencing from July 1, 1953. It appears that the assessee had debited in its account the entire amount of Rs. 96,000 to the principal company and was adjusting against the same the instalments as an when received. Under the agreement, the assessee received a sum of Rs. 12,000 in the financial year 1955-56 and the Income-tax Officer taxed this amount in the assessment year 1956-57 as profits under section 10(5A) of the Act. The contention of the assessee was that the entire compensation amount of Rs. 96,000 accrued to the assessee on the date of the agreement, viz., September 29, 1953, and that the instalment payments were merely repayment of this debt of Rs. 96,000 and could not be assessed as compensation for termination of the agency under section 10(5A). It may be mentioned that there was a clause in the agreement which prohibited the assessee in that case to indulge indirectly or indirectly in any activity in competition with the principal company for a period of 15 years and that if any orders were received by the assessee from third parties which fell within the activity of the principal company, they would be forwarded to the latter and the principal company had a right to stop payment of the outstanding indemnities if the assessee engaged itself in competing business. The learned judges held that the entire amount of Rs. 96,000 had not become due to the assessee on the date of the agreement but the respective amounts became due only on the respective dates on which the instalments fell due provided the assessee observed the conditions mentioned in the agreement which prohibited the assessee from engaging itself in competitive activities for 15 years and required the assessee to forward all orders received. Though reliance was placed by the learned judges on those restrictive covenants of the assessee, really the principle or ratio on which the decision was rendered is that liability to pay is a contingent liability and accrued only on the respective dates on which the instalments became due and payable, though the total amount of compensation was determined even at the time of the original agreement dated September 29, 1953. In our present case also there can be no doubt that the liability is contingent on the sales of the products of the drug company taking place. As and when there was a sale transaction, the assessee gets a right to a 2 per cent. commission on such sale. The minimum guaranteed under the decree does not in any way alter this situation because the minimum is to be payable or 2 per cent. of the gross turnover will have to be determined only at the end of the respective assessment year. In that sense, the liability to pay the money entirely depends on the sales turnover effected in that year and, therefore, the income could be said to accrue to the assessee only during that assessment year. As rightly pointed out by the Tribunal, the decision in CIT v. Sir Chunilal v. Mehta & Sons Private Ltd. [1967] 65 ITR 50 (Bom), which was affirmed by the Supreme Court in [1971] 82 ITR 54, relied on by the assessee, cannot help the assessee in this case. In that case, the managing agency agreement itself provided that the managing agents shall be paid a minimum monthly remuneration of Rs. 6,000 subject to a total remuneration equal to 10 per cent. of the gross profits of the company and that the managing agency agreement is to be in force for a period 21 years. The deed also provided that if the managing agents were deprived of their office before 21 years, they would be entitled to receive from the company as compensation or liquidated damages for loss of office a sum equal entitled to receive for the whole of the unexpired period 21 years. The managing agency agreement was terminated even before the expiry of 21 years period. The amount payable as liquidated damages as per the terms of the managing agency agreement at the rate of Rs. 6,000 minimum guaranteed came to Rs. 2,34,000, but the assessee was claiming Rs. 28,00,000 as compensation and ultimately also filed a suit claiming Rs. 28,00,000. The suit was decreed only for a sum of Rs. 2,34,000. Relying on section 10(5A), the Income-tax Officer as well as the Appellate Assistant Commissioner held that the amount of Rs. 2,34,000 with interest decreed and received in December, 1955, is taxable in the assessment year 1956-57. The Tribunal, however, took the view that as the termination was in April, 1951, the amount had accrued in 1951 and it was taxable if at all in the assessment year relevant to the calendar year 1951. On a reference, the High Court held that since the agreement itself provided for the determination of the compensation and that was the amount that was determined in the suit, the clause relating to compensation came into operation on April 23, 1951, itself when the agreement was terminated and the compensation accrued to the assessee on the date of termination and that in view of the mercantile system of accounting adopted by the assessee, the compensation cannot be taxed as income in the assessment year 1956-57 as it related to the accounting year 1951. As may be seen from the facts in that decision, the managing agency agreement itself provided for liquidated damages on earlier termination of the agreement before the expiry of the period of 21 years and since payment of the liquidated damages is provided, the entire damages accrued due on the termination itself and it did not depend on any further question. The fact that the assessee was claiming more than what was provided under the managing agency agreement and the fact that the court ultimately held that he was entitled to only the liquidated damages as provided in the agreement did not make any difference in this aspect. The decision, therefore, is not applicable to the present set of facts.
10. In the circumstances, therefore, we answer the question referred in the affirmative and against the assessee. The Revenue will be entitled to its costs. Counsel’s fee Rs. 500.