Hegde, J. - (1.) In this appeal by special leave, the question that arises for decision relate to the taxability under Section 10 (5A) of the Indian Income Tax Act, 1922 (in brief 'the Act') of a certain amount received by the assessee firm as compensation on the termination of its managing agency.
(2.) The assessee is a private Limited Company and at the relevant time, it was under voluntary liquidation. It was incorporated in June, 1945 by converting an erstwhile partnership firm into a Private Limited company. The partnership firm had entered into a managing agency agreement on June 15, 1933 with a Public Limited Company called "The Century Spinning and Manufacturing Co. Ltd." Under the said agreement, the assessee was to continue as managing agents for a minimum period of 21 years and thereafter until that firm chose to resign its office or is removed from office by the managed company. During the period of 21 years stipulated in the agreement, the managed company had no right to remove the managing firm from its office except for reasons mentioned in the agreement. During the period the assessee continued to act as the managing agent the agreement provided, that the managing agents will get a minimum remuneration of Rupees 6,000/- a month and if its remuneration is found at the close of the year to be less than 10 per cent, of the gross profit of the company, the managing agents were to be paid a further additional sum to make the aggregate remuneration received by it equal to 10 per cent of the gross profit of the company for that year. The agreement further provided that if the managing agent's services were terminated before the period of 21 years stipulated in the agreement except for reasons mentioned in clause 15 of the agreement, the managing agents would be entitled to receive from the managed company as compensation or liquidated damages for the loss of office of the sum mentioned in Clause 14 of the agreement.
(3.) In about April 1951, a large holding of the managed company was acquired by a group of shareholders who were hostile to the managing agents. Thereafter the relationship between the managing agents and the managed company became strained. On April 23, 1951, the Directors of the managed company passed a resolution terminating the services of the assessee firm as managing agents. This resolution was affirmed by the shareholders at their extraordinary general meeting held on May 23, 1951. In pursuance of the resolution the Board of Directors on April 23, 1951, a notice of termination of the managing agency was issued to the managing agents. In reply the assessee claimed compensation of Rupees 50 lacs for the unlawful termination of its services. But the managed company was prepared to pay Rupees 2,34,000/- as compensation calculating the compensation at Rupees 6,000/- a month for the unexpired period of the agency i.e. 3 years 2 months and 7 days and Rupees 4600/- as remuneration for the 23 days of April, 1951. The assessee refused to accept that amount. Thereafter the assessee sued the managed company on the original side of the Bombay High Court claiming a sum of Rupees 28 lakhs as compensation for the unlawful termination of its services. The managed company resisted that suit. The suit was decreed on November 17, 1955 in the sum of Rupees 2,34,000/- and that decree was affirmed in appeal. The trial Judge as well as the appellate Bench held that under the terms of the agreement the assessee was only entitled to liquidated damages at the rate of Rupees 6,000/- per month for the unexpired term of its agency. The assessee received the amount decreed in December, 1955.;