R.R. Rastogi, J. - (1.) THE Income-tax Appellate Tribunal, Allahabad Bench, has referred the following questions of law under Section 256(1) of the I.T. Act, 1961, for the opinion of this court : " (1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 71,000, representing the surplus of damages received during the previous year representing the loss of commission that the assessee would have earned under the agreement if it was implemented, was a revenue receipt taxable under the Income-tax Act, 1961 ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the aforesaid amount of Rs. 71,000 was taxable as the income of the assessee for assessment year 1970-71 ?"
(2.) THE brief facts are these : THE assessee, a partnership firm, had entered into an agreement with M/s. Gaya Cotton andamp; Jute Mills Ltd. (hereinafter referred to as " the Jute Mills ") on February 1, 1957. By means of that agreement the Jute Mills appointed the assessee as the sole selling agent of pieces of all sorts and yarn manufactured by them. THE assessee was to advance a loan of Rs. 1,50,000 to the Jute Mills to enable them to restart and run the spinning section and waste-cotton plant to its full capacity. THEre was a provision for a further advance of Rs. 50,000 by the assessee and it was to receive commission on all sales. THE agreement was for a period of three years commencing from February 1, 1957. In pursuance of that agreement, the assessee did advance, a loan of Rs. 1,50,000 but it appears that soon after some disputes arose between the parties. THE matter was referred to an arbitrator who gave his award on October 13, 1958. By means of that award the Jute Mills were to pay to the assessee the following amounts : JUDGEMENT_681_ITR119_1979Html1.htm There was a provision for interest at 6 per cent, on loan and damages. That award was made a rule of the court by an order dated September 3, 1959. An appeal was preferred against that order before the High Court of Patna where a compromise was arrived at between the parties and it was agreed that in case the jute mills paid a sum of Rs. 2,44,000 to the assessee in addition to the amount of Rs. 1,00,000 already paid, the decree which had been passed in pursuance of the award would stand fully satisfied. This amount was to be paid in instalments. There again arose some dispute between the parties on the question of costs and the matter went to the Supreme Court where some modification was ultimately made and admittedly the assessee received, on various dates, a total sum of Rs. 3,46,477-50. The assesse allocated that sum as under: JUDGEMENT_681_ITR119_1979Html2.htm The sum of Rs. 29,400 was assessed on accrual basis in the assessments for 1959-60 to 1963-64 and the sum of Rs. 25,822.33 was also assessed on the same basis in assessment years 1959-60 and 1960-61. The sum of Rs. 29,243.13 was shown as profits and assessed in the assessment year 1964-65. The litigation expenses amounted to Rs. 41,001. The remaining amount of Rs. 71,010 was brought to tax by the ITO in the assessment for 1970-71. It may be noted that this amount was out of the sum awarded as compensation for agency.
(3.) IN its appeal before the AAC, the assessee contended that this amount represented compensation for termination of the agency agreement which was in the nature of capital receipt and was not liable to tax. IN the alter native, it was submitted that since the assessee maintained its accounts on mercantile basis and this income accrued to the assessee in the earlier years, therefore, it could not be taxed in the year under consideration. The AAC accepted both these submissions and deleted the addition of Rs. 71,010 from the assessee's assessment. The department filed an appeal against that order before the INcome-tax Appellate Tribunal. The Tribunal has disagreed with the view taken by the AAC on both the points stated above. According to the Tribunal, damages were paid to the asses see by way of commission which it would have earned in case the agreement had been implemented and, therefore, it was a revenue receipt. As for the other question, the view taken is that interest on the loan of Rs. 1,50,000 had not been returned by the assessee on accrual basis, though it had been brought to tax on that basis. Thus the system followed by the assessee for interest was not mercantile. Further, the receipts as per award had been returned by the assessee on cash basis and, therefore, this amount of Rs. 71,010 on that basis was rightly taxed in the year under consideration. So far as the facts of the case are concerned, there is no dispute and they have been narrated in detail above. The first question to which we would like to address ourselves is whether the amount in dispute could be assessed in the year under consideration. This can be done if it is taken that in respect of commission the assessee follows cash system of accounting. If, on the other hand, it follows mercantile system, then this amount cannot be taxed in this year because, admittedly, it related to the period prior to the termination of the agreement, which as noted above, took place on August 31, 1958.;