REGE, J. - (1.) IN this reference under S. 256(1) of the IT Act, 1961, the following question by the 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 S. 10(5A)(a) of the Indian IT Act, 1922 ?" We are concerned with two sums of Rs. 81,000 and Rs, 2,00,000 received by the assessees on 15th February, 1956, and 31st July, 1956, respectively, by way of two instalments of compensation in connection with the termination of their managing agency under an award, which were treated by the ITO as income in the hands of the assessees liable for tax under S. 10(5A)(a) of the Indian IT Act, 1922, in their assessment orders for the asst. yrs. 1957 58 and 1958 59.
(2.) 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 assessees 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 seven times the average annul remuneration as aforesaid earned by the managing agents, if the period preceding such termination, for which the managing agents shall be managing agents, 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 assessees on 15th February, 1956, was shown in the return of the assessees for the asst. year 1957 58, while the second instalment of Rs. 2,00,000 received by the, assessees on 31st July, 1957, was shown in the assessees' return for the asst. 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 S. 10(5A)(a) of the Indian IT Act, 1922, were not applicable and the said amounts should not be treated as, income liable to tax. The ITO 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.
(3.) AGAINST the said orders of the ITO, in appeal filed to the AAC, the same contentions were raised. However, the AAC, by his two separate orders, also came to reject the said contentions of the assessees, and confirmed the ITO's orders. Before the AAC the assessees relied on the earlier order, of the Tribunal dated 3rd January, 1962, in the managed company's assessment for the asst. year 1955 56, wherein, the Tribunal, relying on certain circumstances stated therein, had held that the termination of the managing agency agreement by the managed company was not bona fide and had disallowed the said amounts as deduction. The AAC, however, rejected the contention of the assessees and subjected the said two sums to tax in their hands.;