Banerjee, J. - (1.) This is a reference under Section 66(1) of the Indian Income-tax Act, 1922. The assessment year involved is 1960-61 and the relevant previous year is the year ended on August 31, 1959.
(2.) The circumstances in which this reference has been made are hereinafter related in brief The assessee is a limited company which keeps its accounts according to the mercantile system. One of the obiects with which the assessee was formed was to take over the managing agency of an electricity supply concern, known as Gauhati Electric Supply Corporation (1927) Ltd. Pursuant to that object, the assessee company took over the management of Gauhati Electric Supply Corporation (1927) Ltd., and, under the terms of the managing agency agreement, because entitled to remuneration at varying percentages depending upon the magnitude of the net profits of the managed company. After the passing of the Companies Act, in the year 1956, there was a fresh agreement entered into between the assessee and the Gauhati Electric Supply Corporation (1927) Ltd., on June 4, 1957, for a term of 10 years, from January 15, 1957, and clause 9 of the agreement was to the following effect: "In the event of the Company, being taken over by the State Government, Local Authority, or the State Electricity Board, as the case mav be, before the expiry of the period of ten years from 15th January 1957. the Managing Agents shall be entitled to compensation by the Company for loss of office as provided in Section' 366 of the Companies Act, 1956." Subsequent events show that there was some purpose for the managing agents to have Clause 9 incorporated in the fresh managing agency agreement, because, about three weeks after the execution of the fresh agreement, the managed company was taken over by the State Government, on or about June 25, 1957. A little over two years after the take over, Gauhati Electric Supply Corporation (1927) Ltd. passed a resolution, at its Annual General Meeting held on September 28 1959, to the following effect: "Resolved that the managing agency agreement with Messrs. Development of Industries (India) Private limited be and is hereby terminated with effect from the 25th day of June, 1957, upon payment by the company to the said managing agents compensation for loss of office, such compensation being calculated in accordance with the provisions of Section 366 of the Companies Act, 1956." The above resolution, as is apparent, was passed in terms of Clause 9 of the managing agency agreement, dated June 4, 1957 Under the aforesaid resolution, a sum of Rs. 92.619, which was equivalent to two years' profits of the managed company, was credited by the managed company in favour of the assessee The assessee also in its turn credited the said sum to its profit and loss account during the year which ended on October 31, 1959
(3.) In the Income tax return filed by the assessee, there was included a sum of Rs. 11,500/- only, by way of receipt of compensation during the previous year. By a subsequent letter, dated October 21, 1961, which the assessee addressed to the Income tax Officer, it was explained that no part of the sum of Rs. 92 619/-, out of which only Rs. 11,500/- was included in the return, was taxable in the hands of the assessee. According to the assessee, it was a capital receipt for termination of its managing agency. Alternatively, according to the assessee, since the balance namely, Rs. 81,119 had not been received, it was no part of the year's income and, therefore, ought not to be assessed in the year of assessment with which we are concerned.;