Full Judgment Text
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 7
PETITIONER:
MORVI INDUSTRIES LTD.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX (CENTRAL)CALCUTTA
DATE OF JUDGMENT05/10/1971
BENCH:
KHANNA, HANS RAJ
BENCH:
KHANNA, HANS RAJ
HEGDE, K.S.
GROVER, A.N.
CITATION:
1971 AIR 2396 1972 SCR (1) 970
1972 SCC (4) 451
ACT:
Income-tax Act, 1922, ss. 4(1)(b)(i) and 10(2)(xv)-Income
accrues’ when it becomes due-Relinquishment of office
allowance and commission by managing agent after they had
become due on the ground that managed company had suffered
losses-Relinquishment made after amounts had become due’
under agreement but before they had become payable-Amounts
rightly included in total income-Relinquished amounts not
deductible as expenses under s. 10(2)(xv) when the relin-
quishment is not for purpose of assessee’s business or on
ground of commercial expediency.
HEADNOTE:
The appellant, a limited company, was managing agent of
another company. Under the terms of the agreement the
appellant company was entitled to receive a fixed monthly
sum as office allowance and commission at fixed rates on net
profits and purchases and sales of cotton and yarn. The
managed company’s accounting year closed on the 30th day of
December every year and that of the appellant company on the
30th day of June every year. Under cl. 2(e) of the managing
agency agreement the commission was due on the 31st day of
December every year and it was payable immediately after the
annual accounts of the managed company bad been passed in
the General meeting. The Annual General meetings of the
managed company were held to adopt the- accounts for the
relevant accounting years on November 24, 1955 and July 21,
1956, The amounts of commission in terms of the cl. 2(e)
were thus ’due’ on 31st December 1954 and 31st December 1955
and were ’payable’ immediately after 24th November 1955 and
21st July 1956 respectively. Since the managed company had
suffered losses in the preceding years the appellant
relinquished the commission as well as the office allowance
by resolutions of the Board of Directors dated April 4, 1955
and June 19. 1956. On these dates the amounts of commission
relinquished had become ’due’ but not ’payable’. The
Income-tax Officer in making the assessments for the 1955-56
and 1956-57 did not make any allowance for the amounts
relinquished and included them in the total income of the
appellant. According to the Income-tax Officer the office
allowance- had been relinquished ex-gratia and the
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 7
commission had been relinquished after it had accrued. The
Appellate Assistant Commissioner and the Appellate Tribunal
confirmed the order of the Income-tax Officer. In
,reference the High Court held : (i) that the accrual of
income was complete within the accounting year of the
managed company and as no relinquishment had been done
before the amount became due, the case came within the ambit
of s. 4(1)(b)(i) of the Income-tax Act, 1922, (ii) that the
relinquishment had not been made for the purpose of facili-
tating the legitimate commercial undertaking or by way of
commercial expediency and the case was not then--fore
covered by s. 10(2)(xv). In ;appeal to this Court,
HELD : (i) According to s, 4(1) (b) (i) of the- Act, subject
to the provisions of this Act the total income of any
previous year of any person includes all income profits and
gains from whatever source derived which if such a person is
resident in the taxable territories during
971
such year accrue or arise of the deemed to accrue or arise
to him in the taxable territories that year. The dictionary
meaning of the word ’accrue’ is to come as an accession,
increment, or produce; to fall to one by way of advantage;
to fall due.’ The income can thus be said to accrue when it
becomes due. The postponement of the date of payment has a
bearing only in so far as the time of payment is concerned,
but it does not affect the accrual of income. The moment
the income accrues, the assessee gets vested with the right
to claim that amount, even though it may not be payable
immediately. There also arises a corresponding liability of
the other party from whom the income becomes due to pay that
amount. The further facts that the amount of income is not
subsequently received by the assessee would also not detract
front or efface the accrual of the income, although the non-
receipt may, in appropriate cases, be a valid ground for
claiming deductions. The accrual of an income is not to be
equated with the receipt of the income. That the two,
accrual and receipt of income, have different connotations
is also) clear from the language of s. 4 of the Act. Clause
(a) of sub-s.’(1) of s. 4 of the Act deals with the receipts
of income while the accrual of income is dealt with in cl.
(b) of that sub-section.. [975 B-E]
In the present case the accounts of the appellant company
were maintained on a mercantile basis. Under this system
the profits and gains are credited though not immediately
realised, and the entries thus made really show nothing more
than an accrual or arising of the said profits, at the
material time. Further, the amounts of income for the two
years in question were given up unilaterally after they had
accrued to the-appellant company. As such the appellant
could not escape the tax liability for those amounts. [975
G-H; 976 E]
Indermani Jatia V. C.I.T., U.P., 35 I.T.R. 298 and C.I.T.,
Bombay City I v. M/s. Shoorji Vallabhdas & Co., 46 I.T.R.
144, applied.
(ii) The appellant could claim deduction of the amounts
under s. 10(2)(xv) of the Act if the amounts had
represented an expenditure laid out or expended wholly and
exclusively for the business of the, appellant. There was
however nothing to show that the amounts were relinquished
for the purpose of the appellant’s business or on grounds
of commercial expediency. The High Court therefore rightly
rejected the claim under s. 10 (2) (xv)[976 F-G]
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 7
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 2093 and
2084 of 1970.
Appeals from the judgment and order dated January 28, 1964
of the Calcutta High Court in Income-tax Reference No. 104
of 1960.
B. P. Maheshwari, for the appellant (in both the appeals).
S.T. Desai, P. L. Juneja and R. N. Sachthey, for the
respondent (in both the appeals).
The Judgment of the Court was delivered by
Khanna,J. This judgment would dispose of two Civil Appeal.s
Nos. 2083 and 2084 of 1970 which have been filed on
certificate
972
granted by the Calcutta High Court and are directed against
the Judgment of that Court whereby it answered the questions
referred to the Court under Section 66(1) of the, Indian
Income-tax Act, 1922 (hereinafter referred to as the Act)
for two assessment years against the assessee-appellant and
in favour of the respondent.
The assessee is a Limited Company and the matter relates to
the assessment years 1956-57 and 1957-58, the corresponding
accounting years for which ended on June 30, 1955 and June
30, 1956 respectively.
The appellant Company was appointed as the Managing Agent of
Shree Ramesh Cotton Mills Ltd., Morvi (hereinafter referred
to as the managed company), as per agreement dated 30-12-
1946. The managed company was a 100% subsidiary of the
appellant company. Under the terms of the agreement, the
appellant company was entitled to receive a fixed office
allowance of Rs. 1,000/- per mensem plus a commission at the
rate of 121/2% of the net profits, an additional commission
of 1 % on all purchases of cotton and an equal amount on all
sales of cloth and yarn. In the relevant years, the managed
company suffered losses and congruently the commission
payable at 121/2% of the net profits was nil but the
commission on purchase of cotton at the rate of 1 1/2% and
on sales of cloth and yarn at the same rate, aggregated to
Rs. 38,719/- for the assessment year 1956-57 and Rs. 1,963/-
for the following year. Besides these amounts, the
appellant was entitled to Rs. 12,000/- per annum for each of
the two years as fixed office allowance. The total amounts
which the appellant was entitled to receive from the managed
company were Rs. 50,719/- and Rs. 13,963/- for the two
years.
The managed company’s accounting year closed on the 30th day
of December and that of the appellant company on the 30th
day of June every year. Clause 2(e) of the Managing Agency
Agreement dated 30th ember 1946 contained the following term
as to when the commission would be due and payable
" (e) The said commission shall be due to the
Agents yearly on the thirty-first day of
December or any other date on which the
Company’s yearly account close in each and
every year during the continuance of this
Agreement and shall be payable and be paid
immediate after annual accounts of the said
Company has been passed by the Board of
Directors and Auditors of the Company and by
the company in, General Meeting".
According to the above clause, the commission was due on the
31st day of December every year and it was payable imme-
diately after the annual accounts of the managed company had
973
been passed in the General Meeting. The Annual General
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 7
Meetings of the managed company were held to adopt the
accounts on November, 24, 1955 and July 21, 1956
respectively with regard to the assessment years in
question. The amounts of commission in terms of the above
clause were "due" on 31st December, 1954 and 31st December,
1955 and were "payable " immediately after the 24th of
November, 1955 and 21st of July, 1956 respectively.
The appellant company relinquished the managing agency
commission for the assessment year 1956-57 as per resolution
dated 4th of April, 1955 of the Board of Directors and for
the following year as per resolution dated 19th June, 1956.
The amounts of the commission were thus relinquished after
they had become "due" but before they were "payable" in
terms of clause 2(e) of the agreement. On behalf of the
appellant, it was stated that the managed company had been
suffering heavy losses in the past years and, therefore, the
appellant did not consider it proper to charge any
commission or the fixed office, allowance and had
consequently relinquished the same.
The Income-tax Officer included the sums of Rs. 50,719/- and
Rs. 13,963/- in the total income of the appellant for the
two assessment years in question. The Income-Tax Officer
took the view that in so far as the fixed office allowance
was concerned, it had been given to the appellant to enable
it to recoupe the expenses incurred on behalf of the managed
company and the relinquishment was, therefore made ex-
gratia. As regards the commission, the Income-tax officer
held that it had become due to the appellant at the end of
the accounting year of the managed company, and if the
commission had been foregone after it had become due, it was
taxable on accrual basis. The Appellate Assistant
Commissioner and the Income-tax Appellate Tribunal affirmed
the order of the Income-tax Officer. According to the
Tribunal, the commission became due to the appellant yearly
on the last day of the accounting year of the managed
company, though the actual payment was deferred to a later
date. Postponement of the actual payment after the income
had accrued was held to be inconsequential. Likewise, the
relinquishment of the income after it had become due in the
opinion of the Tribunal, was inconsequential. Claim was ten
made by the appellant that the amount relinquished should be
treated as a permissible expenditure under section 10(2)
(xv) of the Act. The above claim was rejected and it was
observed that the total loss carried over at the end of year
1955 of the managed company was Rs. 14,95,221/-. As a
result of foregoing the amounts of the managing agency
commission, according to the Tribunal, the financial
position of the managed company did not
974
become stronger while that of the appellant company became
weaker. The relinquishment was consequently held to be not
for the benefit of-the appellant.
At the instance of the appellant, the Tribunal referred the
following two questions to the High Court :-
" (1) Whether on the facts and in the
circumstances of the case, the sums of Rs.
50,719/- and Rs. 13,963/foregone by the
assessee by its Directors’ resolution dated 4-
4-1955 and 19-6-1956 respectively, were liable
to be included in its total income for the
accounting years ending 30-6-1955 and 30-6-
1956 ?"
"(2) If the answer to question No. 1 be in the
affirmative, whether the assessee is entitled
to claim an allowance of an equivalent amount
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 7
as expenditure under the provisions of Section
10 (2) (xv) of the Indian Income Tax Act ?"
The High Court agreed with the view taken by the Tribunal.
It was observed that the accrual of income was complete
within the accounting year of the managed company and as no
relinquishment had been done before the amount became due,
the case strictly came within the ambit of section 4 (1) (b)
(i) of the Act. ’no relinquishment, it was further
observed, was a unilateral act of the appellant. As regards
the second question, the High Court found that the
relinquishment had not been made for the purpose of
facilitating the legitimate commercial undertaking or by way
of commercial expediency. The appellant’s case was thus
held to be not covered by section 10(2) (xv) of the Act,
Mr. Maheshwari has assailed the findings of the High Court.
Regarding the first question, the learned counsel contends
that as the amounts in question were never received by the
appellant but were relinquished, there arose no tax
liability for those amounts. As regards the second
question, Mr. Maheshwari submits that the relinquishment of
the amounts should be construed as permissible expenditure
under section 10(2) (xv) of the Act. There is, in our
opinion, no substance in any of the above contentions.
So far as the first question is concerned, we find that
according to clause 2(e) of the Managing Agency Agreement
reproduced above, the commission for the two years in
question became due to the appellant on the 31st day of
December, 1954 and 31st day of December, 1955. The
appellant also became entitled to receive fixed office
allowance of Rs. 12,000/- for each of the two years. It,
therefore, can be said that the income of Rs. 50,719/- had
accrued to the appellant on 31st December, 1954 and of
975
Rs. 13,973/- on 31st December, 1955. The fact that the pay-
ment of the managing agency commission was deferred till
after the accounts had been passed in the meetings of. the
managed company did not affect the accrual of the income of
those amounts on December 31, 1954 and December 31, 1955
respectively. According to Section 4 (1) (b) (i) of the
Act, subject to the provisions of this Act, the total income
of any previous year of any person includes all income,
profits and gains from whatever source derived which if such
person is resident in the taxable territories during such
year accrue or arise or are deemed to accrue or arise to him
in the taxable territories during such year. The dictionary
meaning of the word "accrue" is "to come as an accession,
increment, or produce : to fall to one by way of advantage :
to fall due". The income can thus be said to accrue when it
becomes due. The postponement of the date of payment has a
bearing only in so far as the time of payment is concerned,
but it does not affect the accrual of income. The moment
the income accrues, the assessee gets vested with the right
to claim that amount even though it may not be payable
immediately. There also arises a corresponding liability of
the other party from whom the income becomes due to pay that
amount. The further fact that the amount of income is not
subsequently received by the assessee would also not detract
from or efface the accrual of the income, although the non-
receipt may, in appropriate cases, be a valid ground for
claiming deductions. The accrual of an income is not to be
equated with the receipt of the income. That the two,
accrual and receipt of income, have different connotations
is also clear from the language of Section 4 of the Act.
Clause (a) of sub-section (1) of Section 4 of the Act deals
with the receipt of income while the, accrual of income is
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 7
dealt with in clause (b) of that sub-section.
The appellant-company admittedly was maintaining its account
according to the mercantile system. It is well known that
the mercantile system of accounting differs substantially
from the cash system of book keeping. Under the cash
system, it is only actual cash receipts and actual cash
payments that are recorded as credits and debits; whereas
under the mercantile system credit entries are made in
respect of amounts due immediately they become legally due
and before they are actually received; similarly, the
expenditure items for which legal liability has been
incurred are immediately debited even before the amounts in
question are actually disbursed. Where accounts are kept on
mercantile basis, the profits or gains are credited though
they are not actually realised, and the entries thus made
really show nothing more than an accrual or arising of the
said profits at the material time. The same is the position
976
with regard to debits made. [See Indermani Jatia V. Commis-
sioner of Income-Tax, U.P. (1)]
In the case of Commissioner of Income-Tax, Bombay City I v.
Messrs Shoorji Vallabhdas and Co.(2) Hidayatullah, J (as he
then was) speaking for the Court observed,: "Income-tax is a
levy on income. No doubt, the Income-tax takes into account
two points of time at which the liability to tax is
attracted viz. the accrual of the income or its receipt; but
the substance of the matter is the income. If income does
not result at all, there cannot be a tax, even though in
book-keeping, an entry is made about a "hypothetical
income", which does not materialise. Where income has, in
fact, been received and is subsequently given up in such
circumstances that it remains the income of the recipient,
even though given up, the tax may be payable. Where,
however, the income can be said not to have resulted at all,
there is obviously neither accrual nor receipt of income,
even though, an entry to that effect might, in certain
circumstances, have been made in the books of account".
The assessee firm, who was the managing agent of two
shipping companies in that case, gave up 75% of the managing
agency commission with a view to get the managing agency
transferred to two private companies. It was held that this
was not a case of a gift by the assessee to the managed
companies of a portion of income which had already accrued,
but an agreement to receive a lesser remuneration than what
had been agreed upon. In the present case, the amounts of
income for the two years in question were given up
unilaterally after they had accrued to the appellant
company. As such, the appellant could not escape the tax
liability for those amounts.
Coming to the second question we find that the appellant
could claim deduction of the amounts under section 10(2)
(xv) of’ the Act if the amounts had represented an
expenditure laid out or expended wholly and exclusively for
the business of the appellant. There is, however, nothing
to show that the amounts were relinquished for the purpose
of the appellant’s business. The present is not a case
wherein the amounts due to the assessee were given up on
grounds of commercial expediency or for advancing the
business interest of the assessee. The conclusion of the
learned Judges of the High Court in this respect, in our
opinion, is well founded.
The result is that the appeals fail and ire dismissed but,
in the circumstances, without costs.
Appeals dismissed.
G. C.
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 7
(1) 35 I.T.R. 298.
(2) 46 I.T.R. 144.
977