Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX WEST BENGAL-II, CALCUTTA
Vs.
RESPONDENT:
M/S. BIRLA GWALIOR (PVT.) LTD.
DATE OF JUDGMENT04/04/1973
BENCH:
HEGDE, K.S.
BENCH:
HEGDE, K.S.
KHANNA, HANS RAJ
CITATION:
1973 AIR 2486 1973 SCR (3) 902
1974 SCC (3) 198
CITATOR INFO :
R 1986 SC 368 (16)
RF 1986 SC 757 (15,18,55,57,59)
ACT:
Indian Income Tax Act 1922-S. 10(2)(xv)-Whether an amount
foregone by the assessee as Managing Agency Commission and
an amount foregone as office allowance was allowable as
Revenue Expenditure.
HEADNOTE:
These are all connected appeals. The assessee-respondent
was the managing agent of two companies N & G. As Managing
Agent of N Company, it was entitled to receive a commission
of 12 1/2 on the net profits of the Managed Company together
with a sum of Rs. 18,000/as office allowance. In the case
of G company, the assessee was entitled to get an allowance
of Rs. 30,000/- in addition to its agreed commission. In
all these appeals, certain questions were submitted by the
Tribunal to the High Court. In Civil Appeal No. Z42 of 1970
only one question was submitted and in the other two cases,
i.e., Civil Appeal No. 243 and 244 of 1970, two questions
were submitted.
In the first appeal, the question submitted was whether on
the f,acts and circumstances of the case, a certain sum said
to, have been foregone by the assessee as managing agency
commission was allowable as revenue expenditure. Similar
questions were called for, for the remaining two assessment
years as well and in addition, one more question was
submitted as to whether certain sum, said’ to have been
’foregone by the assessee as, office allowance, was
allowable as revenue expenditure under the lncome Tax Act.
The assessment years were 1954-55, 1955-56 and 1956-57.
The High Court came to the conclusion that it is not
necessary to answer the common question referred to in all
these appeals because it was academic; but the question
relating to the office allowance was ,answered in favour of
the assessee.
In the relevant accounting years, the assessee gave up the
managing agency commission from both the managed companies.
It also gave up the office allowance due from G. Company.
The accounting years of both the assessee company as well as
the managed companies were the financial year. The
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commission was given up by the assessee company after the
end of the financial year, but before the accounts ’of the
managed company were made up. The accounts of the managed
companies were made up some time during the end of September
of the year following the respective accounting years. But
in the case of office allowance, the same was given up even
before the end of the financial years,
On the basis of these facts, the I.T.O. as well as the
Appellate Assistant Commissioner held that the deductions
claimed were not allowable. As regards the commission, they
came to the conclusion that the same having accrued at the
end of each of the financial years, the agency giving up the
same subsequent to these dates, does not bring the case
under s. 10(1) of the Income-tax Act. So far as the office
allowance was concerned, they came to the conclusion that
there was no justification for giving up the same. The
Income Tax Appellate
903
Tribunal differed from this view and held that to the extent
the commission was given up, the assessee company had no
income at all. In other words, the commission that was
given up cannot be considered as the real income of the
assessee company. Therefore, it is an allowable expenditure
under s. 10(2)(xv). As regards the office allowance the
Tribunal held that the same was allowable deduction under s.
10(2) (xv). The Tribunal further held that the commission
as well as the office allowance were given up by the
assessee on the ground of commercial expediency. The High
Court agreed with this view taken by the Tribunal.
Dismissing the appeal,
HELD : (i) As regards office allowance, following C.I.T.
Bombay North v. Chandulal Keshavlal & Co., 38 I.T.R. 601 the
Tribunal was fully justified in coming to the conclusion
that the expenditure incurred came within the scope of s.
10(2)(xv). The only contention advanced by the appellant
was that the allowance was paid to meet certain expenses
incurred by the assessee, company. Therefore, the assessee
could not have given up the same. This contention makes no
difference in law. The ratio of the decision of this Court
in Chandulal’s case completely covers the point under
consideration. [906B]
(ii) The question regarding giving up of the commission, no
due date was fixed for the payment of the commission under
the managing agency agreements. The commission receivable
could have been ascertained only after the managed company
made up its accounts. The assessee had given up the
commission even before the managed company made up its
accounts. Hence, the fact that the assessee company was
maintaining its accounts on the basis of mercantile system
cannot lead to the conclusion that the commission accrued to
’it by the end of the relevant accounting year. It was the
real income of the assessee company that was liable to tax
and the real income could not be arrived at without taking
into account the amount given up by the assessee.
Therefore. in the present case, the contention of the
revenue that a surrender of the commission under the
provisions mentioned in the agreement were not deductable
for the purposes of Income Tax, cannot be sustained. [906 F]
Poona Electric Supply Co. Ltd. v. Commissioner of Income-
tax, Bombay City 1, 57 I.T.R. 521 H. M. Kashiparekh & Co.
Ltd. v. Commissioner of Income-tax, Bombay North, Kutch &
Saurashtra, 39 I.T.R. 706, referred to.
The question whether the given up commission comes under s.
10(2)(xv) depended on whether the income had really accrued
or not. It is not a hypothetical accrual of income that
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has got to be taken into consideration but the real accrual
of the income. In the present case, since there was no real
accrual of Income, the assessee was not liable to tax for
this amount.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 242 to 244
(NT) of 1970.
Appeals by certificate from the judgment and order dated
April 22, and 23, 1969 of the Calcutta High Court in Income-
tax Reference Nos. 187, 188 & 189 of 1963.
S. T. Desai, B. B. A huja, S. P. Nayar and R. N.
Sachthey, for the appellant (in C.A. No. 242).
904
B B. Ahuja, S. P. Nayar and R. N. Sachthey, for the
appellant (in C.A. Nos. 243-244).
B. Sen, Leila Seth, U. K. Khaitan and B. P. Maheshwari,
for the respondent.
The Judgment of the Court was delivered by
HEGDE, J.-These are connected appeals by certificate. They
relate to respondent’s assessment for the assessment years
1954-55 , 1955-56 and 1956-57. The previous financial years
are the relevant accounting years.
In all these appeals, as directed by the High Court of
Calcutta under S.66(2) of the Indian Income Tax Act, 1922,
certain questions were submitted by the Tribunal. In the
first case i.e. Civil Appeal No. 242 of 1970 only one
question was submitted and in the other two cases i.e.,
Civil Appeals Nos. 243 and 244 of 1970, two questions were
submitted. The question submitted in the first case is as
follows :
"Whether on the facts in the circumstances of
the case the sum of Rs. 1, 1 1,779 said to
have been foregone by the assessee as Managing
Agency commission was allowable as a revenue
expenditure under S. 10(2) (xv) of the Indian
Income-tax Act, 1922 for the assessment year
1954-55" ?
Similar questions were called for the remaining two assess-
ment years as well. But, in addition, one more question,
namely
"Whether on the facts and in the circumstances
of the case the sum of Rs. 30,000 said to have
been foregone by the assessee as office
allowance receivable from Gwalior Rayon and
Silk Manufacturing Co. Ltd. was allowable as a
revenue expenditure under Section 10(2) (xv)
of the Indian Income Tax. Act, 1922 for the)
assessment years, 1955-56 and 1956-57, was
called for."
At the hearing, the High Court came to the conclusion that
it is not necessary to answer the common question referred
to in all these three appeals as the same was academic but
the question relating to the office allowance was answered
in favour of the assessee following the decision of this
Court in Commissioner of Income tax Bombay North v.
Chandulal Keshavlal & Co.(1)
The material facts of the case may now be stated. The
assessee --respondent is the managing agent of the National
Bearing Co. Ltd. and Gwalior Rayon and Silk Manufacturina
Co. As managing agent of the former company it was entitled
to receive a commission of 12 1/2 per cent on the net
profits of the managed company together with a sum of Rs.
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18,000 as office allowance. In the
(1) 38 I.T.R. 601.
905
case of Gwalior Rayon and Milk Manufacturing Co. the,
assessee was entitled to get an office allowance of Rs.
30,000 per year, in addition to the agreed managing agency
commission. In the relevant accounting years the assessee
gave up the managing agency commission due from both the
managed companies. It also gave up the office allowance due
from Gwalior Rayon and Silk Manufacturing company. The
accounting years of both the assessee company as well as the
managed companies were the financial years. In the
agreement entered into between the assessee company and the
managed companies, no, date for payment of the managing
agency commission appears to have been stipulated. The
commission was given up by the assessee company after the
end of the financial year but before the accounts of the
managed Co. were made up. The accounts of the managed
companies appear to have been made up somewhere during the
end of September of the year following the respective
accounting years. But, in the case of office allowance the
same was given up even before the end of the financial year.
On the basis of these facts the Incometax Officer as well as
the Appellate Assistant Commissioner came to the conclusion
that the deductions claimed were not allowable. As regards
the commission, they came to the conclusion that the same
having accrued at the end of each of the financial years,
the assessee giving up the same subsequent to those, dates
does not bring the case under S.10(1) of the Act and no case
was made out under S.10(2) (xv). So far as the office
allowance is ;oncerned they came to the conclusion that
there was no justification for Living up the same.
The Income-tax Appellate Tribunal differed from the view
taken by the Income-tax Officer and the Appellate Assistant
Commissioner. Dealing with the question of commission it
came to the conclusion that to the extent the commission was
given up the assessee company. earned no income at all. In
other words the commission that was given up cannot be
considered as the; real income of the assessee company. It
further came to the conclusion that under any circumstance
it is an allowable expenditure under S. 10(2) (xv). As
regards the office allowance, the Tribunal was of the
opinion that the same was an allowable deduction under S.
10(2)(xv). The Tribunal held that the commission as well as
the office allowance were given up by the assessee on the
ground of commercial expediency. The High Court agreed with
the view taken by the Tribunal.
We will first take up the question relating to the office
allowance. According to the finding of the Tribunal the
assessee company gave up the office allowance on the ground
of commercial expediency. It opined that the managed
company’s financial position was not sound during the
relevant accounting years and it
10-L797SL.P. C.I./73
9 0 6
was necessary for the assessee company to give up the office
allowance in order to stabilise the finances of the managed
company. The Tribunal further came to the conclusion that
because of the sacrifices made by the assessee company, the
finances of the managed company improved subsequently, as a
result. of which the assessee company was able to earn more
profits in the later years. This is a finding of fact.
That finding was binding on the High Court. On the basis of
that finding the Tribunal was fully justified in coming to
the conclusion that the expenditure incurred came within the
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scope of S. 10(2) (xv). That conclusion is supported by the
decision of this Court in Chandulal’s case (supra). The
only contention advanced in this Court in respect of the
office allowance was that it was paid to meet certain
expenses incurred by the assessee company-; consequently the
assessee could not have given up the same. We do not know
whether the office allowance was paid solely for that
purpose or whether it was partly as, remuneration and partly
to meet the expenditure incurred. In either case it makes
no difference in law. The ratio of the decision of this
Court in Chandulal’s case completely covers the point under
consideration.
Now turning to the question regarding giving up of the
commission, as mentioned earlier, the assessee was
maintaining its accounts on the basis of mercantile system.
Its accounting year was the financial year. It gave up the
commission after the end of the financial year. On the
basis of these facts it was contended on behalf of the
Revenue that the commission had accrued before it was given
up. Hence it cannot be said that the assessee had not
earned the commission in question. Therefore, the
assessee’s case cannot be considered under S.10(1). We are
unable to accept this contention as correct. As mentioned
earlier no due date was fixed for the payment of the
commission under the managing agency agreements. The
commission receivable could have been ascertained only after
the managed company made up its accounts. The assessee had
given up the commission even before the managed company made
up its accounts. Hence the mere fact that the assessee
company was maintaining its accounts on the basis of
mercantile system cannot lead to the conclusion that the
commission had accrued to it by the end of the relevant
accounting year. This is also the view taken by the Bombay
High Court in H. M. Kashiparekh & Co. Ltd. v. Commissioner
of Income-tax, Bombay North, Kutch & Saurashtra. (1) The
facts of that case are somewhat similar to the, facts of the
present case. Therein the assessee which maintained its
accounts on mercantile system was the, managing agent of a
paper mill company. Under the managing agency
(1)391. R 706.
90 7
agreement it was under a duty to forego upto one-thirds of
its commission where the profits of the managed company were
not sufficient to pay a dividend of 6 per cent. For the
accounting year ending March 31, 1950, the assessee earned a
commission of Rs.- 1,17,644, that as a result of the
resolutions passed by the managed company and the assessee
company the assessee gave up a sum of Rs. 97,000 in
December, 1950. The Appellate Assistant Commissioner held
that the maximum amount the assessee was ’bound to forego
was only Rs. 39,215 and included the balance of the amount
foregone, viz., Rs. 57,785/- in the taxable income. The
Appellate Tribunal, however, found that the sum of Rs.
57,785 was also given up for reasons, of commercial
expediency. Affirming the decision of the Tribunal the High
Court held that it was the real income of the assessee
company for the accounting year that was liable to tax and
that the real income could not be arrived at without taking
into account the amount foregone by the assessee. In
ascertaining the real income the fact that the assessed
followed the mercantile system of accounting did not have
any bearing. The accrual of the commission, the making of
the accounts, the legal obligation to give up part of the
commission, and the foregoing of the commission at the time
of the making of the accounts were not disjointed facts :
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there was a dovetailing about them which could not be
ignored. The real income of the assessee was Rs. 27,644 and
the amount of Rs. 97,000 foregone by the assessee could not
be included in the real income of the assessee for the
accounting year. Rejecting the contention that merely
because the assessee maintained its accounts on the basis of
mercantile system, the income must be held to have accrued
at the end of ,the accounting year, the High Court observed
"even so, (the failure to produce account books) we shall
proceed on the footing that, the assessee company having
following the mercantile system of account, there must have
been entries made in its books in the accounting year in
respect of the amount of the commission. In our judgment,
we would not be justified in attaching any particular
importance in this case to the fact that the company
followed ,the mercantile system of account. That would not
have any particular bearing in applying the principle of
real income to the facts of this case. This decision was
cited with approval by this Court in Poona Electric Supply
Co. Ltd. v. Commissioner of Income-tax, Bombay city
1.(1)Dealing with that decision this is what this Court
observed : "The concept of ’real income’ is also expounded
in the decision of the Bombay High Court in H. M.
Kashiparekh & Co. Ltd. v. Commissioner of Income-tax
(supra). There, under the managing agency agreement the
managing agent was under a duty to forego up to one-third of
(1) 57 I.T.R 521
908
its commission where the profits of the managed company were
not sufficient to pay a dividend of 6 per cent. The
contention of the revenue that such surrender of the
commission under the provisions mentioned in the agreement
was not deductible for the purpose of income-tax was
negatived. The principle has been succintly stated in the
head-note thus
"The principle of real income is not to be so subordinated
as to amount virtually to a negation of it when a surrender
or concession or rebate in respect of managing agency
commission is made, agreed to or given on grounds of
commercial expediency, simply because it takes place some
time after the close of an accounting year. In examining
any transaction and situation of this nature the court would
have more regard to the reality and speciality of the
situation rather than the purely theoretical or doctrinaire
aspect of it. It will lay greater emphasis on the business
aspect of the matter viewed as a whole when that can be done
without disregarding statutory language".
Mr. S. T. Desai, learned counsel appearing for the Revenue
contended that the facts of this case are governed by the
rule laid down by this Court in Morvi Industries Ltd. v.
Commissioner of Income-tax (Central), Calcutta(1). We do
not think that submission is correct. Facts of that case
are :-The assessee, which was the managing agent of its
subsidiary company, maintained its accounts on the
mercantile system. It was entitled to receive an office
allowance of Rs. 1,000 per month, a commission of 12’2 per
cent, of the net profits of the managed company and an
additional commission of 12’ per cent on all purchases of
cotton and sales of cloth and yarn. In the accounting years
ended on December 31, 1954 and December 31, 1955, the
managed Company suffered losses and the assessee earned only
commission on the sale of cloth and yarn for the two years.
The total amounts, including the office allowance which the
assessee was entitled to receive were Rs. 50,719 and Rs.
13,963 for the two years. Under clause 2(e) of the managing
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agency agreement the commission was due to the assessee on
December 31, 1954 and December 31, 1955, respectively, and
it was payable immediately after the annual accounts of the
managed company was passed in general meetings, which were
held on November 24, 1955, and July 21, 1956, respectively.
By resolutions of its board of directors dated respectively,
April 4, 1955, and June 19, 1956 [i.e., after the commission
had become due but before it had become payable in terms of
clause 2(2)], the assessee relinquished its commission on
sales and office allowance because the managed company had
been suffering heavy losses in the past years. The Tribunal
held
(1) 82 1. T. R. 835.
9 0 9
that the relinquishment by the assessee of its remuneration
after it had become due was of no effect; and also rejected
its claim that the amounts relinquished were allowable under
section 10 (2) (xv) of the Income-tax Act, 1922, because, as
a result of the relinquishment, the financial position of
the managed company did not become stronger while that of
the assessee-company became weaker and, therefore, the
relinquishment was not for the benefit of the assessee. On
a reference the High Court agreed with the view taken by the
Tribunal. On appeal this Court affirmed the decision of the
High Court.
As seen from the facts of that case the commission given up
had accrued on the 31st December, 1954 and 31st December,
1955, respectively, and the assessee purported to give up
that commission several months thereafter. Further, the
Tribunal in that case had come to the conclusion that the
assessee did not give up the amounts in question for
commercial expediency. This Court came to the conclusion
that the amounts in question were due at the 31st December,
1955 and 1956, though payable at a later date.
Consequently, those amounts had accrued long before they
were given up and the giving up of the same did not co.-lie
within the scope of section 1 0 ( 1 ). It is true that in
the course of the judgment emphasis was also placed on the,
fact that the assessee was maintaining its accounts on the
basis of mercantile system, but it was not on that basis
alone that this Court came to the conclusion that the income
in question accrued on 31st December, 1955 and 31st
December, 1956. In arriving at- the conclusion that the
income in question accrued on the 31st December, 1955 and
31st December, 1956, this Court primarily took into consi-
deration the terms of the agreement. In the course of the
judgment delivered by one of us, Khanna, J., passage from
the judgment of this Court in Commissioner of Income Tax
Bombay City I v. Messrs. Shoorji Valiabhadas and Co. (1) was
quoted in support of the conclusion reached by this Court.
That passage reads thus :
"Income-tax is a levy on income. Though the Income-tax Act
takes into account two points of time at which the liability
to tax is attracted, viz., the accrual of the income or its
receipt, yet 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 doe 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
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(1) 46 1. T. R. 144.
910
circumstances , have been made in the books of account"
(emphasis supplied). Hence it is clear that this Court in
Morvi Industries’ case did emphasise the fact that the real
question for decision was whether the income had really
accrued or not. It is not a hypothetical accrual of income
that has got to be taken into consideration but the real
accrual of the income.
In addition to the contentions taken earlier, Mr. Desai also
took objection to the way in Which the High Court disposed
of these cases. It may be noted that the High Court came to
the conclusion that the findings reached by the Tribunal
were findings of fact and, therefore, it would not be proper
for the High Court to interfere with the same but strangely
enough, at an earlier stage the High Court called for the
questions referred to earlier, under S.66(2). If the
questions raised are concluded by the facts found by the
Tribunal the High Court was not justified in calling for
those questions. Further when the High Court issued the
rule on the applications made by the Revenue, the assessee
not only objected to the prayer made by the Revenue, but
also submitted that in case the Court was pleased to direct
the Tribunal to State a case, it may also be pleased to
direct the Tribunal to submit the question "whether the
commission given up can be considered as real income coming
within the scope of S.10(1)?" But, the High Court rejected
that prayer but merely called upon the Tribunal to submit
the questions set out earlier. The High Court has now come
to the conclusion that the commission given up by the
assessee cannot be considered as it real income. It is un-
doubtedly true that there are certain incongruities in the
procedure adopted by the High Court but the final conclusion
reached by the High Court is, in our opinion, correct in
law. Therefore, the High Court was justified in refusing to
answer the first question in all the three cases.
In the result these appeals fail and they are dismissed with
costs; one set of hearing fee.
S.C. Appeals dismissed.
911