Full Judgment Text
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PETITIONER:
THE COMMISSIONER OF INCOME-TAX,BOMBAY NORTH & OTHERS.
Vs.
RESPONDENT:
M/S. HARIVALLABHDAS KALIDAS AND CO.,
DATE OF JUDGMENT:
19/02/1960
BENCH:
KAPUR, J.L.
BENCH:
KAPUR, J.L.
DAS, S.K.
HIDAYATULLAH, M.
CITATION:
1960 AIR 703 1960 SCR (3) 50
CITATOR INFO :
R 1960 SC1336 (3)
MV 1986 SC 757 (15)
ACT:
Incometax-Managing Agent’s Commission payable at the end of
the year-Rate of Commission reduced before then by agree-
ment-If voluntary relinquishment of a Portion of accrued
commission.
HEADNOTE:
The respondent-firm Harivallabhdas Kalidas was appointed the
Managing Agent of Shri Ambika Mills Ltd., the appellant in
the connected appeal by means of a Managing Agency Agreement
the relevant portion of which ran thus:-
(2)(a) The Company shall pay each year to the said Firm
either the commission of 5 (five) per cent on the total sale
proceeds of yarn, and of all cloth, manufactured from
cotton,
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silk, jute, wool, waste and other fibres and sold by the
company, or a commission of three pies per pound avoirdupois
on the sale, whichever the said Firm choose to take, and
also a commission of 10 (ten) per cent on the proceeds of
sale of all other materials sold by the Company and 10 (ten)
per cent on the bills of any ginning and pressing factories
and on any other work done by the Company."
And by clause (5) it was provided:
" (5) The remuneration payable to the said Firm under clause
2(a) shall be paid to the said Firm forthwith after the 31st
day of December or such other date as the Directors may fix
for the closing of the accounts of the Company in each year
and after such accounts are passed by the company in General
Meeting."
Subsequently, at the request of the Managed Company the
Managing Agents agreed to charge commission at 3 per cent on
sales instead Of 5 per cent for the year ending December 31,
1950 and a resolution to that effect was passed by the
Managed Company and a formal agreement to that effect was
executed. The income-tax Authorities, however, taxed the
Managing Agents for two assessment years on the basis that
by entering into an agreement with the mills they had
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voluntarily relinquished certain sums of money as their
commission which had accrued to them as income for the
purpose of income-tax. An appeal was taken to the Income-
tax Tribunal which held that the agreement between the
Managing Agent and the Managed Company to receive
remuneration at 3 per cent on the total sale was valid and
took effect from January, 1, 1950 and the questions whether
the commission accrued on the proceeds of every single sale
or only when the assessee firm exercised its option to
charge it on the total sale proceeds or on the weight of the
yarn sold and whether the Managing Agents would get their
commission after the whole profit was determined at the end
of the year, were decided in favour of the Managing Agents.
The High Court also on a reference made to it at the
instance of the Commissioner of Income-tax, answered the
above mentioned question in favour of the Managing Agents.
On appeal by the Incomee-tax Commissioner by special leave,
Held, that on a proper construction of the agreement, it was
clear that there was no accrual of commission till the end
of the year and that it did not accrue as and when the sales
took place. The Managing Agents were to be paid at the end
of the year and by agreeing to the modification of the
agreement before then they had not voluntarily relinquished
any portion of the commission.
Commissioner of Income-tax, Madras, v. K.R.M.T.T. Thiagaraja
Chetty and Co., [1954] S.C.R. 258, E.D. Sasoon and Co. Ltd.
v. The Commissioner of Income-tax Bombay City, [1955] i
S.C.R. 313 and Commissioner of Inland Revenue v. Gardner
Mountain and D’ Ambrumenil Ltd., 29 T.C. 69, not applicable.
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JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 145/58 and
323/57.
Appeals by special leave from the judgment and order dated
September 14, 1955, of the Bombay High Court in I.T.
References, Nos. 8 and 21 of 1955 respectively.
R. Ganapathi Iyer and D. Gupta, for the appellant in C.A.
No. 145 of 1958, and respondent in C. A. No. 323 of 1957.
N. A. Palkhivala, S. N. Andley, J. B. Dadachanji and
Rameshwar Nath, for the respondent in C. A. No. 145 of 1958
and appellant in- C. A. No. 323 of 1957. ,
1960. February, 19. The Judgment of the Court was
delivered by
KAPUR, J.-This judgment will dispose of two appeals, C. A.
No. 145/58 and C. A. 323/57. They arise out of the same
transaction i.e. Managing Agency Agreement and the result of
C. A. No. 323/57 is dependent upon the judgment in C. A.
145158 and we propose to deal with the latter appeal which
was argued before us and the former for reasons to be stated
later was not pressed. The appellant in C. A. 145/58 is the
Commissioner of Income-tax, Bombay and the, respondent is
the assessee, a registered firm, which on March 8, 1941, was
appointed the Managing Agents of Shri Ambica Mills Limited
(hereinafter termed the Managed Company) the appellant in C.
A. 323/57. The duration of the Managing Agency period was
20 years. By clause (2) of the Managing Agency Agreement it
was provided:-
" (2)(a) The Company shall pay each year to the said Firm
either the commission of 5 (five) per cent.on the total sale
proceeds of yarn, and of all cloth, manufactured from
cotton, silk, jute, wool waste and other fibres and sold by
the company, or a commission of three pies per pound
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avoirdupois on the sale, whichever the said Firm choose to
take, and also a commission of 10 (ten) per cent. on the
proceeds of sale of all other materials sold by the Company
and 10 (ten) per cent. on the bills of any ginning and
pressing factories and on any other work done by the
Company.
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(b)If in any year the net profits of the Company shall not
be sufficient to enable the Directors, if they think fit, to
recommend a dividend of eight per cent. per annum on the
capital ’paid up on the ordinary shares for the time being,
the same -Firm shall be bound to give up from the total
amount of commission payable under clause 2(a) hereof such
portion thereof as may be necessary to make up the deficit.
PROVIDED THAT in no event the amount so given up by the said
Firm shall exceed one-third of such total amount of
commission
And by Clause (5) it was provided:
" (5) The remuneration payable to the said Firm ’Under
Clause 2(a) shall be paid to the said Firm forthwith after
the 31st day of December or such other date as the Directors
may fix for the closing of the accounts of the Company in
each year and after such accounts are passed by the Company
in General Meeting ".
On December 9, 1950, the Board of Directors of the Managed
Company passed a resolution to the effect that the Directors
had for some time past been discussing with the Managing
Agents the advisability of modifying the terms of the
Managing Agency Agreement as to the commission payable under
it and that the Managing Agents had agreed to charge 3 per
cent. on sales instead of 5 per cent. for- the year ending
December 31, 1950. A resolution was passed at the Annual
General Meeting of the Managed Company on April 22,1951,
which was to the same effect. The resolution of the Board
of Directors was ratified at an Extraordinary General
Meeting of the shareholders of the Managed Company on
October 7, 1951, and the same day a formal agreement
embodying the terms of the resolution was executed between
the Managing Agents and the Managed Company. For the
accounting years 1950 and 1951 i.e. assessment years 1951-52
and 1952-53 the Managing Agents were taxed by the Income-tax
Authorities on the basis that in those two years they had
voluntarily relinquished a sum of Rs. 1,69,981 and Rs. 2,10,
53O for the respective assessment years. These sums were
added to the income of the Managing Agents for the purpose
of income-tax.
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An appeal was then taken to the Income-tax Appellate
Tribunal and it was held by the Tribunal that the agreement
between the Managing Agents and the Managed Company to
receive remuneration at 3% on the total sales was a valid
one and took effect as from ’January 1, 1950. The second
question, whether the commission accrued on the proceeds of
every single sale or it accrued only when the assessee firm
exercised its option to charge its commission on the total
sale proceeds or on the weight of the yarn sold and whether
the Managing Agents were to get the amount of commission
after the whole profit was determined at the end of the
year, was decided in favour of the Managing Agents. A
Reference was made to the High Court at the instance of the
Commissioner of Income-tax and the questions above mentioned
were answered in favour of the Managing Agents. This appeal
by the appellant has been brought against the judgment of
the High Court by special leave.
In the connected appeal i.e. C. A. 323/57 by the Managed
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Company the facts are the same except that the Appellate
Tribunal allowed the Managed Company the sum on which the
Managing Agents were,to be taxed as allowable deduction.
When the Commissioner got the case stated to the High Court
the Managing Company also had a case stated. But as the
High Court upheld the contention of the Managing Agents the
Managed Company did not press its application which was
therefore dismissed. The appeal of the Managed Company is
brought against that order.
In the appeal by the Commissioner of Income-tax, i.e. C. A.
145/58, it was argued that according to the terms of the
Agency Agreement the Managing Agents were to get the
commission on the sales and as the accounts were kept on a
mercantile basis, the amount of commission accrued as and
when the sales took place and paragraph 5 of agreement was
only a machinery for quantifying the amount. It was also
argued that the Managing Agents by entering into an
agreement with the Mills had voluntarily relinquished a
portion of the amount of commission which had accrued to
them and therefore the whole of the income from commission
which had already accrued was liable to
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income-tax; and reference was made to the cases reported as
Commissioner of lncome-tax, Madras v. K. R. M. T. T.
Thiagaraja Chetty and Co. (1), E. D. Sassoon & Company Ltd.
v. The Commissioner of Income-tax, Bombay City (2) and to an
English case Commissioners of Inland Revenue v. Gardner
Mountain & D’ Ambrumnil Ltd. (3). But these cases have no
application to the facts of the present case. In the
Commissioner of Income-tax, Madras v. K. R. M. T. T.
Thiagaraja Chetty & Co. (1), the assesses firm was, under
the terms of the Managing Agency Agreement, entitled to a
certain percentage of profits and in the books of the
Company a certain sum was shown as commission due to the
assessee firm and that sum was also adopted as an item of
business expenditure and credited to the Managing Agents’
commission account but subsequently it was carried to
suspense account by a resolution of the Company passed at
the request of the assessee firm in order that the debt due
by the Firm might be written off. The accounts were kept on
mercantile basis and it was held that on that basis the
commission accrued to the assessee when the commission was
credited to the assessee’s account and subsequent dealing
with it would not affect the liability of the assessee to
income-tax. It was also held that the quantification of the
commission could not affect the question as it was not a
condition precedent to the accrual of the commission. At
page 267 Ghulam Hassan J., observed:-
" Lastly it was urged that the commission could not be said
to have accrued, as the profit of the business could be
computed only after the 31st March, and therefore the
commission could not be subject to tax when it is no more
than a mere right to receive. This argument involves the
fallacy that profits do not accrue unless and until they are
actually computed. The computation of the profits whenever
it may take place cannot possibly be allowed to suspend
their accrual. In the case of income where there is a
condition that the commission will not be payable until the
expiry of a definite period or the making up of the account,
it might be
(1) [1954] S.C.R. 258 at 267.
(2) [1955] 1 S.C.R. 313, 344.
(3) 29 T.C. 69, 96.
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said with some justification, though we do not decide it,
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that the income has not accrued but there is no such
condition in the present case ".
This passage does not help the appellant’s case. The
question there decided was that the accrual of the
commission was not dependent upon the computation of the
profits although the question whether it would make any
difference where the commission was so payable or was
payable after the expiry of a definite period for the making
of the account was left undecided . In the case before us
the agreement is of a different nature and the above
observations are not applicable to the facts of the present
case.
The next case is E. D. Sasoon & Co., Ltd. v. The
Commissioner of Income-tax, Bombay City (1). But it is
difficult to see how it helps the case of the appellant. If
anything it goes against his contention. In that case the
assessee Company was the Managing Agent of several Companies
and was entitled to receive remuneration calculated on each
year’s profits. Before the end of the year it assigned its
rights to another person and received from him a
proportionate share of the commission for the portion of the
year during which it worked as Managing Agent. On the
construction of the Managing Agency Contract it was held
that unless and until the Managing Agent had carried out one
year’s completed service, which was a condition precedent to
its being entitled to receive any remuneration or commission
it was not entitled to receive any commission. The facts in
that case were different and the question for decision was
whether the contract of service was such that the commission
was only payable if the service was for a completed year or
the assessee Company was entitled to receive even for a
portion of the year for which it had acted as a Managing
Agent. It was held that it was the former.
As was observed by Lord Wright in Commissioners of Inland
Revenue V. Gardner, Mountain & D Ambrumenil Ltd. (2), " It
is on the provisions of the contract that it must be
decided, as a question of construction and therefore of law,
when the commission was earned The contract in, the present
case in para-
(1) [1955] 1 S.C.R. 313, 344.
(2) 29 T.C. 69, 96.
57,
graph 2 shows that (1) the company was to pay each year; (2)
that the Managing Agents were to be paid 5 per cent.
commission on the proceeds of the total sales of yarn and of
all cloth sold by the Company or three pies per pound’
avoirdupois on the sale, whichever the Managing Agents
chose; thus there was an’ option to be exercised at the end
of the year; (3) they were also to be paid at 10 per cent.
on the proceeds of sales of all, other materials; and (4)
the Mills were to pay to the Managing Agents each year after
December 31, or such other dale which the Directors of the
Company may choose for the closing of the accounts. There
was a further clause that if the net profits of the Managed
Company, that is, the Mills were not sufficient to enable
the Directors to recommend a dividend of 8 per cent. per
annum on the paid up capital, then the Managing Agents were
bound to forego a portion of their commission upto one-
third. All these provisions as to payment have to be read
together as an indivisible and an integral whole. On a
proper construction of this contract, therefore, it is
obvious that the Managing Agents were to be paid at the end
of the year. They had the option of receiving a percentage
on total sales or three pies per pound and this was
exercisable at the end of the year. There was also a
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liability to pay back a portion of the commission in certain
contingencies which also could be determined only when the
accounts were made up for the year. It is thus clear that
there was no accrual of any commission till the end of the
year. On this construction of the contract it cannot be
held that the commission had accrued as and when the sales
took place and that as a result of their - agreeing to the
modification of the agreement the Managing Agents had
voluntarily relinquished a portion of their commission. On
the other hand under the original agreement the Managing
Agents were entitled to receive commission only at the end
of the year and before then the agreement was varied
modifying its terms as from the beginning of the accounting
year.
We are of the opinion, therefore, that the High Court
correctly found against the appellant and we therefore
dismiss C. A. No. 145 of 1958 with costs. In
8
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view of this Mr. Palkiwala for the Managed Company did not
press C. A. No. 323 of 1957, which is therefore dismissed
but the parties will bear their own costs in that case
because the result of that appeal is really dependent upon
the result in C. A. No. 145 of 1958.
Appeals dismissed