Full Judgment Text
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PETITIONER:
THE COTTON AGENTS LTD., BOMBAY
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX,BOMBAY.
DATE OF JUDGMENT:
03/05/1960
BENCH:
DAS, S.K.
BENCH:
DAS, S.K.
HIDAYATULLAH, M.
CITATION:
1960 AIR 1279
ACT:
Income-tax-Managing Agency Agreement-Proper construction of-
Commission on sale proceeds of the managed company-Time
of accruing.
HEADNOTE:
Messrs. Shivnarayan Surajmal Nomani were the managing
agents of the New Swadeshi Mills of Ahmedabad Ltd. The
Nemani group and the appellant-company which is the assesses
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held a substantial number of shares of the said mills.
Sometime in 1944 some difference arose between them and it
was decided that the Nemani group should sell its block of
shares to the appellant company at an agreed price and then
the appellant company would become the managing agents of
the mills company on payment of Rs. 5,00,000 to the Nemani
group and would be entitled to the emoluments of the
managing agents as from April 1, 1944. The relevant portion
of the Managing Agency
Agreement ran thus:-
" (2) The remuneration of the agents as such agents of the
company as aforesaid shall be as follows:-
A commission at the rate of three and a half per cent. on
the gross proceeds of all sales of the yarn, cloth, waste
and other articles manufactured by the company earned in any
year or other period for which the accounts of the company
are made up and laid before the General Meeting."
" (3) The said commission shall become due to the Managing
Agents at the end of each financial year or other period for
which the accounts of the company are to be laid before the
General Meeting and shall be payable and paid immediately
after such accounts have been passed by the General
Meeting.,,
The assessment year was 1946-47, and the year ending with
Diwali, 1945 (October 18, 1944, to November 4, 1945) was the
accounting year. The managing agency commission from April
1, 1944, to December 31, 1944, amounted to Rs. 2,20,433 and
from January 1, 1945, to March 31, 1945, to Rs. 67,959. The
case of the appellant-company was that for the assessment
year 1946-47 it was liable to pay tax only on the commission
of Rs. 67,959 which it had earned by working as managing
agent of the Mills company and it was not liable to pay tax
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on the sum of Rs. 2,20,433. On a difference of opinion
having arisen between the departmental taxing authorities
and the Tribunal the following question was referred to the
High Court for decision :-
" Whether on the facts and circumstances of the case the
managing agency commission of 3-1/2 on sales made by the New
Swadeshi Mills of Ahmedabad Ltd., between April 1, 1944, and
December 31, 1944, accrued to Shivnarayan Surajmal Nemani or
to the assessee ? "
The High Court following the decision of the Supreme Court
in E. D. Sassoon and Company Ltd. V. Commissioner of
Income-tax, Bombay City, held that the appellant company was
liable to pay tax on the whole of the commission as the
commission accrued due on March 31, 1945, and they became
entitled to receive it at the end of the year; it also held
that no debt was created in favour of the agents when the
goods were sold. On appeal by the assessee company on a
certificate of the High Court:
Held, that the view of the High Court was correct. The
commission of the managing agents accrued and became due at
the end of the financial year and that neither any debt nor
any right to receive payment arose in favour of the agents
when each
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transaction of sale took place. No income arose or accrued
on the sale proceeds at the time of each sale.
E. D. Sassoon and Company Ltd. v. Commissioner of Income-
tax, Bombay, [1955] 1 S.C.R. 313, referred to.
Lakshminarayan Ram Gopal and Sons v. The Government of
Hyderabad, [1955] 1 S.C.R. 393, followed.
Commissioners of Inland Revenue v. Gardner Mountain &
D’Ambrumenil Ltd., (1947) 29 T.C. 69 and Turner Morrison &
Co. Ltd. v. Commissioner of Income-tax, West Bengal, [1953]
23 I.T.R. 152, distinguished.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 100 of 1.959.
Appeal from the judgment and order dated February 11, 1957,
of the Bombay High Court in Income-tax Reference No. 53 of
1956.
R. J. Kolah, Dwarkadas, S. N. Andley; J. B. Dadachanji,
Rameshwar Nath and P. L. Vohra, for the appellants.
K. N. Rajagopal Sastri and D. Gupta, for the respondent.
1960. May 3. The Judgment of the Court was delivered by
S.K. DAS, J.-This is an appeal on a certificate granted by
the High Court of Bombay, under s. 66A (2) of the Indian
Income-tax Act, 1922. The short facts are these. The
Cotton Agents Limited, Bombay, are a limited liability
company registered under the Indian Companies Act and will
be called the assessee Company in this judgment. It held a
substantial number of shares of the New Swadeshi Mills of
Ahmedabad, Ltd. (hereinafter called the Mills Company).
Messrs. Shivnarayan Surajmal Nemani (called the Nemani
group) also held a block of shares of the Mills Company
along with its managing agency. The assessment year was
1946-47, and the year ending with Diwali, 1945 (October 18,
1944, to November 4, 1945) was the accounting year.
Sometime in 1944 some differences arose between the assessee
Company and the Nemani group; these differences were
referred to one Govindram Seksaria, who decided that the
Nemani group should sell its block of shares to the assessee
Company at an agreed price, It was further decided
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that a sum of Rs. 5,00,000 be paid by the assessee Company
to the Nemani group as the price of the, managing agency
rights. This arrangement was approved by the share-holders
of the Mills Company by a resolution dated January 4, 1945,
and came into effect immediately. The agreement further was
that the assessee Company would come in as managing agents
of the Mills Company in place of the Nemani group and would
be entitled to the emoluments of the managing agents as from
April 1, 1944. The managing agency commission from April 1,
1944, to December 31, 1944, amounted to Rs. 2,20,433 and
from January 1, 1945, to March 31, 1945, to Rs. 67,959. The
case of the assessee Company was that for the assessment
year 1946-47 it was liable to pay tax only on the commission
of Rs. 67,959 which it had earned by working as managing
agent of the Mills Company and it was not liable to pay tax
on the sum of Rs. 2,20,433. This contention of the assessee
Company was not accepted by the departmental taxing
authorities; but the Tribunal decided in its favour. The
assessee Company’s case before the Tribunal was that as the
managing agency commission was based on the sales, the com-
mission accrued to the managing agents as and when the sales
were made and furthermore the sum of Rs. 5,00,000 paid by
the assessee Company to the retiring managing agents
included the purchase price of the managing agency
commission which had accrued in the hands of the retiring
agents. The Tribunal expressed the view that on a true
construction of the relevant managing agency agreement, the
31 per cent. commission on sales made when the Nemani group
was the managing agent accrued to that group and not to the
assessee Company and thus a debt was created in favour of
the Nemani group on every sale during its period of managing
agency and only the payment of the debt was deferred till
the accounts of the Mills Company were passed at a general
meeting; therefore, the commission prior to the close of the
year 1944 was assessable in the hands of the Nemani group
and thereafter in the hands of the assessee Company. The
Department, however, contended that the whole
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814
of the managing agency commission accrued to the assessee.
Thereupon, at the instance of the Department, the Tribunal
referred the following question of law to the High Court for
decision :-
" Whether on the facts and circumstances of the case the
managing agency commission at 3-1/2 on sales made by the New
Swadeshi Mills of Ahmedabad Ltd., between April 1, 1944, and
December 31, 1944, accrued to Shivnarayan Surajmal Nemani,
or to the assessee ?"
The High Court held that the matter was concluded by the
decision of this Court in E. D.Sassoon and Company Ltd. v.
Commissioner of Income-tax, Bombay City (1). With reference
to the argument of learned counsel for the assessee Company
that the commission was payable on the sale proceeds and not
on the profits as in Sassoon’s case (1), it said:
" We would have given serious thought to this aspect of the
matter but for the view we take that the decision of the
Supreme Court with regard to the question of creation of the
debt and with regard to the serving by the managing agents
for a term of one year being a condition precedent for their
being entitled to receive payment, is indistinguishable on
the facts of this case. We may point out that here as in
the Sassoon’s case (1) the commission of 31 per cent. is to
be earned in any year, and also by clause 3 of the agreement
the commission is to become due to the managing agents at
the end of each financial year. Therefore, till the end of
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the financial year there is no debt whatsoever created in
favour of the managing agents and also their right to
receive payment depends upon their having served for a whole
year. Under the circumstances we must hold, following the
decision of the Supreme Court, that the assessees are liable
to pay tax on the whole of the commission as the commission
accrued due on March 31, 1945, and they became entitled to
receive it at the end of the year. We do not agree with the
view of the Tribunal that according to the agreement of the
managing agents the debt was
(1) [1955] 1 S.C.R. 313.
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created in favour of the agents when the goods were sold by
the company and that the payment was deferred to a date
after the accounts having been passed by the shareholders in
the general meeting of the company. In no view of the case
can it be said that the debt was created in favour of the
agents when the goods were sold ".
The answer to the question really depends on a construction
of the relevant terms of the managing agency agreement dated
March 15, 1925, entered into between the Mills Company and
the Nemani group. Before we proceed to a consideration of
those terms it is necessary to state that the Department has
assessed the Nemani group also to tax in respect of the
commission for the period April 1, 1944, to December 31,
1944. That circumstance has, however, no bearing on the
question of construction and learned counsel for the
Department has stated before us that there is no intention
to tax two parties for the same income and if the tax has
been realised from both for the same income, it will have to
be refunded to one of the two parties after the decision of
this Court. We are not considering in this case the
validity or otherwise of what are known as protective or
precautionary assessments, and nothing said in this judgment
has any bearing on that question.
We go at once to the Managing Agency Agreement dated March
15, 1925. Under that agreement the managing agents were
appointed for a period of fifty. one years, but with liberty
to them to resign the appointment and retire from the agency
at any time by twelve calendar months’ notice in writing,
such notice to expire at the end of any financial year of
the Mills Company. Then came cls. (2) and (3) of the
agreement, which are material and must be quoted so far as
they are necessary for our purpose:-
", (2) The remuneration of the Agents as such Agents of the
Company as aforesaid shall be as follows:-
A commission at the rate of three and a half per cent. on
the gross proceeds of all sales of the yarn, cloth, waste
and other articles manufactured
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by the Company earned in any year or other period for which
the accounts of the Company are made up and laid before the
General Meeting."
Provided, etc., (it is unnecessary to quote the proviso).
" (3) The said commission shall become due to the Managing
Agents at the end of each financial year or other period for
which the accounts of the Company are to be laid before the
General Meeting and shall be payable and paid immediately
after such accounts have been passed by the General
Meeting".
Clauses (6) to (11) recited the rights and duties of the
managing agents, one of such rights being to retain,
reimburse and pay themselves " all sums due to the agents
for commission ". Clauses (13) and (14) dealt with the right
to assign the remuneration and the managing agency, and said
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inter alia that " it shall be lawful for the agents to
assign this agreement and the benefit thereof and their
rights and privileges, etc., to any person or firm or
company having authority by its constitution to become bound
by the obligations undertaken by the
agents........................... and the Company shall be
bound to recognise the person, firm or company aforesaid as
the agents of the Company". It is unnecessary to read the
other clauses of the managing agency agreement,
The controversy before us hinges really on the scope and
effect of clauses (2) and (3), read in the context of the
agreement as a whole. On behalf of the assessee Company the
argument is that under el. (2) the managing agency
remuneration accrued at the rate of 31 per cent. on the
gross proceeds of all sales; the word " all " is emphasised,
and it is argued that the remuneration accrued as each sale
took place, the totality of sales giving the gross sale
proceeds. It is argued that embedded in each sale was the
managing agency commission of the assessee Company. It is
further suggested on behalf of the assessee Company that
though cl. (3) uses the word " due ", it merely indicated
the time of payment and not that of accrual.
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We do not think that this reading of the two clauses is
correct. In our view, cl. (3) is the accrual clause;( it
shows that the commission became due at the end of each
financial year or other period for which the accounts of the
Mills Company were to be laid before the General Meeting.
Significantly enough, the clause consists of two parts; one
part says when the commission becomes due and the other says
when it is to be payable and paid. In very clear terms, the
clause says that the commission becomes due normally at the
end of the financial year, but is payable after the accounts
have been passed by the General Meeting. Let us contrast
el. (3) with cl. (2). Clause (2) states how the
remuneration has to be calculated. It says in effect that
the remuneration has to be calculated at the rate of 3-1/2
per cent. on the gross proceeds of all sales, etc., earned
in any year or other period for which the accounts of the
Mills Company are made up. Putting the two clauses side by
side, the conclusion at which we have arrived is that in
their true scope and effect cl. (3) determines the time of
accrual of the managing agency remuneration and cl. (2)
determines the rate at which the remuneration is to be
calculated; and as to the time of payment, that is
determined by the second part of cl. (3).
This view of the managing agency agreement of March 15,
1925, concludes the appeal. If the remuneration accrued at
the end of the financial year, then undoubtedly it accrued
in the hands of the assessee Company. It remains now to
refer briefly to some of the decisions cited at the Bar.
As to the decision in Sassoon’s case(1) it is pointed out
that the commission there payable by way of remuneration was
a percentage on the net profits and this, it is argued for
the assessee Company, distinguishes that decision from the
present case. Indeed, it is true that in Sassoon’s case (1)
the remuneration was fixed at a percentage on the net
profits, but the real point of the decision was as to when
the remuneration accrued. On this point the majority of
learned Judges said:
(1) [1955] 1 S.C.R. 313.
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" It is clear therefore that income may accrue to an
assessee without the actual receipt of the same. If the
assessee acquires a right to receive the income, the income
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can be said to have accrued to him though it may be received
later on its being ascertained. The basic conception is
that he must have acquired a right to receive the income.
There must be a debt owed to him by somebody. There must be
as is otherwise expressed debitum in presenti, solvendum in
futuro: see W. S. Try Ltd. v. Johnson(1) and Webb v. Stenton
(2). Unless and until there is created in favour of the
assessee a debt due by somebody it cannot be said that he
had acquired a right to receive the income or that income
has accrued to him".
It has been argued before us that the decision requires
reconsideration because it failed to make a further
distinction, a distinction which it is stated arises in law,
between the right to receive payment and the creation of a
debt. We consider it unnecessary to consider such a
distinction, if any such exists, in the present case. On
our view of the managing agency agreement, the commission of
the managing agents became due at the end of the financial
year and that is when it accrued; and there were neither any
debt created nor any right to receive payment when each
transaction of sale took place. We were also addressed at
some length on the further question whether managing agency
is service and if so, whether it must be for one full year
or whether apportionment is permissible. These questions do
not fall for decision in the present case and we express no
opinion thereon. We have proceeded in this case on the
footing that the managing agency work of the assessee
Company constituted business within the rule of the decision
in Lakshminarayan Ram Gopal and Sons Ltd. v. The Government
of Hyderabad (3) and on that footing we have decided the
question of accrual. In Commissioners of Inland Revenue v.
Gardner Mountain & D’Ambrumenil Ltd. (4), on which learned
counsel for the appellant placed reliance, the facts were
quite
(1) [1946] 1 All E.R. 532, 539.
(2) [1883] 11 Q.B D. 518, 522,527.
(3) [1955] (1) S.C.R. 393.
(4) [1947] 29 T.C. 69.
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different and on a true construction of the agreements
there, it was held that the commission payable under certain
under-writers’ agreements arose in the year in which the
policies were underwritten. That decision proceeded on a
construction of the agreements there considered; and it is
no authority for construing other agreements of a different
character. Learned counsel for the appellant relied on
Turner Morrison & Co. Ltd. v. Commissioner of Income-tax,
West Bengal(1) for his contention that in the sale proceeds
of each transaction of sale were embedded the income,
profits or gains to be earned by the managing agents and,
therefore, the accrual took place on each transaction, of
sale. The observations at page 160 of the report on which
reliance was placed were made in a different context,
namely, in the context of the place of receipt of income in
relation to the provisions of s. 4(1)(a) of the Income-tax
Act.
Learned counsel for the respondent has pointed out to us
that the observations of Lord Justice Fry in Colquhoun v.
Brooks (2) were not very accurately reproduced in Rogers
Pyatt Shellac and Co. v. Secretary of State for India (3).
He submitted that Lord Justice Fry did not say that the
words " accrual " or " arising " represented a stage
anterior to the point of time when the income becomes
receivable and connote a character of the income which is
more or less inchoate. He has argued that there is nothing
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inchoate about the income when it arises or accrues. We
consider it unnecessary to embark on a discussion as to how
far the aforesaid observations require consideration by us.
It is enough to say that on the view which we have taken of
the relevant clauses of the managing agency agreement, no
income arose or accrued on the sale proceeds at the time of
each transaction of sale; the income accrued at the end of
the financial year at the rate of 31 per cent. on the gross
proceeds of all sales of yarn, cloth, waste, etc., earned in
any one year. In that view of the matter, the High Court
correctly answered the question.
The appeal fails and is dismissed with costs.
Appeal dismissed.
(1) [1953] 23 I.T.R. 152. (2) (1888) 21 Q.B.D. 52, 59.
(3) (1924) 1 I.T.C. 363, 372.
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