1964 (1) TMI 54 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 29,000 was rightly held to be the income of the assessee.
2. The applicability of Section 4(1)(b)(i) of the Income-tax Act, 1922.
3. The relevance of the timing of income relinquishment.
4. The impact of bilateral agreements on income accrual and taxability.
5. The applicability of precedents set by higher courts, including the Supreme Court.

Issue-wise Detailed Analysis:

1. Whether the sum of Rs. 29,000 was rightly held to be the income of the assessee:

The assessee, Rungta Sons Limited, was the managing agent of several companies and was entitled to a managing agency remuneration and commission amounting to Rs. 29,000 for the assessment year 1952-53. The shareholders of the assessee-company passed a resolution on December 16, 1952, forgoing the receipt of this amount. The assessee claimed that this amount should not be treated as income in computing its total income. However, the Appellate Tribunal held that the intention of forgoing was arrived at much later than the closing of the accounting year, and thus, the relinquishment of the claim after the income had already accrued could not exclude it from the total income.

2. The applicability of Section 4(1)(b)(i) of the Income-tax Act, 1922:

Section 4(1)(b)(i) states that the total income of any previous year includes all income, profits, and gains that accrue or arise or are deemed to accrue or arise to a person in the taxable territories during such year. The court had to decide whether the income that accrued during the accounting year but was relinquished beyond that period was liable to tax. The court referred to the definitions of "accrue" and "arise" from Murray's Oxford Dictionary and previous case law, concluding that income accrues when it becomes a present enforceable right.

3. The relevance of the timing of income relinquishment:

The court emphasized that the relinquishment of the accrued income beyond the accounting period does not exempt it from tax liability. The income had already accrued during the accounting year, and subsequent waiver did not affect its assessment. The court distinguished this case from others where the relinquishment occurred within the accounting year based on a bilateral agreement.

4. The impact of bilateral agreements on income accrual and taxability:

The court analyzed the decision in Commissioner of Income-tax v. Shoorji Vallabhadas and Company, where the relinquishment of commission was based on a bilateral agreement made within the accounting year. The court noted that in the instant case, there was no evidence of a bilateral agreement during the accounting year. The relinquishment was made unilaterally by the assessee beyond the accounting period, and thus, the income had already accrued and was taxable.

5. The applicability of precedents set by higher courts, including the Supreme Court:

The court referred to various Supreme Court decisions, including E.D. Sassoon and Co. Ltd v. Commissioner of Income-tax and Commissioner of Income-tax v. K.R.M.T.T. Thiagaraja Chetty & Co., which established that income accrues when it becomes due, regardless of whether it is received or not. The court concluded that the relinquishment of income beyond the accounting year does not affect its taxability, as the income had already accrued during the relevant period.

Conclusion:

The court held that the unrealized income of Rs. 29,000 was liable to assessment of tax because it accrued during the relevant accounting year, ending on July 5, 1951. The relinquishment of income beyond the accounting year by resolutions in shareholder meetings did not exempt the assessee from tax liability. The court emphasized that the right to receive income must come into existence in the relevant previous year for it to be taxable. The question was answered in the affirmative, and the applicant was ordered to pay the costs to the respondent.