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Issues Involved
1. Liability for tax on managing agency commission. 2. Apportionment of income between the assignor and assignee. Detailed Analysis 1. Liability for Tax on Managing Agency Commission The primary issue in this case is whether the firm of Messrs. Agarwal & Co., to whom the managing agency was transferred, is liable to pay tax on the entire managing agency commission of Rs. 27,94,504 for the calendar year 1943, or whether the tax liability should be apportioned between Messrs. Agarwal & Co. and E.D. Sassoon & Co. Ltd. The court examined the managing agency agreement dated February 24, 1920, which stipulated that the managing agents would receive a commission of 7.5% per annum on the annual net profits of the company. The commission was to be due yearly on March 31st and payable after the annual accounts were approved by the shareholders. The agreement allowed the firm to assign the managing agency and their earnings under the agreement. The Department argued that no commission accrued to the managing agents until the end of the calendar year and the ascertainment of profits. Therefore, they contended that the entire commission should be taxed as the income of Agarwal & Co., who were appointed managing agents from December 1, 1943. The court, however, found a fallacy in this argument. It emphasized that the crucial question is not merely when the income accrues, but whose income it is that accrues. The court noted that receipt alone does not attract tax; it must be receipt as "income." The court clarified that if an income is assigned, it is the assignor, not the assignee, who is liable to pay tax on that income. The assignee's title to the income arises from the assignment, not from earning it. Therefore, the court concluded that the income in question was earned by both E.D. Sassoon & Co. Ltd. and Agarwal & Co., and it should be apportioned between them. 2. Apportionment of Income Between the Assignor and Assignee The court noted that E.D. Sassoon & Co. Ltd. worked as managing agents for 11 months, while Agarwal & Co. worked for one month. The commission was the result of services rendered by the managing agents throughout the year. The court emphasized that the mere fact that the commission was ascertained at the end of the year does not mean it was solely the income of Agarwal & Co. The court referenced various authorities cited by Mr. Joshi, which dealt with the time and place of accrual of income. However, the court found these cases irrelevant to the issue at hand, which was about who earned the income. The court reiterated that the income was earned by both E.D. Sassoon & Co. Ltd. and Agarwal & Co., and it should be apportioned accordingly. The court also referenced an English case, Parkins v. Warwick, to illustrate that the person liable to tax is the one who earned the income, not the one to whom it was assigned. In this case, E.D. Sassoon & Co. Ltd. had earned part of the income by working as managing agents for 11 months, and they had assigned the right to receive the commission to Agarwal & Co. Therefore, the court concluded that the income should be apportioned between E.D. Sassoon & Co. Ltd. and Agarwal & Co. based on the period each served as managing agents. The Tribunal's apportionment was accepted as it was based on the correct principle. Conclusion The court answered the references in the affirmative, indicating that the managing agency commission should be apportioned between E.D. Sassoon & Co. Ltd. and Agarwal & Co. based on their respective periods of service. The Commissioner was ordered to pay costs in Reference No. 24, and the assessee was ordered to pay costs in Reference No. 27.
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