1954 (5) TMI 2 - SC - Income Tax

Whether in the circumstances of the case the managing agency commission was liable to be apportioned between the Sassoons and their respective transferees in the proportion of the services rendered as managing agents by each one of them? Held that - The whole difficulty has arisen because the High Court could not reconcile itself to the situation that the transferees had not worked for the whole calendar year and yet they would be held entitled to the whole income of the year of account ; whereas the transferors had worked for the broken periods and yet they would be held disentitled to any share in the income for the year. If the work done by the transferors as well as the transferees during the respective periods of the year were taken to be the criterion the result would certainly be anomalous. But the true test under Section 4(1)(a) of the Income-tax Act is not whether the transferors and the transferees had worked for any particular periods of the year but whether any income had accrued to the transferors and the transferees within the chargeable accounting period. It is not the work done or the services rendered by the person but the income received or the income which has accrued to the person within the chargeable accounting period that is the subject-matter of taxation. That is the proper method of approach while considering the taxability or otherwise of income and no considerations of the work done for broken periods or contribution made towards the ultimate income derived from the source of income nor any equitable considerations can make any difference to the position which rests entirely on a strict interpretation of the provisions of Section 4(1)(a) of the Income-tax Act. The result therefore is that the question referred by the Tribunal to the High Court must be answered in the negative. All the appeals will accordingly be allowed.

Note:- ICDS - Accrual basis of Accounting - Accrual of income versus Receipt of income

Issues Involved:
1. Whether the managing agency commission was liable to be apportioned between the assignor company and the assignee.
2. Whether any income had accrued to the assignor company on the dates of the respective transfers of the managing agencies.
3. Whether the assignment of managing agency rights transferred the right to future income to the assignee.
4. Whether the assignee or assignor is liable to pay tax on the income received after the assignment.
5. Whether Section 36 of the Transfer of Property Act applies to the apportionment of the commission.
6. Whether Section 26(2) of the Indian Income-tax Act applies to the case.

Analysis:

1. Whether the managing agency commission was liable to be apportioned between the assignor company and the assignee:
The High Court held that the managing agency commission for the year accrued as the joint income of both the assignor and the assignee and was thus apportionable between them. This was based on the understanding that the entire remuneration for the year accrued on the completion of the year, i.e., on the 31st December 1943, and that when it accrued, it accrued to both the assignor and the assignee together.

2. Whether any income had accrued to the assignor company on the dates of the respective transfers of the managing agencies:
The argument was made that no part of the managing agency commission for the broken periods of 1943 was earned by the assignor company (Sassoons) and that the contract of employment was an entire and indivisible contract. Therefore, the Sassoons had not earned any commission for the broken periods and were not liable to tax in respect of the same. The Supreme Court agreed with this argument, stating that the Sassoons did not have any vested right to the income until the completion of the year, and thus no income had accrued to them on the dates of the respective transfers.

3. Whether the assignment of managing agency rights transferred the right to future income to the assignee:
The High Court held that the assignment operated to transfer the assignor's share of the future income to the assignee. This was based on the principle that the assignment of a future right is valid and becomes operative by attaching itself to the right when it springs up. The Supreme Court, however, disagreed, noting that the assignor had not earned any income for the broken periods, nor had any income accrued to them, and what was transferred to the assignee was merely the expectancy of earning a commission.

4. Whether the assignee or assignor is liable to pay tax on the income received after the assignment:
The High Court held that the income received by the assignee included the assignor's share of the income, which continued to be the taxable income of the assignor. The Supreme Court, however, concluded that since no income had accrued to the assignor at the dates of the transfers, the income received by the assignee was entirely their own and not attributable to the assignor.

5. Whether Section 36 of the Transfer of Property Act applies to the apportionment of the commission:
Section 36 of the Transfer of Property Act, which deals with the apportionment of rents, annuities, pensions, dividends, and other periodical payments, was considered. The Supreme Court noted that this section applies in the absence of a contract or local usage to the contrary and is relevant only as between the transferor and the transferee. Since the deeds of assignment and transfer executed by the Sassoons in favor of the transferees transferred all the rights and benefits under the agency agreement to the transferees, there was no question of apportionment of any commission between the Sassoons and the transferees.

6. Whether Section 26(2) of the Indian Income-tax Act applies to the case:
Section 26(2) of the Indian Income-tax Act, which deals with the succession to a business, was considered. The Supreme Court concluded that this section does not help the transferees because it is only when the person succeeded has acquired an actual share of the income, profits, or gains of the previous year that he is liable to tax in respect of it. Since no part of the commission had accrued to the Sassoons at the dates of the transfers, Section 26(2) was not applicable.

Conclusion:
The Supreme Court allowed the appeals, concluding that the Sassoons had not earned any income for the broken periods, nor had any income accrued to them. The income received by the transferees was entirely their own and not attributable to the Sassoons. Each party was ordered to bear their own costs.

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