1953 (10) TMI 7 - SC - Income Tax

Whether there is any material for the Tribunal s finding that the appellants (respondents in this case) were being assessed on cash basis in the prior years ? Whether on the facts and in the circamstances of the case the Appellate Tribunal s finding that the sum of ₹ 2,26,850 could not be assessed for the assessment year 1942-43 is correct in law ? Held that - The sum had irrevocably entered the debit side of the company s account as a disbursement of managing agency commission to the firm and had been appropriated to the firm s dues and the same sum could not again be entered in a suspense account at a later date. The sum, therefore, belonged to the firm and had to be included in the computation of the profits and gains that had accrued to it unless the firm had regularly kept its accounts on a cash basis, which is not the case here. Appeal allowed.

Issues Involved:
1. Whether there is any material for the Tribunal's finding that the appellants were assessed on a cash basis in prior years.
2. Whether the Tribunal's finding that the sum of Rs. 2,26,850 could not be assessed for the assessment year 1942-43 is correct in law.

Issue-Wise Detailed Analysis:

1. Material for Tribunal's Finding on Cash Basis Assessment:
The first issue concerns whether there was any material for the Tribunal's finding that the firm was assessed on a cash basis in prior years. Both judges of the High Court unanimously held against the assessee, concluding that there was no material for the Tribunal's finding that the firm was being assessed on a cash basis in previous years. The High Court found that the Tribunal's findings for 1942-43 and 1943-44 were mutually inconsistent. For 1943-44, the Tribunal had held that the sum of Rs. 2,20,702 was assessable to income-tax even though it was merely credited to the firm's account in the company's books and not drawn by the firm.

The firm contended that the Tribunal's finding, being a finding of fact, should not have been interfered with by the High Court. However, the High Court determined that the question related to the existence of any material for the finding, which is a question of law. The High Court applied its mind to the precise question and concluded that there was no material for the finding that the firm was assessed on a cash basis in prior years. The High Court's decision was supported by the fact that the firm kept no separate books of accounts other than those of the company. The sum of Rs. 2,26,850-5-0 was debited as a revenue expenditure of the company and allowed as a deduction in computing the company's profits and gains for income-tax purposes for 1941-42. The High Court found no flaw in the conclusion that the firm did not keep its accounts on a cash basis.

2. Accrual of Income and Assessability for Assessment Year 1942-43:
The second issue pertains to whether the sum of Rs. 2,26,850-5-0, which was the commission earned by the firm as managing agents of the company, could be assessed for the assessment year 1942-43. The Tribunal had excluded this amount from taxation, holding that the income had not accrued to the firm since it was not received during the accounting year. The High Court, however, found that the amount had accrued to the firm. The company had made considerable profit in the assessment year 1942-43, and the firm became entitled to the commission. The firm did not show this sum in its return, relying on a resolution by the company's board of directors to keep the amount in suspense due to an outstanding debt owed by the firm to the company.

The Income-tax Officer held that the firm followed the mercantile method of accounting, making the income assessable whether received or not. This view was upheld by the Appellate Assistant Commissioner and the Commissioner. The High Court found that the income had accrued to the firm, and the mere fact that the amount was put in a suspense account did not alter this fact. The resolution of the directors showed that the amount was treated as belonging to the firm, although its payment was deferred due to a pending dispute.

The High Court noted that the computation of profits could not suspend their accrual. The firm's commission was quantified after certain deductions, but this did not mean that the commission had not accrued. The High Court concluded that the commission accrued on the same date as the company's profits, i.e., 31st March.

Conclusion:
The Supreme Court accepted the view taken by Viswanatha Sastri, J., and allowed the appeals. The respondent was ordered to pay the costs of the Commissioner both in the Supreme Court and before the High Court. The appeals were allowed, affirming that the sum of Rs. 2,26,850-5-0 had accrued to the firm and was assessable for the assessment year 1942-43.

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