1971 (10) TMI 5 - SC - Income Tax

Unilateral relinquishment of managing agency commission after its accrual - appellant could claim deduction of the amounts under section 10(2)(xv) of the Act if the amounts had represented an expenditure laid out or expended wholly and exclusively for the business of the appellant - nothing to show that the amounts were relinquished for the purpose of the appellant s business

Summary

Issues:
1. Whether the relinquished managing agency commission is taxable as income for the appellant?
2. Whether the relinquished amount can be claimed as a permissible expenditure under section 10(2)(xv) of the Indian Income-tax Act?

Detailed Analysis:
The judgment addressed two Civil Appeals concerning the tax treatment of a managing agency commission relinquished by the appellant for assessment years 1956-57 and 1957-58. The appellant, a limited company, was the managing agent of a subsidiary company and entitled to fixed office allowance and commission based on profits. The commission was due annually on December 31st and payable after the managed company's accounts were approved. The appellant relinquished the commission after it became due but before it was payable, citing the managed company's losses as the reason.

Regarding the first issue, the court analyzed the accrual of income under section 4(1)(b)(i) of the Act, emphasizing that income accrues when it becomes due, irrespective of actual receipt. The court noted that the appellant used the mercantile accounting system, where income is recognized when legally due, supporting the tax liability for the relinquished commission. Citing precedent cases, the court held that relinquishment after income accrual does not negate tax liability, as the income had already vested with the appellant.

Concerning the second issue, the court examined if the relinquished amount could be claimed as a permissible expenditure under section 10(2)(xv) of the Act. The court highlighted that for such a claim, the expenditure must be wholly and exclusively for the appellant's business. Since the relinquishment was not for commercial expediency or business advancement, the court agreed with the High Court's decision that the appellant's case did not qualify for the deduction under section 10(2)(xv).

In conclusion, the court dismissed the appeals, upholding the tax liability on the relinquished commission and denying the deduction claim under section 10(2)(xv). The judgment emphasized the distinction between accrual and receipt of income, affirming that relinquishment post-accrual does not absolve tax liability.