1971 (10) TMI 5 - SC - Income Tax

Tax liability on the Unilateral relinquishment commission - deduction of the amounts under section 10(2)(xv) - Accrual of income under section 4(1)(b)(i) - Meaning of word accrue - HELD THAT -The dictionary meaning of the word accrue is to come as an accession increment or produce to fall to one by way of advantage to fall due . The income can thus be said to accrue when it becomes due. The postponement of the date of payment has a bearing only in so far as the time of payment is concerned but it does not affect the accrual of income. The moment the income accrues the assessee gets vested with the right to claim that amount even though it may not be immediately. There also arises a corresponding liability of the other party from whom the income becomes due to pay that amount. In the present case the amounts of income for the two years in question were given up unilaterally after they had accrued to the appellant-company. As such the appellant could not escape the tax liability for those amounts. Further we find that the 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. There is however nothing to show that the amounts were relinquished for the purpose of the appellant s business. The present is not a case wherein the amounts due to the assessee were given up on grounds of commercial expediency or for advancing the business interests of the assessee. The conclusion of the learned judges of the High Court in this respect in our opinion is well-founded. The result is that the appeals fail and are dismissed but in the circumstances without costs. Appeals dismissed.

Summary

The judgment by the Supreme Court addressed two Civil Appeals concerning the assessment years 1956-57 and 1957-58 related to a managing agency agreement between an appellant limited company and a subsidiary company. The core legal issues considered were whether the amounts relinquished by the appellant were taxable as income and if the relinquished amounts could be claimed as permissible expenditure under the Indian Income-tax Act.The Court analyzed the managing agency agreement's terms, specifically clause 2(e) determining when the commission became due and payable to the appellant. The Court emphasized that income accrues when it becomes due, irrespective of actual receipt, as per section 4(1)(b)(i) of the Act. The Court highlighted the distinction between accrual and receipt of income, noting that the mercantile system of accounting recognizes income when legally due, even if not yet received.Referring to precedent, the Court cited Commissioner of Income-tax v. Shoorji Vallabhdas and Co., emphasizing that income tax is levied on income that actually accrues. The Court differentiated between cases where income is given up before or after accruing, stating that in this case, the amounts were relinquished after accruing, thus maintaining tax liability.Regarding the second issue, the Court assessed whether the relinquished amounts could be claimed as permissible expenditure under section 10(2)(xv) of the Act. The Court concluded that the relinquishment was not for the appellant's business purposes or commercial expediency, thus not meeting the criteria for deduction under the Act.In the final determination, the Court dismissed the appeals, upholding the tax liability on the relinquished amounts and rejecting the claim for deduction under section 10(2)(xv) of the Act. The judgment was delivered without costs.In summary, the Court held that the relinquished amounts were taxable income as they had accrued to the appellant, despite not being received, and that the relinquishment did not qualify as permissible expenditure under the Act.