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TMI Blog1960 (4) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... 0, the managing agency commission which accrued to the assessee company amounted to ₹ 1,7,644-40. It appears that after 31st March, 1950, it surrendered at the instance of the managed company ₹ 97,000 out of the managing agency commission which accrued to it. The Income-tax Officer making the assessment on the assessee company for the year 1950-51 did not interfere with the surrender and assessed the assessee company on December 28, 1950 in a sum of ₹ 23,845 which included ₹ 20,644-4-0 only on account of the managing agency commission. 3. On March 6, 1952, the Income-tax Officer with the sanction of the Commissioner of Income-tax issued a notice to the assessee company under section 34(1) of the Act. When these proceedings under section 34(1) were pending the successor of the Commissioner of Income-tax who had sanctioned the reopening of the assessment issued on December 15, 1952, a notice as required by section 33B(1) of the Indian Income-tax Act and by his order dated 20th December, 1952, directed the Income-tax Officer to include in the assessee company's total income, the surrendered commission of ₹ 97,000. A copy of the Commissioner's o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncluded in the assessee company's income. 9. The material on the basis of which the assessee company claimed that the entire amount surrendered should be allowed as a revenue expenditure under section 10(2)(xv) may now be briefly indicated. 10. A chart was produced before the Tribunal showing that this was not the first time that the assessee company had surrendered a part of the managing agency commission. A copy of the chart is annexure D and forms part of the case. A copy of the Tribunal's order in another case was also produced before the Tribunal. A copy of that order is annexure E and forms part of the case. A copy of the resolution passed by the board of directors of the Gujarat Paper Mills Ltd. is annexure F and forms part of the case. In connection with this resolution, it was urged by the Departmental Representative that the surrender was subsequent to the year of account of the assessee and, therefore, the claim of the assessee company could not be sustained for the assessment year 1950-51. We may add that the year of account of the assessee company and the Gujarat Paper Mills Ltd. was the same. 11. The questions of law that, therefore, arise are: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o him. The assessee company is the managing agent of the Gujarat Paper Mills Ltd., Ahmedabad. The assessment year was 1950-51, and the relevant accounting year was April 1, 1949, to March 31, 1950. It earned during the accounting year a commission of ₹ 1,17,644-4-0. At the instance of the managed company, the assessee company surrendered ₹ 97,000. The Income-tax Officer accepted this position, but the Commissioner of Income-tax disapproved of the same and served a notice on the assessee company under section 33B(1). He passed an order directing the Income-tax Officer to include the amount of ₹ 97,000 in the assessee company's total income for the assessment year 1950-51. The matter was carried to the Tribunal and one of the contentions urged on behalf of the assessee company was that clause 5 of the managing agency agreement authorised the managed company to cut down a protion of the commission earned by the managing company and that, therefore, the surrender of ₹ 97,000 was justified. Clauses (5) and (6) of that agreeement may be set out in full: (5) The agents' firm shall receive and the company hereby agrees to pay to the said agents a comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore us that the questions require some recasting though on different considerations. It will be convenient to do so after we have examined the arguments on either side on the points urged before us. The reference came up for hearing before Chagla, C.J., and Tendolkar, J., on February 24th, 1955. It appears that the question whether the amount forgone by the assessee company was on the ground of commercial expediency or not was regarded as one of importance by the court and a supplemental statement of the case was felt necessary. In the judgment of the learned Chief Justice, it is mentioned: The second question arises out of the surrender by the assessee of a sum of ₹ 97,000 which was part of the managing agency commission earned by the assessee and the assessee claimed this deduction as permissible under section 10(2)(xv) of the Act. The Tribunal has held that this was not a permissible deduction, but no facts are set out which led the Tribunal to come to this conclusion. Now, what is necessary to be considered is whether this sum of ₹ 97,000 was given up for reasons of commercial expediency. If the amount was given up for reasons of commercial expediency, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... naged company at a meeting held on 7th December, 1950. The material part of that resolution is as under: The agents placed before the board the balance sheet and the particulars of profit and loss account audited by the auditors together with their report for the year April 1, 1949, to March 31, 1950, and after explanation and discussion the same were approved and it was decided that the directors should sign the balance sheet and the profit and loss account in token of such approval. Accordingly the directors signed the same and therefore it was resolved that in respect of the said balance-sheet and particulars of the profit and loss account which show the amount of profit which now comes to ₹ 57,839-12-7 by reason of the agents company having given up for the benefit of the mills company ₹ 97,000 out of their commission and adding thereto ₹ 37,690-1-6 being the balance brought forward from the last year the total profit comes to ₹ 95,799-14-3 and it is recommended to the shareholders that the same be allocated as follows. Mr. Joshi has asked us to take on record a copy of a similar resolution of the board of directors of the assessee c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to decide the second contention of Mr. Palkhivala and we have not heard counsel for the Revenue on the same. In our opinion, the first contention of Mr. Palkhivala is substantial and must prevail. Counsel for the Revenue does not question the importance of what he describes as the doctrine of real income. His contention strongly urged before us, however, is that a party who follows the mercantile system of account--there is no dispute that the assessee company follows the mercantile system of account--cannot avail of the benefit of the doctrine where, for instance as in the case before us, the income of managing agency commission is credited in the books in one year and has been surrendered by him in the next year. In such a case, his income accures in the year in which it is entered in the books and if the surrender is not made and entered in the same year, no question of real income can arise. It is said that the surrender can, if at all, be taken into consideration only in the year in which it is made, i.e., in the next accounting year, and according to learned counsel for the Revenue, in that next year also, he would not be able to avail of the same as an item of expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A fair interpretation of the transaction and the situation would lead to a preferable and, if we may say so, a correct solution than sheer adherence to one rule and discounting of the other. If this be the true approach, and we feel little doubt that it is, the result cannot be said to flow from any non-conformity with the rule that income-tax is annual in its structure and organisation. One merit of this approach would be the avoidance on the one hand of any a priori construction of a legal situation for the purpose of attracting tax to it and on the other allowing escape from liability. After all, each case must depend and its decision turn on its own facts and circumstances and that is how we prefer to deal with this case. The leading facts to our mind are these. The assessee company had surrendered a part of its managing agency commission for a series of years. A chart showing such surrender is no the record and forms part of the case. The managing agency agreement, the material and relevant part of which we have already set out, in terms contains a provision affecting the quantum of the commission payable by the managed company to the managing company. The proviso must be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the question whether the assessee had become entitiled to the sums or not. It may also be mentioned that in that was we were dealing with and assessee who followed the mercantile system of account. The crucial question before us, therefore, is whether the two facts, one the amount of ₹ 1,17,644-4-0, which would have become payable to the managing company but for surrender and the factum of surrender, are to be isolated or treated as of cogency in determining the actual accrual of income, by which we mean the real income of the assessee company. If the fact of forgoing or surrendering the amount of ₹ 57,000 odd is to be regarded as of cogency in the context of the present point of real income and if it be remembered that the surrender was made at the time of ascertaining the quantum of the commission payable to the assessee company and further if it be remembered, as how found by the Tribunal, that the surrender was made bona fide and on grounds solely of commercial expediency, it seems very difficult to us to see how the Revenue is justified in contending that the real income of the assessee was something different than the amount of ₹ 20,000, which was shown ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case before us. It may also be noticed that the proposition which found favour with their Lordships carried with it certain qualifications and one of those qualifications related to the existence of any condition about the making up of the account and that aspect of the matter was left open in express terms. Now the argument of Mr. Palkhivala before us is that having regard to the facts and circumstances of the case before us it cannot be said that any income--any real income--accrued to the assessee company till the accounts were made for the purpose of satisfying the requirements of clause (5) of the managing agency agreement and particularly the proviso to the same. There is, in our opinion, force in this argument. Another facet of the same argument for the assessee company has been presented in this manner. If the year in which income was earned is chosen as the year of taxability, the subsequent settlement of the liability must relate back to the year in which the income was earned. Then, it is said that the right of the assessee company to receive the commission arose only after the accounting year and only when accounts were made up in December, 1950. The crux of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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