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TMI Blog1975 (4) TMI 131X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal's finding that the appellants (respondents in this case) were being assessed on cash basis in the prior years? (2) Whether on the facts and in the circumstances 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? The assessee is a registered firm (hereinafter referred to as the firm ) consisting of K.R.M.T.T. Thiagaraja Chetty and his two sons. The firm is the managing agent of Shri Meenakshi Mills, Ltd. (hereinafter referred to as the company ) owning a spinning mill at Madura. The firm also conducted insurance business and the business of ginning cotton in a ginning factory at another place. Under the terms of the agreement the managing agents were entitled to a remuneration of ₹ 1,000 per mensem and a commission of percent. on all purchases, 1 per cent. on all sales and 10 per cent. commission on the net profits of the mills before allowing for depreciation. The firm had plenary powers of management of the affairs of the company subject to general supervision of the directors. It was to have charged and custody on behalf of the company of all th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se. The Income-tax Officer held that the firm followed the mercantile method of accounting and not the cash basis and that the income having accrued became assessable whether received or not. The actual amount payable to the firm in accordance with the terms and conditions of the agreement for the year 1942-43 was not disputed. The Appellate Assistant Commissioner confirmed the assessment and dismissed the appeal of the assessee. The Commissioner upheld the view that the income was determined on the mercantile basis and that the income had accrued or arisen to the assessee within the meaning of Section 4(1)(b)(i) of the Income-tax Act, and the mere fact that the amount was put in the suspense account did not alter the fact that the income had accrued to the firm. Upon the matter being carried further in appeal by the assessee, the Tribunal held that the income had not accrued to the firm and that the amount should be excluded from taxation as not having been received during the accounting year. The two questions aforementioned were then referred at the instance of the Commissioner by the Tribunal to the High Court. As already stated, the opinion on the first question was unan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich there was a ledger containing entries relating to the remuneration and commission paid in cash to the firm. The sum of ₹ 2,26,850-5-0 was debited as a revenue expenditure of the company as having been paid to the firm in the books of accounts of the company kept by the firm and was also allowed as a deduction in computing the profits and gains of the company for the purposes of income-tax for 1941-42. The fact that certain moneys were drawn in cash by the firm from time to time does not necessarily lead to the inference that the firm kept its accounts on a cash basis. Any one familiar with commercial transactions knows that even in accounts kept on a mercantile basis there can be entries of cash credits and debits. We see no flaw in the conclusion reached by the High Court on the first question. The next question that falls to be determined is whether the sum of ₹ 2,26,850-5-0 was part of the profits and gains which had accrued to the firm during the accounting year 1941-42. The undisputed facts are that the amount in question was the commission earned by the firm as managing agents of the company. In the books of the company maintained by the firm the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me, profits and gains shall be computed for the purposes of both those sections in accordance with the method of accounting regularly employed by the assessee, but there is a proviso that, if no method of accounting has been regularly employed, or if the method employed is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine. The Income-tax Officer in computing the income of the assessee would have followed the mercantile system or the cash basis whichever was employed by the assessee. There is some evidence, though not conclusive, on the record that the assessee followed the mercantile system of accountancy. This appears from the assessment orders filed in the case, but apart from this, the Income-tax Officer had full authority under the proviso to compute the profits upon such basis and in such manner as he thought fit. The case of St. Lucia Usines and Estates Company, Ltd. v. Colonial Treasurer of St. Lucia* was relied upon strongly before us as it was in the High Court in support of the contention th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder that clause the tax was limited to any interest of money whether the same is received and payable half-yearly or any shorter or more distant period. The learned Master of the Rolls observed: If the interest on the legacy in this case has not arisen to the respondent, if he had not become the dominus of this sum, if it does not lie to his order in the hands of his agent, can it be said that it has arisen to him? I think the answer definitely upon the facts must be: No, it has not. Lord Maugham, L.J., put the position thus: I think in the present case two circumstances may be accurately stated in regard to the sum of ? 40,000 which it is said can be brought into charge. The first is that the sum of ? 40,000 was not during the year of assessment a debt due by the executors to Mr. Dewar, and secondly, that the sum in question may never be paid or received at all. The case of Commissioner of Taxes v. The Melbourne Trust, Limited* turned on the construction of the charging section in the Income Tax Act, 1903, of Victoria, whereby a company was liable to pay tax upon the profits earned in or derived in or from Victoria........... In this case the surplus realized by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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