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TMI Blog1974 (1) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... ka Marketing Ltd., appointing the latter as the selling agents for the sale of the products of the former as per terms incorporated in the agreement, a copy of which is annexure " A " to the statement of the case. The agent-company was entitled to a commission of 1 per cent. on the sales of sugar and 2 1/4 per cent. on the sales of distillery products. The commission was to be calculated on the gross invoice value of the products. The assessee had to consign, transmit and deliver to the selling agents or at their request to other parties such quantities of the products manufactured by it for which the agent-company might place orders from time to time. The accounts contained details of the commission credited to the selling agents month by month. In the previous year in question the commission payable on sales of sugar came to Rs. 1,82,690 and Rs. 22,257 on sales of distillery products. On August 2, 1954, just two days after the closing of the previous year, the assessee-company wrote a letter to the agent-company, a copy of which is annexure " B " to the statement of the case, stating therein that in view of the poor working result of the company found during the year it was diffi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee-appellant, and it was contended that the amounts, therefore, ought to have been allowed as deductions in the assessment of the assessee-company. I may state here that the Tribunal attached no importance to this aspect of the matter and rightly so. We were further informed at the Bar that the addition of the two amounts in the assessment of Ashoka Marketing Ltd. is sub judice and is under challenge in further proceedings. Be that as it may, the question for consideration in this case is whether the assessee could claim a a deduction of the amounts in question as selling commission for the assessment year 1955-56. The principles of law which are deducible from the decided cases, many of which will be noticed in this judgment hereinafter, are these : (1) In a mercantile system of accounting actual cash receipt of income is not necessary for the purpose of taxing a particular item as income ; it is sufficient if the income has accrued during the period in question. Similarly, if the liability to a particular sum has been incurred during the accounting year and if otherwise the sum is allowable as a revenue expense, then whether the sum has been actually paid or not is imma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly agreed that the position might be review at the end of the year. The agreement was also sought to be amended as per draft enclosed with the letter. It is not quite correct to say that the amendment of the agreement was de hors the remission of the commission amount for the year in question : it was a part and parcel of the same negotiations and the variation of the agreement. The suggestion in the letter, therefore, was that the agent-company might charge from the assessee-company for the year ending July 31, 1954, the actual expenses or commission, brokerage, etc., expended by the former. This proposal was accepted by the board of directors of Ashoka Marketing Ltd. by their resolution dated August 11, 1954 (annexure "C"). This also talks about the revision of the agreement dated February 25, 1949, and I have no doubt in my mind that it also relates to the variation for the year in question. Of course, the proposal for the month of August, 1953, does not seem to have been accepted, as the acceptance was for the period of one year commencing from September 1, 1953, only. But that is of no consequence, because the whole of the amount is covered by the period commencing from Septem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scope of this reference to express any opinion in that regard. The Tribunal has relied upon a decision of the Bombay High Court in Commissioner of Income-tax v. New Jehangir Vakil Mills Co. Ltd. and referred to two decisions of the Supreme Court in Commissioner of Income-tax v. Chamanlal Mangaldas & Co. and Commissioner of Income-tax v. Shoorji Vallabhdas and Co. I shall presently deal with them as also with a few more. However, I want to emphasise at this stage that the Tribunal does not seem to have expressed its view on the footing that the remission by the agent-company was not on the ground of commercial expediency. As I read the order of the Tribunal, it seems to have accepted the stand taken on behalf of the assessee. The facts of the case of New Jehangir Vakil Mills Co. Ltd. were that a total liability to the tune of Rs. 4,00,000 and odd payable as agent's commission was incurred by the assessee-company. The managing agents agreed to forgo a sum of Rs. 1,00,000 and odd out of that amount of remuneration. Ultimately, the net amount received by them was Rs. 3,00,000 and odd. In the balance-sheet of the company one-third of the total commission was shown as "voluntarily give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the managing agents to claim full remuneration had been taken away as from January 1, 1950, and it was not a voluntary relinquishment on the part of the managing agents. Therefore, what was taxable was the amount of Rs. 1,00,000 and odd and not the other lakh. The facts of the other civil appeal which was before the Supreme Court were similar. The discussion at page 13 would show that the amounts payable under the agreement could be determined at the end of the year. An entry to that effect had been made on December 31, 1950, but the directors decided that they should be paid a lakh less, and the balance only was credited to their account. In such a situation it was inferred that the right of the managing agents to receive the commission on its accrual was at the end of the accounting year when all the sales were and could be added up and the accounts were made up. It has, therefore, been said: " Thus, the amount which accrued or which they were entitled to receive was the latter sum, i.e., Rs. 1,05,575, and not what would have been payable had there been no variation in, and modification of, the agreement. " Dr. Pal, appearing for the assessee-company, submitted that in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its turn, had relied upon its earlier decision in the case of Commissioner of Income-tax v. Chamanlal Mangaldas & Co. This decision of the Bombay High Court was approved by the Supreme Court in the case of Chamanlal Mangaldas & Co. The learned judge said at page 148: " Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. This is exactly what has happened in this case, at it happened in the Bombay case Commissioner of Income-tax v. Chamanlal Mangaldas & Co., which was approved by this court. Here too, the agreements within the previous year replaced the earlier agreements, and altered the rate in such a way as to make the income different from what had been entered in the books of account. A mere book-keeping entry cannot be income, unless income has actually resulted, and in the present case, by the change of the terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oner of Income-tax, it is no doubt true that by resolution of the board of directors of the managing agency company, the assessee relinquished its commission on sales and office allowance, because the managed company had been suffering heavy losses in the past years. This was done after the commission had become due but before it had become payable in terms of clause 2(e) of the agreement. The Tribunal held that the relinquishment by the assessee of its remuneration after it had become due had no effect and also rejected its claim that the amounts relinquished were allowable under section 10(2)(xv) of the Act. The Supreme Court affirmed the view of the High Court and held that the commission had accrued to the assessee at the end of the previous years and the fact that the payment had been deferred till after the accounts had been passed in the meetings of the managed-company did not affect the accrual of the income. The amounts of income for the two years were given up unilaterally by the assessee after it had accrued to it ; therefore, it could not escape liability to tax on those amounts. Moreover, the amounts were not relinquished for the purpose of the assessee's business and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I have no doubt in my mind that what has to be allowed as a business expense is either the actual amount expended or the real liability incurred. But a liability incurred which in law justifiably could be and was given a go-by was not a real liability of the expenditure; it was a hypothetical liability and became non-existent on variation of the terms of the agreement by mutual consent of the parties for the purpose of commercial expediency. That being so, I have no doubt in my mind that the amount was wrongly allowed by the Tribunal under section 10(2)(xv) of the Act. Learned counsel for the assessee submitted that sub-section (2A) was introduced in section 10 with effect from April 1, 1955. Therefore, the subsequent remission brought about in the accounting year commencing from August 1, 1954, which would correspond to the assessment year 1956-57, could be taxed in the hands of the assessee-company under section 10(2A) of the Act. I am not called upon to decide this question in this case as it does not arise out of the Tribunal's order. I may, however, add that sub-section (2A) seems to be attracted to a case where after allowance or deduction had been made in the assessment for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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