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TMI Blog1960 (4) TMI 93X X X X Extracts X X X X X X X X Extracts X X X X ..... ation. We agree that it is incumbent on the Court to see that there is no departure on its part from any fundamental concept or principle of tax law. There is nothing, however in these axiomatic rules or anything formidable about them which militates against the simultaneous application of another basic principle of tax law which requires the Court -- cases of deemed income apart -- to see that ultimately it is the real income of the assessee which alone is brought to tax and not any artificial or notional income that may be said to have accrued to him. 2. The assessec company is the Managing Agent of The Gujurat Paper Mills Ltd. Ahmedabad. The assessment year was 1950-51 and the relevant accounting year was 1-4-1949 to 31-3-1950. 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 that position, but the Commissioner of Income-tax disapproved of the same and served a notice on the assessee company under Section 33-B(1). He passed an order directing the Income-tax Officer to include the amount of ₹ 97,000/- in the assessee company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee company could be allowed as a revenue deduction under Section 10(2)(xv) of the Act? (iii) If the answer to question (ii) is in the negative, whether the sum of ₹ 57,785/-(Rs. 97,000/- -- ₹ 39,215/-) could legally be included in the assessee company's total income for the assessment year ended 31st March 1950? Nothing has been said before us as to Question No. t on cither side and it will not be necessary for us to say anything about the same. As to Questions 2 and 3 learned Counsel both for the assessee company and the Revenue have stated before 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. 3. The Reference came up for hearing before Chagla, C. J. and Tendolkar, J. on 24th February 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 Case was folt necessary. In the judgment of the learned Chief Justice, it is mentioned: The second question arises o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to appreciate the arguments, ft is necessary to set out here some further facts which have bearing on the present controversy. In the Profits and Loss Account of the managed company, there is an entry of ₹ 20,644-4-0. The detail's of the entry there stated arc as under: To, Managing Agents Commission ... 1,17,644-4-0 Less given up... ... ... 97,000-0-0 _____________ 20,644-4-10. A resolution was passed by the Board of Directors of the Managed 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 Accounts audited by the Auditors together with their Report for the year 1-4-1949 to 31-3-1950, 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 singed the same and thereafter it was resolved that in respect of the said Balance Sheet and particulars of the Profit and Loss Account whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be arrived at without taking' into account the amount which was forgone by the assessee company. The second contention urged by Mr. Palkhiwalla is that the amount of ₹ 57,000/-odd had been given up by the assessee company on the ground of commercial expediency when the quantum of the entire amount of commission was determined and, therefore, it must necessarily be treated as an expenditure of the year of which the determined amount is taken as the income. It will not be necessary for us to decide the second contenlion of Mr. Palkhiwalla and we have not heard Counsel for the Revenue on the same. In our opinion, the first contention of Mr. Palkhiwalla is substantial and must prevail. 6. 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the circumstances of each case. Some propositions could be formulated but whether a general formula applicable to all circumstances could be hit on we rather doubt. 8. Though it may not be possible to prescribe a general formula which may successfully compose every conflicting situation, the position in law seems clear to us that in applying the two rules to particular transactions regard must be had to the true legal rights and the true situation. 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 ot 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. 9. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the principle of real income to the facts of this case. Incidentally, we may observe that we ourselves pointed out in the case of the Commr. of Income-tax v. Shoorji Vallabhclas and Co. that the question whether the income accrued or not is not a mere matter of cogency of the entries made in the account books of the assessee but is essentially one of substance and of the real nature of what happened; a mere book entry is not conclusive of the question whether the assessee bad become entitled to the sums or not. It may also be mentioned that in that case we were dealing with an assessee. who followed the mercantile system of account. The crucial question before us, therefore, is whether the two facts -- one the amount of Hs. 1,17,644-4-0 which would have become payable to the managing company but for the surrender and the faclum 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 surrend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d or the making up of the account, it might bo said with some justification, though we do not decide it; that the income has not accrued, but there is no such condition in the present case . Of course, these are weightly observations and we are dutifully bound to follow the principle there enunciated. But it may be mentioned that the observations are not made iu the context of real income for the question of real income did not arise for their Lordships' consideration as it does 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. 13. Now the argument of Mr. Palkhiwalla 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Joshi. It is said that the point about real income is totally a new point and there is not a word about it in the judgment of the Tribunal. Mr. Joshi has drawn our attention to the Order of the Tribunal. In our opinion, the Statement of the Case as well as the questions submitted by the Tribunal go to show that the point was raised by the asseSscc company. What we have got to see is whether a new contention which was not before the Tribunal is sought to be raised. It is not possible to say that such is tho position in the case before us. We may also mention that all the relevant and necessary facts are to be found in the Statement of the Case. Therefore, the argument that a new contention is sought to be raised by the assessee company must be negative. 18. We have already set out the questions referred to this Court by the Tribunal. Questions 1 and 2 will remain as they are. The 3rd question requires to be refrained. We shall to so as under: Whether the sum of ₹ 57, 785/- could legally be included in the assessee company's total income for the assessment year ended 31st March, 1950? Our answer to the question is in the negative. 19. In view of our answer to t ..... 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