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TMI Blog1976 (6) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... in the circumstances of the case, the Tribunal was justified in holding that the excess profits tax assessment made on the assessee-firm for the C.A.P. ended March 31, 1946, was not valid in law?" So far as questions Nos. 1 and 2 are concerned they were referred to at the instance of the assessee while question No. 3 was referred to at the instance of the revenue. At the outset we may state that even though the assessee has got question No. 1 referred to us it has not been pressed and it is not necessary for us to consider that question and answer the same. Narottam Morarjee Co., the assessee, is assessed as an unregistered firm at all material times. It was the managing agent of Scindia Steam Navigation Co. Ltd. (hereinafter referred to as "the managed company") under the agreement dated March 20, 1919. Under the terms of the agreement remuneration to the assessee was payable by way of commission at the rate of 10% on the annual net profits of the managed company after making all proper allowance and deductions from revenue for working expenses chargeable against profits. Though in the agreement it was provided that the commission shall be due and be paid to the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Profits Tax Act, 1940 (hereinafter referred to as "the Act "), it came to an end on March 31, 1946. So far as the managed company was concerned, in the income-tax and excess profits tax assessments the additional payments of Rs. 1,22,17,667 in 1945-46 and of Rs. 43,64,026 in 1947-48 were spread over earlier accounting periods and the managed company was also granted appropriate deductions in all those periods for payment of the managing agency commission to the assessee. Question No. 2 relates to the excess profits tax assessment of the assessee for the first four chargeable accounting periods. Before the Excess Profits Tax Officer the auditor who appeared on behalf of the assessee contended that out of the excess profits tax payable to be determined a portion of it should be kept in abeyance as the commission receivable is subject to adjustment of hire charges receivable from the Government of India for ships of the managed company that were requisitioned. As regards the future claim that was preferred with the Government, neither the assessee nor the auditor was in a position to give even the estimated figure for the claim made. Such being the position the Excess Profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... additional hire receipt in 1945-46 of Rs. 1,22,17,667 was spread over the preceding four accounting periods in the income-tax and excess profits tax assessments of that company. It was, however, urged on behalf of the assessee that its own commission could not be revised and its commission for the chargeable accounting periods should be determined on the basis of what was actually received by it during that period. It was urged that the assessee's liability for excess profits tax was not relatable to what happened to the excess profits tax assessment of the managed company or even to the deductions which were allowed to the managed company in its income-tax and excess profits tax assessments for payment of commission to the assessee. The Tribunal took the view that, so far as the managed company was concerned, the reopening of its accounts for the purpose of including the amounts of hire and compensation in 1945-46 and 1947-48 was justified. The actual payments by the Government in any particular year to the managed company were meant to be only as payments on account and subject to adjustment later. The contention of the assessee that the profits had not arisen during the account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of accounts has been permitted, have no application in India and in more than one decision of the Supreme Court the practice in this country of relying upon English decisions, where taxing statutes may be differently worded, has not been encouraged. He, therefore, submitted that, whatever may be the view that might have been taken in England, so far as India is concerned, such decisions will not afford a safe guide. He, therefore, submitted that it was not permissible to the Excess Profits Tax Officer to apportion the sum of Rs. 1,22,17,667 that was received by the managed company for the earlier four chargeable, accounting periods and on that basis to enhance the quantum of commission payable to the assessee under the managing agency agreement. Mr. Joshi, on the other hand, relied upon the fact that a right to receive commission in respect of the ships requisitioned by the Government had accrued in each chargeable accounting period and the mere fact that the payments were received later on will make no difference. His submission was that, as and when the payment was received, it would relate back to the year in which the requisition was made, because it was in that year that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of hire charges receivable from the Government in future was to be made, the assessment liability for such amounts which are likely to be received in anticipation of such future receipts should be kept in abeyance. He emphasised that it was even the case of the auditor on behalf of the assessee that a right to receive further amounts had already accrued though the quantification would only depend upon the actual amount that would be payable by the Government to the managed company. He, therefore, submitted that in view of such a plea being urged by the auditor of the assessee before the Excess Profits Tax Officer it is not even permissible to Mr. Kolah to urge that a right to receive future amounts did not accrue in each one of the relevant chargeable accounting periods. He has relied upon a few decisions of the English courts where similar questions have been considered and he has submitted that such decisions are on all fours with the facts of the present case and the finding of the taxing authorities to levy excess profits tax on the assessee in view of the receipt of the sum of Rs. 1,22,17,667 by the managed company from the Government in the year 1945-46 was fully justified. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be equal to fifty per cent. of that excess and shall in respect of any chargeable accounting period beginning after the date, be equal to such percentage of that excess as may be fixed by the annual Finance Act. Thus, for the four chargeable accounting periods, namely, July 1, 1941, to June 30, 1942, July 1, 1942, to June 30, 1943, July 1, 1943, to June 30, 1944, and July 1, 1944, to June 30, 1945, what is required to be determined is the amount by which the profits during each such chargeable accounting period exceed the standard profits. It is clear from the provisions of section 4(1) of the Income-tax Act, 1922, that subject to the provisions of that Act the total income of any previous year of any person includes all income profits and gains from whatever source derived which- "(a) are received or are deemed to be received in the taxable territories in such year by or on behalf of such person, or (b) if such person is resident in the taxable territories during such year,-- (i) accrue or arise or are deemed to accrue or arise to him in the taxable territories during such year, or (ii) accrue or arise to him without the taxable territories during such year or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requisition the managed company rightly proceeded on the footing that as and when the commission was received by it from the Government it was to be apportioned for the period for which its ships were requisitioned by the Government. In fact that was what was done and both the income-tax and excess profits tax assessments of the managed company have been revised after the sum of Rs. 1,22,17,667 was received by it in the year 1945-46, and the further sum Rs. 43,64,026 was received by it in the year 1947-48. So far as the assessee is concerned, it being the managing agent, its right to receive commission arises at the end of each accounting year and the payment of 10% by way of commission on the annual net profits is to be determined in the manner provided by the managing agency agreement. If the annual net profits of the managed company are adjusted in view of future receipts, then, naturally, automatically in view of the terms of the agreement, a right accrued to the assessee in each relevant accounting period to ask for the additional amount by reason of such adjustment. The right had accrued by reason of the terms of the managing agency agreement though the quantification thereo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the notices of enhancement is fully justified in view of such powers being conferred on him by sub-section (4) of section 17 of the Act. That such are the powers of the Appellate Assistant Commissioner is clear from the decision of this court in Narrondas Manordass v. Commissioner of Income-tax [1957] 31 ITR 909, 919 (Bom), where it is pointed out : "...the Appellate Assistant Cammissioner has been constituted a revising authority against the decisions of the Income-tax Officer ; a revising authority not in the narrow sense of revising what is the subject-matter of the appeal, not in the sense of revising those matters about which the assessee makes a grievance, but a revising authority in the sense that once the appeal is before him he can revise not only the ultimate computation arrived at by the Income-tax Officer but he can revise every process which led to the ultimate computation or assessment. In other words, what he can revise is not merely the ultimate amount which is liable to tax, but he is entitled to revise the various decisions given by the Income-tax Officer in the course of the assessment and also the various incomes or deductions which came in for considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ascertaining when a particular income accrued or arose. The meaning of the words "accrue" or de arise "in section 4(1)(b)(i) of the Indian Income-tax Act, 1922, cannot be extended so as to take in amounts received in a later year though the receipt was not on the basis of a right accrued in the earlier year. Such amounts are in law received by the assessee only in the year in which they are paid. On the basis of the findings given by us above, it is quite clear that the question of relating back in fact in the present case does not arise at all. We have come to a clear and definite finding that even qua the assessee the right to receive commission on the basis of the managing agency agreement accrued in each chargeable accounting period as stated above and there was no question of relating back of any income or reopening of account for any particular transaction. In this case the Supreme Court has administered caution in relation to following English decisions in respect of tax matters. The Supreme Court has cited its observations in the earlier case of Commissioner of Income-tax v. Vazir Sullan and Sons [1959] 36 ITR 175, 179 (SC) to the following effect : "While considerin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of accountancy adopted by the assessee ? and (ii) if it is the mercantile system of accountancy, subject to the deemed provisions, when has the right to receive that amount accrued ? If he comes to the conclusion that such a right accrued or arose to the assessee in a particular accounting year, he shall include the said income in the assessment of the succeeding assessment year. No power is conferred on the Income-tax Officer under the Act to relate back an income that accrued or arose in a subsequent year to another earlier year on the ground that the said income arose out of an earlier transaction. Nor is the question of reopening of accounts relevant in the matter of ascertaining when a particular income accrued or arose. A little later it is said : "We do not see any relevancy of the question of reopening of accounts in considering the question when an assessee acquired a right to receive an amount." The other decision of the Supreme Court is that in the case of Commissioner of Income-tax v. Swadeshi Cotton and Flour Mills Private Ltd. [1964] 53 ITR 134 (SC). In this case the assessee paid a sum of Rs. 1,08,325-9-3 by way of profit bonus to its employees for the calendar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayable at the rates laid down in the agreement itself. The additional amount became payable to the assessee not by virtue of any right conferred by the agreement, but because of the order passed in review under the terms of the agreement directing the payment of the amount and thus creating a right to this amount in favour of the assessee. Even though the amount was payable because the assessee had carried out the contract in the accounting year 1945-46 in accordance with the agreement entered into in that year, the mere execution of the agreement and performance of the contract in that year did not entitle the assessee to receive that amount. The right to receive payment of the additional sum could at the earliest have arisen or accrued on November 6, 1947, after the close of the accounting year 1945-46 ; the income did not accrue or arise to the assessee in that accounting year. It is difficult to see how this case is of any assistance to Mr. Kolah. There is a clear finding of the court that the right to receive additional amount did not arise by reason of any term to review in the contract. Such right accrued for the first time when upon an application for review an order was pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he transaction took place. Coming to the decisions cited by Mr. Joshi we will now refer to the two decisions. Both these cases are reported in the same volume. The first is the decision in the case of Isaac Holden Sons Ltd. v. Commissioners of Inland Revenue [1924] 12 TC 768 (KB), The appellant-company in this case was a member of the Wool Combing Employers Federation who were engaged in combing wool commmission for the Government, during the period of control of the wool trade, on the basis of a tariff fixed in 1917. In July, 1918, following negotiations between the Federation and the Government, a provisional increase of 10 per cent. on the tariff, to operate as from the 1st January, 1918, and to be subject to adjustment either up or down on completion of the examination of accounts to the 31st December, 1918, was agreed, and in July, 1919, a total Increase of 20 per cent. to include the first increase, was awarded as a final settlement. In its accounts for the year ended 30th June, 1918, the company charged the full costs for work done in the period, but it included for that work only the amount of commission which had been received under the tariff as increased by the agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company did not admit that the payment was rightly included in its assessable profits. The further payment of pound 5,309 was credited under the same head in the accounts for the half-year ended 30th April, 1922, but was charged to excess profits duty by an additional assessment for the accounting period ended 30th October, 1918. The Special Commissioners discharged this additional assessment on appeal on the ground that the sum received did not represent a trade profit. On ultimate appeal to the House of Lords it was held that the payment in question was a profit arising from the company's trade, and that it must be included for excess profits duty purposes in the profits for the accounting period ending on the 30th October, 1918, in which the rum was taken over. So far as the decision of the House of Lords in this case is concerned it is based on the fact that the right to receive the amount accrued when the bottles of rum were requisitioned. Before the Court of Appeal also that view was taken though in the same judgment there is an observation to the effect that the payment, though received later on, will relate back earlier to the date when the transaction took place. So far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner in which it is presented before us was not argued before the Tribunal. There can be no controversy in view of the clear definition of the expression "chargeable accounting period" that the period from July 1, 1945, to March 31, 1946, constitutes the chargeable accounting period and it is the excess amount of profits during the chargeable accounting period over the standard profits that are subjected to excess profits tax. Schedule I to the Act prescribes the rules for computation of profits for purposes of computation of excess profits tax. Rule 1 is as under : 1. The profits of a business during the standard period, or during any chargeable accounting period, shall be separately computed, and shall, subject to the provisions of this Schedule, be computed on the principles on which the profits of a business are computed for the purposes of income-tax under section 10 of the Indian Income-tax Act, 1922 : ...... Provided further that where that standard period or chargeable accounting period is not an accounting period, the profits or losses of the business during any accounting periods wholly or partly included within the standard period or chargeable accounting period sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the accrual for the last year took place on June 30, 1946, the argument of Mr. Kolah is that since such accrual is after the expiry of the chargeable accounting period no apportionment should be made. Such contention runs contrary to the provisions of rule 1 of Schedule I. Under that rule whenever a part of the accounting year is included in the chargeable accounting period, what is first required to be done is to determine the profits of the whole of the accounting period and a proportionate part thereof pertaining to the chargeable accounting period has to be determined by apportionment. From the mere fact that having regard to the terms of the managing agency agreement commission would accrue due to the assessee on June 30, 1946, it could not be said that no apportionment should be made for the last chargeable accounting period extending from July 1, 1945, to March 31, 1946. Actually, for the period of nine months apportionment should be made on the basis of the profits of the accounting year from July 1, 1945, to June 30, 1946. The view that we have taken of the interpretation of the third proviso to rule 1 of Schedule I gather support both from the decision of this court as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its tax, and the legislature had to devise some machinery whereby profits could be ascertained for the period ending with the 31st of March, 1946. In this particular case the broken period would be from the 5th of November, 1945, to the 31st of March, 1946. Therefore, the third proviso to rule 1 of Schedule I gave the power to the Excess Profits Tax Officer to apportion profits for the broken period in the light of the profits made during the whole of the accounting period." A similar view has been taken by the Madras High Court in In re Keshavalal and Co. [1953] 24 ITR 585 (Mad). At page 591 Satyanarayana Rao J. observed as under : From a perusal of these provisions it would be seen that the unit for computation of the profits under the Excess Profits Tax Act is the accounting period which is a period of 12 months, and, in this case, it is not disputed that the Samvat year was accepted by the assessee as the accounting year for purposes of the excess profits tax and for income-tax purposes. The profits, therefore, in the first instance have to be computed for a period of 12 months and the principles to be adopted in computing those profits are those contained in section 10 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal held that the sums of Rs. 13,00,000 paid for acquiring the goodwill and Rs. 10,00,000 paid for acquiring the shares should be treated as capital, that the commission relating to the chargeable accounting period ended on March 31, 1944, could only be assessed as income accruing and arising in the chargeable accounting period ended on March 31, 1945, and that, similarly, the commission for the period ended on March 31, 1945, would be the income of the last chargeable accounting period ended on March 31, 1946, and that the commission for the period ended on March 31, 1946, was not assessable to tax as excess profits tax, ceased to be operative after March 31, 1946. On a reference to the High Court at the instance of the revenue this court, inter alia, held that the Tribunal was right in holding that the managing agency commission relating to the year ending March 31, 1946, fell outside the chargeability to excess profits tax. Relying upon this decision the contention of Mr. Kolah is that in the present case the managing agency commission for the last chargeable accounting period accrued on June 30, 1946, i.e., long after the chargeability to excess profits tax had ceased and, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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