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TMI Blog1953 (10) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... s delivered by GHULAM HASAN, J. --These three appeals arise from the judgment and order of the Madras High Court dated 2nd February, 1950, delivered on a reference by the Income-tax Appellate Tribunal (hereinafter referred to as "the Tribunal"), whereby the High Court answered the first referred question in the negative, and as regards the second question, Satyanarayana Rao, J., answered it in the affirmative, while Viswanatha Sastri, J., answered it in the negative, as a result of which the judgment of Satyanarayana Rao, J., ultimately prevailed. They relate to the assessment for 1942-43 and are filed by the Commissioner of Income-tax, while Appeal No. 132 of 1952 which relates to 1943-44 is filed by the assessee, and is dealt with separately. The two questions which were referred in respect of the first group of appeals are as follows :-- "(1) Whether there is any material for 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 circamstances of the case the Appellate Tribunal's finding that the sum of Rs. 2,26,850 could not be assessed for the assessment year 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed a debt to the company for a long time past which was outstanding. The firm wrote on the 30th March, 1942, to the company requesting that the debt be written off. The firm also wrote that on account of the extraordinary increase in the volume of business, it found it difficult to bestow adequate attention on all the aspects of the mill business and proposed that the direct responsibility for sales and purchases may be transferred to some other agency, leaving the general supervision over the entire management in the firm's hands. The firm agreed to forego its commission on purchases and sales and agreed to take half of the commission on the net profits. The directors by their resolution, passed on the same date, refused to write off the amount without consulting the general body of shareholders and pending the settlement of the dispute resolved to keep the amount in suspense. 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 accordane with the terms and conditions of the agreement for the year 1942-43 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contention of Mr. Somayya. There the Income-tax Officer had computed the profits of the business for a particular year by taking into account both actual receipts of interest in that year and sums treated by the assessee in that year as receipts of interest by their transference to the interest register from what might be regarded as a suspense account. The Privy Council held that there was nothing illegal or contrary to principle in the computation arrived at by the Income-tax Officer. The High Court under Section 66(1) had to decide the question of law raised by the first question and decided it against the assessee. Nor can it be said that in answering the question, the High Court acted illegally or contrary to principle. Admittedly, the firm kept no separate books of accounts other then the books of accounts of the company in which there was a ledger containing entries relating to the remuneration and commission paid in cash to the firm. The sum of Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be included in the computation of the profits and gains that had accrued to it unless the firm had regularly kept its accounts on a cash basis, which is not the case here. " A reference to the ledger folios in the books of the company shows that apart from the managing agents' monthly remuneration of Rs. 1,000 which has duly entered in their account the amount in question also finds a place in the ledger as outstanding charges against the company and as credits in favour of the firm. The journal entries in the company's books are the same. Section 10 of the Act makes " profits and gains of business, profession or vocation " carried on by an assessee liable to tax. Section 12 makes " income from other sources in respect of income, profits and gains of every kind " liable to tax. By Section 13 income, 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 Offcer, the income, profits and gains cannot properly be deduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to enable interest to be paid on the legacy but the legatee acting on the advice of his accountant did not demand the legacy or interest thereon. It was held that as the legatee had not received interest, there was no income in respect of which he could be charged to sur-tax. The decision turned upon the language of Schedule D, clause 1, sub-clause (b), of the English Income Tax Act of 1918, as distinguished from clause 1(a). Clause 1(a) deals with annual profits or gains arising or accruing from any kind of property whatever........ but clause (b) imposes a tax in respect of " all interest of money, annuities and other annual profits. " Lord Hanworth, M. R., drew the distinction between the two clauses and observed that the case was one of interest of money and fell under clause (b) and not under clause (a). Under 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 age ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rue until the profits have been ascertained. The quantification of the commission is not a condition precedent to its accrual. If the profits of the company are said to have accrued on the 31st of March, upon a parity of reasoning, it must be conceded that the commission also accrued on the same date. The date has as much to do with the accrual of the commission as it has to do with the accrual of the profits. It was faintly suggested that the managing agency was not a business but this is immaterial for income-tax purposes because Section 13 will apply to cases both under Sections 10 and 12, so we refrain from deciding the point. We may, however, point out in passing that in two cases, Tata Hydro-Electric Agencies Ltd. v. Commissioner of Income-tax, Bombay, and Commissioner of Income-tax, Bombay Presidency v. Tata Sons Ltd. it was assumed that the managing agency is business but the point was directly decided in Inderchand Hari Ram v. Commissioner of Income-tax, U. P. and C. P. that it is so. For the foregoing reasons, we accept the view taken by Viswanatha Sastri, J., and allow the appeals. The respondent shall pay the costs of the Commissioner both in this Court and before ..... X X X X Extracts X X X X X X X X Extracts X X X X
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