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PETITIONER: COMMISSIONER OF INCOME-TAX, BOMBAY

       Vs.

RESPONDENT: M/S.  SHREE GOVERDHAN LTD.  BOMBAY

DATE OF JUDGMENT: 09/01/1968

BENCH: RAMASWAMI, V. BENCH: RAMASWAMI, V. SHAH, J.C. BHARGAVA, VISHISHTHA

CITATION:  1969 AIR  292            1968 SCR  (2) 731

ACT: Indian  Income-tax Act, 1922, ss. 2(11)  and  23A-Accounting year of company ending on September 30, every  year--Company a  partner in a firm-Accounting periods of firm for  1951-52 A.Y.   ending   on   November  30,  1950   and   March   31, 1951--Company’s  annual  general  meeting held  on  May  17, 1951--Company’s share of income from partnership whether  to be included in its income for 1951-52 A.Y. for purpose of s. 23A.

HEADNOTE: The  assesee--a  public  limited  company,  entered  into  a partnership  on April 20, 1950 with another firm,  and  thus had two sources of income,(i) from  it,,, own  business  and (2)  from  the  shares of  the  partnership  business.   The Income-tax  Officer  included the shares of  profit  of  the assessee  from the partnership business up to  November  30, 1950  and  up  to March 31, 1951 in the  assessment  of  the assessment year 1951-52.  The see objected, contending  that this  income  accrued  after  the  accounting  year  of  the assessee  which  ended  on September 30, 1950,  and  at  its general meeting held on May 17, 1951, the assessee could not be  expected to declare a dividend for the  assessment  year 1951-52  which  related  to the accounting  year  ending  on September  30, 1950 out of its profits that  accrued  during subsequent  accounting period.  The Revenue  maintained  the assessment, which, on reference, the High Court answered  in favour of the assesse.  In appeal, this Court. HELD  : The assessable income of the assessee  included  the share  of the assessee’s profits in the partnership for  the purpose of application of s.  23A  of  the  Income-tax  Act, 1922 so far as the assessment year 1951-52 was    concerned. Under  s,  2(11) of the Act an assessee may  have  different previous years in respect of different sources of income and under  the  scheme  of the Act the  income  of  the  varying previous  years from the different sources should be  lumped together to arrive at the total income of the assessee.  The provisions of s. 2(11) of the Act make it clear that, except in  cases  where  a  previous  year  is  determined  by  the Department  under cl. (b), the ’varying previous years  must all necessarily end with or within the financial years  next

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preceding  the  assessment year.  In the present  case,  the previous  year  so  far  as the  personal  business  of  the assessee  was  concerned,  was the previous  year  ended  on September  30,  1950, but with regard to the income  of  the partnership  the  previous  year  was  the  period   between November  30, 1950 and March 31, 1951 when the  accounts  of the partnership were made up and closed.  The provisions  of s. 23(1) must be construed in the context of s. 2(11) of the Act and the expression’ previous year’ of the company in  s. 13A(1)  Must be. interpreted as meaning two  previous  years where  the company carries on two different businesses  with different  sources of income for which there  are  separated accounting periods. [736F-737 B] The  annual general meeting of the assessee was hold on  May 17, 1951 after the close of the accounting year of the firm. It is true that the actual profits of the assessee from  its partnership business were ascertained after the close of the accounting period i.e., March 31, 1951.  But the 732 income  may accrue to an assessee without actual receipt  of the same and if the assessee acquires a right to receive the income, the income can be said to have accrued to him though it  may be received later on on its being ascertained.   The legal  position  is  that  a  liability  depending  upon   a contingency is not a debt in praesenti or in futuro till the contingency happens.  But if it is a debt the fact that  the amount has to be ascertained does not make it any the less a debt if the liability is certain and what remains is only  a quantification.  of  the  amount  :  Debitum  in  praesenti. Solvendum in futuro. [737 E-H] Commissioner  of  Inland Revenue v. Gardner  Mountain  &  D’ Ambrumenil Ltd. 29 T.C. 69, applied.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 17 of1967. Appeal  by special leave from the judgment and  order  dated September  18, 1962 of the Bombay High Court  in  Income-tax Reference No. 34 of 1961. C.   K. Daphtary, Attorney-General, T. A. Ramachandran and R.   N. Sachthey, for the appellant. Radhey Lal Aggarwal, Bishambar Lal and H. K. Puri, for the respondent. The Judgment of the Court was delivered by Ramaswami,  J. This appeal is brought, by special leave,  on behalf  of  the  Commissioner  of  Income-tax  against   the judgment  of the Bombay High Court dated September 18,  1962 in  Income  Tax Reference No. 34 of 1961  whereby  the  High Court  held  that the order passed against  the  respondent, hereinafter  referred to as the ’assessee’ under s.  23A  of the Indian Income Tax Act, 1922 (hereinafter referred to  as the  "Act") was not justified and valid for  the  assessment year 1951-52. The  assessee is a public, limited company registered  under the  Indian  Companies Act.  Its share capital  consists  of 50,000 shares subscribed and paid up.  Out of these  shares, 47,493 are held by Shree Raghunath Investment Trust Ltd.,  a company incorporated as a private company under the laws  of Jammu  and  Kashmir (hereinafter referred to as  "The  Jammu Co.")  and having its registered office there.  Out  of  the remaining  2,507 shares, 2,500 shares were held  by  another private limited company incorporated in India and having its registered  office in New Delhi and the remaining  7  shares were held by seven individuals.  The shares of the  assessee

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are  not  quoted on the Stock Exchange any where  in  India. There is nothing, however, in its Memorandum and Articles of Association placing any restriction on the free transfer  of its shares.  The assessee entered 733 into a partnership on April 20, 1950 with a firm called ’The India Steel Syndicate’.  There was a reconstitution of  this firm  on  December  1, 1950.  The shares of  profit  of  the assessee from this firm (which was registered under s.  26-A of  the Act) as up to November 30, 1950 and upto  March  31, 1951 totalling Rs. 70,895/- were included in the  assessment of the assessee for the assessment year 1951-52. During  the assessment years 1950-51 and 1951-52, for  which the  previous   years  ended  on  September  30,  1949   and September 30,  1950, the, Income Tax Officer determined  the assessable income of     the assessee at Rs. 60,350 and  Rs. 93,884  respectively.After deduction of the  taxes  payable, the balance was Rs. 35,834 in the first year and Rs,  53,103 in  the second year.  As the assessee had not  declared  any dividend at its Annual General Meetings during either of the aforesaid  two  years or within six months  thereafter,  the Income  Tax Officer issued notices to the assessee  to  show cause  why an ’order under s. 23-A(1) of the Act should  not be  passed  for  the  two  years.   The  assessee,  however, contended  that s. 23-A was not applicable inasmuch  as  the public  were substantially interested within the meaning  of the  Explanation  appended to, the third proviso to  s.  23- A(l).   Overruling  this contention the Income  Tax  Officer made an order under s. 23-A against the assessee in  respect of  the  undistributed  profits  for  the  said  two  years. Against these orders the assessee appealed to the  Appellate Assistant  Commissioner.  A further ground was taken in  the appeal  that the order under s. 23-A was unwarranted so  far as  assessment  year 1950-51 was concerned inasmuch  as  the assessable profits included a sum of Rs. 70,895/- being  the share   of  the  assessee’s  income  which  arose   in   its partnership  with  the  Indian  Steel  Syndicate  as  up  to November  30, 1950 and March 31, 1951, and that  the  income accrued  after  the accounting year of  the  assessee  which ended  on  September  30,  1950.   The  Appellate  Assistant Commissioner  dismissed  the  appeals  and  his  order   was affirmed by the Appellate Tribunal on June 28, 1959 for both the  assessment years.  At the instance of the assessee  the Appellate Tribunal stated a case to the; High Court under s. 66 (1 ) of the Act on the following question of law :               "Whether the order passed against the assessee               for assessment years 1950-51 and 1951-52 under               section 13-A are justified and valid ?" By its judgment dated September 18, 1962, the High Court an- swered the question in so far as it pertained to  assessment year  1950-51  in  the  affirmative and  in  so  far  as  it pertained  to  assessment year 1951-52 in the  negative  and against the appellant. L3 Sup.  CI/68-3 734 Section 23-A of the Act, as it stood before its amendment by the Finance Act, 1955 was to the following effect :               "23-A.  Power to assess individual members  of               certain  companies.-(1) Where  the  Income-tax               Officer  is satisfied that in respect  of  any               previous   year   the   profits   and    gains               distributed as dividends by any company up  to               the end of the sixth month after its  accounts               for  that  previous year are laid  before  the               company in general meeting are less than sixty

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             per  cent  of  the assessable  income  of  the               company  of that previous year, as reduced  by               the amount of income-tax and super-tax payable               by  the company in respect thereof  he  shall,               unless  he is satisfied that having regard  to               losses  incurred  by the  company  in  earlier               years or to the smallness of the profit  made,               the payment of a dividend or a larger dividend               than that declared would be unreasonable, make               with  the previous approval of the  Inspecting               Assistant  Commissioner  an order  in  writing               that   the   undistributed  portion   of   the               assessable  income  of  the  company  of  that               previous  year  as  computed  for   income-tax               purposes and reduced by the amount of  income-               tax  and super-tax payable by the  company  in               respect  thereof shall be deemed to have  been               distributed    as   dividends   amongst    the               shareholders  as  at the date of  the  general               meeting    aforesaid,   and   thereupon    the               proportionate    share   thereof    of    each               shareholder  shall  be included in  the  total               income of such shareholder for the purpose  of               assessing his total income :               Provided  that when the reserves  representing               accumulations  of past profits which have  not               been  the subject of an order under this  sub-               section  exceed  the paid up  capital  of  the               company  together with any loan capital  which               is  the property of the shareholders,  or  the               actual cost of the fixed assets of the company               whichever  of these is greater,  this  section               shall apply as if instead of the words  ’sixty               per cent’ the words one hundred per cent’ were               substituted :               Provided further that no order under this sub-               section  shall be made where the  company  has               distributed not less than fifty-five per  cent               of  the  assessable income of the  company  as               reduced by the amount of income-tax and super-               tax payable by the company in respect thereof,               unless  the  company, on receipt of  a  notice               from  the Income-tax Officer that he  proposes               to make       735               such  an  order, fails to  make  within  three               months of the receipt of such notice a further               distribution of its profits and gains so  that               the  total distribution made is not less  than               sixty per cent of the assessable income of the               company of the previous year concerned as  re-               duced  by the amount of income-tax and  super-               tax payable by the company in respect  thereof               :               Provided  further that this sub-section  shall               not  apply to any company in which the  public               are   substantially   interested   or   to   a               subsidiary  company of such a company  if  the               whole of the share capital of such  subsidiary               company  is held by the parent company  or  by               the nominees thereof........................               Section 2(11) of the Act states               "2.   In  this Act, unless there  is  anything               repugnant in the subject or context,-               (11)’previous year’ means-

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             (i)   in  respect  of any separate  source  of               income, profits               and   gains-               (a)  the twelve months ending on the 31st  day               of               March  next preceding the year for  which  the               assessment is to be made, or, if the  accounts               of  the assessee have been made up to  a  date               within the said twelve months in respect of  a               year  ending on any date other than  the  said               31st day of March, then, at the option of  the               assessee, the year ending on the date to which               his accounts have been so made up :               Provided that where in respect of a particular               source   of  income,  profits  and  gains   an               assessee has, once been assessed, or where  in               respect of a business, profession or  vocation               newly  set  up an assessee has  exercised  the               option under sub-clause (c), he shall not,  in               respect of that source or, as the case may be,               business, profession or vocation, exercise the               option given by this sub-clause so as to  vary               the  meaning of the expression ’previous  year               as  then  applicable to him  except  with  the               consent  of  the Income-tax Officer  and  upon               such conditions as the Income-tax Officer may               think fit to impose; or               (ii)  in  respect of the share of the  income.               profits and gains of a firm where the assessee               is a partner in the firm and the firm has been               assessed as such, the               736               period as determined for the assessment of the               income, profits and gains of the firm;" On behalf of the appellant the Attorney-General put  forward the  argument  that the High Court was in error  in  holding that the sum of Rs.70,895 which was the assessee’s share  of income  in its partnership with the Indian  Steel  Syndicate should be left out of consideration so far as the assessment year  1951-52  was concerned.  It was pointed out  that  the assessee  had two different sources of income: (1) from  its own  business,  and (2) from the share  of  the  partnership business with the Indian Steel Syndicate and that under s. 2 (1  1 ) of the Act the assessee must be deemed to  have  two previous  years  with  regard to two  different  sources  of income.  It was therefore argued that the High Court was  in error in holding that the income from the partnership  could not  be, included in the assessment income of  the  assessee for the assessment year 1951-52.  On behalf of the  assessee the,  contrary view-point was put forward by Mr. Radhey  Lal Aggarwal.   It  was  submitted that the sum  of  Rs.  70,895 related to the share of the profits of the assessee from out of the partnership for the period between November 30,  1950 to  March 31, 1951 and this period was after the  accounting year of the assessee which ended on September 30, 1950.   It was  contended that at its general meeting held on  May  17, 1951  the  assessee  could  not be  expected  to  declare  a dividend  for the assessment year 1951-52 which  related  to the accounting year ending on September 30, 1950 out of  its profits  that  accrued  during  the  subsequent   accounting period.   In  our opinion, the argument put forward  by  the Attorney-General on behalf of the appellant is  well-founded and  must  be  accepted as correct.  It  is  true  that  the assessee had prepared a balance sheet on the basis that  its accounting  year  ended  on  September  30,  1950.   It  is,

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however.  admitted  that  the assessee had  two  sources  of income: 1 ) from its own business, and (2) from the share of the partnership business with Indian Steel Syndicate.  Under s. 2(1l) of the Act an assessee may have different  previous years  in respect of different sources of income  and  under the  scheme  of the Act the income of the  varying  previous years  from the different sources should be lumped  together to  arrive  at  the  total  income  of  the  assessee.   The provisions of s. 2(11) of the Act make it clear that, except in  cases  where  a  previous  year  is  determined  by  the Department  under cl. (b), the varying previous  years  must all  necessarily end with or within the financial year  next preceding  the  assessment year.  In the present  case,  the previous  year  so  far  as the  personal  business  of  the assessee  was  concerned,  was the previous  year  ended  on September  30,  1950, but with regard to the income  of  the partnership the previous year was 737 the  period,  between November 30, 1950 and March  31,  1951 when  the  accounts  of the partnership  were  made  up  and closed.,  In our opinion, the provisions of s.  23A(l)  must be, construed in the context of s. 2(11) of the Act and the, expression ’previous year’ of the company in s. 23A(l)  must be  interpreted  as  meaning two previous  years  where  the company  carries  on  two  different  businesses  with   two different  sources  of income for which there  are  separate accounting  periods.   It follows therefore in  the  present case  that the Income Tax Officer was right in holding  that the assessable income of the company included the, share  of the  assessee’s profits in its partnership with  the  Indian Steel Syndicate for the purpose of application of s. 23A  of the Act so far as the assessment year 1951-52 was concerend. The  argument was, however, stressed on behalf of  the  res- pondent  that in any event the share of the profit  of  ’the assessee  from the partnership business for the period  from October  1,  1950  to March 31, 1951 was not  known  to  the assessee before its annual general meeting on May 17,  1951. It  was pointed out that for the first time the  Income  Tax Officer was intimated on August 11 . 1953 that the share  of the  profit  of the assessee in the partnership was  to  the extent  of  Rs.  70,895  and  should  be  included  in   its assessment.  After receipt of the intimation the Income  Tax Officer  rectified the original assessment made on  February 29, 1952 and included the said amount of Rs. 70,895.  In our opinion, there is no warrant for the argument put forward on behalf of the respondent.  It is conceded in this case  that the  annual general meeting of the assessee was held on  May 17,  1951  after  the close of the accounting  year  of  the Indian Steel Syndicate.  It is true that the actual  profits of   the  assessee  from  its  partnership   business   were ascertained after the close of the accounting period,  i.e., March  31, 1951.  It is, however, well-established that  the income  may accrue to an assessee without actual receipt  of the same and if the assesse acquires a right to receive  the income, the income can be said to have accrued to him though it  may be received later on on its being ascertained.   The legal  position  is  that  a  liability  depending  upon   a contingency is not a debt in praesenti or in futuro till the contingency happens.  But if it is a debt the fact that  the amount has to be ascertained does not make it any the less a debt if the liability is certain and what remains is only  a quantification  of  the  amount  :  debitum  in   praesenti, solvendum  in  futuro.   Reference  may  be  made  in   this connection  to  the  decision  in  Commissioners  of  Inland Revenue  v.  Gardner Mountain & D’ Ambrumenil,  Ltd.(1)  The

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assessee  in  that case carried on the  business  of  under- writing agents, and entered into agree- (1)  29 T.C. 69. 738 ments with certain underwriters at Lloyds under which it was ,entitled  to  receive as remuneration for its  services  in conducting  the  agency, commissions on the net  profits  of each  year’s  underwriting.  The  agreements  provided  that "accounts should be kept for the period ending 31st December in each year and that each such account shall be made up and balanced  at  the  end of the second  clear  year  from  the expiration of the period or year to which it relates and the amount then remaining to the credit of the account shall  be taken  to  represent  the amount of the net  profit  of  the period  or  year  to which it  relates  and  the  commission payable  to  the  company  shall  be  calculated  and   paid thereon."  The  accounts for the underwriting  done  in  the calendar y‘ear 1936 were made up at the end of 1938 and  the question  that arose was whether the assessee was liable  to additional  assessment  in  respect  of  the  commission  on underwriters’  profits  from the  policies  underwritten  in calendar  year 1936 in the year in which the  policies  were underwritten or in the year when the accounts were thus made up.  The assessee contended that the contracts into which it entered  were executory contracts under which  its  services were not completed or paid for, as regards commission, until the  conclusion of the relevant account; the profit  in  the form of commission was not ascertainable or earned, and  did not  arise,  until that time and the  additional  assessment which was made in the year in which the policies were under- written  should accordingly be discharged.  The Special  Co- mmissioners allowed the assessee’s contention and discharged the  additional  assessment.  The decision  of  the  Special Commissioners  was confirmed on appeal by Macnaghten, J.  in the  King’s Bench Division of the High Court.  The Court  of Appeal  however reversed this decision and a further  appeal was taken by the assessee to the House of Lords.  The  House of  Lords  held  that  on  the  true  construction  of   the agreements,  the commissions in question were earned by  the assessee   in   the  year  in  which   the   policies   were underwritten,  and must be brought into account  accordingly and confirmed the decision of the Court of Appeal.  At  page 96 of the Report Lord Wright observed :               "I agree with the Court of Appeal in  thinking               that  the necessary conclusion from that  must               be that the right to the commission is treated               as  a  vested right which has accrued  at  the               time  when the risk was underwritten.  It  has               then been earned, though the profits resulting               from the insurance cannot be then ascertained,               but in practice are not ascertained until  the               end   of   two  years  beyond  the   date   of               underwriting.   ’The right is  vested,  though               its valuation is postponed, and is not  merely               postponed but depends on all the contingencies               739               which  are inevitable in any  insurance  risk,               losses which may or may not happen, returns of               premium,   premiums   to   be   arranged   for               additional  risks, reinsurance, and the  whole               catalogue  of uncertain future  factors.   All               these   have  to  be  brought   into   account               according to ordinary commercial practice  and               under-standing.      But   the   delays    and               difficulties which there

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             may be in  any  particular case, however  they               may affect               the profit do not affect the right for what it               eventually               proves to be worth."               Lord  Simonds also stated at page 1 10 of  the               Report as follows               "It  is  clear to me that  the  commission  is               wholly  earned  in year 1 in  respect  of  the               profits of that year’s underwriting.  If so, I               should  have thought that it was not  arguable               that that commission did not accrue for Income               Tax purposes in that same year, though it  was               not ascertainable until later." It  is  admitted in the present case that the  Indian  Steel Syndicate,  closed the accounts of the partnership  for  the first  time  for the first set of partners on  November  30, 1950 and for the other set of partners on March 31, 1951 and the  assessee  as a partner was therefore  entitled  to  the share  of the profits as on the last day of  the  accounting period of the partnership i.e., March 31, 1951. For  these reasons we hold that the Income Tax  Officer  was right  in holding that the amount of Rs. 70,895/- which  was the share of the assessee’s income from its partnership with Indian Steel Syndicate for the period ending March 31,  1951 should be included in the assessable profits of the  company for  the  assessment year 1951-52 and should be  treated  as part  of  the distributable profits of the company  for  the purpose  of  s. 23-A (1) of the Act.  In  other  words,  the order  made by the Income Tax Officer against  the  assessee under  s.  23-A of the Act for the assessment  year  1951-52 must  be held to be justified and valid and the question  of law  referred  by the Appellate Tribunal  must  be  answered against  the  assessee  and  in favour  of  the  Income  Tax Department  for the year 1951-52 also.  We  accordingly  set aside the judgment of the Bombay High Court dated  September 18, 1962 so far as the assessment year 1951-52 is  concerned and allow this appeal with costs. Y.P. Appeal allowed. 740