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PETITIONER: COMMISSIONER OF INCOME-TAX WEST BENGAL-II, CALCUTTA

       Vs.

RESPONDENT: M/S.  BIRLA GWALIOR (PVT.) LTD.

DATE OF JUDGMENT04/04/1973

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. KHANNA, HANS RAJ

CITATION:  1973 AIR 2486            1973 SCR  (3) 902  1974 SCC  (3) 198  CITATOR INFO :  R          1986 SC 368  (16)  RF         1986 SC 757  (15,18,55,57,59)

ACT: Indian  Income Tax Act 1922-S. 10(2)(xv)-Whether  an  amount foregone  by the assessee as Managing Agency Commission  and an  amount  foregone as office allowance  was  allowable  as Revenue Expenditure.

HEADNOTE: These  are all connected appeals.   The  assessee-respondent was  the managing agent of two companies N & G. As  Managing Agent of N Company, it was entitled to receive a  commission of 12 1/2 on the net profits of the Managed Company together with  a sum of Rs. 18,000/as office allowance.  In the  case of G company, the assessee was entitled to get an  allowance of  Rs. 30,000/- in addition to its agreed  commission.   In all  these appeals, certain questions were submitted by  the Tribunal to the High Court.  In Civil Appeal No. Z42 of 1970 only one question was submitted and in the other two  cases, i.e.,  Civil Appeal No. 243 and 244 of 1970,  two  questions were submitted. In  the first appeal, the question submitted was whether  on the f,acts and circumstances of the case, a certain sum said to,  have been foregone by the assessee as  managing  agency commission  was allowable as revenue expenditure.   Similar questions were called for, for the remaining two  assessment years  as  well  and  in addition,  one  more  question  was submitted  as  to whether certain sum, said’  to  have  been ’foregone   by  the  assessee  as,  office  allowance,   was allowable  as revenue expenditure under the lncome Tax  Act. The assessment years were 1954-55, 1955-56 and 1956-57. The  High  Court  came  to the conclusion  that  it  is  not necessary  to answer the common question referred to in  all these  appeals  because it was academic;  but  the  question relating to the office allowance was ,answered in favour  of the assessee. In  the relevant accounting years, the assessee gave up  the managing agency commission from both the managed  companies. It  also gave up the office allowance due from  G.  Company. The accounting years of both the assessee company as well as the   managed  companies  were  the  financial  year.    The

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commission  was given up by the assessee company  after  the end  of the financial year, but before the accounts ’of  the managed  company were made up.  The accounts of the  managed companies were made up some time during the end of September of the year following the respective accounting years.   But in the case of office allowance, the same was given up  even before the end of the financial years, On  the  basis  of these facts, the I.T.O. as  well  as  the Appellate  Assistant Commissioner held that  the  deductions claimed were not allowable.  As regards the commission, they came  to the conclusion that the same having accrued at  the end of each of the financial years, the agency giving up the same  subsequent  to these dates, does not  bring  the  case under s. 10(1) of the Income-tax Act.  So far as the  office allowance  was concerned, they came to the  conclusion  that there  was no justification for giving up the  same.   The Income Tax Appellate 903 Tribunal differed from this view and held that to the extent the  commission  was given up, the assessee company  had  no income  at  all.  In other words, the  commission  that  was given  up  cannot be considered as the real  income  of  the assessee company.  Therefore, it is an allowable expenditure under  s.  10(2)(xv).  As regards the office  allowance  the Tribunal held that the same was allowable deduction under s. 10(2)  (xv).  The Tribunal further held that the  commission as  well  as  the  office allowance were  given  up  by  the assessee  on the ground of commercial expediency.  The  High Court agreed with this view taken by the Tribunal. Dismissing the appeal, HELD  :  (i) As regards office allowance,  following  C.I.T. Bombay North v. Chandulal Keshavlal & Co., 38 I.T.R. 601 the Tribunal  was  fully justified in coming to  the  conclusion that  the expenditure incurred came within the scope  of  s. 10(2)(xv).   The only contention advanced by  the  appellant was  that  the allowance was paid to meet  certain  expenses incurred by the assessee, company.  Therefore, the  assessee could not have given up the same.  This contention makes  no difference in law.  The ratio of the decision of this  Court in  Chandulal’s  case  completely  covers  the  point  under consideration. [906B] (ii) The question regarding giving up of the commission,  no due  date was fixed for the payment of the commission  under the  managing agency agreements.  The commission  receivable could  have been ascertained only after the managed  company made  up  its  accounts.   The assessee  had  given  up  the commission  even  before  the managed company  made  up  its accounts.   Hence,  the fact that the assessee  company  was maintaining  its accounts on the basis of mercantile  system cannot lead to the conclusion that the commission accrued to ’it by the end of the relevant accounting year.  It was  the real  income of the assessee company that was liable to  tax and  the real income could not be arrived at without  taking into   account  the  amount  given  up  by   the   assessee. Therefore.  in  the  present case,  the  contention  of  the revenue  that  a  surrender  of  the  commission  under  the provisions  mentioned in the agreement were  not  deductable for the purposes of Income Tax, cannot be sustained. [906 F] Poona  Electric Supply Co. Ltd. v. Commissioner  of  Income- tax,  Bombay City 1, 57 I.T.R. 521 H. M. Kashiparekh  &  Co. Ltd.  v. Commissioner of Income-tax, Bombay North,  Kutch  & Saurashtra, 39 I.T.R. 706, referred to. The question whether the given up commission comes under  s. 10(2)(xv) depended on whether the income had really accrued or   not.   It is not a hypothetical accrual of income  that

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has got to be taken into consideration but the real  accrual of the income.  In the present case, since there was no real accrual  of Income, the assessee was not liable to  tax  for this amount.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 242 to  244 (NT) of 1970. Appeals  by  certificate from the judgment and  order  dated April 22, and 23, 1969 of the Calcutta High Court in Income- tax Reference Nos. 187, 188 & 189 of 1963. S.   T.  Desai,  B.   B.  A huja, S. P.   Nayar  and  R.  N. Sachthey, for the appellant (in C.A. No. 242). 904 B  B.  Ahuja,  S.  P. Nayar and  R.  N.  Sachthey,  for  the appellant (in C.A. Nos. 243-244). B.   Sen,  Leila Seth, U. K. Khaitan and B.  P.  Maheshwari, for the respondent. The Judgment of the Court was delivered by HEGDE, J.-These are connected appeals by certificate.   They relate  to respondent’s assessment for the assessment  years 1954-55 , 1955-56 and 1956-57.  The previous financial years are the relevant accounting years. In  all  these  appeals, as directed by the  High  Court  of Calcutta  under S.66(2) of the Indian Income Tax Act,  1922, certain  questions were submitted by the Tribunal.   In  the first  case  i.e.  Civil Appeal No. 242  of  1970  only  one question  was  submitted and in the other  two  cases  i.e., Civil  Appeals Nos. 243 and 244 of 1970, two questions  were submitted.   The question submitted in the first case is  as follows :               "Whether on the facts in the circumstances  of               the  case  the sum of Rs. 1, 1 1,779  said  to               have been foregone by the assessee as Managing               Agency  commission was allowable as a  revenue               expenditure under S. 10(2) (xv) of the  Indian               Income-tax  Act, 1922 for the assessment  year               1954-55" ? Similar questions were called for the remaining two  assess- ment  years as well.  But, in addition, one  more  question, namely               "Whether on the facts and in the circumstances               of the case the sum of Rs. 30,000 said to have               been  foregone  by  the  assessee  as   office               allowance  receivable from Gwalior  Rayon  and               Silk Manufacturing Co. Ltd. was allowable as a               revenue  expenditure under Section 10(2)  (xv)               of the Indian Income Tax.  Act, 1922 for  the)               assessment years, 1955-56 and  1956-57,  was               called for." At  the hearing, the High Court came to the conclusion  that it  is not necessary to answer the common question  referred to  in all these three appeals as the same was academic  but the  question relating to the office allowance was  answered in  favour  of the assessee following the decision  of  this Court  in  Commissioner  of  Income  tax  Bombay  North   v. Chandulal Keshavlal & Co.(1) The  material  facts  of the case may now  be  stated.   The assessee --respondent is the managing agent of the National Bearing  Co. Ltd. and Gwalior Rayon and  Silk  Manufacturina Co. As managing agent of the former company it was  entitled to  receive  a  commission of 12 1/2 per  cent  on  the  net profits  of the managed company together with a sum  of  Rs.

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18,000 as office allowance.  In the (1)  38 I.T.R. 601. 905 case  of  Gwalior  Rayon and  Milk  Manufacturing  Co.  the, assessee  was  entitled to get an office  allowance  of  Rs. 30,000  per year, in addition to the agreed managing  agency commission.   In the relevant accounting years the  assessee gave  up  the managing agency commission due from  both  the managed companies.  It also gave up the office allowance due from  Gwalior  Rayon and Silk  Manufacturing  company.   The accounting years of both the assessee company as well as the managed   companies  were  the  financial  years.   In   the agreement entered into between the assessee company and  the managed  companies,  no, date for payment  of  the  managing agency  commission  appears to have  been  stipulated.   The commission  was given up by the assessee company  after  the end  of  the financial year but before the accounts  of  the managed  Co.  were  made up.  The accounts  of  the  managed companies  appear to have been made up somewhere during  the end  of  September  of the  year  following  the  respective accounting years.  But, in the case of office allowance  the same was given up even before the end of the financial year. On the basis of these facts the Incometax Officer as well as the Appellate Assistant Commissioner came to the  conclusion that the deductions claimed were not allowable.  As  regards the  commission, they came to the conclusion that  the  same having  accrued at the end of each of the  financial  years, the  assessee giving up the same subsequent to those,  dates does not bring the case under S.10(1) of the Act and no case was  made  out  under S.10(2) (xv).  So far  as  the  office allowance  is  ;oncerned they came to  the  conclusion  that there was no justification for Living up the same. The  Income-tax  Appellate Tribunal differed from  the  view taken by the Income-tax Officer and the Appellate  Assistant Commissioner.   Dealing with the question of  commission  it came to the conclusion that to the extent the commission was given up the assessee company. earned no income at all.   In other  words  the  commission that was given  up  cannot  be considered as the; real income of the assessee company.   It further  came to the conclusion that under any  circumstance it is an allowable expenditure under S. 10(2)   (xv).     As regards the office allowance,      the   Tribunal was of the opinion  that the same was an allowable deduction  under  S. 10(2)(xv).  The Tribunal held that the commission as well as the  office allowance were given up by the assessee  on  the ground of commercial expediency.  The High Court agreed with the view taken by the Tribunal. We  will first take up the question relating to  the  office allowance.   According  to the finding of the  Tribunal  the assessee company gave up the office allowance on the  ground of  commercial  expediency.   It  opined  that  the  managed company’s  financial  position  was  not  sound  during  the relevant accounting years and it 10-L797SL.P. C.I./73 9 0 6 was necessary for the assessee company to give up the office allowance in order to stabilise the finances of the  managed company.   The Tribunal further came to the conclusion  that because of the sacrifices made by the assessee company,  the finances of the managed company improved subsequently, as  a result. of which the assessee company was able to earn  more profits  in  the later years.  This is a  finding  of  fact. That finding was binding on the High Court.  On the basis of that  finding the Tribunal was fully justified in coming  to the conclusion that the expenditure incurred came within the

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scope of S. 10(2) (xv).  That conclusion is supported by the decision  of  this Court in Chandulal’s case  (supra).   The only  contention  advanced in this Court in respect  of  the office  allowance  was  that it was  paid  to  meet  certain expenses incurred by the assessee company-; consequently the assessee  could not have given up the same.  We do not  know whether  the  office  allowance was  paid  solely  for  that purpose or whether it was partly as, remuneration and partly to  meet the expenditure incurred.  In either case it  makes no  difference  in law.  The ratio of the decision  of  this Court in Chandulal’s case completely covers the point  under consideration. Now  turning  to  the question regarding giving  up  of  the commission,   as   mentioned  earlier,  the   assessee   was maintaining its accounts on the basis of mercantile  system. Its accounting year was the financial year.  It gave up  the commission  after  the end of the financial  year.   On  the basis  of  these  facts it was contended on  behalf  of  the Revenue that the commission had accrued before it was  given up.   Hence  it  cannot be said that the  assessee  had  not earned   the   commission  in  question.    Therefore,   the assessee’s  case cannot be considered under S.10(1). We  are unable  to accept this contention as correct.  As  mentioned earlier  no  due  date  was fixed for  the  payment  of  the commission  under  the  managing  agency  agreements.    The commission receivable could have been ascertained only after the managed company made up its accounts.  The assessee  had given up the commission even before the managed company made up  its  accounts.  Hence the mere fact  that  the  assessee company  was  maintaining  its  accounts  on  the  basis  of mercantile  system  cannot lead to the conclusion  that  the commission  had  accrued to it by the end  of  the  relevant accounting year.  This is also the view taken by the  Bombay High Court in H. M. Kashiparekh & Co.  Ltd. v.  Commissioner of  Income-tax,  Bombay North, Kutch & Saurashtra.  (1)  The facts of that case are somewhat similar to the, facts of the present  case.   Therein the assessee which  maintained  its accounts  on mercantile system was the, managing agent of  a paper mill company.  Under the managing agency (1)391.  R 706. 90 7 agreement  it was under a duty to forego upto one-thirds  of its commission where the profits of the managed company were not  sufficient  to pay a dividend of 6 per cent.   For  the accounting year ending March 31, 1950, the assessee earned a commission  of  Rs.-  1,17,644,  that as  a  result  of  the resolutions  passed by the managed company and the  assessee company  the  assessee  gave  up a  sum  of  Rs.  97,000  in December,  1950.  The Appellate Assistant Commissioner  held that  the maximum amount the assessee was ’bound  to  forego was  only Rs. 39,215 and included the balance of the  amount foregone,  viz.,  Rs. 57,785/- in the taxable  income.   The Appellate  Tribunal,  however,  found that the  sum  of  Rs. 57,785  was  also  given  up  for  reasons,  of   commercial expediency.  Affirming the decision of the Tribunal the High Court  held  that  it was the real income  of  the  assessee company  for the accounting year that was liable to tax  and that the real income could not be arrived at without  taking into  account  the  amount foregone  by  the  assessee.   In ascertaining  the  real income the fact  that  the  assessed followed  the mercantile system of accounting did  not  have any  bearing.  The accrual of the commission, the making  of the  accounts, the legal obligation to give up part  of  the commission, and the foregoing of the commission at the  time of  the making of the accounts were not disjointed  facts  :

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there  was  a  dovetailing about them  which  could  not  be ignored.  The real income of the assessee was Rs. 27,644 and the amount of Rs. 97,000 foregone by the assessee could  not be  included  in  the real income of the  assessee  for  the accounting  year.   Rejecting  the  contention  that  merely because the assessee maintained its accounts on the basis of mercantile  system, the income must be held to have  accrued at the end of ,the accounting year, the High Court  observed "even  so, (the failure to produce account books)  we  shall proceed  on  the footing that, the assessee  company  having following the mercantile system of account, there must  have been  entries  made in its books in the accounting  year  in respect  of the amount of the commission.  In our  judgment, we  would  not  be justified  in  attaching  any  particular importance  in  this  case  to the  fact  that  the  company followed ,the mercantile system of account.  That would  not have  any  particular bearing in applying the  principle  of real  income to the facts of this case.  This  decision  was cited  with approval by this Court in Poona Electric  Supply Co.   Ltd.  v.  Commissioner  of  Income-tax,  Bombay   city 1.(1)Dealing  with  that decision this is  what  this  Court observed  : "The concept of ’real income’ is also  expounded in  the  decision  of  the  Bombay  High  Court  in  H.   M. Kashiparekh  &  Co.  Ltd.  v.  Commissioner  of   Income-tax (supra).   There,  under the managing agency  agreement  the managing agent was under a duty to forego up to one-third of (1) 57 I.T.R 521 908 its commission where the profits of the managed company were not  sufficient  to  pay  a dividend of  6  per  cent.   The contention  of  the  revenue  that  such  surrender  of  the commission  under the provisions mentioned in the  agreement was  not  deductible  for  the  purpose  of  income-tax  was negatived.   The principle has been succintly stated in  the head-note thus "The  principle of real income is not to be so  subordinated as to amount virtually to a negation of it when a  surrender or  concession  or  rebate in  respect  of  managing  agency commission  is  made,  agreed  to or  given  on  grounds  of commercial  expediency, simply because it takes  place  some time  after the close of an accounting year.   In  examining any transaction and situation of this nature the court would have  more  regard  to the reality  and  speciality  of  the situation rather than the purely theoretical or  doctrinaire aspect of it.  It will lay greater emphasis on the  business aspect of the matter viewed as a whole when that can be done without disregarding statutory language". Mr.  S. T. Desai, learned counsel appearing for the  Revenue contended  that the facts of this case are governed  by  the rule  laid  down by this Court in Morvi Industries  Ltd.  v. Commissioner  of Income-tax (Central), Calcutta(1).   We  do not  think that submission is correct.  Facts of  that  case are  :-The  assessee, which was the managing  agent  of  its subsidiary   company,   maintained  its  accounts   on   the mercantile  system.   It was entitled to receive  an  office allowance  of Rs. 1,000 per month, a commission of 12’2  per cent,  of  the  net profits of the managed  company  and  an additional  commission of 12’ per cent on all  purchases  of cotton and sales of cloth and yarn.  In the accounting years ended  on  December  31, 1954 and  December  31,  1955,  the managed Company suffered losses and the assessee earned only commission on the sale of cloth and yarn for the two  years. The total amounts, including the office allowance which  the assessee  was  entitled to receive were Rs. 50,719  and  Rs. 13,963 for the two years.  Under clause 2(e) of the managing

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agency  agreement the commission was due to the assessee  on December  31, 1954 and December 31, 1955, respectively,  and it was payable immediately after the annual accounts of  the managed  company was passed in general meetings, which  were held on November 24, 1955, and July 21, 1956,  respectively. By resolutions of its board of directors dated respectively, April 4, 1955, and June 19, 1956 [i.e., after the commission had become due but before it had become payable in terms  of clause  2(2)], the assessee relinquished its  commission  on sales  and office allowance because the managed company  had been suffering heavy losses in the past years.  The Tribunal held (1) 82 1. T. R. 835. 9 0 9 that the relinquishment by the assessee of its  remuneration after it had become due was of no effect; and also  rejected its claim that the amounts relinquished were allowable under section 10 (2) (xv) of the Income-tax Act, 1922, because, as a  result of the relinquishment, the financial  position  of the  managed company did not become stronger while  that  of the  assessee-company  became  weaker  and,  therefore,  the relinquishment was not for the benefit of the assessee.   On a reference the High Court agreed with the view taken by the Tribunal.  On appeal this Court affirmed the decision of the High Court. As seen from the facts of that case the commission given  up had  accrued on the 31st December, 1954 and  31st  December, 1955,  respectively, and the assessee purported to  give  up that  commission  several months thereafter.   Further,  the Tribunal  in that case had come to the conclusion  that  the assessee  did  not  give  up the  amounts  in  question  for commercial  expediency.  This Court came to  the  conclusion that the amounts in question were due at the 31st  December, 1955   and   1956,   though  payable  at   a   later   date. Consequently,  those  amounts had accrued long  before  they were given up and the giving up of the same did not  co.-lie within  the scope of section 1 0 ( 1 ). It is true  that  in the course of the judgment emphasis was also placed on  the, fact  that the assessee was maintaining its accounts on  the basis  of  mercantile system, but it was not on  that  basis alone that this Court came to the conclusion that the income in  question  accrued  on  31st  December,  1955  and   31st December,  1956.   In arriving at- the conclusion  that  the income  in question accrued on the 31st December,  1955  and 31st  December, 1956, this Court primarily took into  consi- deration  the terms of the agreement.  In the course of  the judgment  delivered by one of us, Khanna, J.,  passage  from the  judgment  of this Court in Commissioner of  Income  Tax Bombay City I v. Messrs. Shoorji Valiabhadas and Co. (1) was quoted  in support of the conclusion reached by this  Court. That passage reads thus : "Income-tax is a levy on income.  Though the Income-tax  Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or  its receipt, yet the substance of the matter is the income.   If income  does not result at all, there cannot be a tax,  even though   in   book-keeping,  an  entry  is  made   about   a ’hypothetical  income’,  which doe not  materialise.   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

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(1)  46 1. T. R. 144. 910 circumstances  ,  have been made in the  books  of  account" (emphasis  supplied). Hence it is clear that this  Court  in Morvi Industries’ case did emphasise the fact that the  real question  for  decision was whether the  income  had  really accrued or not.  It is not a hypothetical accrual of  income that  has  got to be taken into consideration but  the  real accrual of the income. In addition to the contentions taken earlier, Mr. Desai also took  objection to the way in Which the High Court  disposed of these cases.  It may be noted that the High Court came to the  conclusion  that the findings reached by  the  Tribunal were findings of fact and, therefore, it would not be proper for the High Court to interfere with the same but  strangely enough,  at an earlier stage the High Court called  for  the questions  referred  to  earlier,  under  S.66(2).  If   the questions  raised  are concluded by the facts found  by  the Tribunal  the  High Court was not justified in  calling  for those  questions.   Further when the High Court  issued  the rule  on the applications made by the Revenue, the  assessee not  only  objected to the prayer made by the  Revenue,  but also submitted that in case the Court was pleased to  direct the  Tribunal  to State a case, it may also  be  pleased  to direct  the  Tribunal to submit the  question  "whether  the commission given up can be considered as real income  coming within  the scope of S.10(1)?" But, the High Court  rejected that  prayer but merely called upon the Tribunal  to  submit the questions set out earlier.  The High Court has now  come to  the  conclusion  that the commission  given  up  by  the assessee cannot be considered as it real income.  It is  un- doubtedly  true that there are certain incongruities in  the procedure adopted by the High Court but the final conclusion reached  by  the High Court is, in our opinion,  correct  in law.  Therefore, the High Court was justified in refusing to answer the first question in all the three cases. In the result these appeals fail and they are dismissed with costs; one set of hearing fee. S.C.                               Appeals dismissed. 911