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PETITIONER: THE COMMISSIONER OF INCOME-TAX,BOMBAY NORTH & OTHERS.

       Vs.

RESPONDENT: M/S.  HARIVALLABHDAS KALIDAS AND CO.,

DATE OF JUDGMENT: 19/02/1960

BENCH: KAPUR, J.L. BENCH: KAPUR, J.L. DAS, S.K. HIDAYATULLAH, M.

CITATION:  1960 AIR  703            1960 SCR  (3)  50  CITATOR INFO :  R          1960 SC1336  (3)  MV         1986 SC 757  (15)

ACT:         Incometax-Managing Agent’s Commission payable at the end of        the  year-Rate of Commission reduced before then  by  agree-        ment-If  voluntary  relinquishment of a Portion  of  accrued        commission.

HEADNOTE: The respondent-firm Harivallabhdas Kalidas was appointed the Managing  Agent of Shri Ambika Mills Ltd., the appellant  in the connected appeal by means of a Managing Agency Agreement the relevant portion of which ran thus:- (2)(a)  The  Company shall pay each year to  the  said  Firm either the commission of 5 (five) per cent on the total sale proceeds  of  yarn,  and of  all  cloth,  manufactured  from cotton, 51 silk,  jute,  wool, waste and other fibres and sold  by  the company, or a commission of three pies per pound avoirdupois on  the  sale, whichever the said Firm choose to  take,  and also  a commission of 10 (ten) per cent on the  proceeds  of sale of all other materials sold by the Company and 10 (ten) per cent on the bills of any ginning and pressing  factories and on any other work done by the Company." And by clause (5) it was provided: " (5) The remuneration payable to the said Firm under clause 2(a) shall be paid to the said Firm forthwith after the 31st day of December or such other date as the Directors may  fix for the closing of the accounts of the Company in each  year and after such accounts are passed by the company in General Meeting." Subsequently,  at  the request of the  Managed  Company  the Managing Agents agreed to charge commission at 3 per cent on sales instead Of 5 per cent for the year ending December 31, 1950  and  a  resolution to that effect was  passed  by  the Managed  Company and a formal agreement to that  effect  was executed.   The income-tax Authorities, however,  taxed  the Managing  Agents for two assessment years on the basis  that by  entering  into  an agreement with  the  mills  they  had

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voluntarily  relinquished  certain sums of  money  as  their commission  which  had  accrued to them as  income  for  the purpose  of income-tax.  An appeal was taken to the  Income- tax  Tribunal  which  held that the  agreement  between  the Managing   Agent   and  the  Managed  Company   to   receive remuneration  at 3 per cent on the total sale was valid  and took effect from January, 1, 1950 and the questions  whether the commission accrued on the proceeds of every single  sale or  only  when  the assessee firm exercised  its  option  to charge it on the total sale proceeds or on the weight of the yarn  sold and whether the Managing Agents would  get  their commission after the whole profit was determined at the  end of the year, were decided in favour of the Managing  Agents. The  High  Court  also  on a reference made  to  it  at  the instance  of  the Commissioner of Income-tax,  answered  the above  mentioned question in favour of the Managing  Agents. On appeal by the Incomee-tax Commissioner by special leave, Held, that on a proper construction of the agreement, it was clear  that there was no accrual of commission till the  end of the year and that it did not accrue as and when the sales took place.  The Managing Agents were to be paid at the  end of  the  year  and by agreeing to the  modification  of  the agreement before then they had not voluntarily  relinquished any portion of the commission. Commissioner of Income-tax, Madras, v. K.R.M.T.T. Thiagaraja Chetty and Co., [1954] S.C.R. 258, E.D. Sasoon and Co.  Ltd. v.  The  Commissioner of Income-tax Bombay  City,  [1955]  i S.C.R.  313  and Commissioner of Inland Revenue  v.  Gardner Mountain and D’ Ambrumenil Ltd., 29 T.C. 69, not applicable. 52

JUDGMENT:        CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 145/58  and        323/57.        Appeals  by special leave from the judgment and order  dated        September  14,  1955,  of  the Bombay  High  Court  in  I.T.        References, Nos. 8 and 21 of 1955 respectively.         R.  Ganapathi Iyer and D. Gupta, for the appellant in  C.A.        No. 145 of 1958, and respondent in C. A. No. 323 of 1957.        N.   A.  Palkhivala,  S.  N. Andley, J.  B.  Dadachanji  and        Rameshwar Nath, for the respondent in C. A. No. 145 of  1958        and appellant in- C. A. No. 323 of 1957. ,        1960.   February,  19.   The  Judgment  of  the  Court   was        delivered by        KAPUR,  J.-This judgment will dispose of two appeals, C.  A.        No.  145/58  and C. A. 323/57.  They arise out of  the  same        transaction i.e. Managing Agency Agreement and the result of        C.  A.  No. 323/57 is dependent upon the judgment in  C.  A.        145158  and we propose to deal with the latter appeal  which        was argued before us and the former for reasons to be stated        later was not pressed.  The appellant in C. A. 145/58 is the        Commissioner  of Income-tax, Bombay and the,  respondent  is        the assessee, a registered firm, which on March 8, 1941, was        appointed  the Managing Agents of Shri Ambica Mills  Limited        (hereinafter termed the Managed Company) the appellant in C.        A.  323/57.  The duration of the Managing Agency period  was        20 years.  By clause (2) of the Managing Agency Agreement it        was provided:-        "  (2)(a) The Company shall pay each year to the  said  Firm        either the commission of 5 (five) per cent.on the total sale        proceeds  of  yarn,  and of  all  cloth,  manufactured  from        cotton, silk, jute, wool waste and other fibres and sold  by        the  company,  or  a  commission of  three  pies  per  pound

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      avoirdupois  on the sale, whichever the said Firm choose  to        take,  and  also a commission of 10 (ten) per cent.  on  the        proceeds of sale of all other materials sold by the  Company        and  10  (ten)  per cent. on the bills of  any  ginning  and        pressing  factories  and  on  any other  work  done  by  the        Company.        53        (b)If  in any year the net profits of the Company shall  not        be sufficient to enable the Directors, if they think fit, to        recommend  a  dividend of eight per cent. per annum  on  the        capital ’paid up on the ordinary shares for the time  being,        the  same  -Firm shall be bound to give up  from  the  total        amount  of commission payable under clause 2(a) hereof  such        portion thereof as may be necessary to make up the  deficit.        PROVIDED THAT in no event the amount so given up by the said        Firm  shall  exceed  one-third  of  such  total  amount   of        commission        And by Clause (5) it was provided:        "  (5)  The  remuneration payable to the  said  Firm  ’Under        Clause  2(a) shall be paid to the said Firm forthwith  after        the 31st day of December or such other date as the Directors        may  fix for the closing of the accounts of the  Company  in        each year and after such accounts are passed by the  Company        in General Meeting ".        On  December 9, 1950, the Board of Directors of the  Managed        Company passed a resolution to the effect that the Directors        had  for  some time past been discussing with  the  Managing        Agents  the  advisability  of modifying  the  terms  of  the        Managing Agency Agreement as to the commission payable under        it  and that the Managing Agents had agreed to charge 3  per        cent.  on sales instead of 5 per cent. for- the year  ending        December  31, 1950.  A resolution was passed at  the  Annual        General  Meeting  of the Managed Company on  April  22,1951,        which  was to the same effect.  The resolution of the  Board        of  Directors  was  ratified  at  an  Extraordinary  General        Meeting  of  the  shareholders of  the  Managed  Company  on        October  7,  1951,  and  the same  day  a  formal  agreement        embodying  the terms of the resolution was executed  between        the  Managing  Agents  and the  Managed  Company.   For  the        accounting years 1950 and 1951 i.e. assessment years 1951-52        and 1952-53 the Managing Agents were taxed by the Income-tax        Authorities  on the basis that in those two years  they  had        voluntarily relinquished a sum of Rs. 1,69,981 and Rs. 2,10,        53O  for the respective assessment years.  These  sums  were        added  to the income of the Managing Agents for the  purpose        of income-tax.        54        An  appeal  was  then  taken  to  the  Income-tax  Appellate        Tribunal and it was held by the Tribunal that the  agreement        between  the  Managing  Agents and the  Managed  Company  to        receive  remuneration at 3% on the total sales was  a  valid        one  and took effect as from ’January 1, 1950.   The  second        question, whether the commission accrued on the proceeds  of        every single sale or it accrued only when the assessee  firm        exercised  its option to charge its commission on the  total        sale proceeds or on the weight of the yarn sold and  whether        the  Managing  Agents were to get the amount  of  commission        after  the  whole profit was determined at the  end  of  the        year,  was  decided  in favour of the  Managing  Agents.   A        Reference was made to the High Court at the instance of  the        Commissioner of Income-tax and the questions above mentioned        were answered in favour of the Managing Agents.  This appeal        by  the appellant has been brought against the  judgment  of        the High Court by special leave.        In  the  connected appeal i.e. C. A. 323/57 by  the  Managed

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      Company  the  facts are the same except that  the  Appellate        Tribunal  allowed the Managed Company the sum on  which  the        Managing  Agents  were,to be taxed as  allowable  deduction.        When the Commissioner got the case stated to the High  Court        the  Managing  Company also had a case stated.  But  as  the        High Court upheld the contention of the Managing Agents  the        Managed  Company  did not press its  application  which  was        therefore  dismissed.  The appeal of the Managed Company  is        brought against that order.        In the appeal by the Commissioner of Income-tax, i.e. C.  A.        145/58,  it  was argued that according to the terms  of  the        Agency  Agreement  the  Managing  Agents  were  to  get  the        commission  on the sales and as the accounts were kept on  a        mercantile  basis, the amount of commission accrued  as  and        when  the sales took place and paragraph 5 of agreement  was        only  a machinery for quantifying the amount.  It  was  also        argued  that  the  Managing  Agents  by  entering  into   an        agreement  with  the Mills had  voluntarily  relinquished  a        portion  of  the amount of commission which had  accrued  to        them  and therefore the whole of the income from  commission        which had already accrued was liable to        55        income-tax; and reference was made to the cases reported  as        Commissioner  of  lncome-tax,  Madras  v. K.  R.  M.  T.  T.        Thiagaraja Chetty and Co. (1), E. D. Sassoon & Company  Ltd.        v. The Commissioner of Income-tax, Bombay City (2) and to an        English  case  Commissioners of Inland  Revenue  v.  Gardner        Mountain  & D’ Ambrumnil Ltd. (3).  But these cases have  no        application  to  the  facts of the  present  case.   In  the        Commissioner  of  Income-tax,  Madras  v. K.  R.  M.  T.  T.        Thiagaraja  Chetty & Co. (1), the assesses firm  was,  under        the  terms of the Managing Agency Agreement, entitled  to  a        certain  percentage  of  profits and in  the  books  of  the        Company  a  certain sum was shown as commission due  to  the        assessee  firm and that sum was also adopted as an  item  of        business  expenditure and credited to the  Managing  Agents’        commission  account  but  subsequently  it  was  carried  to        suspense  account by a resolution of the Company  passed  at        the request of the assessee firm in order that the debt  due        by the Firm might be written off.  The accounts were kept on        mercantile  basis  and it was held that on  that  basis  the        commission  accrued to the assessee when the commission  was        credited  to the assessee’s account and  subsequent  dealing        with  it would not affect the liability of the  assessee  to        income-tax.  It was also held that the quantification of the        commission  could  not affect the question as it was  not  a        condition  precedent to the accrual of the  commission.   At        page 267 Ghulam Hassan J., observed:-        " Lastly it was urged that the commission could not be  said        to  have  accrued, as the profit of the  business  could  be        computed  only  after  the 31st  March,  and  therefore  the        commission  could not be subject to tax when it is  no  more        than  a mere right to receive.  This argument  involves  the        fallacy that profits do not accrue unless and until they are        actually computed.  The computation of the profits  whenever        it  may  take place cannot possibly be  allowed  to  suspend        their  accrual.   In  the case of income where  there  is  a        condition that the commission will not be payable until  the        expiry of a definite period or the making up of the account,        it  might  be        (1) [1954] S.C.R. 258 at 267.        (2) [1955] 1  S.C.R. 313, 344.        (3)  29 T.C. 69, 96.        56        said  with some justification, though we do not  decide  it,

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      that  the  income  has  not accrued but  there  is  no  such        condition in the present case ".        This  passage  does  not help  the  appellant’s  case.   The        question   there  decided  was  that  the  accrual  of   the        commission  was  not dependent upon the computation  of  the        profits  although  the question whether it  would  make  any        difference  where  the  commission was  so  payable  or  was        payable after the expiry of a definite period for the making        of  the account was left undecided . In the case  before  us        the  agreement  is  of  a different  nature  and  the  above        observations are not applicable to the facts of the  present        case.        The  next  case  is  E.  D.  Sasoon  &  Co.,  Ltd.  v.   The        Commissioner  of  Income-tax, Bombay City (1).   But  it  is        difficult to see how it helps the case of the appellant.  If        anything  it goes against his contention.  In that case  the        assessee Company was the Managing Agent of several Companies        and was entitled to receive remuneration calculated on  each        year’s profits.  Before the end of the year it assigned  its        rights   to   another  person  and  received  from   him   a        proportionate share of the commission for the portion of the        year  during  which  it worked as Managing  Agent.   On  the        construction  of  the Managing Agency Contract it  was  held        that unless and until the Managing Agent had carried out one        year’s completed service, which was a condition precedent to        its being entitled to receive any remuneration or commission        it was not entitled to receive any commission.  The facts in        that  case were different and the question for decision  was        whether the contract of service was such that the commission        was only payable if the service was for a completed year  or        the  assessee  Company was entitled to receive  even  for  a        portion  of  the year for which it had acted as  a  Managing        Agent.  It was held that it was the former.        As  was observed by Lord Wright in Commissioners  of  Inland        Revenue  V. Gardner, Mountain & D Ambrumenil Ltd. (2), "  It        is  on  the  provisions  of the contract  that  it  must  be        decided, as a question of construction and therefore of law,        when the commission was earned The contract in, the  present        case in para-        (1) [1955] 1 S.C.R. 313, 344.        (2) 29 T.C. 69, 96.        57,        graph 2 shows that (1) the company was to pay each year; (2)        that  the  Managing  Agents  were to be  paid  5  per  cent.        commission on the proceeds of the total sales of yarn and of        all  cloth  sold  by the Company or three  pies  per  pound’        avoirdupois  on  the  sale, whichever  the  Managing  Agents        chose; thus there was an’ option to be exercised at the  end        of  the year; (3) they were also to be paid at 10 per  cent.        on  the proceeds of sales of all, other materials;  and  (4)        the Mills were to pay to the Managing Agents each year after        December  31, or such other dale which the Directors of  the        Company  may choose for the closing of the accounts.   There        was a further clause that if the net profits of the  Managed        Company,  that is, the Mills were not sufficient  to  enable        the  Directors  to recommend a dividend of 8 per  cent.  per        annum on the paid up capital, then the Managing Agents  were        bound  to  forego a portion of their  commission  upto  one-        third.   All these provisions as to payment have to be  read        together  as  an indivisible and an integral  whole.   On  a        proper  construction  of  this contract,  therefore,  it  is        obvious that the Managing Agents were to be paid at the  end        of the year.  They had the option of receiving a  percentage        on  total  sales  or  three pies  per  pound  and  this  was        exercisable  at  the  end of the year.   There  was  also  a

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      liability to pay back a portion of the commission in certain        contingencies  which also could be determined only when  the        accounts  were made up for the year.  It is thus clear  that        there  was no accrual of any commission till the end of  the        year.   On  this construction of the contract it  cannot  be        held  that the commission had accrued as and when the  sales        took  place and that as a result of their - agreeing to  the        modification  of  the  agreement  the  Managing  Agents  had        voluntarily relinquished a portion of their commission.   On        the  other  hand under the original agreement  the  Managing        Agents  were entitled to receive commission only at the  end        of  the  year  and  before then  the  agreement  was  varied        modifying its terms as from the beginning of the  accounting        year.        We  are  of  the opinion, therefore,  that  the  High  Court        correctly  found  against  the appellant  and  we  therefore        dismiss C. A. No. 145 of 1958 with costs.  In        8        58        view  of this Mr. Palkiwala for the Managed Company did  not        press  C. A. No. 323 of 1957, which is  therefore  dismissed        but  the  parties  will bear their own costs  in  that  case        because  the result of that appeal is really dependent  upon        the result in C. A. No. 145 of 1958.        Appeals dismissed