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PETITIONER: THE COTTON AGENTS LTD., BOMBAY

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX,BOMBAY.

DATE OF JUDGMENT: 03/05/1960

BENCH: DAS, S.K. BENCH: DAS, S.K. HIDAYATULLAH, M.

CITATION:  1960 AIR 1279

ACT: Income-tax-Managing Agency Agreement-Proper construction of- Commission  on  sale proceeds of  the  managed  company-Time of accruing.

HEADNOTE: Messrs.   Shivnarayan  Surajmal  Nomani  were  the  managing agents  of  the New Swadeshi Mills of  Ahmedabad  Ltd.   The Nemani group and the appellant-company which is the assesses 811 held  a  substantial  number of shares of  the  said  mills. Sometime  in 1944 some difference arose between them and  it was  decided that the Nemani group should sell its block  of shares to the appellant company at an agreed price and  then the  appellant company would become the managing  agents  of the  mills company on payment of Rs. 5,00,000 to the  Nemani group  and  would  be  entitled to  the  emoluments  of  the managing agents as from April 1, 1944.  The relevant portion of the Managing Agency Agreement ran thus:- "  (2) The remuneration of the agents as such agents of  the company as aforesaid shall be as follows:- A  commission at the rate of three and a half per  cent.  on the  gross proceeds of all sales of the yarn,  cloth,  waste and other articles manufactured by the company earned in any year  or other period for which the accounts of the  company are made up and laid before the General Meeting." "  (3) The said commission shall become due to the  Managing Agents at the end of each financial year or other period for which the accounts of the company are to be laid before  the General  Meeting and shall be payable and  paid  immediately after  such  accounts  have  been  passed  by  the   General Meeting.,, The  assessment year was 1946-47, and the year  ending  with Diwali, 1945 (October 18, 1944, to November 4, 1945) was the accounting year.  The managing agency commission from  April 1, 1944, to December 31, 1944, amounted to Rs. 2,20,433  and from January 1, 1945, to March 31, 1945, to Rs. 67,959.  The case  of the appellant-company was that for  the  assessment year 1946-47 it was liable to pay tax only on the commission of  Rs.  67,959 which it had earned by working  as  managing agent of the Mills company and it was not liable to pay  tax

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on  the  sum of Rs. 2,20,433.  On a  difference  of  opinion having  arisen between the departmental  taxing  authorities and the Tribunal the following question was referred to  the High Court for decision :- "  Whether  on the facts and circumstances of the  case  the managing agency commission of 3-1/2 on sales made by the New Swadeshi Mills of Ahmedabad Ltd., between April 1, 1944, and December 31, 1944, accrued to Shivnarayan Surajmal Nemani or to the assessee ? " The  High Court following the decision of the Supreme  Court in  E.  D.  Sassoon and Company  Ltd.   V.  Commissioner  of Income-tax, Bombay City, held that the appellant company was liable  to  pay tax on the whole of the  commission  as  the commission  accrued due on March 31, 1945, and  they  became entitled to receive it at the end of the year; it also  held that  no debt was created in favour of the agents  when  the goods  were  sold.  On appeal by the assessee company  on  a certificate of the High Court: Held,  that  the view of the High Court  was  correct.   The commission of the managing agents accrued  and became due at the end of the financial year and that neither any debt  nor any  right to receive payment arose in favour of the  agents when each 812 transaction of sale took place.  No income arose or  accrued on the sale proceeds at the time of each sale. E.   D. Sassoon and Company Ltd. v. Commissioner of  Income- tax, Bombay, [1955] 1 S.C.R. 313, referred to. Lakshminarayan  Ram  Gopal  and Sons v.  The  Government  of Hyderabad, [1955] 1 S.C.R. 393, followed. Commissioners  of  Inland  Revenue  v.  Gardner  Mountain  & D’Ambrumenil  Ltd., (1947) 29 T.C. 69 and Turner Morrison  & Co.  Ltd. v. Commissioner of Income-tax, West Bengal, [1953] 23 I.T.R. 152, distinguished.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 100 of 1.959. Appeal from the judgment and order dated February 11,  1957, of  the Bombay High Court in Income-tax Reference No. 53  of 1956. R.   J.  Kolah, Dwarkadas, S. N. Andley; J. B.   Dadachanji, Rameshwar Nath and P. L. Vohra, for the appellants. K.   N. Rajagopal Sastri and D. Gupta, for the respondent. 1960.  May 3. The Judgment of the Court was delivered by S.K.  DAS, J.-This is an appeal on a certificate granted  by the  High  Court of Bombay, under s. 66A (2) of  the  Indian Income-tax  Act,  1922.   The short facts  are  these.   The Cotton  Agents  Limited,  Bombay, are  a  limited  liability company  registered under the Indian Companies Act and  will be called the assessee Company in this judgment.  It held  a substantial  number of shares of the New Swadeshi  Mills  of Ahmedabad,  Ltd.  (hereinafter called  the  Mills  Company). Messrs.   Shivnarayan  Surajmal Nemani  (called  the  Nemani group)  also  held a block of shares of  the  Mills  Company along  with  its managing agency.  The assessment  year  was 1946-47, and the year ending with Diwali, 1945 (October  18, 1944,  to  November  4,  1945)  was  the  accounting   year. Sometime in 1944 some differences arose between the assessee Company  and  the  Nemani  group;  these  differences   were referred  to  one Govindram Seksaria, who decided  that  the Nemani group should sell its block of shares to the assessee Company at an agreed price, It was further decided 813

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that  a sum of Rs. 5,00,000 be paid by the assessee  Company to  the  Nemani group as the price of the,  managing  agency rights.  This arrangement was approved by the  share-holders of the Mills Company by a resolution dated January 4,  1945, and came into effect immediately.  The agreement further was that  the assessee Company would come in as managing  agents of the Mills Company in place of the Nemani group and  would be entitled to the emoluments of the managing agents as from April 1, 1944.  The managing agency commission from April 1, 1944,  to  December 31, 1944, amounted to Rs.  2,20,433  and from January 1, 1945, to March 31, 1945, to Rs. 67,959.  The case  of  the assessee Company was that for  the  assessment year 1946-47 it was liable to pay tax only on the commission of  Rs.  67,959 which it had earned by working  as  managing agent of the Mills Company and it was not liable to pay  tax on the sum of Rs. 2,20,433.  This contention of the assessee Company   was  not  accepted  by  the  departmental   taxing authorities;  but the Tribunal decided in its  favour.   The assessee Company’s case before the Tribunal was that as  the managing agency commission was based on the sales, the  com- mission accrued to the managing agents as and when the sales were  made and furthermore the sum of Rs. 5,00,000  paid  by the  assessee  Company  to  the  retiring  managing   agents included   the  purchase  price  of  the   managing   agency commission  which had accrued in the hands of  the  retiring agents.   The  Tribunal expressed the view that  on  a  true construction of the relevant managing agency agreement,  the 31 per cent. commission on sales made when the Nemani  group was the managing agent accrued to that group and not to  the assessee  Company and thus a debt was created in  favour  of the Nemani group on every sale during its period of managing agency  and only the payment of the debt was  deferred  till the  accounts of the Mills Company were passed at a  general meeting; therefore, the commission prior to the close of the year  1944 was assessable in the hands of the  Nemani  group and  thereafter in the hands of the assessee  Company.   The Department, however, contended that the whole 106 814 of  the managing agency commission accrued to the  assessee. Thereupon,  at the instance of the Department, the  Tribunal referred the following question of law to the High Court for decision :- "  Whether  on the facts and circumstances of the  case  the managing agency commission at 3-1/2 on sales made by the New Swadeshi Mills of Ahmedabad Ltd., between April 1, 1944, and December  31, 1944, accrued to Shivnarayan Surajmal  Nemani, or to the assessee ?" The  High  Court held that the matter was concluded  by  the decision  of this Court in E. D.Sassoon and Company Ltd.  v. Commissioner of Income-tax, Bombay City (1).  With reference to the argument of learned counsel for the assessee  Company that the commission was payable on the sale proceeds and not on the profits as in Sassoon’s case (1), it said: " We would have given serious thought to this aspect of  the matter  but  for the view we take that the decision  of  the Supreme Court with regard to the question of creation of the debt  and with regard to the serving by the managing  agents for a term of one year being a condition precedent for their being  entitled to receive payment, is indistinguishable  on the  facts of this case.  We may point out that here  as  in the Sassoon’s case (1) the commission of 31 per cent. is  to be earned in any year, and also by clause 3 of the agreement the  commission is to become due to the managing  agents  at the end of each financial year.  Therefore, till the end  of

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the  financial year there is no debt whatsoever  created  in favour  of  the  managing agents and  also  their  right  to receive payment depends upon their having served for a whole year.   Under the circumstances we must hold, following  the decision of the Supreme Court, that the assessees are liable to pay tax on the whole of the commission as the  commission accrued  due on March 31, 1945, and they became entitled  to receive it at the end of the year.  We do not agree with the view of the Tribunal that according to the agreement of  the managing agents the debt was (1)  [1955] 1 S.C.R. 313. 815 created in favour of the agents when the goods were sold  by the  company  and that the payment was deferred  to  a  date after the accounts having been passed by the shareholders in the general meeting of the company.  In no view of the  case can  it be said that the debt was created in favour  of  the agents when the goods were sold ". The answer to the question really depends on a  construction of the relevant terms of the managing agency agreement dated March  15, 1925, entered into between the Mills Company  and the  Nemani group.  Before we proceed to a consideration  of those terms it is necessary to state that the Department has assessed  the  Nemani group also to tax in  respect  of  the commission  for  the period April 1, 1944, to  December  31, 1944.   That  circumstance has, however, no bearing  on  the question  of  construction  and  learned  counsel  for   the Department  has stated before us that there is no  intention to  tax two parties for the same income and if the  tax  has been realised from both for the same income, it will have to be refunded to one of the two parties after the decision  of this  Court.   We  are  not considering  in  this  case  the validity  or  otherwise of what are known as  protective  or precautionary assessments, and nothing said in this judgment has any bearing on that question. We  go at once to the Managing Agency Agreement dated  March 15,  1925.   Under that agreement the managing  agents  were appointed for a period of fifty. one years, but with liberty to them to resign the appointment and retire from the agency at  any time by twelve calendar months’ notice  in  writing, such  notice to expire at the end of any financial  year  of the  Mills  Company.   Then came cls. (2)  and  (3)  of  the agreement,  which are material and must be quoted so far  as they are necessary for our purpose:- ", (2) The remuneration of the Agents as such Agents of  the Company as aforesaid shall be as follows:- A  commission at the rate of three and a half per  cent.  on the  gross proceeds of all sales of the yarn,  cloth,  waste and other articles manufactured 816 by the Company earned in any year or other period for  which the accounts of the Company are made up and laid before  the General Meeting." Provided, etc., (it is unnecessary to quote the proviso). "  (3) The said commission shall become due to the  Managing Agents at the end of each financial year or other period for which the accounts of the Company are to be laid before  the General  Meeting and shall be payable and  paid  immediately after  such  accounts  have  been  passed  by  the   General Meeting". Clauses  (6)  to (11) recited the rights and duties  of  the managing  agents,  one  of  such  rights  being  to  retain, reimburse  and pay themselves " all sums due to  the  agents for commission ". Clauses (13) and (14) dealt with the right to assign the remuneration and the managing agency, and said

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inter  alia  that  " it shall be lawful for  the  agents  to assign  this  agreement and the benefit  thereof  and  their rights  and  privileges,  etc., to any  person  or  firm  or company having authority by its constitution to become bound by      the      obligations     undertaken      by      the agents...........................  and the Company shall  be bound to recognise the person, firm or company aforesaid  as the  agents of the Company".  It is unnecessary to read  the other clauses of the managing agency agreement, The  controversy  before us hinges really on the  scope  and effect  of clauses (2) and (3), read in the context  of  the agreement as a whole.  On behalf of the assessee Company the argument   is  that  under  el.  (2)  the  managing   agency remuneration  accrued  at the rate of 31 per  cent.  on  the gross proceeds of all sales; the word " all " is emphasised, and it is argued that the remuneration accrued as each  sale took  place,  the totality of sales giving  the  gross  sale proceeds.   It is argued that embedded in each sale was  the managing  agency commission of the assessee Company.  It  is further  suggested  on behalf of the assessee  Company  that though  cl. (3) uses the word " due ", it  merely  indicated the time of payment and not that of accrual. 817 We  do  not think that this reading of the  two  clauses  is correct.   In our view, cl. (3) is the accrual  clause;(  it shows  that  the commission became due at the  end  of  each financial year or other period for which the accounts of the Mills  Company were to be laid before the  General  Meeting. Significantly enough, the clause consists of two parts;  one part says when the commission becomes due and the other says when it is to be payable and paid.  In very clear terms, the clause says that the commission becomes due normally at  the end of the financial year, but is payable after the accounts have  been passed by the General Meeting.  Let  us  contrast el.   (3)  with  cl.  (2).   Clause  (2)  states   how   the remuneration  has to be calculated.  It says in effect  that the  remuneration has to be calculated at the rate of  3-1/2 per  cent. on the gross proceeds of all sales, etc.,  earned in  any year or other period for which the accounts  of  the Mills Company are made up.  Putting the two clauses side  by side,  the  conclusion at which we have arrived is  that  in their  true scope and effect cl. (3) determines the time  of accrual  of  the managing agency remuneration  and  cl.  (2) determines  the  rate  at which the remuneration  is  to  be calculated;  and  as  to  the  time  of  payment,  that   is determined by the second part of cl. (3). This  view  of the managing agency agreement  of  March  15, 1925, concludes the appeal.  If the remuneration accrued  at the  end of the financial year, then undoubtedly it  accrued in  the  hands of the assessee Company.  It remains  now  to refer briefly to some of the decisions cited at the Bar. As  to the decision in Sassoon’s case(1) it is  pointed  out that the commission there payable by way of remuneration was a  percentage on the net profits and this, it is argued  for the  assessee Company, distinguishes that decision from  the present case.  Indeed, it is true that in Sassoon’s case (1) the  remuneration  was  fixed at a  percentage  on  the  net profits,  but the real point of the decision was as to  when the  remuneration  accrued.  On this point the  majority  of learned Judges said: (1)  [1955] 1 S.C.R. 313. 818 "  It  is  clear  therefore that income  may  accrue  to  an assessee  without  the actual receipt of the same.   If  the assessee acquires a right to receive the income, the  income

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can be said to have accrued to him though it may be received later  on  its being ascertained.  The basic  conception  is that  he must have acquired a right to receive  the  income. There must be a debt owed to him by somebody.  There must be as is otherwise expressed debitum in presenti, solvendum  in futuro: see W. S. Try Ltd. v. Johnson(1) and Webb v. Stenton (2).  Unless  and until there is created in  favour  of  the assessee  a debt due by somebody it cannot be said  that  he had  acquired a right to receive the income or  that  income has accrued to him". It  has  been argued before us that  the  decision  requires reconsideration   because  it  failed  to  make  a   further distinction, a distinction which it is stated arises in law, between  the right to receive payment and the creation of  a debt.   We  consider  it  unnecessary  to  consider  such  a distinction,  if any such exists, in the present  case.   On our view of the managing agency agreement, the commission of the  managing agents became due at the end of the  financial year and that is when it accrued; and there were neither any debt  created  nor any right to receive  payment  when  each transaction  of sale took place.  We were also addressed  at some length on the further question whether managing  agency is  service and if so, whether it must be for one full  year or whether apportionment is permissible.  These questions do not fall for decision in the present case and we express  no opinion  thereon.   We have proceeded in this  case  on  the footing  that  the  managing agency  work  of  the  assessee Company constituted business within the rule of the decision in Lakshminarayan Ram Gopal and Sons Ltd. v. The  Government of  Hyderabad  (3) and on that footing we have  decided  the question of accrual.  In Commissioners of Inland Revenue  v. Gardner  Mountain & D’Ambrumenil Ltd. (4), on which  learned counsel  for the appellant placed reliance, the  facts  were quite (1)  [1946] 1 All E.R. 532, 539. (2)  [1883] 11 Q.B D. 518, 522,527. (3)  [1955] (1) S.C.R. 393. (4)  [1947] 29 T.C. 69. 819 different  and  on  a true construction  of  the  agreements there, it was held that the commission payable under certain under-writers’  agreements  arose in the year in  which  the policies  were underwritten.  That decision proceeded  on  a construction  of the agreements there considered; and it  is no authority for construing other agreements of a  different character.   Learned  counsel for the  appellant  relied  on Turner  Morrison & Co.  Ltd. v. Commissioner of  Income-tax, West Bengal(1) for his contention that in the sale  proceeds of  each  transaction  of sale  were  embedded  the  income, profits  or gains to be earned by the managing  agents  and, therefore,  the accrual took place on each  transaction,  of sale.   The observations at page 160 of the report on  which reliance  was  placed  were made  in  a  different  context, namely, in the context of the place of receipt of income  in relation  to the provisions of s. 4(1)(a) of the  Income-tax Act. Learned  counsel  for the respondent has pointed out  to  us that  the observations of Lord Justice Fry in  Colquhoun  v. Brooks  (2)  were not very accurately reproduced  in  Rogers Pyatt  Shellac and Co. v. Secretary of State for India  (3). He  submitted  that Lord Justice Fry did not  say  that  the words  "  accrual  " or "  arising  "  represented  a  stage anterior  to  the  point of time  when  the  income  becomes receivable  and connote a character of the income  which  is more or less inchoate.  He has argued that there is  nothing

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inchoate  about  the income when it arises or  accrues.   We consider it unnecessary to embark on a discussion as to  how far the aforesaid observations require consideration by us. It is enough to say that on the view which we have taken  of the  relevant clauses of the managing agency  agreement,  no income arose or accrued on the sale proceeds at the time  of each  transaction of sale; the income accrued at the end  of the financial year at the rate of 31 per cent. on the  gross proceeds of all sales of yarn, cloth, waste, etc., earned in any  one year.  In that view of the matter, the  High  Court correctly answered the question. The appeal fails and is dismissed with costs.                                  Appeal dismissed. (1) [1953] 23 I.T.R. 152.      (2) (1888) 21 Q.B.D. 52, 59. (3) (1924) 1 I.T.C. 363, 372. 820