Commissioner of Income-Tax, Madras Vs.
K. R. M. T. T. Thiagaraja Chetty & Co [1953] INSC 62 (14 October 1953)
HASAN, GHULAM SASTRI, M. PATANJALI (CJ) DAS,
SUDHI RANJAN BOSE, VIVIAN BHAGWATI, NATWARLAL H.
CITATION: 1953 AIR 527 1954 SCR 258
CITATOR INFO :
R 1954 SC 470 (40) F 1957 SC 49 (35) D 1960
SC 703 (3,4) RF 1961 SC 204 (10) RF 1986 SC 757 (6,14,46) RF 1991 SC 513 (7)
ACT:
Indian Income-tax Act (XI of 1922), ss.
4(1)(b),13Commission agency-Accounts kept on mercantile systemCommission
credited to agent and debited as business expenditure, but withheld and carried
over subsequently to suspense account pending disputes-Whether income has
accrued-Computation of profits, whether condition precedent to accrual.
HEADNOTE:
Where, under the terms of a managing agency
agreement the assessee firm who were the managing agents of a company were
entitled to a certain percentage of the profits as their commission and in the
books of the company maintained by the firm a sum of Rs. 2,26,850 odd was shown
as commission due to the firm on the profits for the year 1941-42 and the said
sum was also debited as an item of business expenditure and credited to the
managing agents' commission account, but the aforesaid sum was subsequently carried
to a suspense account by a resolution of the company as a result of a request
made by the firm that a debt due by the firm to the company may be written off
:
Held, that, as the assessee kept the accounts
on the mercantile system the commission accrued to the assessee when the
commission was credited to it in the accounts, and the subsequent carrying over
of the amount of the commission to a suspense account pending the settlement of
the dispute between the company and the assessee could not affect assessee's
liability to be taxed on this income.
Held further, that the fact that the profits
of the business could be computed only after the 31st of March, 1942, was Immaterial as quantification of the commission is not a condition precedent to
its accrual.
CiviL APPELLATE JURISDICTION: Civil Appeals
Nos. 131, 131-A and 131-B of 1952.
Appeals from the Judgment and Decree dated
the 2nd day of February, 1950, of the High Court of Judicature at Madras (Satyanarayana Rao and Vishwanath Sastri JJ.) in Cases Referred Nos. 76 and 78 of
1946 and 32 and 56 of 1947.
259 C.K. Daphtary, Solicitor-General for India (G. N. Joshi, with him) for the appellant.
B. Somayya (Alladi Kuppuswami, with him) for
the respondent.
1953. October 14. The Judgment of the Court
was delivered by GHULAM HASAN J.-These three appeals arise from the judgment
and order of the Madras High Court dated 2nd February, 1950, delivered on a
reference by the Income-tax Appellate Tribunal (hereinafter referred to as 'The
Tribunal'), whereby the High Court answered the first referred question in, the
negative, and as regards the second question, Satyanarayana Rao J. answered it
in the affirmative, while Viswanatha Sastri J. answered it in the negative, as
a result of which the judgment of Satyanarayana Rao J. ultimately prevailed.
They relate to the assessment for 1942-1943 and are filed by the Commissioner
of Incometax, while Appeal No. 132 of 1952 which relates to 19431944 is filed
by the assessee, and, is dealt with separately.
The two question which were referred in
respect of the first group of appeals are as follows:(1) Whether there is any
material for the Tribunal's finding that the appellants (respondents in this
case) were being assessed on cash basis in the prior years? (2) Whether on the
facts and in the circumstances of the case the Appellate Tribunal's finding
that the sum of Rs. 2,26,850 could not be assessed for the assessment year 194243
is correct in law? The assessee is a registered firm (hereinafter referred to
as 'the firm') consisting of K.R.M.T.T. Thiagaraja Chetty and his two sons. The
firm is the managing agent of Shri Meenakshi Mills, Ltd., (hereinafter referred
to as the Company) owning a, spinning mill at Madura. The firm also conducted
insurance business and the business of ginning cotton in a ginning factory at
another place. Under the terms of L/B(D)2SCI-3(a) 260 the agreement the
managing agents were entitled to a remuneration of Rs. 1,000 per mensem and a
commission of I per cent. on all purchases, I per cent. on all sales and 10 per
cent. commission on the net profits of the mills before allowing for
,depreciation. The firm had plenary powers of management of the affairs of the
company subject to general supervision -of the directors. It was to have charge
and custody on behalf of the company of all the property, books of accounts,
papers and documents and effects belonging to the company. It was required to
keep at the expense of the company proper and complete books of account of all
purchases and sales and of all payments made and moneys received on behalf of
the company. It had to defray all the expenses of maintaining a suitable office
and a staff of assistants and clerks sufficient to transact the business of the
firm as managing agents of the company. Clause 16 is most important and lays
down that the firm be at liberty to retain, reimburse, and pay themselves out
of the funds of the company, all charges and expenses, legal or otherwise and
all the costs and expenses of providing and maintaining offices for the company
and the salaries of clerks, servants, agents or workmen and all moneys expended
by them on behalf of the company and all sums due to the firm for commission or
otherwise.
The company made considerable profit in the
assessment year 1942-1943 and the firm became entitled to commission to the
tune of Rs. 2,26,850-5-0. The firm did not show this sum in the return on the
ground that it was not actually received in the year of account, viz., by the
31st March, 1942. It relied upon a resolution of the Board of Directors of the
company, dated the 30th March, 1942, by which they had decided to keep the
aforesaid amount in suspense without paying it on the ground that an amount of
two lakhs odd was due to the company from the firm. It appears that the firm
owed a debt to the company for a long time past which was outstanding. The firm
wrote on the 30th March, 1942, to the company requesting that the debt be
written off. The Firm also wrote that on account of the extraordinary increase
in the 261 volume of business. it found it difficult to bestow adequate
attention on all the aspects of the mill business and proposed that the direct
responsibility for sales and purchases may be transferred to some other agency,
leaving the general supervision over the entire management in the firm's hands.
The firm agreed to forego its commission on purchases and sales and agreed to
take half of the commission on the net profits. The directors by their
resolution, passed on the same date, refused to write off the amount without
consulting the general body of shareholders and pending the settlement of the
dispute resolved, to keep the amount in suspense.
The Income-tax Officer held that the firm
followed the mercantile method of accounting and not the cash basis and that
the income having accrued become assessable whether received or not. The actual
amount payable to the firm in, accordance with the terms and conditions of the
agreement for the year 1942-1943 was not disputed. The Appellate Assistant
Commissioner confirmed the assessment and dismissed the appeal of the assessee.
The Commissioner upheld the view that the income was determined on the
mercantile basis and that the income had accrued or arisen to the assessee
within the meaning of section 4(1) (b)(i) of the Income-tax Act. and the mere
fact that the amount was put in the suspense account did not alter the fact
that the income had accrued to the firm Upon the matter being carried further
in appeal by the assessee, the Tribunal held that the income had not accrued to
the firm and that the amount should be excluded from taxation as not having
been received during the accounting year. The two questions aforementioned were
then referred, at the instance of the Commissioner by the Tribunal to the High
Court.
As already stated, the opinion on the first
question was unanimous, both the learned Judges Satyanarayana Rao J. and
Viswanatha Sastri J. holding against the assessee that there was no material
for the Tribunal's finding that the firm was being assessed on cash basis in
previous years, the latter observing that finding in respect of 1942-1943 and
1943-1944 262 were mutually inconsistent, for in respect of the latter
assessment year the Tribunal had held that the sum of Rs.
2,20,702 was assessable to income-tax, though
the amount merely stood as a credit to the firm in the books of the company and
has not been drawn by the firm.
It is contended by Mr. Somayya on behalf of
the firm that the finding of the Commissioner that the firm was not paid in
cash in the prior years was set aside by the Tribunal and being a finding of
fact ought not to have been interfered with by the High Court. The firm had
raised this question before the Tribunal at the time of the reference and had
contended that no question of law arose from its order, as it was concluded by
finding of fact. The Tribunal, however repelled this contention observing that
the question was one of ,law, as it related to the existence of any material
for the finding. The High Court upon such question being referred applied its
mind to the precise question and came to the conclusion that there was no.
material for the finding that the firm was
being assessed on cash basis in the prior year. The case of Commissioner of
Income-tax, Bihar and Orissa v. Maharaiadhiraja of Darbhanga(1) does not
support the contention of Mr. Somayya.
There the Income-tax Officer had computed the
profits of the business for a particular year by taking into account both
actual receipts of interest in that year and sums treated by the assessee in
that year as receipts of interest by their transference to the interest
register from what might be regarded as a suspense account. The Privy Council
held that there was nothing illegel or contrary to principle in the computation
arrived by the Income-tax Officer. The High Court under section 66(1) had to
decide the question of law raised by the first question and decided it against
the assessee. Nor can it be said that in answering the question, the High Court
acted illegally or contrary to principle. Admittedly, the firm kept no separate
books of accounts other than the (1) 60 I.A, 146.
263 books of accounts of the company in which
there was a ledger containing entries relating to the remuneration and commission
paid in cash to the firm. The sum of Rs. 2,26,850-5-0 was debited as a revenue
expenditure of the company as having been paid to the firm in the books of
accounts of the company kept by the firm and was also allowed as a deduction in
computing the profits and gains of the company for the purposes of income-tax
for 1941-1942. The fact that certain moneys were drawn in cash by the firm from
time to time does not necessarily lead to the inference that the firm kept its
accounts on a cash basis. Anyone familiar with commercial transactions knows
that even in accounts kept on a mercantile basis there can be entries of cash
credits and debits. We see no flaw in the conclusion reached by the High Court
on the first question.
The next question that falls to be determined
is whether the sum of Rs. 2,26,850-5-0 was part of the profit and gains which
had accrued to the firm during the accounting year 1941-1942. The undisputed
facts are that the amount in question was the commission earned by the firm as
managing agents of the company. In the books of the company maintained by the
firm the aforesaid sum was debited as an item of revenue expenditure and the
profits were computed after deducting that sum. The amount was simultaneously
credited to the managing agents' commission account. Under these circumstances,
it is idle to contend that the aforesaid sum had not accrued. There can be no
doubt under the circumstances that the aforesaid sum was income which had
accrued to the firm. The only question is whether the aforesaid sum ceased to
be, income by reason of the fact that on the 30th March the sum was carried to
the suspense account by a resolution of the directors as a result of the
request made by the firm that the outstanding debt due from it may be written
off. It is true that the, sum was not drawn by the firm but that can hardly
affect the question of its liability to tax, once it is established that the
income had accrued orarisen to the firm 264 The mere fact that the company was
withholding payment on account of a pending dispute cannot be held to mean that
the amount did not accrue to the firm.
The resolution of the directors itself shows
beyond doubt that the amount in question was treated as belonging to the firm
though its payment was deferred on account of a pending dispute. As Viswanatha
Sastri J. tersely put it "The sum had irrevocably entered the debit side
of the company's account as a disbursement of managing agency commission to the
firm and had been appropriated to the, firm's dues and the same sum could not
again be entered in a suspense account at a later date. The sum, therefore,
belonged to the firm and had to be included in the computation of the profits
and gains that had accrued to it unless the firm had regularly kept its
accounts on a cash basis, Which is not the case here"'.
A reference to the ledger -folios in the
books of the company shows that apart from the managing agents' monthly
remuneration of Rs. 1,00.0 which has duly entered in. their account the amount
in question also finds a place in the ledger as outstanding charges against the
company and as credits in favour of the firm, The' journal entries in the
company's books are the same.
Section 10 of the Act makes "profits and
gains of business, profession or vocation"' carried on by an assessee
liable to tax. Section 12 makes "income from other sources in respect of
income, profits and gains of every kind" liable to tax. By section 13
income, profits and gains shall be computed for the purposes of both those
sections in accordance with the method of accounting regularly employed by the
assessee, but there is a proviso that, if no method of accounting has been
regularly employed, or if the method employed is such that, in the opinion of
the Income-tax Officer, the income, profits and gains cannot properly be deduced
there from, then the c Computation shall be made upon such basis and in such
manner as the Income-tex Officer may determine.
265 The Income-tax Officer in computing the
income of the assessee would have followed the mercantile system or the cash
basis whichever was employed by the assessee. There is some evidence, though
not conclusive, on the record that the assessee followed the mercantile system
of accountancy.
This appears from the assessment orders field
in the case, but apart from this,' the Income-tax Officer had full authority
under the proviso to compute the profits upon such basis and in such manner as
he thought fit.
The case of St. Lucia Usines and Estates
Company, Ltd. v. Colonial Treasurer of St. Lucia(1) was relied upon strongly
before us as it was in the High Court in support of the contention that the sum
not having been paid to or realized by the firm no income can be said to have
accrued to the firm. In that case the assessee company sold all its property in
St. Lucia in 1920 and ceased to reside or carry on business there. In 1921
interest upon the unpaid part of the purchase price, was payable to it, but was
not paid.
The company was liable to pay income-tax for
the year 1921 under the Income-tax Ordinance, 1910, of St. Lucia, only if the
interest above mentioned was 'income arising and, accruing' to it in 1921. It
was held that though the interest was a debt accruing in 1921, it was not
'income arising or accruing' in 1921, and that the company was not liable. The
decision was based upon the meaning of the word 'income' as used in the
Ordinance which was said to connote the idea of something "coming
in". Lord Wrenbury who delivered the judgment of the Privy Council
construed the words "income arising or accruing" as money arising or
accruing by way of income and not "debts arising or accruing". The
learned Law Lord observed "A debt has accrued to him (taxpayer) but income
has not". It is clear that the case related to the meaning of the word
"Income" as used in the Ordinance and can be no authority on the
question of the assessment of profits and gains under the Indian Income-tax
Act.
The next case relied upon is Dewar v.
Commissioners of Inland Revenue(2). In that case one of the executors be(1)
[1924] A.C. 508. (2) [1935] 2 K.B. 351.
266 came entitled to a legacy which carried
interest for such time as it remained unpaid. The testator's estate was
sufficient at all material times to enable interest to be paid on the legacy
but the legatee acting on the advice of his accountant did not demand the
legacy or interest thereon. It was held that as the legatee had not received
interest, there was no income in respect of which he could be charged to
sur-tax. The decision turned upon the language of Schedule D, clause 1,
sub-clause (b) of the English Income Tax Act of 1918, as distinguished from
clause I (a). Clause I (a) deals with annual profits or gains arising or
accruing from any kind of property whatever......
but clause (b) imposes a tax in respect of
"all interest of money, annuities and other annual profits." Lord
Hanworth.
M. R. drew the distinction between the two
clauses and observed that the case was one of interest of money and fell under
clause (b) and not under clause (a). Under that clause the tax was limited to
any interest of money whether the same is received and payable half-yearly or
any shorter or more distant period. The learned Master of the Rolls observed:
"If the interest on the legacy in this case has not arisen to the
respondent, if he had not become the dominus of this sum, if it does not lie to
his order in the hands of his agent, can it be said that it has arisen to him?
I think the answer definitely upon the facts must be:
No. it has not." Lord Maugham L. J. put
the question thus: "I think in the present case two circumstances may be
accurately stated in regard to the sum of pound 40,000 which it is said can be
brought into charge. The first is that the sum of pound 40,000 was not during
the year of assessment a debt due by the executors to Mr. Dewar, and secondly,
that the sum in question may never be paid or received at all." The case
of Commissioner of Taxes v. The Melbourne Trust, Limited(1) turned on the
construction of the charging (1) [1914] A.C. 1001 267 section in the Income Tax
Act 1903 of Victoria, whereby a company was liable to pay tax upon the profits
earned, in or derived in or from Victoria...... In this case the surplus
realized by the assessees over the purchase price for the assets sold after
making all just deductions was taxed as profit but it was held that they were
entitled to hold in suspense part of the surplus realised to meet possible
losses on other assets and that under the circumstances the profit was earned
for the purposes of the Act only when distributed to the share holders.
Having considered all these cases, we are of
opinion that neither of them has any bearing upon the facts and circumstances
of the present case.
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 subjected
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 said with some
justification, though we do not decide it, that the income has not accrued, but
there is no such condition in the present case. Clauses 7 & 8 of the
agreement which relate to the payment of the commission and the calculation of
the profits mean no more than this that the commission will be quantified only
after certain deductions had been made and not that the commission will not
accrue until the profits have been ascertained. The quantification of the
commission is not a condition precedent to its accrual. If the profits of the
company are said to have accrued on the 31st of March, upon a parity of
reasoning, it must be conceded that the commission also accrued on the same
date. The date has as much to do with the accrual of the commission as it has
to do with the accrual of the profits.
It was faintly suggested that the managing.
agency was not a business but this is immaterial for income-tax purposes
because section 13 will apply to cases both under sections 10 268 and 12, so we
refrain from deciding the point. We may, however, point out in passing that in
two cases Tata Hydro Electric Agencies, Ltd. v. Commissioner of Income-tax
Bombay(1) and Commissioner of Income-tax. Bombay Presidency v. Tata Sons
Ltd.(2) it was assumed that the managing agency is business but the point was
directly decided in Inderchand Hari Ram v. Commissioner of Income-tax, U.P. and
C.P.(3) that it is so.
For the foregoing reasons, we accept the view
taken by Viswanatha Sastri J. and allow the appeals. The respondent shall pay
the costs of the Commissioner both in this court and before the High Court.
Appeals allowed.
Agent for the appellant: G. H. Rajaddhyaksha.
Agent for the respondent: S. Subramanian.
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