The Cotton Agents Ltd., Bombay Vs.
Commissioner of Income-Tax, Bombay [1960] INSC 99 (3 May 1960)
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 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.
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 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 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 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 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 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.
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