1958 (10) TMI 37 - HC - Income Tax

High Court: Reduced commission not income for 1948. Assessee entitled to reduced amounts.

COMMISSIONER OF INCOME-TAX, BOMBAY CITY I Versus SHOORJI VALLABHDAS & CO.

COMMISSIONER OF INCOME-TAX, BOMBAY CITY I Versus SHOORJI VALLABHDAS & CO. - [1959] 36 ITR 25 (Bom) Issues Involved:1. Whether the two sums of Rs. 1,36,903 and Rs. 2,00,625 are income of the 'previous year' ended March 31, 1948.2. If the answer to the first question is in the affirmative, whether they represent an item of expenditure permissible under the provisions of section 10(2)(xv) of the Indian Income-tax Act, 1922, in computing the assessee's income of that 'previous year' from its managing agency business.Issue-wise Detailed Analysis:1. Whether the two sums of Rs. 1,36,903 and Rs. 2,00,625 are income of the 'previous year' ended March 31, 1948:The assessee firm, Messrs. Shoorji Vallabhdas & Co., acted as managing agents for the Malabar Steamship Co. Ltd. and the New Dholera Steamship Co. Ltd., earning a commission of 10% on the freight charged to shippers. For the period April 1, 1947, to December 31, 1947, the firm earned commissions of Rs. 1,71,885 from the Malabar Company and Rs. 2,56,815 from the Dholera Company. These amounts were credited in the assessee's books but were later agreed to be reduced to 2.5% commission due to circumstances involving the shareholders' objections and agreements to change the managing agency to newly floated private limited companies controlled by the assessee's partners.The Income-tax Officer taxed the original commission amounts, arguing that the income had accrued to the assessee and any subsequent reduction was a voluntary gift. The Tribunal's Accountant Member upheld this view, while the Judicial Member disagreed, citing the Bombay High Court decision in Commissioner of Income-tax v. Chamanlal Mangaldas, which distinguished between 'commission earned' and 'commission to which the managing agents became entitled.' The President of the Tribunal, acting as the third member, sided with the Judicial Member, concluding that the sums were not income of the assessee.The High Court examined whether the reduction in commission was a voluntary gift or an agreement. The Court noted that the reduction was a result of negotiations and agreements with the shipping companies, not a unilateral gift. The Court emphasized the business nature of the transactions and concluded that the real commission to which the assessee became entitled was the reduced amount agreed upon. Thus, the sums of Rs. 1,36,903 and Rs. 2,00,625 were not considered income for the relevant accounting year.2. If the answer to the first question is in the affirmative, whether they represent an item of expenditure permissible under the provisions of section 10(2)(xv) of the Indian Income-tax Act, 1922:Given the conclusion on the first issue, it was unnecessary for the Court to address the second issue. The sums in question were not considered income, so the question of whether they could be deducted as an expenditure under section 10(2)(xv) did not arise.Conclusion:The High Court concluded that the sums of Rs. 1,36,903 and Rs. 2,00,625 were not income of the assessee for the previous year ended March 31, 1948. The transactions were seen as business agreements rather than voluntary gifts, and the assessee was only entitled to the reduced commission amounts. Consequently, the question of allowable expenditure under section 10(2)(xv) was not addressed. The reference was answered in favor of the assessee, with the Commissioner ordered to pay the costs.