Commission accrual and apportionment rules govern excess profits tax where receipts are later adjusted and the accounting period is broken.

Where a managing agency commission is linked to annual net profits and the principal's requisition compensation receipts are provisional and later adjusted, the commission for the earlier accounting periods is correspondingly recalculated on the finally ascertained amounts, because the right to additional commission accrues in each period and later quantification only crystallises that right. Where an accounting year ends after the chargeable accounting period under the Excess Profits Tax Act, the profits for the whole accounting year must be determined and then apportioned for the broken period under the statutory computation rule, so commission falling partly outside the chargeable period remains includible to the extent attributable to that period.

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Issues: (i) Whether the managing agency commission received by the assessee for the first four chargeable accounting periods had to be computed on the basis of the amount finally determined after adjustment of the managed company's requisition compensation receipts. (ii) Whether the commission for the accounting period ending 30 June 1946, falling partly outside the chargeable accounting period under the Excess Profits Tax Act, 1940, could be apportioned and included for excess profits tax purposes.

Issue (i): Whether the managing agency commission received by the assessee for the first four chargeable accounting periods had to be computed on the basis of the amount finally determined after adjustment of the managed company's requisition compensation receipts.

Analysis: The commission payable under the managing agency agreement was linked to annual net profits of the managed company. The managed company's receipts from the Government for requisitioned ships were provisional and expressly subject to later adjustment. When those receipts were later finally ascertained and spread over the earlier years, the assessee's commission for those years also stood correspondingly adjusted. The assessee's right to receive additional commission had already accrued in each relevant accounting period, and the later quantification merely crystallised that accrued right. The Appellate Assistant Commissioner was competent to enhance the assessment on that basis.

Conclusion: The commission to be included in the excess profits tax assessment was the amount finally determined by the Appellate Assistant Commissioner, and this was against the assessee and in favour of the Revenue.

Issue (ii): Whether the commission for the accounting period ending 30 June 1946, falling partly outside the chargeable accounting period under the Excess Profits Tax Act, 1940, could be apportioned and included for excess profits tax purposes.

Analysis: The chargeable accounting period for the last year covered only the part ending on 31 March 1946, while the assessee's accounting year ended on 30 June 1946. Under the third proviso to rule 1 of the First Schedule to the Excess Profits Tax Act, 1940, where the accounting period and chargeable accounting period do not coincide, profits must be apportioned proportionately. The fact that the commission accrued on the accounting year-end did not prevent apportionment, because the statutory scheme required profits of the whole accounting year to be determined first and then divided for the broken period. The authorities supporting apportionment in broken accounting periods were applied, and the contrary analogy was rejected.

Conclusion: The commission for the period ending 30 June 1946 was liable to apportionment and inclusion to the extent of the chargeable accounting period, and the assessee's challenge failed.

Final Conclusion: The reference was answered substantially in favour of the Revenue, with the assessee failing on the substantive questions decided and the excess profits tax assessment being upheld.

Ratio Decidendi: Where a contractual right to commission is expressly subject to later adjustment of the principal's receipts, the commission accrues in the relevant accounting periods and may be adjusted when the underlying receipts are finally ascertained; and where an accounting year is only partly covered by the chargeable accounting period, profits must be apportioned under the statutory computation rules.

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