1960 (5) TMI 1 - SC - Income Tax

Tax liability on agency commission accrual upheld by court, dismissing appeal and affirming High Court decision.

The court held that the managing agency commission accrued at the end of the financial year, not at the time of each sale. The interpretation aligned with ... Whether on the facts and circumstances of the case the managing agency commission @ 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 ? Held that:- 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. 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 3 1/2 per cent. on the gross proceeds of all sales of yam, cloth, waste etc. earned in any one year. In that view of the matter, the High Court correctly answered the question. Appeal dismissed. Issues Involved:1. Accrual of managing agency commission.2. Interpretation of managing agency agreement clauses.3. Tax liability for the managing agency commission.Issue-wise Detailed Analysis:1. Accrual of Managing Agency Commission:The primary issue revolved around whether the managing agency commission accrued to the Nemani group or the assessee company. The assessee company contended that the commission accrued to the Nemani group since the sales were made during their period of managing agency. The Tribunal initially supported this view, stating that the commission accrued to the Nemani group as each sale was made, creating a debt in their favor. However, the High Court disagreed, referencing the Supreme Court's decision in E. D. Sassoon and Co. Ltd. v. Commissioner of Income-tax, which established that the commission accrued at the end of the financial year when the accounts were passed by the general meeting.2. Interpretation of Managing Agency Agreement Clauses:The judgment required a detailed interpretation of the managing agency agreement dated March 15, 1925, specifically clauses (2) and (3). Clause (2) outlined the calculation of remuneration at the rate of 3 1/2 percent on the gross proceeds of all sales. Clause (3) specified that the commission became due at the end of each financial year and was payable after the accounts were approved by the general meeting. The court concluded that clause (3) determined the time of accrual, indicating that the commission became due at the end of the financial year, not at the time of each sale. This interpretation aligned with the decision in Sassoon's case, emphasizing that the right to receive the income must be established for it to accrue.3. Tax Liability for the Managing Agency Commission:The Department assessed the Nemani group for the commission from April 1, 1944, to December 31, 1944. The court clarified that there was no intention to tax two parties for the same income and any double taxation would be rectified. The High Court held that the assessee company was liable to pay tax on the entire commission accrued by March 31, 1945, as it became due at the end of the financial year. The court dismissed the argument that the commission embedded in each sale created a debt at the time of sale, affirming that the income accrued at the end of the financial year.Conclusion:The court concluded that the managing agency commission accrued at the end of the financial year and not at the time of each sale. This interpretation was consistent with the managing agency agreement and the precedent set in Sassoon's case. Consequently, the assessee company was liable for the tax on the entire commission accrued by March 31, 1945. The appeal was dismissed with costs, upholding the High Court's decision.