Accrual of income under an entire contract requires a vested right to receive payment; broken-period commission was not taxable in transferor's hands.

Income accrues only when the assessee acquires a vested contractual right to receive it; under an entire managing agency contract with annual remuneration, no commission for a broken period accrues before the year is completed and the contractual conditions precedent are satisfied. The managing agency commission for the broken period was therefore not taxable in the transferor's hands. Section 36 of the Transfer of Property Act, 1882 did not create apportionment contrary to the contract, and section 26(2) of the Indian Income-tax Act, 1922 did not apply because the transferor had not acquired any part of the income before assignment. The transferees were taxable on the whole commission received.

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Issues: (i) Whether managing agency commission for the broken period before assignment had accrued to the transferor and was taxable in its hands; (ii) Whether the commission was apportionable between transferor and transferee under the managing agency arrangements and the relevant apportionment provisions.

Issue (i): Whether managing agency commission for the broken period before assignment had accrued to the transferor and was taxable in its hands

Analysis: The managing agency agreements were construed as entire contracts providing for annual remuneration calculated on annual profits, with the service for the full year treated as a condition precedent to the right to receive commission. Income-tax liability on accrual depends on the existence of a vested right to receive the amount and, until the annual accounts were made up and the contractual conditions were fulfilled, no debt arose in favour of the transferor for any broken period. Mere rendering of services during part of the year did not create an accrued right to commission.

Conclusion: No part of the managing agency commission for the broken period had accrued to the transferor, and it was not taxable in the transferor's hands.

Issue (ii): Whether the commission was apportionable between transferor and transferee under the managing agency arrangements and the relevant apportionment provisions

Analysis: Section 36 of the Transfer of Property Act, 1882 applies only as between transferor and transferee and only in the absence of a contract to the contrary; the assignment deeds and the governing agreements displaced any such default apportionment. Section 26(2) of the Indian Income-tax Act, 1922 also did not assist the revenue because the transferor had not acquired any actual share of the income before the assignment. The case therefore turned not on equitable division of work done, but on whether income had in law accrued at all.

Conclusion: The commission was not apportionable in the manner adopted by the High Court, and the transferees were taxable on the whole of the commission received by them.

Final Conclusion: The legal effect of the decision was that the transferor was not taxable on any broken-period commission, the question referred was answered in the negative, and the appeals succeeded.

Ratio Decidendi: For income-tax purposes, income accrues only when the assessee acquires a vested right to receive it under the contract; where a managing agency contract is entire and annual, no part of the annual commission accrues for a broken period before completion of the year and satisfaction of the contractual conditions precedent.

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