Company cannot escape tax liability by relinquishing accrued commission amounts after income vests under section 10(2)(xv)

Morvi Industries Limited Versus Commissioner of Income-Tax (Central), Calcutta

Morvi Industries Limited Versus Commissioner of Income-Tax (Central), Calcutta - [1971] 82 ITR 835 (SC), 1971 AIR 2396, 1972 (1) SCR 970, 1972 (4) SCC 451 The judgment by the Supreme Court addressed two Civil Appeals concerning the assessment years 1956-57 and 1957-58 related to a managing agency agreement between an appellant limited company and a subsidiary company. The core legal issues considered were whether the amounts relinquished by the appellant were taxable as income and if the relinquished amounts could be claimed as permissible expenditure under the Indian Income-tax Act.The Court analyzed the managing agency agreement's terms, specifically clause 2(e) determining when the commission became due and payable to the appellant. The Court emphasized that income accrues when it becomes due, irrespective of actual receipt, as per section 4(1)(b)(i) of the Act. The Court highlighted the distinction between accrual and receipt of income, noting that the mercantile system of accounting recognizes income when legally due, even if not yet received.Referring to precedent, the Court cited Commissioner of Income-tax v. Shoorji Vallabhdas and Co., emphasizing that income tax is levied on income that actually accrues. The Court differentiated between cases where income is given up before or after accruing, stating that in this case, the amounts were relinquished after accruing, thus maintaining tax liability.Regarding the second issue, the Court assessed whether the relinquished amounts could be claimed as permissible expenditure under section 10(2)(xv) of the Act. The Court concluded that the relinquishment was not for the appellant's business purposes or commercial expediency, thus not meeting the criteria for deduction under the Act.In the final determination, the Court dismissed the appeals, upholding the tax liability on the relinquished amounts and rejecting the claim for deduction under section 10(2)(xv) of the Act. The judgment was delivered without costs.In summary, the Court held that the relinquished amounts were taxable income as they had accrued to the appellant, despite not being received, and that the relinquishment did not qualify as permissible expenditure under the Act.