Commercial expediency and real income principles govern deductibility of surrendered allowance and non-accrual of commission

A business sacrifice made on grounds of commercial expediency was treated as allowable revenue expenditure, because the office allowance was surrendered to support the managed company's finances. The managing agency commission was not taxed as accrued income, since no payment date had been fixed, the amount could be determined only after the managed companies finalised accounts, and the commission was given up before that point. On the real income principle, mercantile accounting alone did not create accrual where entitlement remained unsettled. The Revenue's appeals were dismissed.

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Issues: (i) Whether the office allowance forgone by the assessee was an allowable revenue expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922; (ii) Whether the managing agency commission given up after the close of the accounting year had accrued so as to be taxable income, or whether it could be excluded on the principle of real income.

Issue (i): Whether the office allowance forgone by the assessee was an allowable revenue expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis: The allowance was surrendered on grounds of commercial expediency to support the managed company's finances, and that factual finding was binding. A sacrifice made in the course of business for commercial reasons falls within the statutory allowance. The fact that the allowance may have been connected with meeting expenses did not alter the legal position.

Conclusion: The office allowance was allowable as revenue expenditure, in favour of the assessee.

Issue (ii): Whether the managing agency commission given up after the close of the accounting year had accrued so as to be taxable income, or whether it could be excluded on the principle of real income.

Analysis: No due date for payment had been fixed under the agreements, and the commission could be ascertained only after the managed companies made up their accounts. The assessee gave up the commission before those accounts were finalised. In such circumstances, mercantile accounting did not by itself establish accrual, and the concept of real income required the transaction to be viewed as a whole. The later relinquishment was therefore effective to prevent the amount from becoming taxable income.

Conclusion: The commission forgone did not constitute accrued income assessable under section 10(1), in favour of the assessee on that question, though the appeals as a whole failed.

Final Conclusion: The reference questions were correctly answered in the manner indicated, and the Revenue's appeals were dismissed.

Ratio Decidendi: Where income has not truly accrued because the entitlement is unsettled or the amount is relinquished before it becomes determinable, tax cannot be levied on a hypothetical accrual; and a business sacrifice made on grounds of commercial expediency is deductible as revenue expenditure.

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