TaxTMI 
TaxTMI 
1958 (10) TMI 37
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....two sons, Pratapsinh and Vikramsinh. The firm's business consists of acting as managing agents to several shipping companies, two of them being the Malabar Steamship Co. Ltd., and New Dholera Steamships Ltd. By an agreement dated September 16, 1938, the firm was appointed managing agents of the Malabar Steamship Co. Ltd., (hereafter referred to as the Malabar Company). That agreement has been supplemented from time to time. According to the agreement dated December 7, 1943, the remuneration of the managing agents was fixed to be "10 per cent. (ten per cent.) on the freight charged to shippers" and the agreement came into force as from 1st September, 1943. A copy of the said agreement is marked annexure 'A' and forms part of the case. Similarly by an agreement dated June 8, 1946, the assessee firm was appointed managing agents of New Dholera Steamship Ltd. (hereafter referred to as the Dholera Company). According to clause 2 thereof, the managing agents were to receive "as and by way of remuneration of their services in relation to the shipping business of the company" 10 per cent. of the gross freight charged to the shippers. Clause 5 provided "that all moneys belonging....
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....ign "our office as the managing agents of the company from 1st January, 1948, provided you appoint Messrs. Shoorji Vallabhdas Ltd., Messrs. Pratapsinh Ltd., as your managing agents from the said date for a term of 20 years upon the same terms and conditions as are contained in our managing agency agreement". (underlined by us)*. The suggestion, therefore, was that the new managing agents were to be remunerated at the rate of 10% on the freight charged to shippers. A copy of the letter addressed to the directors of the Malabar Steamship Co. Ltd. is marked annexure 'C' and forms part of the case. 5. In the case of the Malabar Company, two shareholders addressed a letter on November 27, 1947, to the board of directors of that company complaining that while the managing agency firm got a "flat managing agency commission", shareholders did not get any return on their shares and hence opposed the transfer of the managing agency from the firm to the private limited company of Shoorji Vallabhdas Ltd. A copy of the said letter is marked annexure 'D' and forms part of the case. The more important portion of the said letter is as follows: &n....
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....h December, 1947, and in addition to making certain consequential changes in the articles of association of the said company, the said meeting adopted a special resolution, the effect of which was that Shoorji Vallabhdas Ltd., was appointed to be the managing agents of the company for a term of 20 years from the 1st day of January, 1948. 6. In the case of the Dholera Company, a meeting of the board of directors was held on December 1, 1947. The minutes of the said meeting are recorded in Gujerati and an agreed translation of a portion of it is as follows: "The managing agents informed the meeting that they desired Messrs. Pratapsinh Limited to be appointed managing agents of the company in their place, and that Messrs. Shoorji Vallabhdas&Co., were agreeable to accept 2½ per cent. as the managing agency commission instead of 10 per cent. of the freight earnings during the year." "The directors were requested to accept the new managing agents, Messrs. Pratapsinh Limited, for a period of 20 years from the 1st of January, 1948." ....
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.... should charge only 2½ per cent. and not 10 per cent. for the said period." It may be added that the annual general meeting of the Malabar Co., was held on December 30, 1948, i.e., after the close of the account year ended March 31, 1948, and it is as a result of the decision of the said meeting that the managing agents agreed to charge commission at 2½ per cent. instead of 10 per cent. for the period April 1, 1947, to December 31, 1947. 8. The position is also substantially similar in the case of the Dholera Company. The annual report dated December 9, 1948, made by the directors to the shareholders of the said company contains the following: "Your directors have to inform you that according to their suggestion the previous managing agents Messrs. Shoorji Vallabhdas&Co., had agreed to charge managing agency commission at 2½ per cent. instead of 10 per cent. on the freight earnings of S.S. 'Jayhind' for the period April 1, 1947, to December 31, 1947, after which Messrs. Pratapsinh Limited were appointed your managing agents. The previous managing agents have charged their normal 10 per cent. commission on the freight earnings of the S.S. 'J....
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....lace only after the end of the account year. He rejected the second contention on three distinct grounds, viz.: (i) that the two sums under consideration was not expenditure laid out or expended during the accounting year itself; (ii) that the expenditure was not laid out or expended for the purpose of the assessee firm's business; and (iii) lastly, that the expenditure was not incurred wholly and exclusively for the purpose of the assessee firm's business. 11. The Judicial Member accepted both the contentions for the reasons recorded by him in his order dated March 7, 1956, a copy of which is marked annexure 'G' and forms part of the case. In his opinion, the decision of their Lordships of the Bombay High Court in the case of Chamanlal Mangaldas* fully applied to the facts of the present case. This conclusion of his is based upon his opinion contained in the following extract from his order: "In my opinion, the earlier agreements by which the assessee became entitled to commission at the rate of 10 per cent. can be mutually modified and the real commission that accrued or arose to the....
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....the assessee's income of that 'previous year' from its managing agency business?" G. N. Joshi with R. J. Joshi, for the Commissioner N. A. Palkhivala with Kolah, for the assessee JUDGMENT The judgment of the court was delivered by S.T. DESAI, J.--This reference raises a question of some difficulty and importance and the income in dispute relates to managing agency commission. In the matter out of which it arises there was a difference of opinion between the Accountant Member and the Judicial Member constituting the Tribunal and on a reference to the President the decision was in favour of the assessee. The three judgments turned a good deal on the effect of a decision of this court. The arguments before us also have revolved round that decision almost as a spindle and it will be necessary for us to ascertain the ratio decidendi of that case. Of this more hereafter. The assessee, in this reference under section 66(1) made at the instance of the Commissioner of Income-tax, is the firm of Messrs. Shoorji Vallabhdas & Co. The assessment year is 1948-49 and the previous year ended on 31st March, 1948. During that previous year the assessee firm consisted of....
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....essee company addressed letters both to the Malabar Steamship Co. and the Dholera Steamship Co. and the letters were in identical terms. By these letters they requested the shipping companies to allow them to resign and accept the newly floated concerns as the managing agents. Two shareholders of the Malabar Steamship Co. raised objection to the shipping company accepting the newly floated concerns as their managing agents. There was a meeting of the board of directors of that company on 29th November, 1947, and what happened at that meeting is of importance. One resolution passed at that meeting is as follows: "Resolved in consultation with the managing agents that in consideration of the company agreeing to change the managing agency, the managing agents will give a letter to the company as per the draft placed before them" and in the draft letter it was stated: "We cannot agree to a reduction in the managing agency remuneration as already fixed. If the said letter is interpreted as a handle to refuse the change in the managing agency, we are prepared to continue the managing agency in the sam....
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....red Messrs. Pratapsinh Ltd. to be appointed managing agents of the company in their place, and that Messrs. Shoorji Vallabhdas & Co. were agreeable to accept 2? per cent. as the managing agency commission instead of 10 per cent. of the freight earnings during the year." "The directors were requested to accept the new managing agents, Messrs. Pratapsinh Ltd. for a period of 20 years from the 1st of January, 1948." It was resolved at that meeting that an extraordinary general meeting of the shareholders of the company should be called on 30th December, 1947. Such a meeting was in fact held and Messrs. Pratapsinh Ltd. were appointed as the managing agents of that shipping company from 1st January, 1948, in place of the assessee firm of Shoorji Vallabhdas & Co. So far, therefore, as this company is concerned, very little can be said as not done before 31st December, 1947. In case of the Malabar Steamship Company what happened was that it addressed letters to the shareholders in view of the understanding or arrangement or agreement to which we have already made some reference. The material part of that let....
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.... "Your directors have to inform you that according to their suggestion the previous managing agents Messrs. Shoorji Vallabhdas & Co. had agreed to charge managing agency commission at 2? per cent. instead of 10 per cent. on the freight earnings of S.S. 'Jaihind' for the period April 1, 1947, to December 31, 1947, after which Messrs. Pratapsinh Limited were appointed your managing agents. The previous managing agents have charged their normal 10 per cent. commission on the freight earning of the S.S. 'Jaibrahma' which was being run in partnership with the Malabar Steamship Company Ltd. But they have shown their readiness to accept 2?% commission if that is the sense of this general meeting. The accounts will be adjusted according to your decision." It is clear that the arrangement or understanding or agreement with this company was that the accounts were to be adjusted after knowing the sense of the shareholders at the general meeting which was being called. The two amounts of Rs. 1,36,903 and Rs. 2,00,625 were treated by the Income-tax Officer as commission earned by the assessee and he brought them to tax on the groun....
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....g agency business?" Although we have dwelt on the facts at some length, the question that arises for our determination really lies in a very narrow compass, and what we have to determine is whether the assessee firm, although it actually received the managing agency commission at 2?%, is by operation of any principles or provisions of the income-tax law, yet liable to be taxed in respect of these amounts. We have to consider whether the contention of the Revenue that there was an income to which the assessee had already become entitled and which income had been voluntarily abandoned or given away by the assessee firm is correct or whether there was an agreement or arrangement whereby the shipping companies and the assessee firm decided that they should charge commission at the rate of 2?% instead of at the rate of 10%. It has been strenuously argued before us by Mr. G.N. Joshi, learned counsel for the Revenue, firstly that what the assessee did was in the eye of income-tax law nothing else than a voluntary gift by the assessee firm to the shipping companies of which they were the managing agents. It is also argued that even if the court were not satisfied that what happened w....
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....had been valued at a high rate when two persons transferred the same to a company and their Lordships observed that the two partners had not made any money by the mere process of valuing certain stockin-trade by these entries. (See Doughty v. Commissioner of Taxes*.) We put to ourselves the question: "What is the effect of all that happened before December, 1947, and after December, 1947, considered as a whole? Is it a case of a voluntary gift which obviously would be a unilateral transaction or is it a case of an agreement between the parties? If it is a case of a voluntary gift, the argument of Mr. Joshi would have considerable force. If it is not a voluntary gift made by the assessee firm to the shipping company, further considerations would be relevant and necessary. The argument of counsel is that this is not a case in which there was any modification of the managing agency agreement. It is a case of something voluntarily given up. Now, in the present context, this distinction sought to be drawn on behalf of the Revenue is rather too fine. It is a question essentially one of the real nature of what happened. It is a question of substance and not of mere book entries. We hav....
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.... whole amount of Rs. 2,05,575-3-0 had accrued to the assessee in the accounting year and the assessee had given up out of the same Rs. 1 lakh although it had already accrued to it in that year. It was held by Chagla, C.J., and Tendolkar, J., that the right of the assessee to commission was by reason of what had transpired not under the agreement of 1940 but depended upon and arose only after the decision of the board of directors which was on 8th April, 1951. That date was subsequent to the closing of the accounting year but the view was taken that it was by reason of the variation of the agreement that the assessee had become entitled to the lesser remuneration subsequently determined by the directors, and the income of the assessee was reduced to Rs. 1,05,575 only and that was the real income and not any hypothetical income which the assessee might have earned if the old agreement had continued to subsist. In the case before us, it is the contention of Mr. Palkhivala that the assessee firm is not liable to be taxed on any hypothetical income but can only be taxed on what it received in pursuance of the agreement with the shipping companies. It was said that the term of the agreem....
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....nd as to the amount of commission the assessee had become entitled to in consequence of what had happened. Now, let us see what the position before us is in the light of the principle laid down in that case and the ratio decidendi of the same. It cannot be disputed and it has not been disputed before us by Mr. Palkhivala that in a sense it could be said that the managing agency commission was earned when the contracts were put through but what is urged and in our opinion rightly urged is that it is the commission which was really earned by the assessee before us and the actual amount to which the assessee became entitled is the crucial consideration. The argument of Mr. Palkhivala has been that during the accounting year, i.e., in November, 1947, there were conditional agreements when the assessee wrote the two letters to the shipping companies and what happened in the end of 1948 was merely a crystallisation of the quantum to be charged by the assessee company. It is said that quantification took place in 1948 which related back to the year 1947. The argument ran that even if we were to assume that the date of the quantification which was 1948 was the relevant date for decision, t....