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1966 (2) TMI 6
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....ne of its directors being Kailash Nath Agarwal. The British India Corporation Limited owns a number of mills or branches, one being the Kanpur Cotton Mills. One Sharma & Co., a partnership firm, was appointed by the British India Corporation Limited as the sole selling agents of the Kanpur Cotton Mills with effect from January 1, 1946. By March, 1955, Sharma & Co. became indebted to the (British India) Corporation to the extent of Rs. 8,39,350-15-6. The Corporation held its security deposit of rupees one lakh and 299 bales of cotton on its account; after deducting the amount of the security and the price of the bales, a large amount was still due from Sharma & Co. to the Corporation on March 23, 1955. On March 23, 1955, Sharma & Co. and Kailash Nath Agarwal entered into a contract. Under its terms Sharma & Co. undertook to resign or accept the termination of its sole selling agency rights of the Kanpur Cotton Mills, and to have no objection to the appointment of Kailash Nath Agarwal or a firm to be formed by him as the sole selling agent of the mills in its place. In consideration of this undertaking, Kailash Nath Agarwal or the firm formed by him undertook to pay to Sharma & Co. o....
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....o between him and Sharma & Co. and authorising it " to retain one-seventh of our commission for adjustment in the account of Messrs. Sharma & Co. with a minimum of Rs. 50,000 per annum ". On the same date the Corporation wrote a letter to Sharma & Co. acknowledging the receipt of its letter of the date, accepting its resignation from the sole selling agency of the mills and informing it of its intention to appoint Kailash Nath Agarwal or his nominee firm as the sole selling agent in succession to it, to deduct one-seventh of the commission or Rs. 50,000 " out of the commission earned by the new sole selling agents and credit the same " to its account and to incorporate the terms suitably in the new sole selling agency agreement. A meeting of the directors of the Corporation was held on March 26, 1955; the chairman informed the directors of the discussions and negotiations that had taken place between him, Sharma & Co., and Kailash Nath Agarwal, of the resignation of Sharma & Co. from the sole selling agency, the proposal to appoint the assessee as its sole selling agent in its place and the assessee's undertaking to pay off gradually the amount of five lakhs and odd due from Sh....
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.... of the assessee the Income-tax Officer disallowed the deduction. His order was upheld by the Appellate Assistant Commissioner and then by the Tribunal. It applied to the Tribunal to state the case to this court and hence this reference. The case of the assessee is that the sum of Rs. 43,333 was not a part of its income at all, that its income was really Rs. 1,62,950 (Rs. 2,06,283 less by Rs. 43,333) and that if its income was taken to be Rs. 2,06,283, it was entitled under section 10(2)(xv) to the deduction of Rs. 43,333. The two questions relate to these contentions. It is a fact that the assessee did not receive the disputed sum of Rs. 43,333; it received only Rs. 1,62,950. This, however, does not mean that it was liable to pay income-tax only on Rs. 1,62,950 and could not be liable to pay income-tax on Rs. 2,06,283. What is taxed under section 4(1)(a) and (1)(b) of the Act is income received, or income accrued or arisen though not received. We have to see whether the disputed amount of Rs. 43,000 and odd can be said to be income accruing or arising to the assessee. That is question No. 1. The trade discount or commission is undoubtedly profits and gains of business carried o....
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....not be taken as synonymous with 'arises' but in the distinct sense of growing up by way of addition or increase or as an accession or advantage; while the word 'arises' means comes into existence or notice or presents itself. The former connotes the idea of a growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable........ both the words are used in contradistinction to the word 'receive' and indicate a right to receive. They represent a stage anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less inchoate ......" These observations were adopted in V. Ramaswami Naidu v. Commissioner of Income-tax and E. D. Sassoon & Co. Ltd. v. Commissioner of Income-tax. In the latter case Bhagwati J. said at page 51: "If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. The law regarding liability to be taxed ....
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....ny difference if the right to the income is made dependent upon the obligation to spend it in a particular manner ; in the latter case, Vaughan Williams L.J. explained the position thus at page 534; " The truth of the matter is that in these cases no one is bound to accept an engagement in the service of the Manchester Corporation, and if he chooses to enter into the service of the Manchester Corporation, he is really voluntarily entering into a service which he knows will carry with it as part of the contract his agreement that this percentage shall be deducted from his wages, and that it shall be appropriated to the purposes defined in the scheme." Bell v. Gribble was considered by Channell J. in Smyth v. Stretton B. At page 42 he said: " The fact that income which is income, but which has even by operation of some statute to be devoted compulsorily to some purpose or another, does not prevent it being income." But at page 43 he said: ".....there is a substantial difference between a sum being placed out of the disposal of the person who is being dealt with as having got the enjoyment of it, if it is placed out of his disposal by a contract with the person from who....
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.... an express finding that the salary is pound 1,000, but the scheme provides for a deduction of 5 per cent. of his salary and, if his salary was only pound 950, the institution could not deduct the sum of pound 50. The proper sum to deduct would be pound 471 10s. . . . It is hardly necessary to enumerate the astonishing results which would follow if it were held that when a servant directs his employer to pay part of his salary to a fund or third person he is not liable to pay income-tax on the part directed so to be applied." Every income has a source, whether it is a property or a business or a contract. There is a distinction between an obligation to spend money in a particular manner attaching to an income and a similar obligation attaching to the source of an income. Suppose a property is charged with an encumbrance, the income from it must be spent first in discharging the encumbrance. This is an instance of the source of an income being subject to an obligation. If the obligation is on the receiver of the income and not on the source of it, the legal effect of it is quite different. In the former case, the income that is subject to the obligation is diverted at the source ....
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....f deduction under section 10(2) but of exclusion from being treated as his income because "that part has been diverted and never constituted his real income ". The claim of the wife and mother was "an overriding title "to the share given to her by each of the coparceners. He thought that it made no difference whether the lady's claim constituted a charge or not, but this is not the law as I shall show presently. He relied upon Bejoy Singh Dudhuria. The doctrine of diversion of income rather than that of application of income was applied by S. T. Desai and K. T. Desai JJ. to a different set of circumstances, but on the same reasoning, in Ratilal B. Daftari v. Commissioner of Income-tax. Under a partnership between Ratilal and fifteen others, he was entitled to a profit in proportion to the capital invested by him. Under a deed of agreement entered into by him with four others on the same date, the capital invested by him in the partnership belonged to all five of them and all five of them were entitled to share the profit pertaining to his share in the partnership. The learned judges held that his taxable income was only 1/5th of the profit pertaining to his share, the rest bein....
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.... application of a portion of the income to discharge an obligation and not a case " in which by an overriding charge the assessee became only a collector of another's income. " Though he noticed the observations of Chagla C. J. in Motilal Manekchand and did not expressly dissent from them, it is evident that he did not consider the mere existence of a legally enforceable right to be enough for application of the doctrine of diversion. If there is only an obligation to spend an income in a particular manner, it is clearly a case of an application ; there is no diversion unless the source of the income is subject to the obligation and, therefore, the income can be said to have been diverted at source, i.e., before accrual. When a person is obliged to spend something out of certain income on a specified object, there are two ways in which the spending on the object can be achieved : (1) his receiving the income and himself spending it on the object; (2) the payer's retaining the income and spending it himself on the object. In one case there is actual receipt but not in the other case. As I said earlier, the liability to pay tax does not depend upon actual receipt. Even if ....
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....er duty to pay the sum for which she was responsible, namely, the annual interest. From what was it paid ? It was paid from dividends which otherwise she ought to have received into her own hands, and I think it is a false view to say that the interest was paid and the aliquot part of the principal was paid out of the money of the insurance society; because at no time had she so far given the whole of these shares over to the insurance society ... the money that was received by way of dividends was hers primarily ... the whole sum ...was in fact hers, although the disposal of it and the channel ... was the insurance society." The question posed by Scrutton L.J., agreeing, was " whose income was it that paid those debts ? " and answered it by saying that " in any ordinary sense it was the income of the debtor, the lady, which discharged the debts. " Similarly, in Bell v. Gribble, the Manchester Corporation, established under an Act of Parliament, a fund for its employees by which they were required to contribute a percentage of their salaries to the fund and the contributions were returnable to them on superannuation with interest ; the Court of Appeal held that the full salaries....
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....me and was not to be included in it because there was an overriding charge upon the income created by the will. I respectfully dissent; it was a case of application, and not of diversion, of the income ; the source of the income was not charged with the maintenance and education of the daughters. The mere obligation to spend the income on the maintenance and education of the daughters did not convert it into a charge upon the source of the income or even the income itself. The learned judges apparently equated an obligation with a charge; this was not correct. In accordance with the law stated above the following have been held to be income accrued or arisen : (1) annual payment received by an assessee under a guarantee, though it was to be applied in paying interest on capital furnished by the assessee Nizam's Guaranteed State Railway Co.; (2) full salary received by an assessee, though part of it was not actually received and was retained by his employer for being credited to a compulsory deposit fund: Bell ; (3) a sum credited by an employer to the account of the assessee-employee under the provident fund scheme, though no part of it was payable to the assessee s....
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....ion of it by the Corporation amounted to payment of it to the assessee and the assessee's paying it back to it and that the doctrine of application, and not that of diversion, applied. At first Sharma and Company was indebted to the Corporation; the liability of Sharma and Company was then transferred to the assessee through the contract entered into by it and Kailash Nath Agarwal. It is to be noted that it was the first contract entered into in the whole scheme. The contract was with Kailash Nath Agarwal but it was on behalf of a firm which might be constituted by him and the assessee was the firm constituted by him. Through this contract the assessee undertook to pay to Sharma and Company a part of the commission earned by it in consideration of the company's surrendering its sole selling agency to the Corporation and agreeing to the appointment of the assessee as the sole selling agent in succession. The effect of the contract was that the assessee became a debtor of Sharma and Company to the extent of a part of the commission to be earned by it. Under the contract between the Corporation and the assessee, the Corporation became liable to pay, and the assessee became ent....
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....money. Here it could be discharged by money of Sharma and Company or by money of the assessee if it was paid on behalf of Sharma and Company. Sharma and Company did not pay the money and, therefore, it must have been paid by the assessee. Actually the assessee also did not pay it (just as Sharma and Company did not pay it) but it came out of the commission that had been earned by it and so, in the eye of law, it was paid by it. Instead of its paying it as commission and taking it back, the Corporation retained it. Under the contract between the Corporation and the assessee, the Corporation became liable to pay, and the assessee became entitled to receive, commission at a certain rate every year. The disputed amount is undoubtedly out of the commission earned by the assessee for the previous year relating to the assessment year. It was after it had been earned by it that it became liable to be retained by the Corporation for adjustment of the debt due to it from Sharma and Company. The disputed amount was used by the Corporation to reduce the debt due to it from Sharma and Company; it got the right to do so on account of a condition in the contract that it could retain part of th....
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....ion's retention and adjustment of the disputed amount, the liability of the assessee to Sharma and Company has been discharged. The liability was to pay a certain amount to Sharma and Company and could be discharged only by actual or constructive payment. Actual payment could be made by the assessee by delivering the amount or its equivalent and constructive payment could be made by its refraining from receiving an equal amount from Sharma and Company or a third person to whom Sharma and Company would have to pay it. Here, constructive payment was made by the assessee's refraining from receiving from the Corporation the money which Sharma and Company would have to pay to it. It paid the money by taking so much less from the Corporation which was liable to pay it on the Corporation's promise to reduce the liability of Sharma and Company to the same extent. Therefore, what was paid in discharge of the debt due to Sharma and Company was its own money; in other words, the disputed amount was its own money, i.e., had accrued to it. The language used by the Corporation, Kailash Nath Agarwal and Sharma and Company in the contracts and the letters leaves no room for doubt th....
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....mpany (through Kailash Nath Agarwal) ; it was its own voluntary act. It itself had agreed that it would pay to Sharma and Company through adjustment of part of the commission due to it from the Corporation. Thus it had voluntarily undertaken the liability to take reduced commission so long as its liability to Sharma and Company was not discharged. It is useless to stress the words " conditions of the appointment of the sole selling agents " used in the contract between the Corporation and the assessee. The law regarding capital or revenue nature of an expenditure has been dealt with by us in detail in Lakshmiratan Cotton Mills Co. Ltd. v. Commissioner of Income-tax (I.T.R. No. 586 of. 1961 decided on 27-7-1965) and Gangadhar Baijnath v. Commissioner of Income-tax (I.T.R. No. 286 of 1960 decided on 22-10-1965). The latest decision of the Supreme Court is Commissioner of Income-tax v. Chari and Chari Ltd. in which it was laid down that ordinarily compensation for loss of agency is a capital receipt (unless the agency is one of several agencies) earned by the assessee and its loss, far from impairing his profit-making structure, is within the framework of his business. On the same ....
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....is a payment on capital account. It is really one payment, though spread over in instalments. Instalments may be payable even though the lease is determined before the last instalment is paid. Payment of rent stands on a different footing. It is payable only for the period during which the lease right is enjoyed; it is for the enjoyment of the right and not for acquisition of it. In Indian Radio and Cable Communications Co. Ltd. v. Commissioner of Income-tax a payment made as a part of the consideration in respect of a number of different advantages was held to be of capital nature. The Judicial Committee stressed the fact that some of the advantages were not of a purely temporary character and the agreement under which the payment was made was much more like one for a joint adventure for terms of years between the assessee and the recipient than one for a lease for the period. A payment made to earn profits is an expenditure of revenue nature but " a payment out of profits and conditional on profits being earned cannot accurately be described as payment made to earn profits ": see Pondicherry Railway Co. Ltd. at page 170. In Jagat Bus Services v. Commissioner of Income-tax Malik C....
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....e. The business was an asset and the money spent in acquiring it was a capital expenditure. The learned Advocate-General argued that the disputed amount was a part of a payment to be made by the assessee so long as it continued to be the sole selling agent of the Corporation and not out of a fixed amount or out of money to be paid in a certain number of instalments. If it discontinued the sole selling agency after a year, it had only to pay Rs. 50,000 and ceased to be liable for the future. The learned Advocate-General asked "what about the balance if the amount of Rs. 7 lakhs and odd to be paid by the assessee to Sharma & Co. was a capital expenditure ?" It was argued that whatever might have been the contract between the assessee and Sharma & Co., there was no contract between the assessee and the Corporation for payment of a fixed amount in instalments or of a fixed number of instalments of a certain sum. I do not find any substance in the argument. It is not the essence of a capital expenditure that it is made in a lump sum ; the learned Advocate-General conceded that a capital payment can be made in instalments but contended that the amount must be fixed. In the instant case t....