TaxTMI 
TaxTMI 
1960 (4) TMI 93
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.... for the Revenue, that we are bound to act in conformity with this principle of computation. We agree that it is incumbent on the Court to see that there is no departure on its part from any fundamental concept or principle of tax law. There is nothing, however in these axiomatic rules or anything formidable about them which militates against the simultaneous application of another basic principle of tax law which requires the Court -- cases of deemed income apart -- to see that ultimately it is the real income of the assessee which alone is brought to tax and not any artificial or notional income that may be said to have accrued to him. 2. The assessec company is the Managing Agent of The Gujurat Paper Mills Ltd. Ahmedabad. The assessment year was 1950-51 and the relevant accounting year was 1-4-1949 to 31-3-1950. It earned during the accounting year a commission of Rs. 1,17,644-4-0. At the instance of the managed company, the assessee company surrendered Rs. 97,000/-. The Income-tax Officer accepted that position, but the Commissioner of Income-tax disapproved of the same and served a notice on the assessee company under Section 33-B(1). He passed an order directing the Income....
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.... or void? (ii) Whether the amount of Rs. 97,000/- surrendered by the assessee company could be allowed as a revenue deduction under Section 10(2)(xv) of the Act? (iii) If the answer to question (ii) is in the negative, whether the sum of Rs. 57,785/-(Rs. 97,000/- -- Rs. 39,215/-) could legally be included in the assessee company's total income for the assessment year ended 31st March 1950? Nothing has been said before us as to Question No. t on cither side and it will not be necessary for us to say anything about the same. As to Questions 2 and 3 learned Counsel both for the assessee company and the Revenue have stated before us that the questions require some recasting though on different considerations. It will be convenient to do so after we have examined the arguments on either side on the points urged before us. 3. The Reference came up for hearing before Chagla, C. J. and Tendolkar, J. on 24th February 1955. It appears that the question whether the amount forgone by the assessee company was on the ground of commercial expediency or not was regarded as one of importance by the Court and a supplemental Statement of Case was folt necessary. In the judgme....
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....oes arise for our determination, we have heard arguments on the same. In order to appreciate the arguments, ft is necessary to set out here some further facts which have bearing on the present controversy. In the Profits and Loss Account of the managed company, there is an entry of Rs. 20,644-4-0. The detail's of the entry there stated arc as under: "To, Managing Agents Commission ... 1,17,644-4-0 Less given up... ... ... 97,000-0-0 _____________ 20,644-4-10." A resolution was passed by the Board of Directors of the Managed Company at a meeting held on 7th December 1950. The material part of that resolution is as under : The Agents placed before the Board the Balance Shee....
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....f the amount of Rs. 57,000/- odd out of the same took place eight months after the expiry of the accounting year and, therefore, it could not be treated as an expenditure incurred in the accounting year. 5. The contention urged on behalf of the assessee company is twofold. It has been urged firstly that in arty event and in any view of the case, it is the real income of the assessee company for the accounting year that is liable to tax and that real income cannot be arrived at without taking' into account the amount which was forgone by the assessee company. The second contention urged by Mr. Palkhiwalla is that the amount of Rs. 57,000/-odd had been given up by the assessee company on the ground of commercial expediency when the quantum of the entire amount of commission was determined and, therefore, it must necessarily be treated as an expenditure of the year of which the determined amount is taken as the income. It will not be necessary for us to decide the second contenlion of Mr. Palkhiwalla and we have not heard Counsel for the Revenue on the same. In our opinion, the first contention of Mr. Palkhiwalla is substantial and must prevail. 6. Counsel for the Revenue do....
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....etween the two rules, The facts of a case may present some difficulty in applying the rules but the conflict would, in our opinion, be rather apparent than real. The facts of a given case may create the impression of a discrepant situation but the apparent discrepancy can be resolved in a manner not inconsistent with the basic concepts underlying the two rules. In our judgment, they permit of harmonious application, though the application to a degree must depend on the circumstances of each case. Some propositions could be formulated but whether a general formula applicable to all circumstances could be hit on we rather doubt. 8. Though it may not be possible to prescribe a general formula which may successfully compose every conflicting situation, the position in law seems clear to us that in applying the two rules to particular transactions regard must be had to the true legal rights and the true situation. A fair interpretation of the transaction and the situation would lead to a preferable and if we may say so a correct solution than sheer adherence to one rule and discounting of the other. If this be the true approach and we feel little doubt that it .is, the result cannot ....
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....ment of the Case. Even so, we shall proceed on the footing that the assessee company having followed the mercantile system of account, there must have been entries made in its books in the accounting year in respect of the amount of the commission. In our judgment, we would not be justified in attaching any particular importance in this case to the fact that the company followed the mercantile system of account. That would not have any particular bearing in applying the principle of real income to the facts of this case. Incidentally, we may observe that we ourselves pointed out in the case of the Commr. of Income-tax v. Shoorji Vallabhclas and Co. that the question whether the income accrued or not is not a mere matter of cogency of the entries made in the account books of the assessee but is essentially one of substance and of the real nature of what happened; a mere book entry is not conclusive of the question whether the assessee bad become entitled to the sums or not. It may also be mentioned that in that case we were dealing with an assessee. who followed the mercantile system of account. The crucial question before us, therefore, is whether the two facts -- one the amount of....
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....he 31st March, and therefore the commission could not be subjected to tax when it is no more than a mere right to receive. This argument involves the fallacy that profits do not accrue unless and until they are actually computed. The computation of the profits whenever it may take place cannot possibly be allowed to suspend their accrual. In the case ot income where there is a condition that the commission will not be payable until the expiry of a definite period or the making up of the account, it might bo said with some justification, though we do not decide it; that the income has not accrued, but there is no such condition in the present case". Of course, these are weightly observations and we are dutifully bound to follow the principle there enunciated. But it may be mentioned that the observations are not made iu the context of real income for the question of real income did not arise for their Lordships' consideration as it does in the case before us. It may also be noticed that the proposition which found favour with their Lordships carried with it certain qualifications and one of those qualifications related to the existence of any condition about the making up of ....