TaxTMI 
TaxTMI 
1954 (5) TMI 2
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....idambaram Mulraj & Co. Ltd. and Rajputana Textile (Agencies) Ltd. respectively by letters dated the 3rd September, 1943, 16th April, 1943, and the 27th April, 1943. The consent of the shareholders of the respective companies to the agreements for transfer was duly obtained and the managing agencies were ultimately transferred to the respective transferees with effect from the 1st December, 1943, 1st June, 1943, and 1st July, 1943, respectively. The Sassoons executed in favour of Messrs. Agarwal & Co., Chidambaram Mulraj & Co. Ltd. and Rajputana Textile (Agencies) Ltd. formal deeds of assignment and transfer and received from them Rs. 57,80,000, Rs. 12,50,000 and Rs. 6,00,000 respectively on transfers of the managing agencies, and the net consideration, viz., Rs. 75,77,693, received by them on such transfers was taken by them to the "Capital Reserve Account". The accounts of the managing agency commission payable by the respective companies to the managing agents for the year 1943 were made up in the year 1944 and Messrs. Agarwal & Company received from the E. D. Sassoon United Mills Ltd. a sum of Rs. 27,94,504, Chidambaram Mulraj & Co. Ltd. received from the Elphinstone Weaving & S....
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....1st January, 1943, to the 30th June, 1943, contending that such managing agency commission had accrued to the Sassoons for services rendered so that on the dates on which the agencies were transferred the Sassoons were entitled to such remuneration from the managed companies in the form of commission for services rendered up to the dates of the transfers. In spite of the objection of the Sassoons the Income-tax Officer and the Excess Profits Tax Officer determined these sums as their escaped incomes and assessed them accordingly. The Sassoons appealed to the Appellate Assistant Commissioner who dismissed the appeals and further appeals were taken to the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal relied upon its order dated the 28th December, 1949, in the case of the transferees and confirmed the orders of the Appellate Assistant Commissioner. The Tribunal was of the opinion that the managing agency commission was earned for services rendered and therefore it was taxed in the hands of the person who carried on the business of the managing agency and not in the hands of the person to whom it was assigned, and that therefore so far as the Sassoons were concerned ....
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....tion submitted to the High Court in both the references in the affirmative. Following upon this judgment the High Court also answered in the affirmative the question which had been referred to it by the Tribunal in Income-tax Reference No. 23 of 1951. The decision of the High Court was thus against the contentions which had been urged both by the Sassoons and the Commissioner of Income-tax and the Sassoons as well as the Commissioner of Income-tax obtained leave under Section 66A(3) of the Indian Income-tax Act and Section 133(1)(c) of the Constitution for filing appeals to this Court. The appeal of the Sassoons was Civil Appeal No. 3 of 1953 and it was filed against the Commissioner of Income-tax, Bombay City. The appeals of the Commissioner of Income-tax against Messrs. Agarwal & Co. and Chidambaram Mulraj & Co. Ltd. respectively were Civil Appeal No. 30 of 95 and Civil Appeal No. 31 of 1953. These, appeals have come for hearing and final disposal before us. 9. All the appeals raise one common question of law, viz., whether in the circumstances of the case the managing agency commission was liable to be apportioned between the Sassoons and their respective transferees in the p....
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.... for the said remuneration and upon and subject to the terms and conditions therein contained. Clause 10 of the agreement provided as under:- "It shall be lawful for the said firm to assign this agreement and the rights of the said firm hereunder to any person, firm or company having authority by its constitution to become bound by the obligations undertaken by the said firm hereunder and upon such assignment being made and notified to the said company the said company shall be bound to recognise the person or firm or company aforesaid as the agents of the said company in like manner as if the name of such person, firm or company had entered into this agreement with the said company and the said company shall forthwith upon demand by the said firm enter into an agreement with the person firm or company aforesaid appointing such person, firm or company the agents of the said company for the then residue of the term outstanding under the agreement and with the like powers and authorities remuneration and emoluments and subject to the like terms and conditions as are herein contained." 12. The letter dated the 3rd September, 1943, recording the agreement of transfer of the....
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....igns were to be at liberty to retain, reimburse and pay themselves out of the moneys of the company inter alia all sums due to them for commission and otherwise. The deed of transfer executed by the Sassoons in favour of Chidambaram Mulraj & Co. Ltd. on the 2nd June, 1943, stated that the Sassoons assigned and transferred the agreement dated the 23rd May, 1922, between themselves and the company for the unexpired residue of the term of sixty years specified therein and the full benefit and advantage thereof together with the benefit of the agency and the office of the agents thereunder and the right to receive the remuneration thereafter to become payable by the company under or by virtue of the said agreement and together with the benefit of all rights, privileges, powers and authorities given and conferred on the Sassoons thereunder. 14. It is significant to observe that before the Income-tax authorities as also the High Court no distinction was drawn between the provisions of these two agency agreements in regard to the right of the managing agents to remuneration thereunder and the facts in so far as they related to all the managing agencies were treated as similar. The quan....
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....cuted by the Sassoons in favour of the transferees as having been assigned by them to the transferees and even though the transferees received the whole of the managing agency commission payable by the companies to the managing agents under the terms of the respective managing agency agreements, the Sassoons the assignors and not the transferees the assignees were assessed to tax in respect of the proportionate shares of income earned by the Sassoons in the year 1943. 16. It was urged before us on behalf of the Sassoons that no part of the managing agency commission for the broken periods of 1943 was earned by them. It did not become a debt due by the companies to the Sassoons and it could not therefore be said to have accrued to them. The contract of employment was an entire and an indivisible contract and the remuneration payable by the companies to the Sassoons thereunder was payable at stated periods. It was a condition precedent to the Sassoons earning the remuneration that they fulfilled the terms of their employment and completed the period for which the remuneration was payable to them and the service for the particular period was a condition precedent to their earning t....
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.... against them the assignees. 18. The position of an employee under an entire contract of service has been thus enunciated in Halsbury's Laws of England (Hailsham Edition) Vol. 22, page 133, para. 221:-- "When the contract of service is an entire contract, providing for payment on the completion of a definite period of service, or of a definite piece of work, it is a condition precedent to the recovery of any salary or wages in respect thereof that the service or duty shall be completely performed, unless the employer so alters the contract as to entitle the servant to regard it at an end, in which case the whole sum payable under the contract becomes due, or unless there is a usage that the servant is entitled to wages in proportion to the time actually served. But when the contract, though in respect of work terminating at a particular time, is to be construed as providing that remuneration shall accrue due and become vested at stated periods, such remuneration constitutes a debt recoverable at the end of each such period of service. " 19. Section 219 of the Indian Contract Act also provides that in the absence of any special contract, payment for the performanc....
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....e decision of the Deputy County Court Judge and there was a further appeal. It was held by the Court of Appeal that neither under the agreement nor under the articles was the director entitled to the sum he claimed. The question of the applicability of the Apportionment Act was sought to be raised before the Appeal Court but was not allowed to be raised in appeal as it had not been done in the County Court. In arriving at this decision Lord Sterndale, M. R., stated the position as follows at page 774 :-- "It seems to me that upon the construction of the agreement it must fail. It is a payment per annum, a payment for a year, and unless he serves for the year he cannot get the payment. " 23. The decision in Swabey v. Port Darwin Gold Mining Co. had been cited before the Court of Appeal in support of the proposition that the director was in such cases entitled to his proportionate remuneration for the broken period. The learned Master of the Rolls however observed at page 777 :-- "There is nothing in Swabey v. Port Darwin Gold Mining Co. in my opinion to oblige us to hold that wherever there is power, mutual or onesided, to terminate an agreement in the middle of....
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....difference of opinion. In Swabey v. Port Darwin Gold Mining Company, in the Court of Appeal, the article was as follows, and not as stated in the report : 'The directors shall each receive by way of remuneration out of the funds of the company in each year the sum of pound 200, and the chairman in addition pound 100 per annum.' The words 'at the rate of' were not present (as appears from the articles registered at Somerset House). A director resigned in the course of a current year, and was held entitled to an apportioned part of the remuneration for that year. But in Salton v. New Beeston Cycle Co. where the article provided that 'the directors shall be entitled to receive by way of remuneration in each year pound 5,000', Cozens-Hardy, J., held that a director who vacated office before the end of a current year was 'not entitled to any apportionment. This case was followed by Wright, J., in McConnell's Claim, the words being 'each director shall be paid the sum of pound 300 per annum' ; and by Bruce, J., in Inman v. Acroyd and Bert. See also Central de Kaap Gold Mines (Wright, J.). In these four cases the court no doubt proceeded on....
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....ary would accrue due and become payable to him until at the end of such period of service. 27. We shall now examine the terms of the managing agency agreements with a view to see whether the Sassoons were entitled thereunder to remuneration or commission for the broken periods. The agreement between the E.D. Sassoon United Mills Ltd. and the managing agents was for a fixed period of 30 years from the date of the registration of the company and thereafter until they resigned or were removed from their office by a special resolution of the company and the appointment of the firm of E.D. Sassoon & Co. and their assigns was for the whole period. E.D. Sassoon & Co. and their assigns covenanted and agreed with the company to be and act as such agents for the remuneration and upon and subject to the terms and conditions therein contained. It was lawful for them to assign the agreement and their rights thereunder to any person, firm or company having authority by its constitution to become bound by these obligations and upon such assignment being made and notified to the company, the company was bound to recognise such person, firm or company as the agents of the company in like manner ....
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....naging agents and it was on the 31st March in each and every year that the amount of commission thus calculated at 7 1/2 per cent. per annum on the annual net profits of the company became due by the company to the managing agents. Until and unless the accounting year of the company had gone by and the managing agents have served the company as their agents for the full period no part of the managing agency commission which was payable per year in the manner aforesaid could become due to them and the performance of the service for the year was a condition precedent to the managing agents being entitled to any part of the remuneration, or commission for the accounting year of the company. The managing agency agreement therefore was an entire and indivisible contract stipulating a payment of remuneration or commission per year and enjoined upon the managing agents the duty and obligation of rendering the services to the company for the whole year by way of condition precedent to their earning any remuneration or commission for the particular accounting year. 28. It was however urged that clause 10 of the managing agency agreement itself contemplated a broken period, because there ....
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....the agreement was merely consequential upon the earlier provision therein contained which stated in so many terms that the company was bound to recognise such new or substituted managing agents in like manner as if their names had appeared in the said agreement in lieu of the partners of E. D. Sassoon & Co. and as if they had entered into the agreement with the company. The rights of such new or substituted agents were created by the very terms of clause 10 of the agreement and the formal embodiment thereof in the fresh agreement to be entered into by the company with them merely confirmed the rights which had already been created in them under that clause. 29. It was further pointed out that at the end of the managing agency agreement if not earlier, during the continuance thereof there would certainly be a broken period because the period of 30 years stipulated in clause 1 of the agreement would certainly expire on some date in February, 1950. The calendar year would expire on the 31st December, 1949, and there would of necessity be between the date of the expiration of the calendar year and the date of the expiration of the term of the agreement a period of about 2 months whi....
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....riod thereunder. 31. It may however be observed that the managing agency agreement with which we are here concerned was the agreement dated the 23rd May, 1922, between the company and the Sassoons and the managing agents there described were E. D. Sassoon & Co. Ltd. on behalf of themselves, their successors and assigns. Clause 1 of the agreement employed the Sassoons, their successors and assigns the agents of the company from the 1st February, 1922, for the unexpired portion of the term of 60 years commencing from the 3rd July, 1919, and it was these managing agents thus described, viz., the Sassoons, their successors and assigns, who were during the continuance of the agreement to be remunerated by a commission of 10 per cent. on the net profits of the company and the company agreed to pay such commission to them. The right of retainer and reimbursement reserved under clause 6 of the agreement would not carry the transferees any further because it was in respect of all sums due to them for commission or otherwise. Unless and until the commission became due to them they had no such right of retainer. It would still have to be determined whether any sum became due to them by way....
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.... construe the agreements arrived at between business people in a business sense. Ordinarily in the case of business or trading concerns accounts of profits are not made except at stated intervals usually separated by a year. Particularly in the case of limited companies incorporated under the Indian Companies Act the accounts are cast every year and the net profits earned by the company are ascertained every year both for the declaration of dividends and for submitting the returns to the Income-tax authorities. Under Section 131(1) of the Indian Companies Act of 1913 every company was required once at least in every year and at intervals of not more than 15 months to cause the accounts to be balanced and a balance sheet to be prepared which was called the annual balance sheet. The first schedule to the Companies Act which contained the regulations, by which unless excluded the affairs of the company were to be governed, provided under Regulation 106 the preparation once at least every year of the profit and loss account for the period and under Regulation 108 for the balance sheet to be made out in every year and laid before the company in general meeting. Having regard to the cour....
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....on such calculation of net profits the managing agents may be paid their remuneration or commission at the percentage stipulated in the managing agency agreement and the shareholders also be paid dividends out of the net profits of the company. We are sure that these were the considerations which weighed with the managing agents of this company in not taking up any such contention before the Income-tax authorities and the High Court that the remuneration or commission payable to them under the managing agency agreement was not payable per year and the contention put forward before us in this behalf was a clear after-thought. We would be therefore justified in treating the terms and conditions in regard to the payment of managing agency commission in both these managing agency agreements as on a par with each other stipulating for such payment per year on the net annual profits of the companies. 34. If this be the true construction of the managing agency agreement it follows that the contract of service between the companies and the managing agents was entire and indivisible, that the remuneration or commission became due by the companies to the managing agents only on completion....
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....erms of money) ; annual or periodical receipts accruing to a person or corporation (Oxford Dictionary). The word clearly implies the idea of receipt, actual or constructive. The policy of the Act is to make the amount taxable when it is paid or received either actually or constructively. 'Accrues', 'arises' and 'is received' are three distinct terms. So far as receiving of income is concerned there can be no difficulty ; it conveys a clear and definite meaning, and I can think of no expression which makes its meaning plainer than the word 'receiving' itself. The words 'accrue' and 'arise' also are not defined in the Act. The ordinary dictionary meanings of these words have got to be taken as the meanings attaching to them. 'Accruing' is synonymous with 'arising' in the sense of springing as a natural growth or result. The three expressions 'accrues', 'arises' and 'is received' having been used in the section, strictly speaking 'accrues' should 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 adva....
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....ber Trust Ltd., and Mukherjea, J., in Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay, where this passage from the judgment of Mukerji, J., in Rogers Pyatt Shellac & Co. v. Secretary of State for India is approved and adopted. It is clear therefore that income may accrue to an assessee without the actual receipt of the same. 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. There must be as is otherwise expressed debitum in praesenti, solvendum in futuro ; See W. S. Try Ltd. v. Johnson (Inspector of Taxes), and Webb v. Stenton and Others, Garnishees. Unless and until there is created in favour of the assessee a debt due, by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him. 40. The word "earned" even though it does not appear in Section 4 of the Act has been very often used in the course of the judgments by learned Judges both in the High Courts as well as the S....
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....e transferees, the moment the remuneration or commission was ascertained at the end of the calendar year and became a debt due to the managing agents under the terms of the managing agency agreements it could be referred back to the period in which it was earned and the portions of the remuneration or commission which were earned by the Sassoons during the broken period could certainly then be said to be the income which had accrued to them during the chargeable accounting period. 43. Reliance was placed in support of this position on Commissioners of Inland Revenue v. Gardner Mountain & D'Ambrumenil, Ltd. The assessee in that case carried on inter alia the business of underwriting agents, and entered into agreements with certain underwriters at Lloyds under which it was entitled to receive as remuneration for its services in conducting the agency, commissions on the net profits of each year's underwriting. The agreements provided that "accounts should be kept for the period ending 31st December in each year and that each such account shall be made up and balanced at the end of the second clear year from the expiration of the period or year to which it relates and the am....
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....t the principle was to refer back to the year in which it was earned so far as possible remuneration subsequently received even though it could only be precisely calculated afterwards. Lord Wright in his speech at page 94 said that it was necessary to determine in what year the commission was earned, or in the language of the Act, in what year the assessee's profits arose and observed at page 96 :-- "I agree with the Court of Appeal in thinking that the necessary conclusion from that must be that the right to the commission is treated as a vested right which has accrued at the time when the risk was underwritten. It has then been earned, though the profits resulting from the insurance cannot be then ascertained, but in practice are not ascertained until the end of two years beyond the date of underwriting. The right is vested, though its valuation is postponed, and is not merely postponed but depends on all the contingencies which are inevitable in any insurance risk, losses which may or may not happen, returns of premium, premiums to be arranged for additional risks, reinsurance, and the whole catalogue of uncertain future factors. All these have to be brought into ac....
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....possibly be allowed to suspend their accrual................................" "The quantification of the commission is not a condition precedent to its accrual. "(Per Ghulam Hasan, J., in Commissioner of Income-tax, Madras v. K.R.M.T.T. Thiagaraja Chetty & Co. See also Isaac Holden & Sons, Ltd. v. Commissioners of Inland Revenue, and Commissioners of Inland Revenue v. Newcastle Breweries Ltd.) What has however got to be determined is whether the income, profits or gains accrued to the assessee and in order that the same may accrue to him it is necessary that he must have acquired a right to receive the same or that a right to the income, profits or gains has become vested in him though its valuation may be postponed or though its materialisation may depend on the contingency that the making up of the accounts would show income, profits or gains. The argument that the income, profits or gains are embedded in the sale proceeds as and when received by the company also does not help the transferees, because the managing agents have no share or interest in the sale proceeds received as such. They are not co-sharers with the company and no part of the sale proceeds belongs to them. Nor i....
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....f 10 per cent., they are entitled to that amount. If, on the other hand, the working does not show a profit which entitles them to a commission of Rs. 15,000 they are in any case entitled to that amount. Therefore, in our opinion, the Tribunal rightly held that the accrual of the commission was at the end of the calendar year, which was the year maintained by the mills and not from time to time as contended by the Department. " 50. In the case of Salt and Industries Agencies Ltd., Bombay v. Commissioner of Income-tax, Bombay City, the question for the consideration of the Court no doubt was what was the place where the profits had accrued. In determining the place where the profits had accrued it was however necessary to find when the profits had accrued to the assessee and it was held that what was conclusive of the matter was the consideration as to when the right to managing agency commission arose and when did the company become liable to pay managing agency commission to the managing agents and it was further held that it was only when all the accounts of the working of the company were submitted to the head office in Bombay and the profit was determined that it could be sa....
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.... of shares. Lord Ormidale observed at page 709 :-- "The value of the shares had to be determined as a matter of bargain between the parties, and the purchaser thought that it was not unreasonable that he should pay something over par for them because of the possibility, not the certainty but the possibility, of a dividend six months afterwards being paid upon the shares so purchased by him. " 53. Lord Anderson observed at page 710 :-- "He buys two things with his money. He buys, in the first place, a share of the assets of the industrial concern proportionate to the number of shares which he has purchased ; and he also buys the right to participate in any profits which the company may make in the future. Now, when a transaction of this nature is entered into during the currency of the financial year of the industrial concern it is obvious that what happens is this, that not only is a part of the assets purchased outright but that a chance is bought as well--a chance of sharing in any profits which may be made during the currency of that financial year. " 54. Wigmore (H.M. Inspector of Taxes) v. Thomas Summerson and Sons, Limited, was the case of a vendor of ....
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....n a manner favourable to him. This contention was dealt with in the manner following :-- "One has to remember that this transaction concerned not merely Mr. Pilcher but also the vendor of the orchard. Mr. Pilcher was able to buy the orchard complete with the cherries from the vendor and by that means, according to his own calculation, the cherries stood him in pound 2,500. It by no means follows that if he had been minded to buy the cherries from the vendor apart from the land, as a separate transaction, the vendor would have been willing to sell them to him for pound 2,500, or at any price. The difference is obviously a material one from the vendor's point of view because, dealing with the matter as he did, he was selling a capital asset, and the resulting capital receipt, prima facie would attract no tax. If he sold the cherries separately in the way of trade he would at once have created an income receipt on which, prima facie, tax would have been exigible. Therefore the alteration in the form of the bargain required to make it more favourable to Mr. Pilcher from the tax point of view would have involved an alteration not merely of form but of substance owing to its....
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....nvested for the purpose of acquiring that business and the assessee could not deduct from the net profits of the working of the business after the date of the purchase any part of the capital which had been thus invested by it. This result was achieved even though in the purchase of unexecuted contracts there was included the part of the work done towards the performance of the contracts by the vendors. The assessee derived the benefit from such partial execution of the contracts by the vendors ; nevertheless the value of such work was not treated as any income which had accrued to the vendors and which the assessee was entitled to deduct from its profits arising from the performance by it of those unexecuted contracts. 59. Learned counsel on behalf of the transferees contended that all these cases were concerned with the question whether the income derived by the assessee out of the income bearing asset after the date of the purchase could be treated as a capital expenditure so far as it formed part of the consideration paid by the assessee to the vendors and in none of these cases were the courts concerned with the question that arises before us, viz., whether any part of the ....
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.... to have accrued to the Sassoons, during the chargeable accounting period. 61. In view of the above it is unnecessary to deal with the contention which was urged by the learned counsel for the Sassoons that even if there be an assignment of income the assignee and not the assignor would be liable to pay the tax. He referred us to the case of Commissioner of Income-tax, Bombay Presidency v. Tata Sons Ltd., in support of this contention of his and he also referred us to note 'G' at page 209 in Simon's Income Tax, 2nd Edition, Vol. II, where the ratio of Parkins v. Warwick (H. M. Inspector of Taxes), relied upon by the High Court in the judgments under appeal, has been criticised. We do not however think it necessary to go into this question as in our opinion there were no debts due by the companies to the Sassoons which were assigned under the respective deeds of transfer and assignment. 62. The only question which remains to consider is whether Section 36 of the Transfer of Property Act imports the principle of apportionment in regard to the commission received by the transferees herein. Section 36 of the Transfer of Property Act, provides :-- "In the abse....
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....ncies to the transferees. In order to attract the operation of Section 26(2) the person succeeded must have had an actual share in the income, profits or gains of the previous year and on the construction of the agreements the Sassoons cannot be said to have acquired any share in commission for the broken periods. 64. The whole difficulty has arisen because the High Court could not reconcile itself to the situation that the transferees had not worked for the whole calendar year and yet they would be held entitled to the whole income of the year of account ; whereas the transferors had worked for the broken periods and yet they would be held disentitled to any share in the income for the year. If the work done by the transferors as well as the transferees during the respective periods of the year were taken to be the criterion the result would certainly be anomalous. But the true test under Section 4(1)(a) of the Income-tax Act is not whether the transferors and the transferees had worked for any particular periods of the year but whether any income had accrued to the transferors and the transferees within the chargeable accounting period. It is not the work done or the services ....
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....r referred to as Chidambarams) on the 1st June, 1943, and (3) to Rajputana Textile (Agencies) Ltd., on the 1st July, 1943. The assessments with which we are concerned are those of (1) Sassoons, (2) Agarwals, and (3) Chidambarams and relate to income by way of managing agency remuneration paid in the year 1944 by the mill companies to the respective assignee-companies for the calendar year 1943. For Sassoons and Agarwals the assessment year was 1944-45 and the accounting year was the calendar year 1943. For Chidambarams the assessment year was 1945-46 and the chargeable accounting period was from 31st July, 1943, to 30th June, 1944. The tax was assessed on the basis not of receipts but of accrual. The Income-tax authorities treated the total remuneration for the entire year 1943 in each case as income which accrued to the assignee-companies in the respective accounting periods. The assignee-companies objected on the ground that part of the remuneration, up to the date of the respective assignments, accrued to the assignor-company, viz., Sassoons, and that they were, therefore, liable to be assessed only in respect of the balance of the remuneration referable to the portion of the ca....
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....here are thus three appeals, one by the Sassoons against the Income-tax Commissioner and the other two by the Income-tax Commissioner against Agarwals and Chidambarams respectively. In the first of the appeals, the Income-tax Commissioner supports the position taken up by the Sassoons, while in the other two the Commissioner is the appellant and contests the position taken by the Agarwals and the Chidambarams. Thus it will be seen that though in form the three appeals are each between the Income-tax Commissioner and one of the three companies, in fact they raise a controversy between the assignor-company, the Sassoons, on the one side and the two assignee-companies, the Agarwals and the Chidambarams, on the other, the Commissioner supporting the Sassoons and opposing the other two. 69. The arguments before us covered a wide range and were advanced on the assumption that what the High Court held was that the Sassoons became entitled on the very date of the respective assignments to a proportionate share of the year's remuneration for the managing agency, and that accordingly that share accrued to the Sassoons as their taxable income, then and there, and did not cease to be su....
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....n the 31st December that the Income-tax Appellate Tribunal also took care to say, in making their reference to the High Court, as follows : "The question is not when the managing agency commission accrued. The real question is to whom it accrued. " 72. It appears to me, therefore, that it is not correct to approach the consideration of this case as though the decision therein turns directly upon the question whether any income had accrued to the Sassoons on the dates of the respective transfers of the managing agency to the transferees. 73. In the arguments before us considerable stress was laid by learned counsel appearing for the Sassoons on the fact that the managing agency agreements with which we are concerned provide for annual remuneration for an year's work. It was pointed out that the remuneration payable was fixed as commission at a certain specified percentage of the net profits of the respective mill companies. So far as the Sassoons United Mills Ltd. are concerned, whose managing agency had been assigned to Agarwals, the commission was in terms stated in the agency agreement to be per annum and on the annual net profits of the company. So far as Elph....
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....the non-payability of remuneration on account of non-completion of the work. The year's work has been completed by the assignee-company in continuation of that of the assignor-company. The total remuneration for the year has in fact been paid into the hands of the assignee-company. The only questions, therefore, are (1) whether the money so received accrued by way of remuneration for the year's work and became taxable income on the 31st December, 1943, (2) if so, whether it was the joint income of the assignor and the assignee or the sole income of the assignee, and (3) whether the assignment operated to transfer the assignor's share of the income on its accrual. 75. The answer to the first of the above questions seems to me to admit of no doubt. The remuneration was for the year's work. The year's work was completed on the expiry of the year. The right to receive the remuneration became, therefore, vested on the 31st December, 1943. It is true that in Agarwals' case there is a clause in the original managing agency agreement that "the managing agency commission shall be due yearly on the 31st day of March, in each and every year and shall be pay....
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....ostponing the accrual from the 31st December to 31st March. But even otherwise, this does not at all affect the final conclusion in this case reached by the High Court of Bombay. If the view of the High Court is correct that the income accrued both to the assignor and to the assignee after the completion of the year's work, it seems to matter little whether that accrual is on the 31st December or on the 31st March next. 77. The further question as to whether the view taken by the High Court that the assignments operated to transfer to the assignee the assignor's share of the year's remuneration after it accrued to him as his income and whether it continues to remain the assignor's taxable income in spite of the assignment, may also be shortly dealt with. If the High Court be right in its view that the remuneration accrued both to the assignor and to the assignee together, whenever it may be, then it is clear that on the respective dates of the assignment, the assignor had a future right to a share of the remuneration on the completion of the year. If so, there is ample authority for the position that the assignment of such a future right is valid and becomes oper....
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....his argument that now requires examination. The cases that have been relied on in support of this argument are the following : Commissioners of Inland Revenue v. Forrest ; Wigmore v. Thomas Summerson ; and Commissioners of Inland Revenue v. Pilcher. Commissioners of Inland Revenue v. Forrest is a case of purchase of certain shares and the income derived therefrom and is analogous to the second head of income chargeable to income-tax under Section 6 of the Indian Income-tax Act, viz., securities. The income therefrom is directly referable only to the ownership of the shares or securities. Mere lapse of time makes income payable and the taxation depends on the receipt of the income. Wigmore v. Thomas Summerson is also a case similar to the above. Commissioners of Inland Revenue v. Pilcher is the case of a sale of an orchard inclusive of the year's fruit crop, which by the date of the sale does not appear to have become ripe enough to be treated as a severable item of property. This was a case of property whose ownership itself, in the ordinary course and by lapse of time, gives rise to income and is analogous to head No. 3 of Section 6 of the Indian Income-tax Act. It is interest....
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....ts were partially executed there is nothing to show that the execution was of any such extent as to have become a substantial source of income. It may also be noted that this decision is a direct authority only on what is capital expenditure and what is revenue expenditure for purposes of deduction. The point in the form relevant for the present case was not raised there and cannot be taken to have been decided. It is interesting to notice that in Simon's Income Tax, Vol. 2, (1949 Edn.), page 188, paragraph 222, the following passage appears : "In City of London Contract Corporation Ltd. v. Styles where the company acquired a business including a number of unexecuted contracts, it was held that the sum paid for the contracts could not be deducted in computing the company's profits, on the ground that the whole of the purchase price of the business was a sum 'employed or intended to be employed as capital in such trade'. " 81. Similarly in Spicer and Pegler's Income Tax and Profits Tax (20th Edn.), at page 116 it is stated as follows : "Cost of unexecuted contracts taken over with a business (in arriving at the profits from the performance of....
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....ough in another context, in John Smith & Son v. Moore in the following passage : "The business makes no profits. The profits are not fruits yielded by a tree spontaneously. They are the result of the operations carried on by the owner of the business for the time being. " 84. Therefore, on principle, apart from authority, it appears to me to be erroneous to treat the managing agency agreement as by itself the direct source of income and to treat it as an income-producing asset. 85. An examination of the provisions of the Indian Income-tax Act clearly bears out this view. Sections 3 and 4 of the Income-tax Act are the charging sections. The charge is (in so far as it is relevant for purposes of this case) on the income of the previous year (a) which is received by the assessee within the taxable territory, or (b) which accrued or arose within the taxable territory to a resident assessee. As stated at the outset the assessment in the present case is based on accrual and not on receipt. Computation of the taxable income is governed by the provisions of Chapter III of the Act. Section 6 thereof enumerates the following heads of income as being chargeable to income-tax : ....
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....hasised by the Privy Council in Commissioner of Income-tax, Bengal v. Shaw Wallace & Co. A recent decision of this Court in Liquidators of Pursa Limited v. Commissioner of Income-tax, Bihar, also emphasises this and explains that the phrase "carried on by him" in Section 10(1) of the Indian Income-tax Act "connotes the fundamental idea of the continuous exercise of an activity as the essential constituent of that which is to produce the taxable income." This phrase appears to me also clearly to connote the idea that the taxable income is that of the very assessee or the combination of assessee whose continuous activity produces the income. Where, as in this case, that continuity is kept up by two persons successively, it appears to me that under this section, the profits and gains are the assessable income of both together. 87. This is in accord with the well-accepted notion, under the normal law, that if two persons jointly carry out a work or conduct a business, the total remuneration in fact earned for the work or the total gains made on that business belongs to both of them as their joint property and that such property has to be apportioned between them on some equitable ba....
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....ee the right to the entire income payable after the date of assignment. But it appears to me that a term of this kind has reference only to the payment aspect of the money which constitutes remuneration and has no bearing on the question as to whose income it is for purposes of taxation. Taxable income must be derived from specified sources indicated in the Indian Income-tax Act. Since the mere ownership of managing agency cannot as a matter of law be treated as the source of income, as explained above, any term in the managing agency agreement between the principal and the agent entitling only the assignee to receive the year's remuneration and negativing to the assignor any direct recourse to his quondam principal for his share of the income, cannot have the effect of denying to the assignor a substantial right to a share in the remuneration, if otherwise he has a vested right thereto. A distinction exists in law between the right to receive or get payment of a certain amount of money and the right to the money itself. The right to enforce payment of money may belong to one person. But the beneficial right in that money may belong wholly or partially to another. Benami contra....
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....into an agreement with the person, firm or company aforesaid appointing such person, firm or company the agents of the said company for the then residue of the term outstanding under the agreement and with the like powers and authorities, remuneration and emoluments and subject to the like terms and conditions as are herein contained." 91. Stress has been laid on the underlined portion of the above clause. It is urged that this as well as clauses 1 and 3 of the managing agency agreement show that the assignor and the assignee are to be treated as one entity and that on assignment the assignee becomes the managing agent as if his name had been inserted in the managing agency agreement from the beginning, and that the continuity of the managing agency was preserved thereby and that whoever satisfies the description of the managing agent at the time when the commission for the year becomes due, is also the person entitled to the amount by way of remuneration--not, as per this argument by virtue of any mutual arrangement between the assignor and the assignee, but--by the very terms of the managing agency which is the source of income. It is urged, therefore, that this feature stamps....
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....rights and obligations will be governed by the old agreement for the residue of the term with the assignee-company's name substituted for the assignor-company's name. Such effect can only be prospective and not retrospective. 92. There can be no doubt, however, that though any mere clause in the managing agency agreement that the employer is to be responsible only to the assignee for the payment of the entire year's remuneration is not by itself enough to vest in the assignee a beneficial right to the remuneration of the year, such a right may arise by virtue of a specific or implied term as between the transferor and the transferee, either as part of the deed of transfer or independent thereof. It may be mentioned that in the Agarwals' case there was such a specific term in the agreement preliminary to the actual assignment. But learned counsel for the Sassoons expressly disclaimed it on the ground that it was not incorporated in the deed of transfer and was, in any case, superfluous and did not rely on it. In his view the right of the assignee to receive the entire remuneration did not depend on any specific term between the assignor and the assignee, but on th....