TaxTMI 
TaxTMI 
1954 (5) TMI 2
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....ram 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 & Spinn....
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....943, 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 the managing a....
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....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. 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 proportion of the services rendered as managing age....
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....nd 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. " The letter dated the 3rd September, 1943, recording the agreement of transfer of the managing agency provided that in the event of the transaction being com....
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....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. 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 quantum also was not disputed in each case though the principle of apportionment was in ....
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....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. 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 the remuneration for that period. The stated period was that of a year and no remuneration was pa....
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.... 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. " Section 219 of the Indian Contract Act also provides that in the absence of any special contract, payment for the performance of any act is not due to the agent until the completion of such act. Our attention was drawn in this connection to th....
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....er 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. " 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 the year, there must, as a matter of necessity, be inferred a right to receive payment from day to day, and receive payment for the broken period. I do not think in this ....
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....ve 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 the assumption that the report of Swabey's case was correct, and that the article in that case contained the words 'at the rate of'. Certainly Lord Alverstone, C.J., acted on this assum....
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....itled 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 as if the name of such person, firm or company had appeared in these presents in lieu of the names of the partners of E.D. Sassoon & Co. and as if such person, firm or company had entered into the agreement with....
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....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. It was however urged that clause 10 of the managing agency agreement itself contemplated a broken period, because there was nothing therein to prevent the managing agents from assigning the agreement and their rights thereunder at any time in a particular year during the continuance of the agreement. If the managing agents therefore co....
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....eir 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. 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 which would certainly be a broken period and not a full year. What would happen however on the expiration of the period of the managing agency agreement cannot affect the construction of the relevant terms of the agreement whi....
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....ibed 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 of such commission. Whether any commission became due to them would depend upon the construction of clause 3 of the agreement and under that clause the commission calculated at 10 per cent. of the net profits of the company was to bec....
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....d 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 course of business which prevailed in this company also so far as it is evidenced by the fact that the accounts of the managing agency commission was made up for the calendar year 1943 and was paid to Chidambaram Mulrai & Co. Ltd. who became the managing agents i....
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....at 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. 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 of a definite period of service and at stated periods, that it was a condition precedent to the recovery of any wages or salary in respect thereof that the service or duty should be completely performed, that such remuneration constituted a debt only at the end of....
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....crues', '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 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. It is difficult to say that this distinction has be....
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....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. 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 Supreme Court. (Vide Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay, and Commissioner of Income-tax, Madras v. K. R. M. T. T. Thiagaraja Chetty & Co.). It has also been used by the Judicial Committee of the Privy Council in Commissioners of Taxation v. Kirk. The concept however cannot be divorced from th....
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....assoons during the broken period could certainly then be said to be the income which had accrued to them during the chargeable accounting period. 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 amount then remaining to the credit of the account shall be taken to represent the amount of the net profit of the period or year to which it relates and the commission payable to the company shall be calculated and paid thereon. " The accounts for the underwriting done in the calendar year 1936 were made up at the end of 1938 and the question t....
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....r 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 account according to ordinary commercial practice and understanding. But the delays and difficulties which there may be in any particular case, however they may affect the profit, do not affect the right for what it eventually proves to be worth. " Lord Simonds in his speech at page 110 stated :-- " It is clear to me that the commission is wholly ear....
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....e 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 is there any ground for saving that the company are the trustees for the business or any of the assets for the managing agents. The managing agents cannot therefore be said to have acquired a right to receive any commission unless and until the accounts are made up at the end of the year, the net profits ascertained and the amount of commission due by the company to the managi....
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.... as contended by the Department. " 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 said that a right to receive a commission at the rate specified in the managing agency agreement had arisen and the managing agents became entitled to a certain specified commission. These considerations are germane to the question which we have to decide in these appeals and support the conclusion which we have already arrived at, that the right to receive the commission would arise and the income, pr....
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....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. " Wigmore (H.M. Inspector of Taxes) v. Thomas Summerson and Sons, Limited, was the case of a vendor of war loan stock bearing interest payable without deduction of tax. The sale was effected on the 10th April, 1923, with interest rights. The vendor was assessed for " the year 1923-24 in respect of the amount of interest said to have accrued on the stock in the period between the last payment of interest and the sale of the stock, it being contended that the price received by the vendor on sale of stock included this interest. The purcha....
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....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 adverse effect on the tax situation of the vendor, and it cannot be assumed that the bargain thus altered would have been one to which Mr. Pilcher could have secured the vendor's agreement. " These observations throw considerable light on the situation obtaining in the cases before us. It will be remembered that the total amount of Rs. 75,77,693 received by the Sassoons on the transfers of the managing agencies was taken by them to the "Capital Reserve A....
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....ontracts 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. 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 income which was actually received by the assessees could be said to have accrued to the vendor. Even though the question did not arise in terms it is none the less involved in the consideration of the question whether the assessee was liable to pay the income-tax on the whole of the income thus derived by him. As was pointed out by Jenkins, L.J., in Commissioners of Inland Revenue v. Pilcher, quoted above, the vendor's point of view cannot be neglected and once you come to....
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....t 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. 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 absence of a contract or local usage to the contrary, all rents, annuities, pensions, dividends and other periodical payments in the nature of income shall, upon the transfer of the interest of the person entitled to receive such payments, be deemed, as between the transferor and the transferee, to accrue due from day to day, and to be apportionable accordingly, but to be payable on the days appointed for the payment thereof. " It may be noted that the section applies in the absence of a contract or local us....
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....o 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 rendered by the person but the income received or the income which has accrued to the person within the chargeable accounting period that is the subject-matter of taxation. That is the proper method of approach while considering the taxability or otherwise of income and no considerations of the work done for broken periods or contribution made towards the ultimate income derived from the source of income nor any equitable considerations can make any difference to the position which rests entirely on a strict interpret....
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.... 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 calendar year 1943 subsequent to the respective dates of the assignments. The objection was overruled and the assessments were made. On appeals to the Income-tax Appellate Tribunal, their contention was accepted and the assessments were modified. It may be mentioned that the Rajputana Textiles (Agencies) Ltd. does not appear to have filed any appeal to the Tribunal. Meanwhile (presumably by way of caution) the Income-tax authorities issued notices to the assignor-company, viz.,. Sassoons, under Section 34 of the Indian Income-tax Act and as....
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.... 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. 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 such notwithstanding the assignment thereof. The case was accordingly debated before us as though the decision turned upon the question whether any income could accrue to the Sassoons on the dates of the respective transfers of the managing agency to the transferees. It is necessary, therefore, to clarify, at the outset, what the question was which was directly raised on the reference made to the High Court and what, in the view of the High Court, was the date when a share of the year's remuneration accrued to the Sassoons as its income. It appears to me ....
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.... 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 Elphinstone Spinning and Weaving Mills Co. Ltd. are concerned, whose managing agency was assigned to Chidambarams, the remuneration is merely stated in the corresponding agreement to be a percentage of the net profits of the company, but is not in terms stated to be per annum or on the annual net profits. But there can be no reasonable doubt that is a matter of construction, the remuneration in the latter case also must be taken to be per annum and on the annual net profits, notwithstanding some argument before us to the contrary. Having regard to this basic fact, the following are, in substance, the argu....
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....ed to transfer the assignor's share of the income on its accrual. 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 payable and be paid immediately after the annual accounts of the mill company have been passed by the shareholders. " It has been urged, in reliance on this clause, that the accrual of the income, in so far as the case of Agarwals is concerned, is not on the 31st December, but on the 31st March next. In the first place such a contention, in so far as it relates to the date of accrual, is not permissible in view of the clarification in the order of reference made by the Tribunal to the High Court and in view of the specific and categorical language of some of the grounds in the statements of the case filed before us both b....
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....m 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 operative by way of attaching itself to the right when it springs up. (See Bansidhar v. Sant Lal, Misri Lal v. Mozhar Hossain, Palaniappa Lakshmanan, and Baldeo v. Miller.) The validity of such an assignment as between the assignor and the assignee and the effect thereof on the assignor's future right may also be supported with reference to the principle of estoppel feeding title which finds recognition in Section 43 of the Transfer of Property Act. For the further position, viz., that a person continues to be liable for tax in respect of accrued income notwithstanding assignment thereof operating on or after such accrual, there is....
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.... 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 interesting to note, that in this case, the learned Judges make a distinction between fructus industriales and fructus naturales and point out that the fruits derived from the orchard being cherries are fructus naturales and not fructus industriales. That the result might have been different if it was fructus industriales appear, clearly, at least so far as Lord Justice Singleton and Lord Justice Tucker are concerned. In the case of fructus industriales the income does not arise by mere ownership but as a result of further investment and labour which may be the effective source of income. These decisions refer only to cases where the sole or effective source of inco....
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.... 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'. " 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 the contracts) " and the case of City of London Contract Corporation v. Styles is quoted as authority. These standard text-books also show that this case has been treated as having reference to unexecuted contracts (and not to partially executed contracts) and as being authority for the question as to what are permissible deductions from taxable income of business concerns. The above cases, therefore, cannot be treated as in any way supporting the contention put forward by learned counsel for the appellant-Sassoons that in the case of an assignment of managing agency the entire remuneration for the year's work accrues as a matter of law to the assignee and is his sole income....
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....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 : (1) Salaries, (2) Interest on securities, (3) Income from property, (4) Profits and gains of business, profession or vocation, (5) Income from other sources. The residual item (5) may for the present purposes be left out. Of the other four heads, items (2) and (3) are the only items in which the taxable income is directly related to the ownership of an asset. In the present case the computation of the taxable income has no relation to those items but may conceivably fall under head No. (1) or head No. (4). At this stage, it is necessary to observe that, though, so far, in the above discussion, the managing agency has been referred to as service and the commission therefor as remuneration, for purposes of convenien....
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....rs to me that under this section, the profits and gains are the assessable income of both together. 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 basis. This is quite independent of any question as to whether the claim for remuneration for the work or for the emoluments of the business can be individually or jointly enforced as against the person who is liable to pay. It cannot be disputed that in the absence of any specific contract to the contrary between the persons who contribute to the work or business, the fruits of such work or of such business is the joint property of both, when the same has in fact been realised. Nor can it be said that this holds good only in cases where both the persons concurrently join together to earn the remuneration for the work or the profits of the business. There is no reason in law why the same principle should not be equally applicable wher....
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....nnot 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 contracts are familiar examples of such a case. Instances of joint rights in money or money's, worth enforceable only at the instance of one out of the persons entitled, in special situations, are easily conceivable. It may be true that there is no accrual of income unless there is a vested right to receive the money which constitutes income. But this proposition has relevance only to the factum or date of accrual but not necessarily to the ownership of the income on such accrual. None of the cases that have been cited before us in support of the proposition that there is no accrual of income unless there is a right to receive it negative this view. In the course of the arguments repeated stress has been laid on the proposition that there is no accrual ....
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....ereby 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 the managing agency as an income-bearing asset. In substance, therefore, this argument amounts to saying that by virtue of this clause the service of the assignee subsequent to the date of assignment can be tacked on to the service of the assignor for the earlier portion of the year, so as to constitute it service for the entire year which earns the remuneration, as the sole property of the assignee, i.e., that the assignment has to be given retrospective operation from the commencement of the year in respect of the work so far done. But if this clause is to be construed as having such retrospective operation, it must, on the very terms of the underlined portion, become so operative from the original commencement of the agreement itself and not from any particular dat....
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.... 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 the fact that what was transferred is an income-bearing asset which carried with it a right to the entire income that falls due after the date of assignment. It is on account of the insistence on this view, that, as I apprehend, learned counsel for the Sassoons disclaimed the above mentioned special term between the assignor and the assignee as being superfluous. He seems to have sought thereby to obviate the consequence of the contention that the assignor's share of remuneration became the assignee's by virtue of the specific assignment thereof operating thereon on its accrual and that hence it remained the taxable income of the assignor. It may be mentioned in this context that clause 10 of the managing agency agreement in Agarwals' case has been relied on by le....