Judgment

GULAM HASAN J. : These three appeals arise from the judgment & order of the Madras High Court dated 2-2-1950, delivered on a reference by the Income-tax Appellate Tribunal (hereinafter referred to as The Tribunal ), whereby the High Court answered the first referred question in the negative, and as regards the second question Satyanarayana Rao, J. answered it in the affirmative, while Viswanatha Sastri J. answered it in the negative, as a result of which the judgment of Satyanarayana Rao J. ultimately prevailed. They relate to the assessment for 1942-1943 and are filed by the Commissioner of Income-tax, while Appeal No. 132 of 1952 which relates to 1943-1944 is filed by the assessee, and is dealt with separately.

2. The two questions which were referred in respect of the first group of appeals are as follows :

(1) Whether there is any material for the Tribunal s finding that the appellants (respondents in this case) were being assessed on cash basis in the prior years?

(2) Whether on the facts and in the circumstances of the case the Appellate Tribunal s finding that the sum of Rs. 2,26,850/- could not be assessed for the assessment year 1942-43 is correct in law?

3. The assessee is a registered firm (hereinafter referred to as the firm ) consisting of K. R. M. T. T. Thiagaraja Chetiy and his two sons. The firm is the managing agent of Shri Meenakshi Mills, Ltd. (hereafter referred to as the Company) owning a spinning mill at Madura. The firm also conducted insurance business and the business of ginning cotton in a ginning factory at another place. Under the terms of the agreement the managing agents word entitled to a remuneration of Rs. 1,000 per mensem and a commission of 1/2 per cent. on all purchases, 1 per cent. on all sales and 10 per cent, commission on the net profits of the mills before allowing for depreciation. The firm had plenary powers of management of the affairs of the company subject to general supervision of the Directors. It was to have charge and custody on behalf of the company of all the property books of accounts, papers and documents and effects belonging to the company.

It was required to keep at the expense of the company proper and complete books of account of all purchases and sales and of all payments made and moneys received on behalf of the company. It had to defray all the expenses of maintaining a suitable office and a staff of assistants and clerks sufficient to transact the business of the firm as managing agents of the company. Clause 16 is most important and lays down that the firm shall be at liberty to retain, reimburse, and pay themselves out of the funds of the company, all charges and expenses, legal or otherwise and all the costs and expenses of providing and maintaining offices for the company and the salaries of clerks, servants, agents or workmen and all moneys expended by them on behalf of the company and all sums due to the firm for commission or otherwise.

4. The Company made considerable profit in the assessment year 1942-1943 and the firm became entitled to commission to the tune of Rs. 2,26,850-5-0. The firm did not show this sum in the return on the ground that it was not actually received in the year of account, viz., by 31-3-1942. It relied upon a resolution of the Board of Directors of the company, dated 30-3-1942, by which they had decided to keep the aforesaid amount in suspense without paying it on the ground that an amount of two lakhs odd was due to the company from the firm. It appears that the firm owed a debt to the company for a long time past which was outstanding.

The firm wrote on 30-3-1942, to the company requesting that the debt be written off. The firm also wrote that on account of the extraordinary increase in the volume of business, it found it difficult to bestow adequate attention on all the aspects of the mill business and proposed that the direct responsibility for sale and purchases may be transferred to some other agency, leaving the general s