1954 Supreme(SC) 94

SUPREME COURT OF INDIA
14th May 1954
S.R. DAS, BHAGWATI AND JAGANNADHA DAS, JJ.
E. D. Sassoon and Company Ltd. and others, Appellants
Versus
Commr. of Income-Tax, Bombay City and others, Respondents.
Civil Appeals No. 3, 30 and 31 of 1952.
Advocates appeared
In C. A. No. 3, Mr. B. J. M. MacKenna, Senior Advocate, (Mr. D. H. Dwarka Das - Permitted to appear under Rule 6,Order II, S. C. R. and Mr. Rajinder Narain, Advocate, with him), for Appellant; Mr. M. C. Setalvad, Attorney General for India. (Messrs. G. N. Joshi and P. A. Mehta, Advocates, with him), instructed by Mr. R. H. Dhebar, Agent, for Respondents in C. A. No. 3 and for Appellant in C. A. Nos. 30 & 31; Mr. C. K. Daphtary, Solicitor-General for India, (Messrs. R. J. Kolah, N. A. Palkhiwala and I. N. Shroff, Advocates, with him), (in C. A. No. 30) & Messrs. R. J. Kolah, N. A. Palkhiwala and I. N. Shroff, Advocates, (C. A. No. 31), for Respondents.

Headnote:Section 4-Meaning of "Income", "Accrue" and "Earned". Held: (Per Das and Bhagwati J J.) : 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 presenti solvendum in future. 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 S. 4 of the Act has been very often used in the course of the judgments by the learned judges both in the High Court as well as the Supreme Court. The concept however cannot be divorced from that of income accruing to the assessee. If income has accrued to the assessee it is certainly earned by him in the sense that he has contributed to its production or the parenthood of the income can be traced to him. But in order that income can be said to have accrued to or earned by the assessee it is not only necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise but he must have created a debt in his favour. A debt must have come into existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or in other words a debitum in presenti solvendum in future, it cannot be said that any income has accrued to him. The mere expression earned in the sense of rendering the service etc. by itself is of no avail.-Sections 4 (1) (a), 12A, 26(2)-Managing Agents of company paid commission after yearly accounts, every year-Transfer of Managing Agency in the middle of the chargeable year-Commission paid to transferee - Income for period of year before date of transfer does not accrue to the transferor-Income accrues at the end of the year-So 36, Transfer of Property Act and S. 26 (2) Income Tax Act not applicable.

       E.D. Sassoon and Co. Ltd. (hereinafter referred to as the Sassoons) were the Managing Agents of three mills under three different agreements. They agreed to transfer their managing agencies of the said companies to three different parties 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. Formal deeds of assignment and transfer were also executed by the Sassoons in favour of the transferees and the net considerations of Rs. 75,77,693 for the said transfers were 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 payments made accordingly. For the assessment year 1944-45 and the chargeable accounting period 1st January 1943 to 21st December 1943 the original income-tax and excess profits tax assessments of the Sassoons were made on the 31st May 1945 at a total income of Rs. 46,48,483. This income however did not include any part of the managing agency commission received by the transferees. The entire amounts of the Managing Agency Commission received by the transferred were assessed by the Income-Tax Officer for the assessment year 1945-46 as the income of the transferees.

       The Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. On further appeal, the Income Tax Appellate Tribunal accepted the transferees contention that the Managing Agency commission received by them should be apportioned on a proportionate basis and the

       1. On appeal from A. I. R. 1951 Mad. 600.

       transferees should be made liable to pay tax only on the commission earned by them during the period that they had worked as the Managing Agents of the respective companies.

       The Income-Tax Officer and the Excess Profits Tax Officer appear to have discovered that the amounts of the Managing Agency commission earned by the Sassoons prior to the dates of the respective transfers were not brought to tax and therefore issued on the 29th June 1946 notices under section 34 of the Indian Income Tax Act and Section 15 of the Excess Profits Tax upon the Sassoons on the ground that their income from the managing Agency had escaped assessment.

       The Income-tax Officer and the Excess Profits Tax Officer wanted to include in the assessable income of the Sassoons Rs. 2851934 made up of Rs. 25,61,629/- in respect of Managing Agency of the E.D. Sassoons United Mills/Ltd. for the period of 11 months from the 1st January 1943 to the 30th November 1943, Rs. 99001/- in respect of the Managing Agency of the Elphinstone Spinning and Weaving Mills Ltd. for the period of five months from the 1st January 1943 to the 31st May 1943 and Rs. 1,91,304/- in respect of the Managing Agency of the Apollo Mills Ltd. for the period of six months from the 1st January 1943 to the 30th June 1943 contending that such Managing Agency commission had accrued to the Sassoons for rendered services 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 order was confirmed both by the Appellate Asstt. Commissioner and the Income Tax Appellate Tribunal. On the application of the Sassoons the following question was referred to the High Court:

       Whether in the circumstances of the case was the Managing Agency commission liable to be apportioned between the assessee company and the assignee.

       The High Court answered the references in the affirmative.

       Held: (by majority, Jagannadhadas J. dissenting):

       (1) 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 persons but the income received or the income which has accrued to the persons 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 income derived from the source of income nor any equitable considerations can make any difference to the position which rests entirely on a strict interpretation of the provisions of section 4(1) (a) of the Income Tax Act.1

       1. A.I.R. 1952 Bom. 330 revered.

       (2) On construction of the Managing Agency agreements, the commission was an annual payment calculated upon the annual net profits of the company and was to be due to the Managing Agents yearly on the 31st March in each and every year. Unless and until the annual net profits of the Company were determined the 71 per cent commission could not be ascertained but the sum nonetheless became due on the 31st March in each and every year following the close of the accounting year of the Company. The amount of such commission did not become a debt owing by the Company to the Managing Agents until the 31st March in each and every year and was to be paid immediately after the annual accounts of the Company had been passed by the shareholders.

       The postponment of the date of payment in this manner however did not prevent the amount of the commission thus ascertained becoming due to the Managing Agents and it was on the 31st March in each and every year that the amount of commission thus calculated at 7% 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 had 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.

       (3) Whatever be the position as between the transferor and the transferee, whatever be their arrangements inter se, whatever be the periods of the year during which they might have served the Company in their capacity as the Managing Agents the Managing Agents as described in the recitals and cls. 1 and 3 of the Managing Agency Agreement were one entity and no severance of such periods of service during the course of a particular year was ever contemplated under the Agreement. On assignment, the transferee became the Managing Agent as if its name had been inserted in the Managing Agency Agreement from the beginning. For the future period the transferor effaced itself and the transferee took the place of the transferor and preserved the continuity of the Managing Agency so that whoever happened to satisfy the description of the Managing Agents at the time when the commission for the accounting year became due to the Managing Agents thus described which was expressly stated to be due yearly on the 31st March in each and every year, became entitled to receive the debt which thus became due and to the payment thereof after the annual accounts of the Company had been passed by the shareholders.

       (4) What would happen however on expiration of the period of the Managing Agency agreement cannot affect the construction of the relevant terms of the agreement which have a reference to a year or years during the continuance of the Agreement.

       (5) If this be the true construction of the Managing Agency Agreements 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 each such period of service and that no remuneration or commission was payable to the Managing Agents for broken periods.

       (6) If therefore on the construction of the Managing Agency Agreements we cannot come to the conclusion that the Sassoons had created .any debt in their favour or had acquired a right to receive the payments from the companies as at the date of the transfers of the Managing Agencies in favour of the transferees no income can be said to have accrued to them. They had no doubt rendered services as Managing Agents of the Companies for the broken periods. Brit unless and until they completed their performance viz. the completion of .the definite period of service of a year which! was a condition precedent to their being entitled to receive the remuneration or commission stipulated thereunder no debt payable by the Companies was created in their favour and they had no right to receive any payment from the Companies. No remuneration or commission could therefore be said to have accrued to them at the dates of the respective transfers.

       (7) It was, however, urged that even though no income can be said to have accrued to the Sassoons at the date of the respective transfers which could be the subject matter of any assignment by them in favour of the 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 during the broken period could certainly then be said to be the income which had accrued to them during the chargeable accounting period. It is no doubt true that the accrual of income does not depend upon its ascertainment or the accounts cast by assessee. The accounts may be made up at a much later date. That depends upon the convenience of the assessee and also upon the exigencies of the situation. Amount of the income, profits or gains may thus be ascertained later on the accounts being made up. But when the accounts are thus made up the income profits or gains ascertained as the result of the account are referred Back to the chargeable accounting period during which they have accrued or arisen and the assessee is liable to tax in respect of the same during that chargeable accounting period. The computation of the profits whenever it may take place cannot possibly be allowed to suspend their accrual". 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 acquiesced a right to receive the same or that it 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 gain safe embedded in the sale proceeds and when received by the Company also does not help the transferees, because the Managing Agents have no share of interest in the sale proceeds received as such. They are not co-sharers with the Company and no part of the sale proceeds belong to them. Nor is there any ground for saying 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 Managing Agents thus determined. It is clear therefore that no part of the Managing Agency Commission had accrued to the Sassoons at the dates of the respective transfers of the Agencies to the transferees.

       (8) All that the transferee obtained under the deeds of assignment. and transfer executed by the Sassoons in their favour was an income bearing asset consisting of the office of Managing Agents, the Managing Agency Agreement and all the rights and benefits as such Managing Agents under the Agreement and no part of the consideration paid by the transferees to the Sassoons could be allocated as a receipt of income by reason of their contribution towards the earning of the commission in the shape of services rendered by them as Managing Agents of the Companies for the broken periods. What the transferees obtained under the deeds of assignment and transfer was the expectancy of earning a commission in the event of the condition precedent by way of complete performance of the obligation of the Managing Agents under the Managing Agency Agreements being fulfilled and a debt arising in favour of the Managing Agents at the end of the stated periods of service contingent on the ascertainment of net profits as a result of the working of the Company during the calendar year. If what was transferred by the Sassoons to the respective transferees was merely expectations of earning commission and not any part of the commission actually earned by them or which had accrued to them under the terms of the Managing Agency Agreements, what the transferees received from the companies under the terms of the Managing Agency Agreements which were thus transferred to them would be their income and no part of income could ever be said to have accrued to the Sassoons during the chargeable accounting period.

       (9) Section 36, Transfer of Property Act which applies in the absence of a contract or local usage to the contrary as between the transferor and the transferee, had no room for application as between the subject and the State. The contract to the contrary must be between the transferor and the transferee. Whatever was the contribution of S. & Co. Ltd. towards the earning of the commission during the whole of the calendar year 1943 was the subject matter of the assignment in favour of the transferees and that was sufficient to spell out a contract to the contrary as provided in S. 36 of the Transfer of Property Act.

       (10) Section 26(2) of the Income-Tax Act also had no application. 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 Sassoons could not be said to have acquired any share in commission for the broken periods. Sassoons were not therefore taxable for the period during which they worked as Managing Agents in the chargeable year.

       Per Jagannadhadas J. (contra) : The continuous and successive functioning by both the assignor and the assignee under the managing agency agreement was the effective source of the years income. That income accrued on the completion of the year and was the joint income of both the assignor and the assignee. The prior assignments in the course of the year operated as assignments of this future right to a share of the income. It is only by virtue of inter se arrangement between the assignor and the assignee, resulting from the transactions of assignment, that the assigned had the right to collect the entire income. Nevertheless, the share in this income which accrued to the Sassoons on the completion of the year remained the taxable income of the Sassoons and they were rightly taxed in respect thereof. - Contract Act (1872) S. 219. - Transfer of Property Act (1882), S. 36-Applies in absence contract to contrary between transferor and transferee.