Commission payable to Managing Agents is taxable income only when it accrues or arises, and not when it is credited to their account.

Headnote:
INCOME TAX - Commission payable to Managing Agents - Modification of agreement - Whether amount surrendered by Managing Agents taxable - Held, no.
Fact of the Case:

The Managing Agents of two companies entered into agreements with the companies for payment of commission on sales and profits. In 1950, the agreements were modified to provide that the Managing Agents would accept a lesser remuneration if the Directors of the companies so decided. The Managing Agents accepted the modifications. The Income-tax Authorities held that the entire commission payable under the original agreements was taxable income, and that the amount surrendered by the Managing Agents was a voluntary surrender which could not affect the taxability of the whole amount of commission accruing to them. The Income-tax Appellate Tribunal held that the amount surrendered was not taxable income.
Finding of the Court:

The High Court held that the income of the Managing Agents was not the full amount of commission payable under the original agreements, but only the amount payable under the modified agreements.
Issues: Whether the amount surrendered by the Managing Agents was taxable income.
Ratio Decidendi: The court held that the commission payable to the Managing Agents was not taxable income until the end of the accounting year, when all sales were added up and the accounts were made up. The amount which accrued or which they were entitled to receive was the amount payable under the modified agreements, and not what would have been payable had there been no variations in and modification of the agreement.
Final Decision: The appeals were dismissed.

Judgment

KAPUR, J. : These are two appeals against two judgments and orders of the High Court of Bombay on two References made by the Income-tax Appellate Tribunal. The appellant in both the appeals is the Commissioner of Income-tax and in C. A. 162 of 1958, the respondent is the assessee Chamanlal Mangaldas and Co., a registered firm, who are the Managing Agents of Girdhardas Harivallavdas Mills Ltd., Ahmedabad and in C. A. 210 of 1953, the respondent is Mangaldas Girdhar Das Parekh Ltd., a private limited company, which is the Managing Agent of Rajnagar Spinning Weaving and Manufacturing Co. Ltd., Ahmedabad. The respondents in the two appeals will in the judgment be called the Managing Agents and the Company of which they are the Managing Agents will be referred to as the Managed Company.

2. In C. A. 162 of 1958 the Managing Agents were appointed by an agreement dated September 7, 1940, under which they were to receive from the Managed Company a commission at the rate of 3 1/2 per cent on the sale price of all cotton yarn and cotton cloth manufactured and sold by the Company and a commission of 3 1/2 per cent on the sale proceeds of all material yarn and fabrics manufactured from wool, jute and silk and other fibres sold by the Company and a commission of 10 per cent on the profits made by the Company from its ginning or pressing operations. On December 28, 1950, the Directions of the Managed Company passed a resolution modifying the terms of the Managing Agency Agreement in regard to the commission and added a proviso that for the years 1950 and 1951 if the Directors of the Company having regard to the result of the working were of the opinion that a lesser remuneration than that given in the agreement should be paid to the Managing Agents then the Directors shall have the right, in their absolute discretion, to fix such lesser remuneration payable either by way of lump sum or at a reduced percentage rate. This resolution was accepted by the Managing Agents by a letter of the same date. On March 17, 1951, a supplemental agreement was entered into between the Managing Company and the Managing Agents whereby a proviso was added to the Managing Agency Agreement embodying the terms of the resolution of December 28, 1950, which had been agreed to by the Managing Agents. A meeting of the Board of Directors of the Managed Company by a resolution dated April 8, 1951, resolved that the Managing Agents should accept a commission of Rs. 1,05,575 instead of Rs. 2,05,575; in other words that they should be paid Rs. 1,00,000 less than the commission calculated at the rates mentioned in the original agreement. On December 31, 1950, in the books of the Company the following entry was made :

"Rs. 1,05,575/3/- M/s. Chamanlal Mangaldas & Company s Commission account credited dated 31-12-1950.

Commission from 1-1-1950 to 31-12-1950 calculated on your sales of Rs. 62,36,802 less returns inwards etc., Rs. 3,63,226 equal to Rs. 58,73,557 at 3 1/2 per cent Rs. 2,05,575/3/- but as per resolution passed by the Board of Directors on 8-4-1951, commission of Rs. 1,05,575/- 3/- only is credited to the account of Agents".

The Income-tax Authorities held that the entire sum of Rs. 2,05,575 was taxable income having accrued as commission during the previous year and that Rs. 1,00,000 was a mere voluntary surrender which could not affect the taxability of the whole amount of commission accruing to the Managing Agents. On appeal the Income-tax Appellate Tribunal by an order dated February 9, 1954, held that as a result of the agreement between the Managing Agents and the Managed Company the right of the Managing Agents to claim full remuneration i.e., Rs. 2,05,575 had been taken away as from the first January 1950 and it was not a voluntary relinquishment on the part of the Managing Agents and therefore the amount which was subject to taxation on this account was Rs. 1,05,575. The two Members of the Tribunal approached the question from a different point of view

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1960 Supreme(SC) 44

Commission payable to Managing Agents is taxable income only when it accrues or arises, and not when it is credited to their account.

Cases Referred (1)