Morvi Industries vs Commissioner Of Income Tax (Central) Calcutta

Judicial Analysis Court Copy Headnote Facts Arguments Court observation

1971 Supreme(SC) 532

SUPREME COURT OF INDIA
K.S. HEGDE, A.N. GROVER AND H.R. KHANNA, JJ.
M/s. Morvi Industries Ltd. (In both the Appeals), Appellant
Versus
The Commissioner
Advocates appeared
Mr. B. P. Maheshwari, Advocate, for Appellant (In both the Appeals); Mr. S. T. Desai, Sr. Advocate (M/s. P. L. Juneja and R. N. Sachthey, Advocates, with him, for Respondent (In both the Appeals).

Headnote:
Indian Income-tax Act, 1922 – Sections 66, 4, 10 – Assessment – Tribunal referred two questions to High Court (1) Whether on facts and in circumstances of case, sums of Rs. 50,719/- and Rs. 13,963/- foregone by assessee by its Directors resolution dated 4-4-1955 and 19-6-1956 respectively, were liable to be included in its total income for accounting years ending 30-6-1955 and 30-6-1956? – (2) If answer to question No. 1 be in affirmative, whether assessee is entitled to claim an allowance of an equivalent amount as expenditure under provisions of Section 10 (2) (xv) of Indian Income Tax Act?" – High Court agreed with view taken by Tribunal. – It was observed that accrual of income was complete within accounting year of managed company and as no relinquishment had been done before amount became due, case strictly came within ambit of Section 4 (1) (b) (i) of Act. –Relinquishment it was further observed was a unilateral act of appellants. – As regards second question High Court found that relinquishment had not been made for purpose of facilitating legitimate commercial undertaking, or by way of commercial expedieney. – Appellants case was thus held to be not covered by S. 10 (2) (xv) of Act. – Held, Income-tax Act takes into account two points of time at which liablility to tax is attracted, viz, accrual of income or its receipt; but substance of matter is income. – If income does not result at all, there cannot be a tax, even though in bookkeeping an entry is made about a "hypothetical income, which does not materialise. – Where income has, in fact, been received and is subsequently given up in such circumstances that it remains income of recipient, even though given up, tax may be payable. – Where, however, income can be said not to have resulted at all there is obviously neither accrual nor receipt of income, even though an entry to that effort might in certain circumstances, have been made in books of account." – Assessee firm, who was managing agent of two shipping companies in that case, gave up 75% of managing agency commission with a view to get managing agency transferred to two private companies. – It was held that this was not a case of a gift by assessee to managed companies of a portion of income which had already accrued but an agreement to receive a lesser remuneration than what had been agreed upon. – Amounts of income for two years in question were given up unilaterally after they had accrued to appellant company. – As such, appellant could not escape tax liability or those amounts – Court find that appellant could claim deduction of amounts under Section 10 (2) (xv) of Act if amounts had represented an expenditure laid out or expended wholly and exclusively for business of appellant. – There is, however, nothing to show that amounts were relinquished for purpose of appellant s business. – Present is not a case wherein amount due to assessee were given up on grounds of commercial expediency or for advancing business interest at assessee. – Conclusion of Judges of High Court in this respect is well founded – Appeals Dismissed

Judgment

KHANNA, J. : - This judgment would dispose of two Civil Appeals Nos. 2083 and 2084 of 1970 which have been filed on certificate granted by the Calcutta High Court and are directed against the judgment of that Court whereby it answered the questions referred to the Court under Section 66 (1) of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act) for two assessment years against the assessee appellant and in favour of the respondent.

2. The assessee is a limited Company and the matter relates to the assessment years 1956-57 and 1957-58, the corresponding accounting years for which ended on June 30, 1955 and June 30, 1956 respectively.

3. The appellant Company was appointed as the Managing Agent of Shree Ramesh Cotton Mills Ltd., Morvi (hereinafter referred to as the managed Company) as per agreement dated 30-12-1946. The managed company was a 100% subsidiary of the appellant company. Under the terms of the agreement, the appellant company was entitled to receive a fixed office allowance of Rs. 1,000/- per mensem plus a commission at the rate of 12 1/2% of the net profits, an additional commission of 1 1/2% on all purchases of cotton and an equal amount on all sales of cloth and yarn. In the relevant years, the managed company suffered losses and consequently the commission payable at 12 1/2% of the net profits was nil but the commission on purchase of cotton at the rate of 1 1/2% and on sales of cloth and yarn at the same, rate, aggregated to Rs. 38,719/- for the assessment year 1956-57 and Rs. 1,963/- for the following year. Besides these amounts, the appellant was entitled to Rs. 12,000/- per annum for each of the two years as fixed office allowance. The total amounts which the appellant was entitled to receive from the managed company were Rs. 50,719/- and Rupees 13,963/- for the two years.

4. The managed company s accounting year closed on the 30 th day of December and that of the appellant company on the 30th day of June every year. Clause 2 (e) of the Managing Agency Agreement dated 30th December, 1948 contained the following term as to when the commission would be due and payable:-

"(e) The said commission shall be due to the Agents yearly on the thirty-first day of December or any other date on which the Company s yearly account close in each and every year during the continuance of this agreement and shall be payable and be paid immediate after annual accounts of the said Company has been passed by the Board of Directors and Auditors of the Company and by the company in General Meeting."

5. According to the above clause, the commission was due on the 31st day of December every year and it was payable immediately after the annual accounts of the managed company had been passed in the General Meeting. The Annual General Meetings of the managed company were held to adopt the accounts on November, 24, 1955 and July 21, 1956 respectively with regard to the assessment years in question. The amounts of commission in terms of the above clause were "due" on 31st December, 1954 and 31st December, 1955 and were "payable" immediately after the 24th of November, 1955 and 21st of July, 1956 respectively.

6. The appellant company relinquished the managing agency commission for the assessment year 1956-57 as per resolution dated 4th of April, 1955 of the Board of Directors and for the following year as per resolution dated 10th June, 1956. The amounts of the commission were thus relinquished after they had become "due" but before they were "payable" in terms of Clause 2 (e) of the agreement. On behalf of the appellant it was stated that the managed company had been suffering heavy losses in the past years and, therefore, the appellant did not consider it proper to charge any commission or the fixed office allowance and had consequently relinquished the same.

7. The Income-tax Officer included the sums of Rs. 50,719/- and Rs. 13,963/in the total income of the appellant for the two assessment years in question. The Inco

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1971 Supreme(SC) 532

Cases Referred (1)