Judgment

JAGANMOHAN REDDY, J. :- The assessee and his wife owned a large number of shares in a private limited company engaged in the business of running hotels. By virtue of Art. 109 of the Articles of Association of the said company, the assessee became the first Managing Director on terms and conditions agreed to and embodied in an agreement dated November 20, 1955 between himself and the company. Under the said agreement, the assessee was to receive Rs. 2,000/- per month, a fixed sum of Rs. 500/- p.m. as car allowance, 10 per cent of gross profits of the company and he and his wife were entitled to free board and lodging in the hotel. For the assessment year 1956-57 for which the accounting year is the year ending 30th September 1955, the assessee was assessed in respect of Rs. 53,913/- payable to him as 10% of the gross profits of the company which he gave up soon after the accounts were finalised but before they were passed by the general meeting of the shareholders. The above amount was given up by him because the company would not be making net profits if the stipulated commission was paid to him. The assessee claimed that the amount given up by him was not liable to be included in his total income because the amount had not accrued to him at all, at any rate, in the accounting year ended 31st March 1956 and that even assuming that it had accured in the account year ended 31st March 1956, it is not taxable under S. 7 or S. 10 of the Indian Income-tax Act, 1922 (hereinafter called the Act ). The Income-tax Officer, the Appellate Assistant Commissioner, the Tribunal and on a reference under S. 66 (1) the High Court have all held that the 10% commission on gross profits amounting to Rs. 53,913/- was taxable as salary under S. 7 of the Act and that the income had accrued to the assessee during the previous year. Against the judgment of the High Court, this appeal is by special leave.

2. The questions of law which were referred to the High Court under S. 66 (1) of the Act are as follows :

1. Whether the sum of Rs. 53,913/- was a revenue receipt of the assessee of the previous year ?

2. Whether the amount is chargeable under S. 7 or S. 10 of the Income-tax Act?

3. If the amount is chargeable under Section 10, is the assessee entitled to a deduction of Rs. 53,913/- under S. 10 (1) or S. 10 (2)?

The High Court answered the first question in the affirmative and in favour of the revenue, and on the second question it was of the view that the amount payable as commission was chargeable under S. 7 as salary and not under S. 10 of the Act. On this view, it did not think it necessary to answer the third question.

3. When the matter came up earlier, this court on November 9, 1971 considered it necessary to call for a further statement of the case from the Tribunal on the third question on the basis of the materials before it and having regard to the decision of Morvi Industries Ltd. v. Commr. of Income-tax, 82 ITR 835. The Tribunal in its supplementary statement of case has answered the question against the assessee and in favour of the Department in holding that the assessee is not entitled to a deduction of the sum of Rs. 53,913/- either under S. 10 (1) or 10 (2) of the Act.

4. It is not disputed that the commission payable to him would be a revenue receipt nor is it disputed that if it is chargeable under S. 7 no other question would arise having regard to the finding based on the decision in Morvi Industries case, 82 ITR 835 = (AIR 1971 SC 2396) (supra) that the amount of Rs. 53,913/- had accrued to the assessee in the year of account. It is therefore necessary for us to consider whether the 10 per cent gross profits payable to the assessee under the terms of the agreement appointing him as the Managing Director is liable to be assessed as salary or under the head income from business . It may be mentioned that salary under S. 7 of the Act includes also commission, wages, perquisites etc.

5. On behalf of the assessee, it was contend