Income tax is a levy on income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a "hypothetical income", which does not materialise.

JUDGMENT :

Hidayatullah, J.

1. This is an appeal on a certificate of fitness under Section 66-A(2) of the Indian Income Tax Act by the High Court of Bombay against its judgment dated October l, 1958. The appellant is the Commissioner of Income Tax, Bombay, and the respondent, Messrs Shoorji Vallabhdas and Co. (referred to hereinafter as the "assessee Firm").

2. We are concerned with the Assessment Year, 1948-49, corresponding to the previous year ending March 31, 1948. The Assessee-firm consisted of three partners, Shoorji Vallabhdas and his two sons, Pratapsinh and Vikramsinh. The assessee firm was the managing agents of several Shipping Companies including the Malabar Steamship Co. Ltd., and the New Dholera Steamships Ltd. With the Malabar Steamship Co. Ltd., "the assessee Firm had entered into an agreement on September 16, 1938 (modified on December 7, 1943) and with the New Dholera Steamships Ltd. on June 8, 1946. Under these agreements, the assessee firm was entitled to receive as its commission, 10 per cent of the freight charged. Between April 1, 1947 and December 31, 1947, the amount of commission at the rate of 10 per cent of the freight was Rs 1,71,885 from the Malabar Steamship Co. Ltd. and Rs 2,56,815 from the New Dholera Steamships Ltd. These amounts were credited in the books of account of the assessee firm to itself with a corresponding debit to the Shipping Companies.

3. In 1947, the assessee firm floated two private limited companies, called Shoorji Vallabhdas Ltd and Pratapsinh Ltd. The assessee firm desired to substitute these two Companies as the managing agents of the Shipping Companies, one for each, and on November 20, 1947 expressed its desire to resign from the managing agency and to have the private limited companies appointed on the same terms. Two shareholders of the Malabar Steamship Co., Ltd. objected to the rate of commission, and wrote a letter on November 27, 1947 in protest. They suggested that the commission should be either 10 per cent of the profits of the managed company or 2= per cent of the freight received. This letter was considered by the Board of Directors of the Malabar Steamship Co. Ltd., and the invited they assessee-firm to make an offer to reduce the managing agency commission to 2= per cent of freight for the current year as also for the future years. As a result, the assessee-firm made an offer as follows:

"That whilst we will continue to insist on our right to receive the full managing commission, however, in order to put the Company on a firm financial basis, and because we are interested both as shareholders and managing agents in the prosperity of the Company, we shall voluntarily agree to a reduction in the Managing Agency Commission both in respect of the current year as also in future years as may be mutually agreed between the Board and ourselves or between the Company and ourselves to the extent of 21 per cent of the total freight."

A similar procedure was followed in the case of the New Dholera Steamships Ltd., though all the documents are not in the record.

4. On December 30, 1947, Extraordinary General Meetings of the two managed Companies were held, and the two private limited Companies were appointed as the managing agents from January 1, 1948. It appears, therefore, that the offer contained in the letter of the assessee firm was accepted. Later, at the Annual General Meetings of the two managed Companies held in December, 1948, the commission was reduced from 10 per cent of the freight to 2= per cent as already agreed. As a result, the assessee firm gave up 75 per cent of its earnings during the relevant years of account, which amounted to Rs 1,36,903 (Malabar Steamship Co. Ltd.,) and Rs 2,00,625 (New Dholera Steamships Ltd).

5. In the assessment which followed, the Income Tax Officer and the Appellate Assistant Commissioner came to the conclusion that the amount of larger commission had already accrued during the previous year ending March 31, 1948, and was thus asses