The real income of an assessee is the income that is ultimately brought to tax, and not any artificial or notional income that may be said to have accrued to the assessee.

Headnote:
INCOME TAX - Managing Agency Commission - Surrender of Commission - Real Income - Accrual of Income - Mercantile System of Account - Annual Structure of Income-tax - Commercial Expediency.
Fact of the Case:

The assessee company, a managing agent, surrendered a portion of its commission earned during the accounting year 1-4-1949 to 31-3-1950, amounting to Rs. 97,000/-. The Income-tax Officer accepted the surrender, but the Commissioner of Income-tax disapproved and served a notice under Section 33-B(1) to include the surrendered amount in the assessee company's total income for the assessment year 1950-51. The Tribunal upheld the surrender to the extent of Rs. 39,214-12-0, being 1/3rd of the commission earned, but rejected the surrender of the balance amount of Rs. 57,785-4-0. The assessee company referred the matter to the High Court on the questions of whether the surrender was allowable as a revenue deduction under Section 10(2)(xv) of the Act, and if not, whether the balance amount of Rs. 57,785-4-0 could be included in the assessee company's total income for the assessment year ended 31st March 1950.
Finding of the Court:

The High Court found that the surrender of the balance amount of Rs. 57,785-4-0 was made by the assessee company on grounds of commercial expediency, as recorded by the Tribunal in a supplemental Statement of the Case. The Court held that the real income of the assessee company for the accounting year was Rs. 20,000/- odd, after considering the surrender of the commission.
Issues: 1. Whether the order of the Commissioner of Income-tax under Section 33-B(1) during the pendency of the proceedings under Section 34 of the Act is illegal or void? 2. Whether the amount of Rs. 97,000/- surrendered by the assessee company could be allowed as a revenue deduction under Section 10(2)(xv) of the Act? 3. If the answer to question (ii) is in the negative, whether the sum of Rs. 57,785/-(Rs. 97,000/- -- Rs. 39,215/-) could legally be included in the assessee companys total income for the assessment year ended 31st March 1950?
Ratio Decidendi: 1. The Court held that the principle of real income is not incompatible with the rule that income-tax is annual in its structure. Both rules can be harmoniously applied, depending on the circumstances of each case. 2. In the present case, the surrender of the commission was made at the time of ascertaining the quantum of commission payable to the assessee company, and was found to be bona fide and on grounds solely of commercial expediency. Therefore, the real income of the assessee company was the amount of Rs. 20,000/- shown as income from managing agency commission at the time of assessment. 3. The Court rejected the Revenue's argument that the surrender could only be taken into consideration in the next accounting year, as this would lead to an unfair result and would not reflect the real income of the assessee company.
Final Decision: The Court answered the reframed Question 3 in the negative, holding that the sum of Rs. 57,785/- could not legally be included in the assessee company's total income for the assessment year ended 31st March 1950. The Court did not answer Questions 1 and 2 in view of its answer to Question 3.

JUDGMENT - 1. This Reference raises a question of some importance and the income under assessment relates to managing agency commission. It is a trite saying that income-tax is not and cannot be cast on logical lines. No considerations of equity or hardship can be permitted to control the application of the Act. Nor is it permissible to the Court to disregard any axiomatic principle of tax law. One such principle expressed in the laconic style of Lord Macnaghten is that income-tax is a tax on income -- an expression of wide connofation and elaslic ambit. Another principle -- one of computation which also may bo regarded as axiomatic -- is that in assessing the yearly profits and gains of a business for the purpose of the Income-tax Act, each year is a self-con-tained period. We have said all this at the very outset, because we have been very strongly reminded by Mr. G. N. Joshi, .learned Counsel for the Revenue, that we are bound to act in conformity with this principle of compulation. We agree that it is incumbent on the Court to see that there is no departure on its part from any fundamental concept or principle of tax law. There is nothing, however in these axiomatic rules or anything formidable about them which militates against the simultaneous application of another basic principle of tax law which requires the Court -- cases of deemed income apart -- to see that ultimately it is the real income of the assessee which alone is brought to tax and not any artificial or notional income that may be said to have accrued to him.

2. The assessec company is the Managing Agent of The Gujurat Paper Mills Ltd. Ahmedabad. The assessment year was 1950-51 and the relevant accounting year was 1-4-1949 to 31-3-1950. It earned during the accounting year a commission ot Rs. 1,17,644-4-0. At the instance of the managed company, the assessee company surrendered Rs. 97,000/-. The Income-tax Officer accepted that position, but the Commissioner of Income-tax disapproved of the same and served a notice on the assessee company under Section 33-B(1). He passed an order directing the Income-tax Officer to include the amount of Rs. 97,000/- in the assessee companys total income for the assessment year 1950-51. The matter was carried to the Tribunal and one of the contentions urged on behalf of the assessee company was that Clause 5 of the Managing Agency Agreement authorised the managed company to cut down a portion of the commission earned by the managing company and that, therefore, the surrender or Rs. 97,000/- was justified. Chases (5) and (6) of that Agreement may be set out in full:

"(5) The Agents firm shall receive and the Company hereby agrees to pay to the said Agents a commission at the rate of 5 per cent (five per cent) on the total proceeds of sale of all paper, cardboards, pulp, and all other raw materials and good? manufactured or produced by the Company.

Provided however that if in any year the profits of the said Company after providing for depreciation of the Companys machinery and Buildings and other charges is not sufficient to pay a dividend at the rate of 6 per cent per annum on the Capital of the said Company issued and paid, the said Agents Finn shall give up to the said Company, such portion of their commission as is necessary to make up such deficit but not exceeding the one third of the entire commission to which the said Agents Firm shall be entitled to receive in that particular year.

(6) The commission payable shall be credited to the Agents Account on the first of every month and it shall cany interest at the rate of 6 per cent pec annum, such commission shall be payable at the interval of six months or a year as the Agents may determine".

It is clear from the above that the maximum amount that the assessee company was bound to forege was only l/3rd of Rs. 1,17,644-4-0 i.e. Rs. 39,214-12-0. That was the view taken by the Tribunal which decided in favour of the assessee company only to the extent of that amount and reje

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