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Narottam Morarji and Co. Vs. Commissioner of Excess Profits Tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberExcess Profits Tax Reference No. 1 of 1966
Judge
Reported in[1977]109ITR69(Bom)
ActsExcess Profits Tax Act, 1940 - Sections 2(9) and 17(4) - Schedule - Rule 1
AppellantNarottam Morarji and Co.
RespondentCommissioner of Excess Profits Tax
Appellant AdvocateR.J. Kolah, Adv.
Respondent AdvocateR.J. Joshi, Adv.
Excerpt:
direct taxation - excess profit - rule 1 to schedule and sections 2 (9) and 17 (4) of excess profits tax act, 1940 - assessee was managing agent of some company - remuneration to assessee was payable by way of commission - assessee received certain amount - more amount to be received by that company and consequently by assessee - right to receive more commission accrued to assessee - in such circumstances notice of enhancement of excess profit tax justified. - - the terms of payment of the compensation were not settled at the time of the requisition, but as regards the tenor of the agreement with the government the tribunal has accepted what was found by the appellate assistant commissioner who in his order stated 'what the government did was to make payments to the managed company.....kantawala, c.j.1. this reference is made both at the instance of the assessee and the revenue and the questions referred for our determination are : '1. whether the notice of enhancement given by the appellate assistant commissioner was valid and legal 2. on the facts and in the circumstances of the case, whether in the 4 c.a.ps. ended june 30, 1942, june 30, 1943, june 30, 1944, and june 30, 1945, respectively, the managing agency commission to be included in the excess profits tax assessment is, (1) the amount of the commission stated in paragraph 4 above as received by the assessee in the c.a.p. concerned according to the accounts of the managed company, or (2) the said amount together with the estimated addition made thereto in the c.a.p. concerned as stated at the end of paragraph 5.....
Judgment:

Kantawala, C.J.

1. This reference is made both at the instance of the assessee and the revenue and the questions referred for our determination are :

'1. Whether the notice of enhancement given by the Appellate Assistant Commissioner was valid and legal

2. On the facts and in the circumstances of the case, whether in the 4 C.A.Ps. ended June 30, 1942, June 30, 1943, June 30, 1944, and June 30, 1945, respectively, the managing agency commission to be included in the excess profits tax assessment is, (1) the amount of the commission stated in paragraph 4 above as received by the assessee in the C.A.P. concerned according to the accounts of the managed company, or (2) the said amount together with the estimated addition made thereto in the C.A.P. concerned as stated at the end of paragraph 5 above, or (3) the amount as determined by the Appellate Assistant Commissioner

3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the excess profits tax assessment made on the assessee-firm for the C.A.P. ended March 31, 1946, was not valid in law ?'

2. So far as questions Nos. 1 and 2 are concerned they were referred to at the instance of the assessee while question No. 3 was referred to at the instance of the revenue. At the outset we may state that even though the assessee has got question No. 1 referred to us it has not been pressed and it is not necessary for us to consider that question and answer the same.

3. Narottam Morarjee & Co., the assessee, is assessed as an unregistered firm at all material times. It was the managing agent of Scindia Steam Navigation Co. Ltd. (hereinafter referred to as 'the managed company') under the agreement dated March 20, 1919. Under the terms of the agreement remuneration to the assessee was payable by way of commission at the rate of 10% on the annual net profits of the managed company after making all proper allowance and deductions from revenue for working expenses chargeable against profits. Though in the agreement it was provided that the commission shall be due and be paid to the assessee yearly on the 31st day of December in each and every year, it is common ground that it was paid on the 30th day of June in every year and no controversy is raised on the basis of difference in the terms of the agreement and the date of the actual receipt of the commission.

4. The ships of the managed company were requisitioned by the Government during the second world war. The terms of payment of the compensation were not settled at the time of the requisition, but as regards the tenor of the agreement with the Government the Tribunal has accepted what was found by the Appellate Assistant Commissioner who in his order stated 'What the Government did was to make payments to the managed company for the requisitioned ships at provisional rates, but it was clearly understood between the parties that substantial additional payments would be due for the ships thus supplied on requisition. It is of vital importance in my view to appreciate that the liability for making additional payments, i.e., over and above the payments made at ad hoc rates, was clearly agreed to and clearly constituted a part of the contract between the parties right from the inception of the contract. The Government, in fact, made additional payments on an ad hoc basis from time to time during the chargeable accounting period in terms of this agreement, although the quantum of the total additional dues of the managed company were finally determined and adjusted in the year 1947-48'. In view of this arrangement, in addition to the yearly payments at ad hoc rates, a sum of Rs. 1,22,17,667 was paid by the Government to the managed company during the period July 1, 1945, to June 30, 1946, when the ships were derequisitioned and the final payment on account of the hire and compensation of Rs. 43,64,026 was made during the year 1947-48.

5. The accounting period of the managed company and the assessee was from 1st July to 30th June. The assessee received from the managed company for the five chargeable accounting periods according to the accounts of the managed company the sums as follows :

Rs.

1st C.A.P. 5,64,877

2nd C.A.P 6,11,889

3rd C.A.P. 5,78,392

4th C.A.P. 6,95,571

5th C.A.P. 9,68,564

6. The 1st C.A.P. was from July 1, 1941, to June 30, 1942, and each of the subsequent C.A.Ps. was the succeeding year. So far as the last C.A.P. was concerned, under the provisions of the Excess Profits Tax Act, 1940 (hereinafter referred to 'the Act'), it came to an end on March 31, 1946.

7. So far as the managed company was concerned, in the income-tax and excess profits tax assessments the additional payments of Rs. 1,22,17,667 in 1945-46 of Rs. 43,64,026 in 1947-48 were spread over earlier accounting periods and the managed company was also granted appropriate deductions in all these periods for payment of the managing agency commission to the assessee.

8. Question No. 2 relates to the excess profits tax assessment of the assessee for the first four chargeable accounting periods. Before the Excess Profits Tax Officer the auditor who appeared on behalf of the assessee contended that out of the excess profits tax payable to be determined a portion of its should be kept in abeyance as the commission receivable is subject to adjustment of hire charges receivable from the Government of India for ships of the managed company that were requisitioned. As regards the future claim that was preferred with the Government, neither the assessee nor the auditor was in a position to give even the estimated figure for the claim made. Such being the position the Excess Profits Tax officer while passing the assessment order took into account the actual amount received and added thereto estimated receipt of Rs. 60,000 on account of commission that will be earned on further hire charges receivable from the Government of India. The proportionate tax on this estimated receipt of Rs. 60,000 was kept in abeyance till the amount receivable for the year was finally determined and it was on this basis that the assessment order was passed by the Excess Profits Tax Officer in the first chargeable accounting period. Similarly, the sums of Rs. 90,000, Rs. 75,000 and Rs. 60,000 were added as estimated commission in respect of the amount that will be received from the Government in future for the subsequent three chargeable accounting periods and the assessment orders were passed on the same footing.

9. The appeals by the assessee for all the years were disposed of by the Appellate Assistant Commissioner by his order dated March 24, 1962. By the time when the matter was disposed of by the Appellate Assistant Commissioner the further amounts that were expected from the Government were actually received by the managed company and a notice of enhancement for each of the accounting periods in question was given to the assessee. The Appellate Assistant Commissioner took the view that, in view of the deductions which had then been granted to the managed company in respect of the commission payable to the assessee for the various accounting periods, the assessee's own excess profits tax assessments would be liable to enhancement. As by the time the order was passed by him the further amounts that were receivable by the managed company from the Government were ascertained and they were apportioned both for the income-tax and excess profits tax assessments of the managed company, he made suitable orders of enhancement for each chargeable accounting period concerned and revised the estimated amounts that were arrived at by the Excess Profits Tax Officer.

10. On appeal by the assessee before the Tribunal three contentions were urged. The first two contentions are not urged before us and so it is unnecessary for us to refer to the same. The third contention was that the assessee's case must be considered independently of what happened to the income-tax and excess profits tax assessments of the managed company. So far as the managed company was concerned, the additional hire receipt in 1945-46 of Rs. 1,22,17,667 was spread read over the preceding four accounting periods in the income-tax and excess profits tax assessments of that company. It was, however, urged on behalf of the assessee that its own commission could not be revised and its commission for the chargeable accounting periods should be determined on the basis of what was actually received by it during that period. It was urged that the assessee's liability for excess profits tax was not relatable to what happened to the excess profits tax assessment of the managed company or even to the deductions which were allowed to the managed company in its income-tax and excess profits tax assessments for payment of commission to the assessee. The Tribunal took the view that, so far as the managed company was concerned, the reopening of its accounts for the purpose of including the amounts of hire and compensation in 1945-46 and 1947-48 was justified. The actual payments by the Government in any particular year to the managed company were meant to be only as payments on account and subject to adjustment later. The contention of the assessee that the profits had not arisen during the accounting period was rejected relying upon an English decision. The Tribunal pointed out that it was quite apparent from the orders of the Excess Profits Tax Officer that the assessee itself well under stood at that time that its commission had yet not been finally determined and that it would be entitled to extra commission when further payments from the Government on account of the hire charges would come to the managed company. Accordingly, there was no question of national working out as sought to be contended by the assessee. It was emphasised by the Tribunal that when appeals were preferred before the Appellate Assistant Commissioner against the orders of the Excess Profits Tax Officer there was not even a contention of the assessee that the Excess Profits Tax Officer had wrongly construed the words 'subject to adjustment'. This contention urged on behalf of the assessee was rejected and the assessment that was made by the Appellate Assistant Commissioner pursuant to the notice of enhancement was confirmed.

11. Question No. 2, raised at the instance of the assessee, relates to these findings. It was urged by Mr. Kolah, on behalf of the assessee, that for the purpose of determining the excess profits tax liability of the assessee the year in which the ships of the managed company were requisitioned by the Government is irrelevant and is of no consequence. He submitted that by mere requisition of the ships the right to receive compensation had not accrued to the managed company. Such right accrued to the managed company for the first time as and when the payments were made and if ultimately the sum of Rs. 1,22,17,667 was paid in the year 1945-46 it could not be related back on a pro-rata basis to the earlier chargeable accounting periods. He further submitted that, irrespective of whatsoever may be the position qua the managed company so far as the assessee is concerned, its right to receive commission is solely dependent upon the terms of the managing agency agreement, the amount to be paid to the assessee by way of commission is determined at the end of the each year, i.e., 30th day of June of each relevant year, and it is the amount that has been determined as payable on that date which has to be treated as the profits of the assessee for that accounting year. He submitted that English decisions, where the doctrine of relating back has been applied and/or reopening of accounts has been permitted, have no application in India and in more than one decision of the Supreme Court the practice in this country of relying upon English decisions, where taxing statutes may be differently worded, has not been encouraged. He, therefore, submitted that, whatever may be the view that might have been taken in England, so far as India is concerned, such decisions will not afford a safe guide. He, therefore, submitted that it was not permissible to the Excess Profits Tax Officer to apportion the sum of Rs. 1,22,17,667 that was received by the managed company for the earlier four chargeable accounting periods and on that basis to enhance the quantum of commission payable to the assessee under the managing agency agreement.

12. Mr. Joshi, on the other hand, relied upon the fact that a right to receive commission in respect of the ships requisitioned by the Government had accrued in each chargeable accounting period and the mere fact that the payments were received later on will make no difference. His submission was that, as and when the payment was received, it would relate back to the year in which the requisition was made, because it was in that year that the right to receive hire charges or compensation accrued to the managed company. He emphasised the fact that, if regard be had to the nature of the conduct of the managed company in its relation to the Government and the types of the entries that were made in the balance-sheet at the time when accounts were passed at the shareholders' meeting of the managed company, it is quite evident that whatever actual amount was in fact paid during a specific chargeable accounting period was not final but it was subject to adjustment. In short, his submission is that, once a right to receive an amount has accrued as and when the same is received, it will relate back to the relevant year in which such right to receive has accrued. He laid great stress upon the agreement or understanding that was arrived at between the managed company and the Government as determined by the Appellate Assistant Commissioner and which has been approved by the Tribunal. He also pointed out that in the balance-sheet of the managed company for every relevant year it is clearly mentioned in the profit and loss account that the amount of commission payable to the assessee is specifically managed subject to adjustment so that, as and when the payment was made pursuant to the balance-sheet that was passed by the shareholders of the managed company, both the managed company as well as the assessee realised that the figure was likely to be adjusted depending upon the payment that will be received. He also emphasised the fact that in view of the future receipt of the sum of Rs. 1,22,17,667 and the sum of Rs. 43,64,026 in the years 1945-46 and 1947-48, respectively, the income-tax and the excess profits tax assessments of the managed company were revised by making appropriate adjustments. In view of these future receipts automatically for each relevant accounting period a right accrued to the assessee and any amount which will be receivable by the assessee by reason of such adjustment will be the profit or income of the assessee in that accounting year. He also pointed out that it was not even the plea of the auditor of the assessee who appeared before the Excess Profits Tax Officer that a right to receive future amounts from the Government had not accrued to the managed company. In fact, the very plea of the auditor before the Excess Profits Tax Officer was that in view of the fact that an adjustment of hire charges receivable from the Government in future was to be made, the assessment liability for such amounts which are likely to be received in anticipation of such future receipts should be kept in abeyance. He emphasised that it was even the case of the auditor on behalf of the assessee that a right to receive further amounts had already accrued though the quantification would only depend upon the actual amount that would be payable by the Government to the managed company. He, therefore, submitted that in view of such a plea being urged by the auditor of the assessee before the Excess Profits Tax Officer it is not even permissible to Mr. Kolah to urge that a right to receive future amounts did not accrue in each one of the relevant chargeable accounting periods. He has relied upon a few decisions of the English courts where similar questions have been considered and he has submitted that such decisions are on all fours with the facts of the present case and the finding of the taxing authorities to levy excess profits tax on the assessee in view of the receipt of the sum of Rs. 1,22,17,667 by the managed company from the Government in the year 1945-46 was fully justified.

13. Before we consider the rival contentions of the counsel it will be necessary to see the relevant provisions of the Act. The expression 'accounting period' is defined in section 2(1) of the Act as follows :

'2. In this Act, unless there is anything repugnant in the subject or context -

(1) 'accounting period' in relation to any business means -

(a) where the accounts of the business are made up for successive periods of twelve months, each of each periods;

(b) in any other case, such period as the Excess Profits Tax Officer may determine :

Provided that in determining any accounting period under sub-clause (b) the Excess Profits Tax Officer shall have regard to the period, if any, which is, or has been, determined as the previous year for that business for the purposes of the Indian Income-tax Act, 1922.'

The expression 'chargeable accounting period' is defined in section 2(6) and it means :

'(a) any accounting period falling wholly within the term beginning on the 1st day of September, 1939, and ending on the 31st day of March, 1946, and

(b) where any accounting period falls partly within and partly without the said term, such part of that accounting period as falls within the said terms.'

14. The word 'profits' is defined in section 2(19) as meaning profits as determined in accordance with the First Schedule. The charging provisions are contained in section 4 and its provisions are as under :

'4. Charge of tax. - (1) Subject to the provisions of this Act, there shall, in respect of any business to which this Act applies, be charged, levied and paid on the amount by which the profits during any chargeable accounting period exceed the standard profits a tax (in this Act referred to as 'excess profits tax') which shall, in respect of any chargeable accounting period ending on or before the 31st day of March, 1941, be equal to fifty per cent. of that excess and shall, in respect of any chargeable accounting period beginning after that date, be equal to such percentage of that excess as may be fixed by the annual Finance Act : ....' (The rest of the provisions of the section are not relevant).

15. It is clear from these provisions that excess profits tax is charged, levied and paid on the amount by which the profits during any chargeable accounting period exceed the standard profits. For the period ending on or before March 31, 1941, such tax shall be equal to fifty per cent. of that excess and shall in respect of any chargeable accounting period beginning after the date, be equal to such percentage of that excess as may be fixed by the annual Finance Act. Thus, for the four chargeable accounting periods, namely, July 1, 1941, to June 30, 1942, July 1, 1942, to June 30, 1943 July 1, 1943, to June 30, 1944, and July 1, 1944, to June 30, 1945, what is required to be determined is the amount by which the profits during each such chargeable accounting period exceed the standard profits. It is clear from the provisions of section 4(1) of the Income-tax Act, 1922, that subject to the provisions of that Act the total income of any previous year of any person includes all income profits and gains from whatever source derived which -

'(a) are received or are deemed to be received in the taxable territories in such year by or on behalf of such person, or

(b) if such person is resident in the taxable territories during such year, -

(i) accrue or arise or are deemed to accrue or arise to him in the taxable territories during such year, or

(ii) accrue or arise to him without the taxable territories during such year, or

(iii) having accrued or arisen to him without the taxable territories before the beginning of such year and after the 1st day of April, 1933, are brought into or received in the taxable territories by him during such year, or ...'

16. What we have to consider so far as this reference is concerned is whether the income, profits or gains have accrued or arisen to the assessee during such year. Having regard to the terms of the managing agency agreement, the assessee is entitled to commission of 10% on the annual net profits of the managed company after making all proper allowance and deductions from revenue for working expenses chargeable against profits. It is well settled that in respect of commission claimable by the managing agents the accounts of the managed company as duly passed by the shareholders have to be accepted and it is quite clear from the profit and loss account of the managed company for each relevant year that the profit is determined by calculating the figure of the assessee's commission (the amount payable to the assessee) subject to adjustment. So, right from the inception it was anticipated both by the managed company as well as the assessee that the quantum of commission payable to the assessee as the managing agents, which was mentioned in the profit and loss account, was not the final figure but it was subject to adjustment depending upon the future payments that may be received from the Government by the managed company from time to time. Though it is not very clear from the statement of the case how the compensation amount payable by the Government to the managed company was to be determined, in view of the fact that the ships of the managed company were requisitioned by the Government under powers reserved under the Defence of India Rules, compensation to the managed company was to be paid under the terms and the provisions of the Rules. The right to receive compensation accrued to the managed company right from the time when the ships were requisitioned though the actual quantification of the amount payable by the Government to the managed company will have to be determined in view of an agreement if such agreement was arrived at, or, in the absence of an agreement, by resorting to arbitration proceedings as contemplated by the Rules. The right to receive compensation being specific and having arisen by reason of the fact of requisition the managed company rightly proceeded on the footing that as and when the commission was received by it from the Government it was to be apportioned for the period for which its ships were requisitioned by the Government. In fact that was what was done and both the income-tax and excess profits tax assessments of the managed company have been revised after the sum of Rs. 1,22,17,667 was received by it in the year 1945-46, and the further sum Rs. 43,64,026 was received by it in the year 1947-48. So far as the assessee is concerned, it being the managing agent, its right to receive commission arises at the end of each accounting year and the payment of 10% by way of commission on the annual net profits is to be determined in the manner provided by the managing agency agreement. If the annual net profits of the managed company are adjusted in view of future receipts, then, naturally, automatically in view of the terms of the agreement, a right accrued to the assessee in each relevant accounting period to ask for the additional amount by reason of such adjustment. The right had accrued by reason of the terms of the managing agency agreement though the quantification thereof depended upon such further amount that may be received by the managed company and the quantum of the annual net profits so determined. Not only this is the legal effect of the terms of the agreement and the provisions in law but that is what was really understood by both the parties at all relevant and material times. At the time when the balance-sheet and the profit and loss account of the managed company were passed by the shareholders, it was done on the footing that the amount of commission payable to the assessee was subject to adjustment. Not only that, in the arguments that were advanced by the auditor of the assessee before the Excess Profits Tax Officer, he clearly stated that out of the excess profits tax payable to be determined a portion of it should be kept in abeyance, as the commission receivable is subject to adjustment of hire charges receivable from the Government of India for ships of the company requisitioned. This submission clearly pre-supposes that even on the submission of the auditor the right to receive further commission by reason of future amounts being paid by the Government to the managed company had already accrued to the assessee and the only plea made by the auditor before the Excess Profits Tax Officer was that in respect of such amount rather than making an estimate, it should be kept in abeyance. When the matter came up in appeal before the Appellate Assistant Commissioner there was no question of making any estimate because when the appeals were disposed of by him the actual amounts receivable by the managed company from the Government were determined and even apportionment thereof was made during the several chargeable accounting periods of the managed company. So far as the Appellate Assistant Commissioner is concerned, his powers under section 12 of the Act are very comprehensive. Sub-section (4) thereof provides that the Appellate Assistant Commissioner shall hear and determine the appeal and, subject to the provisions of the Act, shall pass such orders as he thinks fit, and such orders may include an order enhancing the assessment or a penalty. In view of these provisions actually notices of enhancement were issued and served upon the assessee. Though at one time the validity of these notices was challenged, that point was not pressed before us. So, whatever was done by the Appellate Assistant Commissioner pursuant to the notices of enhancement is fully justified in view of such powers being conferred on him by sub-section (4) of section 17 of the Act. That such are the powers of the Appellate Assistant Commissioner is clear from the decision of this court in Narrondas Manordass v. Commissioner of Income-tax : [1957]31ITR909(Bom) , where it is pointed out :

'... the Appellate Assistant Commissioner has been constituted a revising authority against the decisions of the Income-tax Officer; a revising authority not in the narrow sense of revising what is the subject-matter of the appeal, not in the sense of revising those matters about which the assessee makes a grievance, but a revising authority in the sense that once the appeal is before him he can revise not only the ultimate computation arrived at by the Income-tax Officer but he can revise every process which led to the ultimate computation or assessment. In other words, what he can revise is not merely the ultimate amount which is liable to tax, but he is entitled to revise the various decisions given by the Income-tax Officer in the course of the assessment and also the various incomes or deductions which came in for consideration of the Income-tax Officer.'

17. Thus, by the time when the appeals were disposed of by the Appellate Assistant Commissioner, as the actual future amounts were received by the managed company and they were apportioned during the various chargeable accounting periods of the managed company, the right of the assessee to receive managing agency commission was crystallised and on the basis of such a right which had already accrued to the assessee during each of the respective chargeable accounting periods, he was entitled to determine the correct amount of excess profits tax payable. Thus, as during the first four chargeable accounting periods the right to receive the commission had already accrued to the assessee, even the adjustment made by reason of the subsequent receipts of the amounts in the years 1945-46 and 1947-48 by the managed company was fully justified and the view taken by the Appellate Assistant Commissioner and the Tribunal has to be upheld.

18. Our attention is invited to a large number of decisions both by Mr. Kolah on behalf of the assessee and by Mr. Joshi on behalf of the revenue. Strong reliance was placed by Mr. Kolah upon two decisions of the Supreme Court reported in the same volume. The first is the decision in the case of Commissioner of Income-tax v. A. Gajapathy Naidu : [1964]53ITR114(SC) . The Supreme Court in this case has taken the view that the provisions of the Indian Income-tax Act, 1922, have to be construed on their own terms without drawing any analogy from English statutes whose terms may superficially appear to be similar. When an Income-tax Officer proceeds to include a particular income in the assessment, he should ask himself, inter alia, two questions, namely : (i) what is the system of accountancy adopted by the assessee, and (ii) if it is the mercantile system, subject to the deeming provisions, when has the right to receive accrued If he comes to the conclusion that such a right accrued or arose to the assessee in a particular accounting year, he should include the said income in the assessment of the succeeding assessment year. No power is conferred on the Income-tax Officer under the Act to relate back an income that accrued or arose in a subsequent year to another earlier year, on the ground that the income arose out of an earlier transaction. Nor is the question of reopening of accounts relevant in the matter of ascertaining when a particular income accrued or arose. The meaning of the words 'accrue' or 'arise' in section 4 (1)(b)(i) of the Indian Income-tax Act, 1922, cannot be extended so as to take in amounts received in a later year though the receipt was not on the basis of a right accrued in the earlier year. Such amounts are in law received by the assessee only in the year in which they are paid. On the basis of the findings given by us above, it is quite clear that the question of relating back in fact in the present case does not arise at all. We have come to a clear and definite finding that even qua the assessee the right to receive commission on the basis of the managing agency agreement accrued in each chargeable accounting period as stated above and there was no question of relating back of any income or reopening of account for any particular transaction. In this case the Supreme Court has administered caution in relation to following English decisions in respect of tax matters. The Supreme Court has cited its observations in the earlier case of Commissioner of Income-tax v. Vazir Sultan and Sons : [1959]36ITR175(SC) to the following effect :

'While considering the case law it is necessary to bear in mind that the Indian Income-tax Act is not in pari materia with the British income-tax statutes, it is less elaborate in many ways, subject to fewer refinements and in arrangement and language it differs greatly from the provisions with which the courts in England have had to deal. Little held can, therefore, be gained by attempting to construe the Indian Income-tax Act, in the light of decisions bearing upon the meaning of the income-tax legislation in England. But, on analogous provisions, fundamental concepts and general principles unaffected by the specialities of the English income-tax statutes, English authorities may be useful guides.'

19. The Supreme Court has cited with approval the definition given to the words 'accrue' and 'arise' by Mukerji J. in Rogers Pyatt Shellac and Co. v. Secretary of State for India : AIR1925Cal34 to the following effect :

'..... both the words are used in contradistinction to the word 'receive' and indicate a right to receive. They represent a stage anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less inchoate.'

It is pointed out in this case : [1964]53ITR114(SC) :

'If an income accrues within a particular year, it is liable to be assessed in the succeeding year. When does the right to receive an amount under a contracts accrue or arise to the assessee, i.e., come into existence That depends upon the terms of a particular contract. No other relevant provision of the Act has been brought to our notice - for there is none which provides an exception that though an assessee does not acquire a right to receive an income under a contract in a particular accounting year, by some fiction the amount received by him in a subsequent year in connection with the contract, through not arising out of a right accrued to him in the earlier year, could be related back to the earlier year and made taxable along with the income of that year.'

As regards the principle of reopening of closed accounts it is said (page 119) :

'Whether this principle is justified in the English law, it has no place under the Indian Income-tax Act. When an Income-tax Officer proceeds to include a particular income in the assessment, he should ask himself, inter alia, two questions, namely : (i) what is the system of accountancy adopted by the assessee and (ii) if it is the mercantile system of accountancy, subject to the deemed provisions, when has the right to receive that amount accrued If he comes to the conclusion that such a right accrued or arose to the assessee in a particular accounting year, he shall include the said income in the assessment of the succeeding assessment year. No power is conferred on the Income-tax Officer under the Act to relate back an income that accrued or arose in a subsequent year to another earlier year on the ground that the said income arose out of an earlier transaction. Nor is the question of reopening of accounts relevant in the matter of ascertaining when a particular income accrued or arose.'

A little later it is said (page 119);

'We do not see any relevancy of the question of reopening of accounts in consideration the question when an assessee acquired a right to receive an amount.'

20. The other decision of the Supreme Court is that in the case of Commissioner of Income-tax v. Swadeshi Cotton and Flour Mills Private Ltd. : [1964]53ITR134(SC) . In this case the assessee paid a sum of Rs. 1,08,325-3 by way of profit bonus to its employees for the calendar year 1947 in terms of an award made on January 13, 1949, under the Industrial Disputes Act. It debited the amount in its profit and loss account for the year 1948 but in fact paid it to the employees in the calendar year 1949. It was held that it was only in 1949 that the claim to profit bonus was settled by an award of the Industrial Tribunal and the only year to which the liability under the award could be properly attributed was 1949 and that, therefore, the sum of Rs. 1,08,325-9-3 had to be deducted in the calendar year 1949 relevant to the assessment year 1050-51. An employer who follows the mercantile system of accounting incurs a liability towards profit bonus only when the claim, if made, is settled amicably or by industrial adjudication. The system of reopening of accounts does not fit in with the scheme of the Income-tax Act. As far as receipts are concerned there can be no reopening of accounts, and the position is the same in respect of expenses.

21. From the ratio, of this decision it is quite apparent that according to the Supreme Court the liability arose for the first time when the claim for bonus was settled amicably or by industrial adjudication. Consequently, the right to the worker to receive the bonus accrued only when the settlement was arrived at or when the award was made by the Industrial Tribunal and not at the time when the work was done. This case, therefore, is of an assistance in the present case.

22. Mr. Kolah has relied upon two decisions of the Allahabad High Court. The first is the decision in the case of Commissioner of Income-tax v. Kalicharan Jagannath : [1961]41ITR40(All) . The facts of the case show that during the accounting year April 1, 1945, to March 31, 1946, the assessee entered into a contract with, and supplied fruits and bullock carts to, the military authorities at C and K at rates fixed by the agreement. The supply at K resulted in a loss, and the assessee submitted a petition for a review under the terms of the agreement. On November 6, 1947, the military authorities sanctioned the payment of an additional sum which was paid to the assessee on February 17 and 24, 1948. The income-tax department sought to include this additional sum in the assessment for the accounting year 1945-46. The Allahabad High Court took the view that until the order of review the only right that the assessee had was to claim the money payable at the rates laid down in the agreement itself. The additional amount became payable to the assessee not by virtue of any right conferred by the agreement, but because of the order passed in review under the terms of the agreement directing the payment of the amount and thus creating a right to this amount in favour of the assessee. Even though the amount was payable because the assessee had carried out the contract in the accounting year 1945-46 in accordance with the agreement entered into in that year, the mere execution of the agreement and performance of the contract in that year did not entitle the assessee to receive that amount. The right to receive payment of the additional sum could at the earliest have arisen or accrued on November 6, 1947, after the close of the accounting year 1945-46; the income did not accrue or arise to the assessee in that accounting year. It is difficult to see how this case is of any assistance to Mr. Kolah. There is a clear finding of the court that the right to receive additional amount did not arise by reason of any term to review in the contract. Such right accrued for the first time when upon an application for review an order was passed by the competent authority to grant an additional amount. Thus, the right to receive the additional amount only accrued for the first time when the order was passed. So the question of relating back will not arise.

23. The other decision of the Allahabad High Court relied upon by Mr. Kolah is in the case of Haji Rahmat Ullah and Co. v. Commissioner of Income-tax : [1966]59ITR109(All) . In this case the assessee had supplied goods to the military department in the chargeable accounting period for a fixed commission under a contract. He was paid at a later period an additional amount in respect of the same applies in view of the rise in prices subsequent to the date of the contract. The Allahabad High Court took the view that the additional amount, which was decided to be paid and was paid only subsequent to the chargeable accounting period, could not be assessed to excess profits tax in the chargeable accounting period. The High Court has pointed out that a payment received subsequent to a chargeable accounting period is not liable to be treated as the profits of that period, merely because the work which occasioned that payment was done during that period. What is the clear meaning of the expression 'profits during the chargeable accounting period' is pointed out in this case. The 'profits during the chargeable accounting period' are those profits respecting which a right to receive has accrued or arisen during that period. If the right to receive those profits has accrued or arisen subsequently, then even though they have accrued or arisen by reason of work done during the chargeable accounting period, they are not liable to be treated as the profits of that chargeable accounting period. We have applied in this case the test which has been laid down by the Allahabad High Court. On the facts of the present case we have clearly taken the view that the right to receive amounts which in fact were paid in the year 1945-46 and the subsequent year had accrued or arisen during each chargeable accounting period because the managed company by reason of requisition of its ships was entitled to receive compensation therefor and the assessee as the managing agent of the managed company was entitled to receive commission on the basis of 10% of the net annual profits of the managed company. This is far from applying the doctrine of relationship to the year in which the transaction took place.

24. Coming to the decisions cited by Mr. Joshi we will now refer to the two decisions. Both these cases are reported in the same volume. The first is the decision in the case of Isaac Holden & Sons Ltd. v. Commissioners of Inland Revenue [1924] 12 TC 768. The appellant-company in this case was a member of the Wool Combing Employers Federation who were engaged in combing wool on commission for the Government, during the period of control of the wool trade, on the basis of a tariff fixed in 1917. In July, 1918, following negotiations between the Federation and the Government, a provisional increase of 10 per cent. on the tariff, to operate as from the 1st January, 1918, and to be subject to adjustment either up or down on completion of the examination of accounts to the 31st December, 1918, was agreed, and in July, 1919, a total increase of 20 per cent., to include the first increase, was awarded as a final settlement. In its accounts for the year ended 30th June, 1918, the company charged the full costs for work done in the period, but it included for that work only the amount of commission which had been received under the tariff as increased by the agreement of July, 1918. Rowlatt J. held that the total amount of commission received for the year ended 30th June, 1918, under the terms of the final settlement arose from the company's trade in that year, and must be included in arriving at the profits of that period for the purpose of computing the company's liability to excess profits duty. Rowlatt J. applied the doctrine of reopening the accounts so as to include in the profits the sums received pursuant to later negotiations between the federation and the Government. A similar view was taken by the House of Lords in the case of Commissioners of Inland Revenue v. Newcastle Breweries Ltd. [1927] 12 TC 927. The respondent-company carried on the business of brewers and wine and spirit merchants, and in the course of this business kept large stocks of rum which had to be reduced and blended before sale. The blended product was sold either wholesale or retail in relatively small quantities. In January, 1918, the Admiralty, acting under the Defence of the Realm Regulations, took over about one-third of the stocks in question then owned by the respondent-company. Payment of dollar 10,315 was offered by the Admiralty, based on the actual cost of the rum and allowing a profit of about 1sh. per proof gallon, and this amount was accepted on account by the respondent-company, without prejudice to its claim for a larger amount. In regard to this claim litigation ensued, but before its conclusion the Indemnity Act, 1920, was passed, providing that any person who had sustained loss or damage by reason of interference with his property or business through the exercise or purported exercise of any power under the Defence of the Realm Regulations should be entitled to payment or compensation in respect of such loss or damage, to be assessed on the principles mentioned in the Regulation. Following a claim by the company, the War Compensation Court in November, 1921, gave judgment for payment to them of a total sum of 15,624, and the balance 5,309 was accordingly paid by the Admiralty in January, 1922. The original payment of 10,315 was credited in the company's accounts for the year ended 30th October, 1918, under the head of 'Sales of rum' and was included in an excess profits duty assessment for that accounting period. No appeal was entered against this assessment, but in subsequent proceedings the company did not admit that the payment was rightly including in its assessable profits. The further payment of 5,309 was credited under the same head in the accounts for the half-year ended 30th April, 1922, but was charged to excess profits duty by an additional assessment for the accounting period ended 30th October, 1918. The Special Commissioners discharged this additional assessment on appeal on the ground that the sum received did not represent a trade profit. On ultimate appeal to the House of Lords it was held that the payments in question was a profit arising from the company's trade, and that it must be included for excess profits duty purposes in the profits for the accounting period ending on the 30th October, 1918, in which the rum was taken over. So far as the decision of the House of Lords in this case is concerned it is based on the fact that the right to receive the amount accrued when the bottles of rum were requisitioned. Before the Court of Appeal also that view was taken though in the same judgment there is an observation to the effect that the payment, though received later on, will relate back earlier to the date when the transaction took place. So far as this fact is concerned the decision of the Supreme Court in Commissioner of Income-tax v. A. Gajapathy Naidu : [1964]53ITR114(SC) is very clear. The Supreme Court has not approved of the English doctrine of reopening of accounts with regard to the relating back of profits to the date of the transaction but has applied the test of time when the right to receive the amount had accrued. In this case they have also administered the caution in following English decisions in tax matters in view of the special provisions of legislation in that country.

25. That takes us to the third question referred to us for determination. The relevant assessment year for this question was from July 1, 1945, to June 30, 1946. However, the chargeable accounting period in view of the definition contained in the Act for this year was the period from July 1, 1945, to March 31, 1946. The contention of Mr. Kolah is that having regard to the provisions of the managing agency agreement the right to receive commission accrued for the first time on June 30, 1946, i.e., after the expiry of the chargeable accounting period. There can be no apportionment in respect of the amount of commission received by the assessee during this assessment year. Secondly, he submitted that as the chargeability in respect of the Excess Profits Tax Act came to an end on March 31, 1946, and the income by way of commission for this period arose for the first time on June 30, 1946, i.e., 3 months after the expiry of the chargeable accounting period, it cannot be included for the purpose of determining the excess profits tax liability. On the other hand, Mr. Joshi on behalf of the revenue contended that under the definition of the expression where any accounting period falls partly within and partly without the term beginning on the 1st day of September, 1939, and ending on the 31st day of March, 1946, such part of that accounting period as falls within the said term is included within the expression 'chargeable accounting period'. He also submitted that profits for any chargeable accounting period have to be determined in accordance with the provisions of the First Schedule and if regard be had to the provisions of the third proviso to rule 1 in Schedule I to the Act it is quite apparent that in such a case apportionment has to be made as provided therein.

26. At the outset it may be stated that the point in the manner in which it is presented before us was not argued before the Tribunal. There can be no controversy in view of the clear definition of the expression 'chargeable accounting period' that the period from July 1, 1945, to March 31, 1946, constitutes the chargeable accounting period and it is the excess amount of profits during the chargeable accounting period over the standard profits that are subjected to excess profits tax. Schedule I to the Act prescribed the rules for computation of profits for purposes of computation of excess profits tax. Rule 1 is as under :

'1. The profits of a business during the standard period, or during any chargeable accounting period, shall be separately computed, and shall, subject to the provisions of this Schedule, be computed on the principles on which the profits of a business are computed for the purposes of income-tax under section 10 of the Indian Income-tax Act, 1922 : .......

Provided further that where that standard period or chargeable accounting period is not an accounting period, the profits or losses of the business during any accounting periods wholly or partly included within the standard period or chargeable accounting period shall be so computed as aforesaid, and such division and apportionment to specific periods of those profits or losses and such aggregation of those profits and losses, or any apportioned part thereof, shall be made as appears necessary to arrive at the profit during the standard period or chargeable accounting period; and any such apportionment shall be made in proportion to the number of months or fractions of months in the respective periods unless the Excess Profits Tax Officer, having regard to any special circumstances, otherwise directs.'

27. The argument of Mr. Joshi was that in view of the third proviso to rule 1 as the chargeable accounting period does not synchronise with the accounting period and only a part of the accounting period is included in the chargeable accounting period apportionment has to be made as contemplated by this proviso. On the other hand, Mr. Kolah, urged that the third proviso is not attracted in the present case, because the accounting period goes beyond the chargeable accounting period. So far as this proviso is concerned, it deals with the doctrine of apportionment and the question of apportionment will only arise when the accounting period does not wholly synchronise with the chargeable accounting period. If a part of the accounting period is included in the chargeable accounting period, then the profits of business of such accounting period so partly included in the chargeable accounting period have to be determined by apportionment. On a plain reading of its language it is quite apparent that its provisions will be attracted when the accounting period is partly included in the chargeable accounting period and such is the position in the present case. The accounting period in the present case for the last year extends from July 1, 1945, to June 30, 1946. The whole of it is not included in the chargeable accounting period, but only a part thereof expiring on March 31, 1946, is so included in the chargeable accounting period. Such a case is directly covered by the third proviso and apportionment is contemplated by the proviso has to be made.

28. It was, however, urged by Mr. Kolah that regard to the provisions of the managing agency agreement commission was payable by the managed company to the assessee only at the end of the year, i.e., on 30th of June every year and till then no commission was earned by the assessee. As the accrual for the last year took place on June 30, 1946, the argument of Mr. Kolah is that since such accrual is after the expiry of the chargeable accounting period no apportionment should be made. Such contention runs contrary to the provisions of rule 1 of Schedule I. Under that rule whenever a part of the accounting year is included in the chargeable accounting period, what is first required to be done is to determine the profits of the whole of the accounting period and a proportionate part thereof pertaining the chargeable accounting period has to be determined by apportionment. From the mere fact that having regard to the terms of the managing agency agreement commission would accrue due to the assessee on June 30, 1946, it could not be said that no apportionment should be made for the last chargeable accounting period extending from July 1, 1945, to March 31, 1946. Actually, for the period of nine months apportionment should be made on the basis of the profits of the accounting year from July 1, 1945, to June 30, 1946. The view that we have taken of the interpretation of the third proviso to rule 1 of Schedule I gather support both from the decision of this court as well as from the decision of the Madras High Court. In Nahalchand Laloochand v. Commissioner of Excess Profits Tax : [1953]24ITR617(Bom) the scheme of the third proviso to rule 1 of Schedule I to the Act was considered. It was held that the power of apportionment given to the Excess Profits Tax Officer under the third proviso to rule 1 of Schedule I of the Excess Profits Tax Act, 1940, is with regard to profits and not with regard to items in the profit and loss account of the assessee. The assessee-firm in that case was the selling agent of a mill. The assessee's accounting period was the year commencing from 5th November, 1945, to 24th October, 1946. The income-tax authorities held that a certain sum credited in the books of account of the assessee on 20th December, 1945, represented undisclosed profits of the assessee from business. In computing the profits of the assessee for the chargeable accounting period ending 31st March, 1946, the Excess Profits Tax Officer, acting under the third proviso to rule 1 of Schedule I, apportioned the profits of the assessee other than the sum credited on 20th December, 1945, on the ground that sum constituted profits of a business which had ceased to exist and the income from which was received and ascertained prior to the end of the chargeable accounting period. The Division Bench of this court held that the sum was not profit of the assessee on 20th December, 1945, but was only a receipt and the profits were what were ascertained to be profits at the end of the accounting period. Consequently, the Excess Profits Tax officer was not entitled to exclude that sum from the apportionment. For coming this conclusion Chagla C.J. considered the scheme of the Act and at page 623 observed :

'The Excess Profits Tax Act came to an end on 31st of March 1946, and the assessee' accounting period is the Samvat year commencing from the 5th of November, 1945, to the 24th of October, 1946. Therefore, the Excess Profits Tax Act was not applicable during the whole of the relevant accounting period of the assessee. The legislature realised the difficulty of determining profits of a broken period. In this particular case although the profits of the accounting period could only be ascertained at the end of the accounting period, the profits made subsequent to the 31st of March, 1946, were not liable to payment of excess profits tax, and the legislature had to devise some machinery whereby profits could be ascertained for the period ending with the 31st of March, 1946. In this particular case the broken period would be from the 5th of November, 1945, to the 31st of March, 1946. Therefore, the third proviso to rule 1 of Schedule 1 gave the power to the Excess Profits Tax Officer to apportion profits for the broken period in the light of the profits made during the whole of the accounting period.'

29. A similar view has been taken by the Madras High Court in In re Keshavalal and Co. : [1953]24ITR585(Mad) Satyanarayana Rao J. observed as under :

'From a perusal of these provisions it would be seen that the unit for computation of the profits under the Excess Profits Tax Act is the accounting period which is a period of 12 months, and in this case, it is not disputed that the Samvat year was accepted by the assessee as the accounting year for purposes of the excess profits tax and for income-tax purposes. The profits, therefore, in the first instance have to be computed for a period of 12 months and the principles to be adopted in computing those profits are those contained in section 10 of the Indian Income-tax Act, subject of course, to such modifications as have been introduced in Schedule I to the Excess Profits Tax Act. After computing the profits in that manner, if the accounting period does not correspond or is not conterminous with the chargeable accounting periods,or with the standard period in order to arrive at the profit for such periods, the proportion has to be worked out in the manner indicated in the third proviso to rule 1 of Schedule I. The first step and the most important and essential step in arriving at the profits for the chargeable accounting period is to find out and ascertain the profits of the assessee during the accounting period; that is, a period of 12 months which has been fixed by the assessee or has been settled by the Excess Profits Tax officer. If this is done, then the question of making apportionment under the third proviso would arise in case in which the periods did not correspond or are not conterminous.'

30. These observations were made also in a case where the accounting period ended after March 31, 1946, while the excess profits tax was to be levied in respect of the chargeable accounting period for a part of the assessment year ending on March 31, 1946. Both these cases, therefore, clearly show that, even when the accounting period,goes beyond the last date of the chargeable accounting piriod, apportionment of profits in the manner indicate in the third proviso to rule 1 of Schedule I has to be made.

31. Reliance was placed by Mr. Kolah upon a decision of the Division Bench of this court in Commissioner of Excess Profits Tax V. Ramgopal Ganpatrai and Sons Ltd. : [1972]85ITR272(Bom) . In this case on July 1, 1943, the assessee company obtained an assignment of the managing agency of certain mills from a Hindu undivided family. The assessee paid to the Hindu undivided family a sum of Rs. 13,00,000 for the purpose of the goodwill of the Hindu undivided family. The assessee also took over from the Hindu undivided family 6,000 shares of the mills for a sum of Rs. 10,00,000. Under the managing agency agreement, the commission due by the mills to the managing agent would become due on the 1st of April immediately following the year ended on 31st March. In respect of the assessment of the assessee to excess profits tax for the accounting periods ended on March 31, 1944, 1945 and 1946, the Appellate Tribunal held that the sums of Rs. 13,00,000 paid for acquiring the good will and Rs. 10,00,000 paid for acquiring the shares should be treated as capital, that the commission relating to the chargeable accounting period ended on March 31, 1944, could only be assessed as income accruing and arising in the chargeable accounting period ended on March 31, 1945, and that, similar, the commission for the period ended on March 31, 1945, would be the income of the last chargeable accounting period ended on March 31, 1946, and that the commission for the period ended on March 31, 1946, was not assessable to tax as excess profits tax, ceased to be operative after March 31, 1946. On a reference to the High Court at the instance of the revenue this court, inter alia, held that the Tribunal was right in holding that the managing agency commission relating to the year ending March 31,1946, fell outside the chargeability to excess profits tax. Relying upon this decision the contention of Mr. Kolah is that in the present case the managing agency commission for the last chargeable accounting period accrued on June 30, 1946, i.e. long after the chargeability to excess profits tax had ceased and, therefore, the ratio of this decision is attracted in the present case. In this case the question of apportionment contemplated by the third proviso to rule 1 of Schedule I did not arise for consideration having regard to the facts of the case. In that case the accounting year of the mills, the accounting year of the assessee and the chargeable accounting period all ended on March 31 of the same year. Therefore, no question arose for apportionment of the managing agency commission earned by the assessee for the purpose of computation of the profits. Reliance was placed on behalf of the revenue on rule 9 of Schedule I to support the plea of apportionment, but it was rejected on the ground that the principles laid down by that rule would apply only if the performance of the contract, i.e., rendering of services as managing agents, extends beyond one accounting period. As in that case the last day of the accounting period and the chargeable accounting period synchronised there was no question of apportionment whatsoever. The question of apportionment will only arise in those cases under rule 1, proviso 3, where the accounting period and the chargeable accounting period do not synchronise wholly but only a part of the accounting year is included in the chargeable accounting period. This decision of the Division Bench is, therefore, of no assistance as it is not applicable to the facts of the case.

32. In the result, our answers to the questions referred to us are as under :

Question No. 1 : Not pressed,

Question No. 2 : On the facts and in the circumstances of the case in the four C.A.Ps. ended June, 1942, June 30, 1944, June 30, 1944, and June 30, 1945, respectively, the managing agency commission to be included in the excess profits tax assessment is the amount as determined by the Appealate Assistant Commissioner.

Question No. 3 : Answered in the negative.

33. The Tribunal was not justified in holding that the excess profits tax assessment made on the assessee firm for the C.A.P. ended March 31, 1946, was not valid in law. The assessee shall pay the costs of the revenue.


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