S.T. Desai, J.
1. This reference raises a question of some difficulty and importance and the income in dispute relates to managing agency commission. In the matter out of which it arises there was a difference of opinion between the Accountant Member and the Judicial Member constituting the Tribunal and on a reference to the President the decision was in favour of the assessee. The three judgments turned a good deal on the effect of a decision of this court. The arguments before us also have revolved round that decision almost as a spindle and it will be necessary for us to ascertain the ratio decidendi of that case. Of this more hereafter.
2. The assessee, in this reference under section 66(1) made at the instance of the Commissioner of Income-tax, is the firm of Messrs. Shoorji Vallabhdas & Co. The assessment year is 1948-49 and the previous year ended on 31st March, 1948, During that previous year the assessee firm consisted of three partners and its business consisted of acting as managing agents to several shipping companies. We are concerned in this reference with only two of the shipping companies, viz., the Malabar Steamship Co. Ltd. and the New Dholera Steamship Co. Ltd. Under agreements with the two companies, the managing agents were entitled to 10 per cent. commission on the freight charged to shippers. According to the agreement with the two companies, the assessee firm would have become entitled to claim commission of Rs. 1,71,885 from the Malabar Steamship Co. Ltd. and Rs. 2,56,815 from the Dholera Steamship Co. for the period April 1, 1947, to December 31, 1947, which was the period of first 9 months of the relevant assessment year 1948-49. In the books of account of the assessee credit entries were made relating to this commission and corresponding debit entries were made in the accounts of the shipping companies maintained in their books by the assessee. It does not appear from the statement that any such entries were made in the account books maintained by the shipping companies. But later on, it appears, the assessee company agreed to receive remuneration at 2 1/2% in the circumstances to which we shall presently advert. Shorn of details, the result was that the assessee company accepted only 2 1/2% commission instead of 10%. There is no dispute that in fact the assessee company has at no time received these two sums of Rs. 1,71,885 and Rs. 2,56,815. But the case of the Revenue is that having made entries in its books of account, the assessee company who were following a mercantile system of accounting lost all right to rely on any agreement whereby they charged smaller commission. It is also the case for the Revenue that there was in fact no agreement between the assessee firm and the shipping companies and according to them what the managing agents did was making a voluntary gift of 7 1/2% of commission which they had actually earned and which they, in law, were entitled to receive and it is on that alleged largess or benefaction that the Revenue seeks to tax the assessee company.
3. Some time before the end of the year 1947, it appears, the assessee company had floated two private limited companies known as Shoorji Vallabhdas Ltd. and Pratapsinh Ltd. in which the three partners were substantially interested and had controlling interest. On 20th November, 1947, the assessee company addressed letters both to the Malabar Steamship Co. and the Dholera Steamship Co. and the letters were in identical terms. By these letters they requested the shipping companies to allow them to resign and accept the newly floated concerns as the managing agents. Two shareholders of the Malabar Steamship Co. raised objection to the shipping company accepting the newly floated concerns as their managing agents. There was a meeting of the board of directors of that company on 29th November, 1947, and what happened at that meeting is of importance. One resolution passed at that meeting is as follows :
'Resolved in consultation with the managing agents that in consideration of the company agreeing to change the managing agency, the managing agents will give a letter to the company as per the draft placed before them'
and in the draft letter it was stated :
'We cannot agree to a reduction in the managing agency remuneration as already fixed. If the said letter is interpreted as a handle to refuse the change in the managing agency, we are prepared to continue the managing agency in the same firm name and on the same terms as before although as rightly pointed out by the shareholders, we can get the resolution passed because of our predominant voting majority. However, it is not our desire to vote against the wishes of the shareholders.
We, however, place the following for you consideration : 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 2 1/2 per cent. of the total freight.'
4. The contents of this letter and the resolution have considerable bearing on the question which has been pressed for our determination in this reference. What is recorded here is what happened before December, 1947. It will be necessary for us to see whether this is an understanding or an arrangement or a conditional agreement as the assessee would have us hold or a purely voluntary gift as the revenue would have us hold. Some time thereafter there was an extraordinary general meeting of the shareholders of the company on December 30, 1947, and a special resolution was passed at that meeting appointing Shoorji Vallabhdas Ltd. as the managing agents of the company for a term of 20 years from January 1, 1948. One thing is clear that this resolution put an end to the managing agency of the assessee firm and left the question of fixation of the commission to be paid to the assessee firm for the period of 9 months to be determined as mentioned in the letter and the resolution to which we have already made reference.
5. The position as regards the Dholera Company is in some respects different, although many of the relevant facts are common. As we have already mentioned a letter had been addressed to this company also by the assessee firm on 20th November, 1947. The relevant part of the minutes of the meeting of the board of directors of the company held on 1st December, 1947, is as under :
'The managing agents informed the meeting that they desired Messrs. Pratapsinh Ltd. to be appointed managing agents of the company in their place, and that Messrs. Shoorhi Vallabhdas & Co. were agreeable to accept 2 1/2 per cent. as the managing agency commission instead of 10 per cent. of the freight earnings during the year.'
'The directors were requested to accept the new managing agents, Messrs. Pratapsinh Ltd. for a period of 20 years from the 1st of January, 1948.'
6. It was resolved at that meeting that an extraordinary general meeting of the shareholders of the company should be called on 30th December, 1947. Such a meeting was in fact held and Messrs. Pratapsinh Ltd. were appointed as the managing agents of that shipping company from 1st January, 1948, in place of the assessee firm of Shoorhi Vallabhdas & Co. So far, therefore, as this company is concerned, very little can be said as not done before 31st December, 1947.
7. In case of the Malabar Steamship Company what happened was that it addressed letters to the shareholders in view of the understanding or arrangement or agreement to which we have already made some reference. The material part of that letter stated :
'The Chairman informed the meeting that when the managing agents applied for change of managing agency from themselves to their private limited company, the directors of the company received letters from some of the shareholders asking the directors to oppose the change as the change was only beneficial to the managing agents without any benefit to the company and the shareholders suggested that if the change was to be sanctioned, the managing agents should charge only 2 1/2% commission instead of 10 per cent. commission on the freight earnings for the period from April 1,1947, to December 31, 1947. The Chairman further informed the meeting that pursuant to the desires of the shareholders they asked the managing agents to agree to the suggestion of the shareholders if they wanted the change to be sanctioned. The managing agents, however, declined to agree conditionally to such change at that time but they agreed with the directors that if the annual general meeting decided that the managing agents should charge 2 1/2 per cent. commission only instead 10 per cent. commission for the said period of nine months, they would accept their decision....... Mr. Sorab Vakil one of the shareholders spoke in support of the managing agents being allowed 2 1/2% only for the said period of 9 months. The Chairman thereafter took the sense of the meeting as regards the managing agents' commission whether the managing agents should be allowed 2 1/2% or 10% for the said period of 9 months, and the meeting having decided unanimously that the managing agents should charge only 2 1/2% and not 10 per cent. for the said period.'
8. The annual general meeting had been held the previous day and the principal plank in the argument for the Revenue is that if the assessee firm did not voluntarily make a gift of what was due to them (the commission which they had already earned), they can at the most rely on an agreement which agreement was arrived at, at no time during the accounting year, at no time material for the purpose of the assessment of the assessee firm, but as late as 30th December, 1948.
9. We have already mentioned that the position as regards the Dholera Company is in some respects different. What happened in respect of that company may be gathered from its annual report dated 9th December, 1948. In it was mentioned :
'Your directors have to inform you that according to their suggestion the previous managing agents Messrs. Shoorji Vallabhdas & Co. had agreed to charge managing agency commission at 2 1/2 per cent. instead of 10 per cent. on the freight earnings of S. S. 'Jaihind' for the period April 1, 1947, to December 31, 1947, after which Messrs. Pratapsinh Limited were appointed you managing agents. The previous managing agents have charged their normal 10 per cent. commission on the freight earning of the S. S. 'Jaibrahma' which was being run in partnership with the Malabar Steamship Company Ltd. But they have shown their readiness to accept 2 1/2% commission if that is the sense of this general meeting. The accounts will be adjusted according to your decision.'
10. It is clear that the arrangement or understanding or agreement with this company was that the accounts were to be adjusted after knowing the sense of the shareholders at the general meeting which was being called.
11. The two amounts of Rs. 1,36,903 and Rs. 2,00,625 were treated by the Income-tax Officer as commission earned by the assessee and he brought them to tax on the ground that they represented the income of the assessee firm accrued to it by way of managing agency commission for the accounting year. The contention of the assessee before the Income-tax Officer was that the amounts were never received by the firm and did not represent the income of the firm. The other contention raised on behalf of the assessee was that in any event the amounts should be allowed by way of deduction as an item of expenditure under the provisions of section 10(2)(xv). The Appellate Assistant Commissioner confirmed the decision. The matter was carried in appeal to the Tribunal and as mentioned at the outset the Judicial Member and the Accountant Member took divergent views. In the opinion of the Accountant Member, both the contentions of the assessee failed. He distinguished the decision of this court of which we have made some mention. We shall examine that decision a little later in our judgment. The Judicial Member accepted both the contentions of the assessee. In this view, the decision in the case of Commissioner of Income-tax v. Chamanlal Mangaldas wholly applied to the facts of the case. His opinion was that the agreement relating to payment of commission with the two shipping companies had agreement relating to payment of commission with the two shipping companies had been modified by mutual consent and the commission that really accrued to the assessee was at the rate of 2 1/2%. Very briefly stated his conclusion was that it was the real commission which could be taxed. On that difference, the matter went to the President of the Tribunal and in his opinion the managing agency commission had been varied in the year of account by mutual consent of the parties. He also observed that even if the variation had taken place after the year of account that would have made no difference. He held that the two sums were not the income of the assessee and did not deem it necessary to decide the other question. The Commissioner has now come before us on this reference.
12. The two questions we are asked to determine are :
'(1) Whether the two sums of Rs. 1,36,903 and Rs. 2,00,625 are income of the 'previous year' ended March 31, 1948
(2) If the answer to the first question is in the affirmative, whether they represent an item of expenditure permissible under the provisions of section 10(2)(xv) of the Indian Income-tax Act, 1922, in computing the assessee's income of that 'previous year' from its managing agency business ?'
13. Although we have dwelt on the facts at some length, the question that arises for our determination really lies in a very narrow compass, and what we have to determine is whether the assessee firm, although it actually received the managing agency commission at 2 1/2%, is by operation of any principles or provisions of the income-tax law, yet liable to be taxed in respect of these amounts. We have to consider whether the contention of the Revenue that there was an income to which the assessee had already become entitled and which income had been voluntarily abandoned or given away by the assessee firm is correct or whether there was an agreement or arrangement whereby the shipping companies and the assessee firm decided that they should charge commission at the rate of 2 1/2% instead of at the rate of 10%.
14. It has been strenuously argued before us by Mr. G. N. Joshi, learned counsel for the Revenue, firstly that what the assessee did was in the eye of income-tax law nothing else than a voluntary gift by the assessee firm to the shipping companies of which they were the managing agents. It is also argued that even if the court were not satisfied that what happened was a voluntary gift there was no finalised agreement binding on both the parties in the accounting year as erroneously decided by the President of the Tribunal. It is said that if the agreement took place in the subsequent year (in December, 1948) the effect of that agreement only was that the assessee firm gave up what had already accrued to it by virtue of the entries in the assessee's books. The argument has proceeded that whether the amount was given up after 4 months or a year or in the accounting year or thereafter is not the crucial matter for the consideration of the court. The moment the amounts were credited in the books of account of the assessee (though not in the books of the company) it became the assessee's income and in the eye of income-tax law they were as good as received by the assessee, the only difference being that the income that accrued had been subsequently voluntarily given up. That, the argument ran, did not make the slightest difference. We are unable to subscribe to any of those propositions. The accounts maintained by the assessee were on the mercantile basis and the cogency of the entries so strongly relied on by Mr. Joshi need not be denied. But the question is not of their cogency but the effect of the entries in the context of the question whether the income had accrued to the assessee or not; or to put it differently whether the assessee firm had become entitled to the sums or not. The crux of the argument here was that once you have the position that it was the mercantile system which was adopted by the assessee and you have the entries crediting the commission to the proper account and debiting the shipping company in its account with the assessee firm, for all purposes the income became income which had accrued to the assessee firm and was as good as received by the assessee firm. Now, the incidences of the mercantile system are well understood in income-tax law and it is unnecessary for us to discuss the same. Since, however, great reliance is placed on the effect of the entries against the assessee firm, we may refer to what their Lordships of the Privy Council said in an income-tax case though in a somewhat different context. What their Lordships in effect opined was that the revenue is not entitled to take a mere book entry as conclusive evidence of the existence of a profit. In that case the stock-in-trade had been valued at a high rate when two persons transferred the same to a company and their Lordships observed that the two partners had not made nay money by the mere process of valuing certain stock-in-trade by these entries. (See Doughtly v. Commissioner of Taxes.)
15. We put to ourselves the question : 'What is the effect of all that happened before December, 1947, and after December, 1947, considered as a whole Is it aa case of a voluntary gift which obviously would be a unilateral transaction or is it a case of an agreement between the parties If it is a case of a voluntary gift, the argument of Mr. Joshi would have considerable force. If it is not a voluntary gift made by the assessee firm to the shipping company, further considerations would be relevant and necessary. The argument of counsel is that this is not a case in which there was any modification of the managing agency agreement. It is a case of something voluntarily given up. Now, in the present context, this distinction sought to be drawn on behalf of the Revenue is rather too fine. It is a question essentially one of the real nature of what happened. It is a question of substance and not of mere book entries. We have not to permit ourselves to indulge in any overrefined distinction and would prefer to lay emphasis on the business aspects of what was done rather than any doctrinaire concept or sheer technicality and when we look at the transactions as a whole we see no reason to treat these as gifts or voluntary giving up of income by the assessee but business transactions of hard-headed businessmen who would not be and were in fact not willing to lose any part of their income unless circumstances required them to do so. The idea of a gift or voluntary giving up of something which was earned could have been father from the intention of the assessee. It was nothing short of a matter of bargaining and reaching an agreement with the shipping companies in their own interest and for their benefit. It was a matter of expediency.
16. The next question that we have then to put to ourselves is what was the effect of this agreement in so far it has bearing on the tax liability of the assessee firm Can it be said in spite of the agreement and in spite of the fact that the assessee firm did not in fact receive these two amounts, that in the eye of income-tax law they must be treated as having accrued to them and for which they were liable to pay tax It is in this connection that the decision of this court in the case of Chamanlal Mangaldas has loomed large in this matter. We shall now immediately turn to the same. There, the assessee was the managing agent of a company and, under an agreement, entitled to a fixed percentage on the sale proceeds of the managed company, which was a textile mills. On 28th December, 1950, the Mills company passed a special resolution empowering the directors after considering the results of working of the mills for the years 1950-51 to fix a lesser remuneration to the assessee than fixed under the agreement of agency which had been entered into in 1940. On the same day, the assessee wrote to the Mills company accepting the resolution. What had happened so far was within the accounting year. On 8th April, 1951, the board of directors of the company resolved that the assessee should accept a commission of Rs. 1,05,575-3-0 for the relevant year 1950 instead of Rs. 2,05,575-3-0 which would have been payable to them under percentage basis which was one of the terms of the managing agency agreement. The Department contended that the whole amount of Rs. 2,05,575-3-0 had accrued to the assessee in the accounting year and the assessee had given up out of to same Rs. 1 lakh although it had already accrued to it in that year. It was held by Chagla, C.J., and Tendolkar, J., that the right of the assessee to commission was by reason of what had transpired not under the agreement of 1940 but depended upon and lose only after the decision of the board of directors which was on 8th April, 1951. That date was subsequent to the closing of the accounting year but the view was taken that it was by reason of the variation of the agreement that the assessee had become entitled to the lesser remuneration subsequently determined by the directors, and the income of the assessee was reduced to Rs. 1,05,575 only and that was the real income and not any hypothetical income which the assessee might have earned if the old agreement had continued to subsist. In the case before us, it is the contention of Mr. Palkhivala that the assessee firm is not liable to be taxed on any hypothetical income but can only be taxed on what it received in pursuance of the agreement with the shipping companies. It was said that the term of the agreement relating to 10% commission had been modified or varied by substituting 2 1/2% commission in place of the same. The learned Chief Justice emphasises at the very outset of his judgment in the case of Chamanlal Mangaldas that in fact the assessee company had only received the lesser amount in the circumstances of that case. The argument relating to voluntary gift was urged before the court in that case and repelled. The argument about the income having accrued after the closing date of the accounting year was also pressed before the court in that case and does not appear to have found favour with the court, although there are observations in that judgment which would suggest that the court was considering whether the variations had taken place during the accounting year. But that was bound to be the position since such were the facts of that case. The ratio decidendi of that case, as we read it, is to be gathered from the following observations of the learned Chief Justice :
'A managing agent may earn a commission, but in all questions of managing agency commission the question is not when was the managing agency commission earned or what was the managing agency commission earned according to the agreement, but the real question is what was the commission to which the managing agents became entitled.'
17. Comparison of the facts of one case with the facts of another case is not a helpful method or if we may say so a right method of deciding any case. What has to be examined is the principle underlying the decision and the proposition or principle of law that may emerge from the decision, and one principle one principle which clearly emerges from that decision is that in case of a managing agency commission of the nature before us - and the nature of the agreement before the court in that case was the same - what is to be regarded is what was the real commission to which the managing agents became entitled in consequence of the agreement between the parties. The emphasis, as we read that judgment, was not so much on the earlier agreement between the parties which was in the accounting year or the finalised agreement which was when the directors passed their resolution on 8th April, 1951, after the close of the accounting year, but was on the actual commission earned by the assessee company and as to the amount of commission the assessee had become entitled to in consequence of what had happened. Now, let us see what the position before us is in the light of the principle laid down in that case and the ratio decidendi of the same. It cannot be disputed and it has not been disputed before us by Mr. Palkhivala that in a sense it could be said that the managing agency commission was earned when the contracts were put through but what is urged and in our opinion rightly urged is that it is the commission which was really earned by the assessee before us and the actual amount to which the assessee became entitled is the crucial consideration. The argument of Mr. Palkhivala has been that during accounting year, i.e., in November, 1947, there were conditional agreements when the assessee wrote the two letters to the shipping companies and what happened in the end of 1948 was merely a crystallisation of the quantum to be charged by the assessee company. It is said that quantification took place in 1948 which related back to the year 1947. The argument ran that even if we were to assume that the date of the quantification which was 1948 was the relevant date for decision, there would be no accrual of any income till the commission was fixed at 2 1/2%.
18. Now, as we have already mentioned, Mr. Joshi's argument is that even if it be held that there was an agreement that agreement was subsequent to the relevant period which was the accounting year. The argument on the other hand is that there was at the worst a conditional agreement, if not a finalised agreement, during the accounting year. It will be convenient here to deal with the case of the two companies separately and we shall first take up the car of the Malabar Steamship Co. It is not necessary for us to rehearse what we have already stated in the earlier part of our judgment nor is it necessary for us to dwell on the matter at any length. We have already set out the resolution of the board of directors of the 27th November, 1947, and what the assessee had written to the company and we have already taken the view that there was nothing of the nature of a voluntary giving up of what had been earned by the assessee or of commission which accrued to the assessee. Call it a conditional agreement or an arrangement or an understanding, one thing does emerge. All that happened before the accounting year is that the commission which would have been earned by the assessee under the original agency agreement was treated as not having become due to the assessee firm because if it already became due to the assessee firm, there would have been no question of any reduction of the amount nor would there have been any question of any reduction of the amount which had already accrued. Question of reduction could only have arisen in respect of future years. We have mentioned this question of reduction only incidentally to show the nature of the arrangement or agreement between the parties. There is reference in that resolution and in that letter to the assessee company and the shipping company agreeing to a change in the managing agency agreement. What took place was the result of consensus of the parties. It was agreed that the amount of commission was to be reduced. It was the extent of that commission that was to be decided or fixed later on and the minimum was in any event to be 2 1/2%. All these considerations lead us, in the light of the legal position, to the conclusion that the tax which the Revenue seeks to levy on the assessee firm in respect of the commission relating to Malabar Steamship Co. was not an income of the assessee firm for the relevant accounting year.
19. The position about the Dholera Steamship Co. as we have already mentioned is somewhat different. There was little scope here for any argument about the agreement or arrangement or understanding being subsequent to the closing of the accounting year. Of course what was stressed was that here also there was voluntary giving up of the commission by the assessee company after it had already accrued. We having already repelled that condition.
20. In view of the conclusion reached by us on the first question it will unnecessary to deal with the second question.
21. Our answer to the first question is in the negative.
22. Commissioner to pay the costs.
23. Reference answered accordingly.