Skip to content


J. P. Shrivastava and Sons (Private) Ltd. Vs. Commissioner of Income-tax, M. P. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMadhya Pradesh High Court
Decided On
Case NumberMiscellaneous Civil Case No. 152 of 1960
Reported in[1963]47ITR49(MP)
AppellantJ. P. Shrivastava and Sons (Private) Ltd.
RespondentCommissioner of Income-tax, M. P.
Cases ReferredNew Mahalaxmi Silk Mills Ltd. v. Commissioner of Income
Excerpt:
.....to distribute the statutory percentage of its profits as dividends, then the provisions of sub-section (1) have to be applied, unless the income-tax officer is satisfied that having regard to the losses incurred by the company in earlier years or to the smallness of the profits made, the payment of a dividend or a larger dividend than that declared would be unreasonable......the accounting period ending on march 31, 1952, the assessee company was entitled to the managing agency commission amounting rs. 41,842 and for the subsequent accounting year ending march 31, 1953, the amount of the commission was rs. 1,16,690. the managed companys claims for reduction in the two years in question of the commission paid to the managing agents was allowed. the managed company debited rs. 41,842 as a liability in the profit and loss account of the year ending march 31, 1952. similarly, the amount of rs. 1,16,690 was shown as liability in the profit and loss account for the year ending march 31, 1953. the assessee company, however, did not bring in its own books of account the two amounts of managing agency commission in the respective years. the managing agency.....
Judgment:

DIXIT C.J. - This is a reference under section 66(1) of the Indian Income-tax Act, 1922, at the instance of the assessee, Sir J. P. Shrivastava and Sons (Private) Limited, Bhopal, by the Income-tax Appellate Tribunal to this court in respect of assessment for the assessment years 1952-53 and 1953-54. The questions which have been submitted to this court for answer are as follows :

'1. Whether, in determining the smallness of the profit made by the applicant for the purpose of section 23A, the Tribunal correctly included the commission of Rs. 41,842 and Rs. 1,16,690 in the applicants profits of the accounting periods ended 31st March, 1952, and 31st March, 1953, respectively ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the orders under section 23A ?'

The assessee is a private company and is the managing agent of New Bhopal Textiles Ltd. Under sub-clauses (b) and (c) of clause 2 of the managing agency agreement entered into between the assessee and the New Bhopal Textiles Ltd., the managing agents are entitled to be paid a certain commission on the annual net profits of the company. Sub-clause (c) provided that such commission shall become due and payable to the managing agents every year immediately on the passing of the audited accounts of the New Bhopal Textiles Ltd., by the shareholders at a general meeting. The accounting periods of both the assessee company and the managed company are the same, namely, the financial years. For the accounting period ending on March 31, 1952, the assessee company was entitled to the managing agency commission amounting Rs. 41,842 and for the subsequent accounting year ending March 31, 1953, the amount of the commission was Rs. 1,16,690. The managed companys claims for reduction in the two years in question of the commission paid to the managing agents was allowed. The managed company debited Rs. 41,842 as a liability in the profit and loss account of the year ending March 31, 1952. Similarly, the amount of Rs. 1,16,690 was shown as liability in the profit and loss account for the year ending March 31, 1953. The assessee company, however, did not bring in its own books of account the two amounts of managing agency commission in the respective years. The managing agency commission for the year ending on March 31, 1952, was brought into the books in the assessment year 1953-54 and the amount for the year ending on March 31, 1953, was brought into the books in the assessment year 1954-55. These amounts were not shown in the returns of income for the relevant assessment years. The Income-tax Officer, however, included the amount of Rs. 41,842 for the purpose of assessment for the previous year ending on March 31, 1952. He also similarly included the amount of Rs. 1,16,690 in the assessment for the previous year ending on March 31, 1953. The assessee company did not file any appeals against the inclusion of the said amounts in the assessment years 1952-53 and 1953-54.

The Income-tax Officer also applied section 23A(1) of the Income-tax Act as it stood before its amendment by the Finance Act, 1955. He took the view that the assessee company had not complied with the provisions of section 23A(1) and the first proviso to it, as it had not been distributed by way of dividend among its shareholders 100 per cent. of the assessable income of the company for the periods in question. The assessees contention that for making an order under section 23A 'commercial profits' alone could be taken into consideration and not the profits assessed to income-tax or super-tax and that as the aforesaid amounts of commission were not actually received by it in the two years in question they could not be taken into account in determining the extent of profits was negatived by the Income-tax Officer. The Income-tax Officer stated that the assessee company maintained its accounts on the mercantile basis; that its only income was from managing agency commission; and that as both the assessee company and the accounts of the managed company must have been prepared and finalised soon after March 31 in each year, the assessee should have taken into consideration the commission which accrued to it under the managing agency agreement. Accordingly, the Income-tax Officer made two orders under section 23A holding the balance of undistributed profits in the relevant years as 'deemed to have been declared as dividends amongst the shareholders'.

The Appellate Assistant Commissioner disagreed with the view taken by the Income-tax Officer. According to him, for the making of an order under section 23A, the Income-tax Officer was required to take into consideration not the assessable income of the company but the actual profits made by the company; that as under clause 2(c) of the managing agency agreement, the assessee did not have any right to receive the amount of compensation till after the passing of the accounts of the managed company at the general meeting, the assessee could not take into account 'receipts' which has not been actually paid to it; and that the assessee could not be expected to distribute dividends out of the income which had not been actually received by it. The proposition that commercial profits and not the assessed profits have to be considered for making an order under section 23A was accepted by the Tribunal. It, however, proceeded to say that commercial profits need not be book profits; and that the managing agency commission accrued when the profits were ascertained, and it then became a debt in favour of the assessee whose payment was only deferred till after the shareholders had passed the accounts of the managed company at the general meeting. The Tribunal observed that the managed companys books showed the amount of the commission to the assessees credit at the close of the accounting year and the company had also claimed the amount as a revenue deduction in its own assessment and, therefore, the managing agents earned the commission at the close of the accounting year. On this reasoning, the Tribunal restored the order passed by the Income-tax Officer.

In our opinion, both the questions raised must be answered in the affirmative. Shri Sen, learned counsel appearing for the assessee, did not dispute that the amount of the managing agency commission included in the profits of the relevant accounting years was an assessable income. Indeed, he could not when the assessee company did not file any appeal against the inclusion by the Income-tax Officer of the amounts of Rs. 41,842 and Rs. 1,16,690 in the assessment years 1952-53 and 1953-54. Therefore, it is not now open to the assessee to contend that the managing agency commission was not an assessable income or that it should not have been included in the profits of the relevant accounting years. The contention of Shri Sen was that the Income-tax authorities were in error in treating the amounts of Rs. 41,842 and Rs. 1,16,690 as actual profits for the purpose of section 23A. It was said that, as under sub-clause (c) of clause 2 of the managing agency agreement, the managing agency commission became due and payable to the managing agents every year only on the passing of the audited accounts of the company by the shareholders at the general meeting, and as no meeting was held in 1952 before March 31 of that year, the amount of Rs. 41,942 was not actually paid to the assessee before March 31, 1952, and it could not be said that the income arose or accrued to the managing agents in the relevant accounting year and that similarly as no meeting was held in 1953 before March 31, the amount of Rs. 1,16,690 was not received by the assessee and, consequently, these managing agency commission amounts could not be regarded as actual profits of the purpose of section 23A. Learned counsel relied on Cotton Agents Ltd. v. Commissioner of Income-tax, to show that the time of accrual and payment of the managing agency commission had to be determined according to clause 2 of the managing agency agreement. Learned counsel for the assessee also referred to Bipinchandra Maganlal & Co. v. Commissioner of Income-tax, Commissioner of Income-tax v. F. L. Smidth & Co. and New Mahalaxmi Silk Mills Ltd. v. Commissioner of Income-tax, to support the contention that for judging the reasonableness of payment of dividend for purposes of section 23A actual profits from the commercial point of view should be taken into consideration and not the notional profits and that the managing agency commission which was not actually received by the assessee in the relevant accounting year was only notional income.

We are unable to accept the argument that the managing agency commission was only notional income of the assessee. It is quite true that in judging the reasonableness or the unreasonableness of payment of dividend for purposes of section 23A, the actual profits from the commercial point of view and not the assessable profits must be taken into consideration. The assessable profits may include certain sums by legal fiction. Such sums would be notional profits and not profits in a commercial sends. The managing agency commission was an income which was actually earned by the assessee and was in no sense an income which under any provision of the Income-tax Act was deemed to be profits for the purposes of assessment. The commission amounts were real profits. It may be that managing agency commission was not paid to the assessee in each of the relevant accounting year before March 31. But, merely because of the delayed payments, the amounts of the managing agency commission would not cease to be real profits. According to the decision in Cotton Agents Ltd. v. Commissioner of Income-tax the time of the accrual and the payment of the managing agency commission has no doubt to be determined in accordance with the relevant clause of the managing agency agreement. But the question as to when the managing agency commission arose or accrued to the managing agents and became payable to theme does not really arise for consideration here. The reason is that the assessee, not having appealed against the decision of the Income-tax Officer including the managing agency commission amounts in the assessment years 1952-53 and 1953-54, cannot now contend that those amounts should not have been included in the assessable income of the years in question. Thus the time of accrual and payment of the managing agency commission has no bearing at all on the question whether the managing agency commission income represented real profits or notional profits. The decisions in Bipinchandra Maganlal & Co. v. Commissioner of Income-tax, Commissioner of Income-tax v. F. L. Smidth & Co., New Mahalaxmi Silk Mills Ltd. v. Commissioner of Income-tax only point out the distinction between commercial profits and notional profits and lay down that for the purposes of section 23A actual profits from the commercial point of view must be taken into consideration. They do not furnish any basis for the proposition that even if the inclusion of profits, which are otherwise real, in the assessable income of a particular year cannot be questioned, those profits must be treated as notional profits for the purposes of section 23A if they did not become legally due and, therefore, could not be brought into credit in the mercantile system of accounting. The substance of the assessees contention is that the amounts of the managing agency commission though real must be treated as notional because not having become legally due they could not be included in the assessable income of the relevant accounting years. The objection is thus as to the inclusion of the commission amounts in the assessment years 1952-53 and 1953-54. The character of profits is one thing and the time at which they can be brought into credit in the mercantile system of accounting is another. It is not altered according to the right or erroneous inclusion of profits in the assessable income. Here, as pointed out earlier, if the assessee cannot question the inclusion of the managing agency commission in the assessment years 1952-53 and 1953-54, it cannot be heard to say that the commission amounts should have been excluded from the profits of those accounting years.

Now section 23A(1) is applicable where the profits distributed as dividends are less than sixty per cent. of the assessable income of the company. Where the first proviso is applicable, the sub-section would come into play when the profits distributed as dividends are less than hundred per cent. of the assessable income of the company. When there is a failure on the part of assessee company to distribute the statutory percentage of its profits as dividends, then the provisions of sub-section (1) have to be applied, unless the Income-tax Officer is satisfied that having regard to the losses incurred by the company in earlier years or to the smallness of the profits made, the payment of a dividend or a larger dividend than that declared would be unreasonable. There was no dispute before us that the dividend declared was less than the statutory percentage prescribed by the first proviso which was applicable to the assessee. It was also not disputed that if the amounts of managing agency commission were real profits then the payment of a larger dividend than that declared would not be unreasonable.

We, therefore, answer both the questions submitted to us in the affirmative. The assessee shall pay the costs of this reference. Counsels fee is fixed at Rs. 200.

Questions answered in the affirmative.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //