1 to 4. [These paras are not reproduced here as they involve a minor issue.] 5. We now take up the assessees' two appeals. The dispute in these appeals is common, and it concerns the charging to tax of the commission on net profits allowed to the assessees in 1978-79, whereas according to the assessees these called for being assessed only in the next year, namely, 1979-80. The commission was receivable by the assessees from Ranbaxy Laboratories Ltd. The accounting period of the company ended on 31-12-1977 whereas the accounting period of the assessees ended on 31-3-1978. The assessee's contention was that the accounts of the company for the year ending on 31-12-1977 were passed at the general body meeting of the said company field on 25-5-1978 and that the net profits of the company were determined only on that date and that, as such, the commission payable to the assessees became due only on that date which date fell outside the previous year of the assessees relevant for this year. The assessees were employed as directors in Ranbaxy Laboratories Ltd. and the terms of appointment were : a fixed salary plus \ per cent commission on the net profits of the company. It was not in dispute that the commission receivable by the assessees, under the terms of the assessees' appointment as directors, was liable to be assessed in the hands of the assessees as income from salary and that it could be assessed on due basis. The assessees, however, submitted that the said commission became due only when the accounts of the company, showing its net profits, were passed at the general body meeting and not earlier. The ITO, however, did not concede this. The assessees had attached along with the return a note which read as under : According to the terms of appointment, the commission payable on the working results of the year ending 31-12-1977 amounts to Rs. 14,904.
The said amount of commission has not been included in my income of current year as the same was not received by me till 31st March, 1978. I am maintaining my accounts on receipt basis. The aforesaid amount of commission would be included by me as the income of the year in which the same is received.
According to the ITO, commission became a part of the salary which had to be assessed on due basis and in the year of accrual only. The Commissioner (Appeals) upheld in appeal the action of the ITO. He observed that salary became due as soon as the employee had rendered service. By the end of the company's accounting year, namely, 31-12-1977, the assessee had rendered service entitling him to be paid commission on the company's profits of the year ending on that date even though the company took time after 31-12-1977 to finalise its accounts. According to the Commissioner (Appeals) the profits had already accrued on 31-12-1977 and the liability of the company to pay commission to the assessee was embodied in the net profits. He further observed, that it made no difference whatsoever if the actual amount of commisssion got quantified later and was payable only after such quantification. The Commissioner (Appeals) upheld the action of the ITO and the assessees are in further appeal before us.
6. We have heard the parties. The facts as stated above are not in dispute. The only other relevant fact is that the auditors had completed the audit of the accounts on 20-4-1978. The terms of appointment of the assessees with the company provided that besides salary, they shall also be paid 1/2 per cent commission on the net profits of the company. The point for consideration is whether the net profits get ascertained immediately on the closing of the accounts or that these could be said to have been determined and ascertained only after the accounts had been duly audited and certified by the auditors.
The company of which the assessees were directors was a public limited company. It had to function under the regulations laid down by the company law. The accounts had necessarily to be audited, and the book results could not be said to have become final till the accounts were audited and these were certified by the auditors to have been correctly arrived at in accordance with the provisions of law. Such a result emerged in this year only, when the auditors gave the certificate on 20-4-1978. The holding of the general body meeting by the company was not very relevant. The provision for making the payment of commission at 1/2 per cent of the net profits to the two assessees had already been approved by the general body meeting earlier while approving their terms of appointment as directors and, therefore, the amount of commission payable could not be varied in the general body meeting. It is from this angle that it may be considered that the holding of the general body meeting in May, 1978, was not of much relevance ; but that could not be said in respect of the audit of the accounts because nothing could be said to have been finalised till the audit was completed by the auditors. It was only after the audit was over that it could be said that the net profits had been determined or ascertained.
In fact many adjustments have to be made in the light of the audit of the auditors. The assessee had submitted that in respect of the income from commission, the accounts were being maintained on receipt or cash basis. Even though the commission was an item included in the terms of appointment of the assessee, it could still have a different treatment depending on the facts of the case. The assessees were directors and they had to show, in respect of the accounts of the company, that they were not rushing through the matters and were not taking away their shares of profit in the shape of commission even before the accounts had been audited by the auditors or had been passed at the general body meeting. They had not only to act properly but they had also to show that they were acting properly. There are certain items which may be included in the terms of appointment but which may not be assessed or may be assessed only in part like the house rent allowance or the entertainment allowance, etc. There may also be items which may get determined only after a certain act had been done in respect of them though the right may be there. That would be the position in the case of these assessees in respect of commission income. The right in question depended on the "net profits" and the net profits were determined, at the earliest, only on 20-4-1978 which was after 31-3-1978. Before the net profits were determined, no right could be said to have become due. The right would become due only when the net profits came into existence and this happens only after the accounts had been audited. Viewed from this angle, it could not be said that the right had not come into existence on due basis in this year. The payment of salary was a different matter. It was earlier not paid from month to month and it did not depend on the earning or non-earning of profits, but that was not the position regarding the commission payment as the commission payment depended on the earning of net profits, which was at the end of the accounting period of the company of which the assessees were directors but which net profits came into existence only after the accounts had been audited and were certified by the auditors as representing the true state of affairs. We, accordingly, hold that the amounts of commission in the cases of both the assessees would fall to be assessed in the next year on receipt basis as was contended by the assessees. There was no charge of the revenue that the assessees had manoeuvred this position to reduce their tax liability in this year. The amounts had been duly shown by the assessees in the succeeding year on receipt basis. The assessees had also contended that the terms of appointment of the assessees were approved by the Company Law Board in March, 1978, which was after 31-12-1977, the end of the accounting period. The two appeals are allowed.
7. As a result, the two appeals of the assessees are allowed. The department's appeal is dismissed.