1. The first dispute in this appeal is with regard to the disallowance of commission of Rs. 23,878 claimed by the assessee-company as having accrued and arisen during the previous year under consideration. The assessee is a company which was incorporated on 28-12-1976. Its accounting period ended on 31-12-1977. Its main object is to export goods from India to outside countries. With a view to accomplish the above object, it appointed many agents in foreign countries, the details of which have been given at page 1 of its paper book.
Agreements were entered into by the assessee with them. A copy of the agreement with Misr Import & Export Co., Cairo, has been filed before me and it was stated on behalf of the assessee that other agreements are similar. It appears from the aforesaid agreement that the agent was to develop and expand the sale of the products of the assessee within the territory for which it was appointed (Clause 3), that the principal (i.e., the assessee) was to deliver the products ordered by the agent on board of the vessel at Calcutta or any other Indian port against irrevocable letter of credit by the customers in favour of the principal or any other terms of payment agreed upon by the principal (Clause 4), that the principal was to allow the agent a commission at the stipulated rate in consideration of the services rendered by the agent on the f.o.b. value of the products on all such sales against orders secured directly by the agent and orders received directly by the principals and such commission "will be payable to the agent only upon full realisation of the sale proceeds of the exported materials" (Clause 6). The agreements with other agents as noted earlier were on similar lines.
2. During the accounting period under consideration, the assessee-company exported goods of the f.o.b. value of Rs. 4,64,724 on which commission of Rs. 29,900 became payable. The realisations during the accounting period out of the aforesaid f.o.b. value were of Rs. 1,30,290 only, corresponding commission on the realised value worked out to Rs. 6,883. The assessee claimed that the entire commission of Rs. 29,900 should be allowed to it as deduction while computing the income of the assessee for the year under consideration but the ITO allowed to the assessee only Rs. 6,883. The remaining amount, i.e., Rs. 23,878, was disallowed by him as not having become due by the assessee during the year under consideration. On appeal, the learned Commissioner (Appeals) has upheld the order of the ITO by observing, inter alia, as follows : I have looked into the terms of the agreement copy which has been placed in the assessment records. It is seen that commission is payable to the agent only upon full realisation of the sale proceeds of the exported materials within one month from the realisation of the sale proceeds in a manner approved by the Exchange Control Authority. In view of the terms of the agreement I agree with the view of the ITO that the liability for payment of Rs. 23,878 was not incurred during the relevant year. The addition is, accordingly, confirmed.
3. The assessee's counsel challenges the above finding of the learned Commissioner (Appeals) and submits that Clause (6) of the agreement referred to above did not determine the accrual of the commission income to the agents. That income accrued and arose to them as soon as they placed orders on the assessee-company and the assessee-company in compliance with the said orders placed goods on the ships (free on board) in question. The goods were being loaded only when irrevocable letters of credit had been opened in favour of the assessee and the realisation of such letters of credit was a matter of course. The agent had no role in getting these moneys realised. His only duty was to procure the orders and place them with the assessee-company. With the procurement of the said orders and their compliance, his services were completed and the commission due to him accrued and arose. He had nothing further to do to earn it. The stipulation in Clause "(6) of the agreement, referred to above, was not that the commission would accrue and arise to the agent after the payment had been realised ; rather it stipulated that commission will not be payable to the agent unless full realisation of the sale proceeds of the exported materials had been made. This was due to the insistence of the Reserve Bank of India that the commission be not paid till the value of the goods exported had come in. This stipulation, according to the learned counsel for the assessee, had nothing to do with the point of time at which the commission due to the agent accrued against the assessee-company. The learned Commissioner (Appeals) should, therefore, have allowed the assessee's claim as the assessee was admittedly maintaining its accounts on mercantile basis and payment was no consideration in this system for determining as to whether or not an expenditure had in fact been incurred.
4. On behalf of the revenue, the order of the learned Commissioner (Appeals) was stoutly supported and it was pointed out that an expenditure could be said to have been incurred only when the person who could claim the payment of the said expenditure had acquired the right in law to file a suit against the assessee-company to enforce his claim in a court of law. In the present case, the agents could not file a case in a court to get the commission from the assessee till all the payments were received by the assessee in India. The accrual of liability could not, therefore, have resulted till the sale proceeds had come into India. In rejoinder, the learned counsel for the assessee submitted that the test as to whether or not an expenditure had been incurred under the mercantile system of accounting was not as to whether a person had acquired a right to file a suit in a court of law but as to whether the services for which the amount in question was payable, had been rendered. Services had admittedly been rendered by the agents during the previous year under consideration and, therefore, the commission should have been allowed in entirety during the previous year under consideration.
5. I have carefully considered the facts of the case and the rival submissions. There is no doubt that the assessee is following the mercantile system of accounting and under this system, an expenditure is due as and when the liability to pay accrues and arises irrespective of whether or not the payment in question has been made. The point of time when such liability accrues and arises would normally depend, in the absence of an agreement to the contrary, on when the services in question for which the payment is to be made had been rendered. If, however, there is an agreement which indicates the point of time when the liability would accrue and arise, the principle of rendering services would not avail. The question as to whether or not liability in question has arisen would in such a case be determined with reference to the terms of the contract between the parties irrespective of whenever the services in question might have been rendered. In the present case there is no doubt that services were rendered during the previous year and, therefore, if there was nothing in the contract to the contrary, it could be said that the liability for paying the commission had accrued and arisen as soon as the services were rendered by the agent and nothing further remained to be done by him. But Clause (6) of the present agreement goes to show that irrespective of time of rendering the services, the commission will be payable to the agent only upon full realisation of the sale proceeds of the exported materials. Apparently the implication is that if by chance the sale proceeds do not come in full, the commission would not become payable to the agent even though he had rendered his services and even when he had no role to play in the realisation of the bill made out by the assessee for the exported goods. The contention of the learned counsel for the assessee that the liability has accrued and arisen during the previous year and that only payment has been deferred till the full realisation of the sale proceeds of the exported materials, does not appear to me to be correct interpretation of Clause (6) of the agreement. The said clause clearly makes the right of the agent to claim commission contingent on the realisation in full of the sale proceeds of the exported materials. This is not merely the condition of the payability but also affects the accrual of the liability.
The argument of the learned counsel for the assessee in the present case has the familiar ring of the argument which was advanced before their Lordships of the Supreme Court in the case of E. D. Sassoon & Co.
Ltd. v. C[T  26 ITR 27. There too it was urged that the managing agency commission was relatable to the services rendered as managing agent and, therefore, for the period during which the transferor-managing agent rendered services as managing agent to the managed company, it became entitled to the managing agency commission for the aforementioned period and for the remaining period the transferee-managing agent became entitled to the managing agency commission on the principle of rendering of services respectively by them to the managed company. This argument had in fact been accepted by the Bombay High Court, who adopting the test of the services rendered by the Sassoons as well as the transferee during the whole of the years, considered the proportions of the service rendered by the Sassoons and the transferee as the managing agents of the companies as decisive of the portions of the managing agency commission earned respectively by each. The parenthood of the income received by the transferee was considered to be the real test, i.e., whoever rendered the services earned the income arising from those services. This argument was, however, negatived by their Lordships of the Supreme Court who said that one had to look not merely at the services rendered but at the fact whether as a result of the said services a right to sue in a court of law for the income resulting from such services had vested in the claimant. The accrual could result only at that point of time when the right to enforce the claim in a court of law had arisen.
The relevant observations of their Lordships appearing at page 51 may be extracted here for ready reference as follows : The word 'earned' even though it does not appear in Section 4 of the Act has been very often used in the course of the judgments by learned Judges both in the High Courts as well as the Supreme Court ... The concept however cannot be divorced from that of income accruing to the assessee. If income has accrued to the assessee it is certainly earned by him in the sense that he has contributed to its production or the parenthood of the income can be traced to him.
But in order that the income can be said to have accrued to or earned by the assessee, it is not only necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise but he must have created a debt in his favour.
A debt must have come into existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment ... it cannot be said that any income has accrued to him. The mere expression 'earned' in the sense of rendering the services, etc., by itself is of no avail.
6. From the aforesaid observations of their Lordships, it is clear that the test for determining as to whether an income has accrued or arisen or whether the corresponding expenditure has been incurred, is not merely the rendering of the services but one has also to find out as to whether the payee had acquired the right to enforce the payment of the said amount. Till this right crystallises, it would not be possible to say that the expenditure in question has been incurred or that the liability to pay it has accrued and arisen. Vide terms of Clause (6) of the agreement referred to above, it is clear that the agent in question could not have asked the assessee to make the payment until full realisation of the sale proceeds of the exported materials had been made and conversely speaking if there is no realisation, no commission would at all be payable. When this is the position, it cannot be said that the liability to pay commission had accrued and arisen during the previous year merely because the agents had rendered services during the previous year. The order of the learned Commissioner (Appeals) appear to be correct and 1 confirm it.