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The Commissioner of Income Tax, Delhi, New Delhi Vs. Mehar Singh Sampuran Singh Chawla - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtDelhi High Court
Decided On
Case NumberIncome Tax Reference No. 34 of 1968
Judge
Reported inILR1973Delhi130; [1973]90ITR219(Delhi)
ActsIncome Tax Act, 1922 - Sections 4(1)
AppellantThe Commissioner of Income Tax, Delhi, New Delhi
RespondentMehar Singh Sampuran Singh Chawla
Advocates: G.C. Sharma,; V. Kumaria,; Randhir Chawla,;
Cases ReferredIn Keshav Mills Co. Ltd. vs. Commissioner of Income
Excerpt:
.....& 7--accrual of income--salary, commission and bonus payable to assessed at the end of the year--assessed, however, foregoing these amounts during and prior to the accounting year coming to an end--whether these amount taxable in the hands of assessed.;the assessed is an individual. under an agreement dated the 5th july, 1945, executed between the assessed and messrs punjab distilling industries ltd., khasa, the assessed was appointed this company's managing director and his remuneration was fixed at ( commission at the rate of 71/2 percent of the annual net profit of the company, and (ii) salary of the rs.5,000/- per month besides these he was also entitled to receive bonus as and when it was declared. for the year in question, the commission at the aforesaid rate worked out to..........opinion of the high court is as under: 'whetheron the facts and in the circumstances of the case, salary, commission and bonus amounting to rs. 1,19,118 accrued or arose to the assessed as an income for the relevant year?'(2) the assessment year in question is 1951-52, the corresponding financial year ending on 31st march, 1951. the assessed is an individual. under an agreement dated the 5th july, 1945, executed between the assessed and messrs. punjab distilling industries ltd., khasa, the assessed was appointed this company's managing director and his remuneration was fixed at (i) commission at the rate of 7' per cent of the annual net profit of the company, and (ii) salary of rs. 5,000.00 per month. besides these, he was also entitled to receive bonus as and when it was declared. for.....
Judgment:

Prakash Narain, J.

(1) This is a reference by the Income-Tax Appellate Tribunal, Delhi Bench 'B', under section 66(1) of the Income-Tax Act, 1922, made on the application of the Commissioner of Income-Tax, Delhi. The question of law that has been referred for the opinion of the High Court is as under:

'WHETHERon the facts and in the circumstances of the case, salary, commission and bonus amounting to Rs. 1,19,118 accrued or arose to the assessed as an income for the relevant year?'

(2) The Assessment year in question is 1951-52, the corresponding financial year ending on 31st March, 1951. The assessed is an individual. Under an agreement dated the 5th July, 1945, executed between the assessed and Messrs. Punjab Distilling Industries Ltd., Khasa, the assessed was appointed this company's Managing Director and his remuneration was fixed at (i) commission at the rate of 7' per cent of the annual net profit of the company, and (ii) salary of Rs. 5,000.00 per month. Besides these, he was also entitled to receive bonus as and when it was declared. For the year in question, the commission at the aforesaid rate worked out to Rs. 44,116.00 and the salary was Rs. 60,000.00. The assessed would have also been entitled to a sum of Rs. 15,000.00 as bonus for the year in question. Thus the three amounts put together came to Rs. 1,19,118.00. The amount was taxed in the hands of the assessed, although his case before the Department was that he had foregone his commission, salary and bonus on account of the company being in financial difficulties. It was contended by the assessed that inasmuch he had foregone these amounts, the same never accrued to him or arose to him and so could not be regarded as his income during the relevant year and no tax could be assessed on this amount. The Income-Tax Officer was of the view that the financial condition of the company was not such as required the assessed to forego his salary, commission and bonus and that these amounts did accrue to the assessed on which he was liable to pay tax. On appeal, the Appellate Assistant Commissioner confirmed the inclusion of these amounts in computation of the income of the assessed. He, however, made a distinction between the nature of the income earned from salary, commission and bonus. According to the A.A.C., salary accrued to the assessed from month to month but the commission arose at the end of the accounting year and the bonus when it was declared. On further appeal to the Tribunal, it was contended by the assessed that no income from salary, commission and bonus arose to him during the relevant year as he had surrendered the same before such income accrued or arose. On behalf of the Revenue, it was contended before the Tribunal that foregoing by the assessed was only an application of the income after it had been earned and consequently it was taxable. The Tribunal agreed with the contention of the assessed and directed deletion of the amount of Rs. 1,19,118.00 from his income. The Commissioner of Income-Tax thereupon moved an application for staling a case to the High Court and referring the above noted question for its opinion.

(3) The relevant provision of the Income-Tax Act, 1922, in this case is section 4(1)(b) which reads as under:-

'4.Application of Act.-(1) Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which- (a) ............................ (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 The various heads under which income is chargeable to income-tax are set out in section 6 of the said Act. In the case of this assessed, salary, commission and bonus were taxable under the head 'Salaries' as defined by section 7 of the Act, the relevant portion whereof reads as under:- '7. Salaries.-(1) The tax shall be payable by an assessed under the head 'Salaries' in respect of any salary or wages, any annuity, pension or gratuity, and any fees, commissions, perquisites or profits in lieu of, or in addition to, any salary or wages, which are allowed to him by or are due to him, whether paid or not, from, or are paid by or on behalf of, the Government, a local authority, a company or any other public body or association, or any private employer; and for the purposes of this sub-section advances by way of loan or otherwise of income chargeable under this head shall be deemed to be salary due on the date when the advance is received.'

(4) The admitted facts in the case are that the assessed was the Managing Director of Messrs. Punjab Distilling Industries Ltd. and his remuneration according to the agreement executed between him and the company, were as noticed above; that for the relevant year the assessed did not receive and the company did not pay anything towards salary, commission or bonus; that the fact of the assessed giving up his salary, commission and bonus for the relevant year was recorded in a resolution of the company as embodied in the minutes of the meeting of 20th January, 1951; and the Directors' Report for the relevant financial year mentioned that 'the Managing Director has generously offered to forego not only the commission and bonus for the year but also his salary amounting to a total sum of Rs. 1,19,117-14 As.'

(5) The contention on behalf of the Revenue is that according to the agreement between the assessed and the company, the former was entitled to a salary of Rs. 5,000.00 per month which accrued to him month to month and irrespective of whether the salary was paid or not and received or not, the liability for tax arose on accrual. If the salary was due to the assessed, the incidence of tax would be attracted and payment is immaterial. In other words, on a strict construction of section 4(1)(b), it is the accrual of salary which attracts taxability and not its payment or receipt. The contention of the assessed is that salary would accrue only if there is a right in the assessed to claim the same and a corresponding obligation on the company to pay it. If the salary had been foregone before it accrued or became payable, then there was neither a right in the assessed to receive the same nor a corresponding obligation on the company to pay it. thereforee, the question that arises is whether the assesses gave up his right to take salary and, if so, when. A distinction has to be made in foregoing salary before it becomes due and in surrendering the same after it has become due or has accrued. In the former case, there will be no accrual of salary while in the latter case it would be an application of the salary which had become due and payable. If this be the correct proposition, a distinction will have to be made in the salary due month by month, commission which is to be computed on the basis of net profits at the close of the financial year, and bonus which is declared after the close of the financial year and computation of the profits and losses of the company. The point of time when amounts under these three heads become due or payable or accrue will, thereforee, have to be determined. In order to do so, it has first to be determined as to what is the exact meaning of the words 'accrue or arise or are deemed to accrue or arise' in section 4(1)(b) and the words 'which are allowed to him by or due to him' in section 7 of the said Act, inasmuch as payment itself is immaterial.

(6) In Commissioner of Income Tax . Kerala and Coimbatore vs . L. W. Russel : [1964]53ITR91(SC) , the Supreme Court was concerned to find out whether an employer's share of the contribution towards premiums in effecting policies of insurance of its employees in a superannuation scheme devised by the employer for the benefit of its employees was taxable in the hands of the employees. On a construction of the rules of the scheme, it was held that until an employee attained the age of superannuation, he did not acquire any vested right in the employer's share of the contributions towards the premiums and at best, he had acontingent right therein. So, whether the employer's contribution was a perquisite within the meaning of section 7(1) of the Act and thus taxable depended upon when the vested right was acquired by the employees. This vested right was only in respect of such sums which the employer was under an obligation to pay and the employee had a right to claim; it could not apply to contingent payments to which the employee had no right till the contingency occurred. The employer's contributions towards premiums were not perquisites allowed to the employee by the employer or amounts due to him from the employer within the meaning of section 7(1) read with clause (v) of the Explanationn thereto. The ratio of the decision, thereforee, is that payment by itself is immaterial and it is the right to claim payment which is the guiding factor. This right may arise in different contingencies at different points of time. As and when the right arises, there is a corresponding obligation to pay and it is at that point of time that the amount accrues or becomes due attracting the incidence of tax.

(7) The Calcutta High Court in Rungta Sons (Private) Ltd., vs . Commissioner of Income-Tax : [1966]62ITR468(Cal) was considering the various amounts to which the assessed was entitled under a managing agency agreement. The amounts to which the assessed was entitled were (i) an office allowance of Rs. 500.00 per month, and (ii) a commission of 10 per cent of the net yearly profits of the company with a minimum payment of Rs. 6,000 for the whole year. By a resolution during the course of the financial year, the assessed relinquished its right to receive part of the managing agency commission and by another resolution, also during the financial year, the assessed gave up the office allowance and the minimum commission of Rs. 6,000.00 in respect of one of the companies which the assessed was managing. It was held that the office allowance after the date of relinquishment was deductable from computation of the total income and not prior to the date of relinquishment as it accrued month by month, and the managing agency commission could not be claimed as a deduction as the resolution surrendering it was passed only after the end of the accounting year. Basing his contention on this decision, Mr. G. C. Sharma, the learned Counsel for the Revenue, urges that inasmuch as the resolution of the company evidenced by the minutes of the meeting of 20th January, 1951, and the Directors' Report show that the assessed gave up this right to receive salary, commission and bonus only after the close of the accounting year, he is not entitled to claim deductions of these amounts in his return for the relevant assessment year and the amounts are liable to be taxed. Indeed, Mr. Sharma urges that there was no evidence to contend that the income did not accrue to the assessed, and the giving up of the salary, commission and bonus at any point of time would be immaterial for according to the agreement between the assessed and the company, the income from these three sources was allowed to the assessed and was due to him whether it was claimed or not and whether it was paid or not. Reliance was placed on the decision of the Supreme Court in Morvi Industries Ltd. vs . Commissioner of Income-Tax (Central), Calcutta : [1971]82ITR835(SC) . This was a case of an assessed who was the managing agent of its subsidiary company. The assessed was entitled to receive an office allowance of Rs. 1,000.00 per month, a commission at 12^ per cent of the net profits of the managed company and an additional commission of 1' per cent on all purchases of cotton and sales of cloth and yarn. In the accounting years ended on 31st December, 1954 and 31st December, 1955, the managed company suffered losses and the assessed earned only commission on the sale of cloth and yarn for the two years. The total amounts including the office allowance which the assessed was entitled to receive were Rs. 50,7191- and Rs. 13,963.00 for the two years. Under clause 2(e) of the managing agency agreement, the commission was due to the assessed on 31st December, 1954, and 31st December, 1955, respectively, and it was payable immediately after the annual accounts of the managed company had been passed in the general meetings which were held on 24th November, 1955 and 21st July, 1956, respectively. By resolutions of its Board of Directors dated, respectively, April 4, 1955, and June 19, 1956, that is, after the commission has become due but before it had become payable in terms of clause 2(e), the assessed relinquished its commission on sales and the office allowance because the managed company had been suffering heavy losses in the past years. The Tribunal had come to the conclusion that relinquishment by the assessed of its remuneration after it had become due was of no effect. The Supreme Court affirming the decision of the High Court held that the commission had accrued to the assessed on 31st December, 1954, and 31st December, 1955, and the fact that payment was deferred till after the accounts had been passed in the meetings of the managed company did not affect the accrual of the income. It was also held that since the amounts of income for the two years were given up unilaterally by the assessed after the same had accrued to it, the assessed could not escape liability to tax on those accounts.

(8) The leading case on the question cited before us is the decision of the Supreme Court in E. D. Sassoon & Company Ltd. and others vs . Commissioner of Income-Tax, Bombay City : [1954]26ITR27(SC) . The question before the court in that case was whether tax on managing agency commission was payable for the whole of the accounting year by the assessed or whether the income had to be apportioned between the assessed and another company which had during the course of the accounting year assigned to the assessed all its rights and benefits under the managing agency agreement it had as Managing Agent of a third company. The question that arose, thereforee, was as to when did the income represented by the managing agency commission accrue. Mr. G. C. Sharma, on behalf of the Revenue, relied on the observations of Bhagwati J., who spoke for the majority, which noticed with approval the position of an employee under an entire contract of service as enunciated in Halsbury's Laws of England (Hailsham Edition), Volume 22, page 133, para 221, to the following effect:-

'WHENthe contract of service is an entire contract, providing for payment on the completion of a definite period of service, or of a definite piece of work, it is a condition precedent to recovery of any salary or wages in respect thereof that the service or duty shall be completely performed, unless the employer so alters the contract as to entitle the servant to regard it at an end, in which case the whole sum payable under the contract becomes due, or unless there is a usage that the servant is entitled to wages in proportion to the time actually served. But when the contract, though in respect of work terminating at a particular time, is to be construed as providing that remuneration shall accrue due and become vested at stated periods, such remuneration constitutes a debt recoverable at the end of each such period of service.'

(9) Bhagwati J. also observed that 'Section 219 of the Indian Contract Act also provides that in the absence of any special contract, payment for the performance of any act is not due to the agent until the completion of such act.' Relying on this rule, it was urged that inasmuch as the salary of Rs. 5,000.00 became due and claimable month by month, the sum of Rs. 60,000.00 representing the salary for the whole year was taxable as income. The word 'income' has not been defined in the Income-Tax Act but as was noticed in E. D. Sassoon's case, the Privy Council in Commissioner of Income-Tax, Bengal, vs. Shaw Wallace & Co., (1932) 59 Cal 1343, attempted a definition of the term income in the following words:

'INCOME,their Lordships think, in the Indian Income-tax Act, connotes a periodical monetary return 'coming in' with some sort of regularity, or expected regularity from definite sources. The sorce is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall..'

(10) The observations of Mukerji, J., in Rogers Pyatt Shellac & Co. vs. Secretary of State for India, (1925) 1 I.T.C. 363, were also reproduced by Bhagwati,J., and after noticing certain other decisions the conclusion arrived at was in the following words:-

'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. [Vide Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay, (1959) S.C.R. 335, and Commissioner of Income-tax, Madras v. K.R.M.T.T. Thiagaraja Chetty & Co. : [1953]24ITR525(SC) . It has also been used by the Judicial Committee of the Privy Council in Commissioners of Taxation v. Kirk, (1900) A.C. 588. The concept however cannot be divorced from that of income accruing to the assessed. If income has accrued to the assessed it is cartainly earned by him in the sense that he has contributed to its production or the panenthood of the income can be to him. But in order that the income can be said to have accrued to or earned by the assessed it is not only necessary that the assessed must have contributed to its accruing or arising by rendering services or otherwise but he must have created a debt in his favor. 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 or in other words a debitum in Braesenti, solvendum in future 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, If thereforee on the construction of the managing agency agreements we cannot come to the conclusion that the Sassoons had created any debt in their favor or had acquired a right to receive the payments from the companies as at the date of the transfers if the managing agencies in favor of the transferees no income can be said to have accrued to them. They had no doubt rendered services as managing agents of the companies for the broken periods. But unless and until they completed their performance, viz., the completion of the definite period of service of a year which was a condition precedent to their being entitled to receive the remuneration or commission stipulated there under no debt payable by the companies was created, in their favor and they had no right to receive any payment from the companies. No remuneration or commission could thereforee be said to have accrued to them at the dates of the respective transfers.'

(11) The argument in E. D. Sassoon's case that commission could not be ascertained till the accounts were made up and so could be said to accrue only when the accounts were made up did not find favor with the court. It was held that accrual of income does not depend on its ascertainment or the accounts cast by the assessed. Or, in other words, computation of the profits has nothing to do with a accrual thereof.

(12) The above decision was followed by this court in 1962 I.T.R. 46 , Shri Ram Pershad vs. Commissioner of Income-tax, decided on 29th September, 1967, (10) and we are informed that the decision has been affirmed by the Supreme Court.

(13) Mr. Sharma also invited our attention to the decision in Smyth vs. Stretton, 5 Tax Cas 36, (II) and Parkins vs. Warwick, 25 Tax Cas 419 The principle enunciated in these cases is the same as in E. D. Sassoon's case. Thus, as observed by us earlier, the question for determination is as to when did the salary, commission and bonus accrue to the assessed and whether the assessed gave up his right to claim them from the company prior to these amounts crystalising into a debt due from the company to the assessed and recoverable by him as such from the company.

(14) This brings us to the question as to what are the facts found in this case for the question of law has to be answered on the basis of facts found.

(15) Mr. Manchanda, the learned counsel for the assessed, contends that all that we are entitled to see are the facts as stated in the statement of the case submitted to us by the Tribunal and that we cannot refer to any other document. According to the learned Counsel, the facts and circumstances contemplated by the question posed for our opinion are the facts and circumstances as set out in the statement of case. Mr. G. C. Sharma, on the other hand, contends that reference can also be made to the order of the Income-tax officer and the appellate order of the Appellate Assistant Commissioner. The controversy that has to bs first resolved, thereforee, is. what is meant by 'on the facts and in the circumstances of the case'.

(16) In Karnani Properties Ltd. vs. Commissioner of Income-tax, West Bengal. : [1971]82ITR547(SC) it was urged before the Supreme Court that the decisions of the Income-tax Officer, the Appellate Assistant Commissioner as well as the Tribunal were incorrect on the evidence as adduced before them. The High Court after reassessing the evidence on the record accepted this contention on behalf of the assessed. When the matter came up before the Supreme Court, Hegde, J., who spoke for the Court observed as follows:- 'We say nothing about it as it is not within our province to reappreciate the evidence on record. The question as to the correctness of the facts found by the Tribunal was not before the High Court nor is it before us. When the question referred to the High Court speaks of 'on the facts, and in the circumstances of the case', it means on the facts and circumstances found by the Tribunal and not about the facts and circumstances that may be found by the High Court. We have earlier referred to the fact found and the circumstances relied on by the Tribunal, the final facts finding authority. It is for the Tribunal to find facts and it is for the High Court and this court to lay down the law applicable to the facts found. Neither the High Court nor this court has jurisdiction to go behind or to question the statements of fact made by the Tribunal. The statement of the case is binding on the parties and they are not entitled to go behind the facts found by the Tribunal in the statement.

(17) Mr. Manchanda urged that in view of the decision in the above case, all that we are entitled to see is the statement of the case and not the orders of any other authority as is contended by Mr. Sharma. In Praise & Co. Private Ltd. vs. Commissioner of Income-tax West Bengal, : [1966]60ITR566(Cal) , a Bench of the Calcutta High Court had taken the view that the orders of the Appellate Assistant Commissioner and the Income-tax Officer can be looked into and reliance in this behalf was placed by the Bench on the decision of the, House of Lords in Griffiths vs. J. P. Harrison, 1963 A,C. (15). Praise & Co. had really followed an earlier Bench decision of the Calcutta High Court in Humayun Properties Limited vs. Commissioner of income-tax. Calcutta : [1962]44ITR73(Cal) .

(18) In Keshav Mills Co. Ltd. vs. Commissioner of Income-tax, Bombay : [1965]56ITR365(SC) . The Supreme Court had observed as under:-

'IT is clear that when the Tribunal draws up a statement of the case and refers a question of law to the High Court under section 66(1), the said question must arise out of its order, and the statement of the case would necessarily be limited to the statement of facts already brought on the record either before the Income-tax Officer or before the Appellate Assistant Commissioner, or before the Tribunal. There is no doubt and indeed no dispute before us that the question of law must arise from the Tribunal's order and the statement of the case must be confined to the facts already brought on the record. The same would be the position where the High Court requires the Tribunal to state the case and refer to it under section 66(2). The position, thereforee, is that when the High Court is exercising its advisory jurisdiction under section 66(4), it is dealing with a question of law arising from the order of the Tribunal and has to answer the said question in the light of the statement of the case submitted to it by the Tribunal. In the normal course, the statement of the case would refer to facts selected by the Tribunal from out of the material already on the record and it is in the light of the said statement of the case that the question has to be answered by the High Court. Thus far, there is no controversy or dispute.'

(19) Mr. Sharma also referred to a decision of the Delhi High Court in I.T.R. 46-D of 1962 above referred to and the decision of the Supreme Court in Civil Appeal No. 1946 of 1968 arising out of Itr 46-D of 1962, decided on 9-11-1971. His contention was that the order of the Appellate Assistant Commissioner could be looked into.

(20) The Calcutta cases cannot be said to be good law in view of the decision of the Supreme Court and the observations of Gajendravadekar, CJ., in Keshav Mills(17) case do not detract from what has been categorically laid down by Hegde, J., in the case of Karnani Properties (11). The result is that the only documents that can be seen in answering the question posed to the High Court for its opinion are the statement of the case, by which the parties are bound, and possibly also the order of the Tribunal because the Tribunal is the final fact finding authority and the facts as found by the Tribunal are stated in that order.

(21) Applying this rule to the present case, we find that it is found as a fact that the salary was made payable only at the end of the accounting year although it was to be computed on the basis of Rs. 5,000.00 per month. The commission could accrue only at the close of the accounting year in keeping with the rule laid down in E. D. Sassoon's case and the bonus could accrue only when declared, which obviously had to be after the close of the accounting year. It is also found as a fact that the assessed had foregone all these three items during the accounting year and prior to the accounting year coming to an end. In that view of the matter, since neither the salary nor the commission nor the bonus had accrued to the assessed, it cannot be regarded as income taxable in his hands. The question referred to this court has, thereforee, to be answered in the negative, in favor of the assessed and against the Revenue. The assessed would be entitled to his costs. Counsel's fee Rs. 500.00.


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