Satyanarayana Rao, J.
1. By an order of this Court in C. M. P. No. 2928 of 1947 dated 25th August 1947, the Appellate Tribunal was directed under S. 66(2) of the Indian Income-tax Act to refer to this Court the following two questions and they have been accordingly referred to us. They are :
'1. Whether there is any material for the Tribunal's finding that the appellants (Respondents in this case) were being assessed on cash basis in the prior years? 2. Whether on the facts and in the circumstances of the case the Appellate Tribunal's finding that the sum of Rs. 2,26,850/- could not be assessed for the assessment year 1942-43 is correct in law?'
The assessment year with which we are now concerned in this reference is the year 1943-43, corresponding to the accounting year ending with 31st March 1942. The assessees are the firm of Messrs. K.R.M.T.T. Thiagaraja Chetty and Company. They were originally members of an undivided Hindu family and alter partition in the family they constituted themselves into a firm. They are the managing agents of Sri Meenakshi Mills, Ltd., Madura and under the terms of the Managing Agency agreement then in force the managing agents were entitled to remuneration of Rs. 1000/- per mensem and 1/2 per cent. commission on sales of yarn, waste cotton etc., made by the mills and 10 per cent. commission on the nett profits of the mills before allowing for depreciation. There is no dispute now with reference to the remuneration of Rs. 1000/- per mensem and with regard to the sum of Rs. 12,000/- the remuneration earned at that rate per mensem, during the accounting year and the assessees do not dispute their liability to pay Income-tax. The dispute is confined to the commission on sales and the 10 per cent. commission oh the nett profits of the mills. The amounts which the assessees were entitled to under these two heads during the account year amounted to Rs. 2,26,850-5-0- There is no dispute regarding the amount. The amount was shown in the accounts of the mills and in the assessment of income of the mills, the mills claimed this amount as deduction which was allowed. This income however was not admitted by the assessees in the return they submitted during the assessment year as the amount was not actually received by the firm in the year of account.
2. On the 30th March, 1942, the managing agents wrote to the mills (the reference is to the Sri Meenakshi Mills, Ltd., Madura) requesting the mills to write off their previous indebtedness and pay the amount earned by them in full. It would appear that the managing agents were indebted to the mills from a long time even when their family was joint in a sum which amounted in the accounting year to Rs. 2,04,058-11-8. On receipt of, this letter the Board of Directors of the Mills met and passed a resolution on that date in these terms :
'Read the letter dated 30-3-1942 from the managing agents to the Board of Directors regarding the debt due by the former to the Company and decided that until the Board of Directors came to a final decision on this matter, the commission due to the Managing Agents for 1941-42 on the purchases and sales and the 10 per cent. commission on the net profits should not be paid But should be kept in suspense. As the amount involved is large, without the approval of the general body, the Board thinks that it will not be proper to debit it as an expenditure.
As the managing agents object to the withholding of their remuneration and want the matter to be settled by 'arbitration it has been decided to take up that question in the next meeting.'
As a result of this resolution the mills kept the amount in suspense and did not pay it over to the managing agents as they did in the previous years. On the ground therefore, that this amount was not paid over to the managing agents and was not even credited in the Mills' accounts to the managing agents the assessees claimed that they were not liable to pay tax on this amount. If has now been found conclusively that the assessees themselves maintained no accounts of their own with regard to the commission and remuneration payable by the mills to them; and, in fact, they have not followed any method of accounting in respect of this source of their income. The Income-tax Officer rejected the claim of the assessees. He was of opinion that the resolution of the Board of Directors passed at its meeting on 30th March 1942 was collusive and that the income which accrued to the assessees whether received or not was chargeable to income-tax, particularly as there was no dispute regarding the actual amount payable to the assessees' firm under the terms of the managing agency agreement and in respect of the working for 1941-42.
3. When once the income had accrued, as it did, according to the Income-tax Officer, its disposal did not affect the liability of the income to assessment under the Act. The refusal of the mills to permit the managing agents to withdraw the amount was not on absolute refusal or denial of their right but the Board of Directors while admitting the right of the managing agents to receive the income claimed that they were entitled to apply it for the discharge of the prior indebtedness of the managing agents. On appeal this decision was affirmed by the Appellate Assistant Commissioner. On a further appeal to the Tribunal by the Assessees the Tribunal disagreed with the view of the Income-tax Officer and the Appellate Assistant Commissioner, The Tribunal on a consideration of the facts and circumstances came to the definite conclusion that the resolution of the Board of Directors was not at all collusive but was 'bona fide', that in the previous years the income was assessed on cash baste as the commission and remuneration were paid to the assessees by the mills and that as in the present year the amount was not paid by the mills, the managing agents had acquired only a right to receive the income and the income itself had not accrued to the asses-sees. According to the Tribunal the assessees were definitely assessed in the previous years on cash basis for this income and that as no cash was paid during the accounting year and received by the assessees they were not liable to pay tax on the amount.
4. The Income-tax Commissioner thereafter applied to the Tribunal for a reference under Section 66(1) of the Indian Income-tax Act and he formulated in his application three questions. The second or the questions, related to the finding of the Appellate Tribunal that the resolution of the Board of Directors was not collusive. The Tribunal by their order referred only two questions and declined to refer the question relating to the bona fide nature of the resolution for the reason that that question was a question of fact and raised no question of law. The Tribunal therefore omitted question No. 2 and referred the other two questions which were substantially on the same terms as the questions which had been formulated by the Court. On this the Income-tax Officer applied to this Court in C. M. P. 2928 of 1947 for directing the Tribunal to refer all the questions including the question relating to the 'bona fide' character of the resolution of the Board of Directors. This Court modified the language of the two questions which were already directed by the Appellate Tribunal to be referred to this Court but the second of the questions relating to the collusive nature of the resolution was not referred. That question was abandoned at the time of the hearing of the application for reference before this Court and the two questions as set forth above were directed to be referred to this Court after altering the language of the questions as formulated by the Appellate Tribunal.
5. From this it follows that this reference must be dealt with on the footing that the finding of the Tribunal that the resolution of the Board of Directors was not collusive but 'bona fide' is final and it cannot now be reopened by the Income-tax Commissioner.
6. The first question relates to the point whether the previous assessments were on cash basis. It is now beyond dispute that the assessee himself maintained no accounts. under Section 13 of the Act
'Income, profits and gains shall be computed for for purposes of Sections 10 and 12; in accordance with the method of accounting regularly employed by the assessee provided that if no method of accounting has been regularly employed or if the method employed is such that in the opinion of the Income-tax Officer, the income, prifits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine.'
If, therefore, the assessee himself had maintained any accounts and had adopted either the method of mercantile system or cash basis the Income-tax Officer will be bound to compute his income on a particular basis adopted in the accounts unless the conditions of the proviso are satisfied in which case liberty is given to the Income-tax Officer to assess the income in any manner he deems proper. From an examination of the accounts of the mills it no doubt appears that in the prior years the amount was paid to the assessees in cash; and the cash books of the mills bear out the fact. The argument on behalf of the assessees by Mr. Alladi Krishnaswami Ayyar was that under the terms of the managing Agency agreement, the assessees as managing agents of the mills were bound to maintain proper and complete books of account in respect of all the transactions of the mills and such accounts in so far as they related to the assessees may by treated as really their accounts as there is no magic in insisting on the managing agents to maintain a duplicate set of accounts relating to their managing agency's commission and remuneration. The method of accounting contemplated however by the section is the method of accounting employed by the assessee in respect of his income, profits and gains; and not an account maintained by him for the purpose of the mills. What is material under the section is an election by the assessee between the two systems of accounting as to which system he decides to adopt as the proper method of accounting in respect of his transactions. It cannot be said with any propriety that the managing agents' choice on behalf of the mills in adopting a particular method of accounting for the purpose of the mills is also an indication of their. method of accounting for the purpose of their individual transactions. They hold two capacities, one, as managing agents of the mills and the other their own individual right as partners of a firm. When there are no accounts of their own, it is impossible to determine that they had unalterably indicated their mind regarding the choice of the method of accounting which they would adopt in respect of their dealings. I am, therefore, unable to accept the argument of the learned counsel on behalf of the assessees that the accounts of the mills are also the accounts of the assessees and the method of accounting adopted in those accounts should be treated also as a method of accounting for the purposes of the assessees' income. It follows, therefore, that the view of the Appellate Tribunal that merely because in the previous years cash was paid to the assessees by the mills as shown by their accounts, it would justify a finding that the method of accounting adopted by the assessees was on cash basis is wrong. Of course, if cash basis was adopted in the accounts maintained by the managing agents for purposes of their transactions, unless cash was received they would not be liable to pay tax on the amount which admittedly was not received by the assessees. The first question therefore must be answered in the negative and against the assessees.
7. This leads me on to the consideration of the more difficult question raised by the second of the two questions above set forth.
8. The main argument advanced on behalf of the assessees by their learned counsel, Mr. Alladi Krishnaswami Iyer is that the amount in dispute was not 'income' of the assessees which had accrued or arisen in the accounting year, it is no doubt true, says the learned counsel, that under the terms of the managing agency agreement the amount was earned by the assessees during the accounting year but as the directors refused to pay the amount until the question of writing off the prior indebtedness of the assessees to the mills was decided and kept the amount in suspense without even crediting it to the assessees it cannot be treated as income of the assessees which would be chargeable to Income-tax under the provisions of the Income-tax Act. In support of this contention the learned counsel drew our attention to the scheme learned counsel drew our attention to the scheme underlying the provisions of the Act and also to the decisions, English and Indian, which have construed the word 'income' which is assessable to tax under the Income-tax laws.
9. The connotation of the words 'income, profits and gains accruing and arising' has therefore to be considered. Under Section 3 of the Act which is the charging section, income-tax shall be charged for any year in accordance with, and subject to the provisions of the Act, in respect of the totalincome of the previous year of every individual, Hindu undivided family etc. Section 4 enumerates the heads of income that should be included in the total income of an assesses which is chargeable to tax, from whatever source it may be derived. There are three categories indicated in the section. It is either income which is 'received' or which is 'deemed to be received' or which 'accrues or arises. 'Received' means actual receipt or constructive receipt, 'Deemed to be received' is statutorily defined in some of the provisions of the Act. 'Income which accrues or arises has nowhere been explained in the Act though in 1947 by Section 2 of the Income-tax Act and Excess Profits Tax (Amendment Act) 1947, (Act XXII of 1947), an inclusive definition of income was introduced into the Act by Sub-section 6(c) of Section 2 of the Act. In the present case the amount under consideration is not profits of a business falling under Section 10 and must necessarily fall under Section 12 which relates to 'income, profits and gains from other sources'. All the heads of sources are indicated in Section 6. Section 13 was introduced for the first time by the Act of 1922 so as to fill up the lacuna which was noticed in the Pull Bench decision of this Court in 'SECY, to the Board of Revenue Income-tax Madras v. Arunachalan Chettyar', 44 Mad 65 . When there is no method of accounting employed by the assessee and when there are no accounts maintained by him, the Income-tax Officer has to compute the income of the assessee by recourse to other material that is available for him to arrive at the Income of the assessee. In the present case, therefore, in order to arrive at the income the Income-tax Officer relied on the accounts maintained by the Mills and the managing agency agreement and arrived at the figure that the remuneration and commission amounted to Rs. 2,26,850-6-0. In order to constitute income, according to the learned counsel for the assessees, it must be established that the assessees had dominion over the sum and that it lay to their order in the hands of their agent or banker. It must be money available, for the assessees use and deposited at their direction and under their control either with a bank or with another person who holds the money on their behalf. Actual receipt may not be necessary but there must be potential receipt in the sense that it was at their disposal and they were at liberty to enjoy it. A mere 'right' to receive an amount from a third person would not, according to the learned counsel, be 'income' though, it may be a 'debt'. There must be an incoming to constitute an income and it is not a mere debt which could be reduced to possession by appropriate proceedings. In other words, it must be possible to predicate that the sum was as good as receipt though not actually received and was not ft mere claim to receive something from a third person. On the facts of the present case it was argued on behalf of the assessees that the Board of Directors 'bona fide' refused to pay the amount to the assessees and kept it in suspense account though they admitted that it was money of the assessees in their hands. They resisted payment and prevented the managing agents from withdrawing the amount which they were entitled to do under the terms of the managing agency agreement. The claim was resisted by the mills on the ground that they had a counter claim or a cross claim against the agents, thereby making it impossible for the managing agents to call the money. The money was not therefore at their disposal and they could not have called the money if they wanted to utilise it and enjoy it.
10. It may now be convenient to deal with the decisions that have been relied on in support of these contentions. In 'GRESHAM Life Assurance Society v. Bishop', (1902) AC 287 Lord Lindley considered the meaning of receipt of a sum of money. The Learned Lord observed :
'My Lords, I agree with the Court of Appeal that a sum of money may be received in more ways than one e.g., by the transfer of a coin or a negotiable instrument or other document which represents and produces coin, and is treated as such by businessmen. Even a settlement in account may be equivalent to a receipt of a sum of money, although no money may pass; and I am not myself prepared to say that what amongst business men is equivalent to a receipt of a sum of money is not a receipt within the meaning of the statute which your Lordships have to interpret. But to constitute a receipt of anything there must be a person to receive and a person from whom he receives, and something received by the former from the latter, and in this case that something must be a sum of money. A mere entry in an account which does not represent such a transaction does not prove any receipt whatever else it may be worth.'
If the mills had adjusted the amount towards the debt due to them and made an entry to that effect in the accounts instead of keeping the amount in suspense there would undoubtedly have been a receipt of the money and apart from any other question the assessees would have been liable. But until such adjustment is made and an entry to that effect in the accounts was made by the mills, it cannot be said that in the present case there was a receipt of the money in the sense in which it is understood under the Income-tax law.
11. The leading case, which in my opinion, strongly supports the contention urged on behalf of the assessees is the decision of the Judicial Committee in 'ST. LUCIA Usines and Estates Co. v. St. Lucia (Colonial Treasurer)', 1924 AC 503 (PC). The Judicial Committee were there construing the Income-tax Ordinance of 1910 of St. Lucia. In that case the assessees sold their property situated in St. Lucia and ceased to reside and carry on business in that State. Under the deed of sale of one of the properties part of the purchase price was left unpaid and was secured by a vendor's Hen and the purchaser covenanted to pay in November 30, 1921 the sum with interest at 6 per cent. He did not pay the interest and the assessee was obliged to sue and obtain a judgment. The interest was not paid. The company, i.e., the Assessee, was held by the revenue authorities of St. Lucia liable to pay tax for the year 1921 on the interest which accrued due but was not paid. Under Section 3 of the Ordinance every person receiving income or to whom income shall accrue shall in respect of such income pay an annual income-tax at certain defined rates; and Section 4 Sub-section (1) of the Ordinance provided that the income in respect of which income-tax is imposed shall include (a) certain income arising or accruing to any person residing in the colony, (b) certain income arising or accruing to a person not residing in the colony but derived from profits o property in the colony or from profession or trade carried on in the colony, and (c) income arising or accuring to any person residing in the colony derived from a source in or out of the colony and income arising or accruing to a person not residing in the colony derived from a source in the colony with a proviso that 'in respect of income derived from sources out of the colony so much of such income as is received in this colony shall be chargeable with income-tax'. The assessee ceased to reside in the colony from 1920 but the source of the income was in the colony; and the question that had to be considered was whether the company had received an income or income accrued to it in that year in respect of interest under Section 3 of the Ordinance. The revenue authorities contended that as the interest became payable it was an accrued income even though it was not paid in that year. This contention was rejected by the Judicial Committee. Lord Wren-bury who delivered the judgment considered the meaning of the words 'income arising or accruing' at page 512 of the report in the following words : 'The words 'income arising or accruing' are not equivalent to the words 'debts arising or accruing'. To give them that meaning is to ignore the word 'income'. The words mean 'money arising or accruing by way of income'. There must be a coming in to satisfy the word 'Income'. This is a sense which is assisted or confirmed by the word 'received' in the proviso at the end of Section 4, Sub-9. 1. If the tax-payer be the holder of stock of a foreign Government carrying say 5 per cent interest, and the Government is that of a defaulting State which does not pay the interest, the tax-payer has neither received nor has there accrued to him any income in respect of that stock, A debt has accrued to him but income has not. It does not follow that income is confined to that which the tax-payer actually receives. Where income-tax is deducted at the source the tax-payer receives the sum deducted but it accrues to him. It is said, and truly, that a commercial company, in preparing its balance sheet and profit and loss account, does not confine itself to its actual receipts--does not prepare a mere cash account -- but values its book debts and its stock-in-trade and so on and calculates its profits accordingly. Prom the practice of commerce and of accountants and from the necessity of the case this is so. But this is far from establishing that income arises or accrues from (as above instanced) an investment which falls to pay the interest due.' This passage it may be noticed really deals with two situations. One, income arising or accruing from sources other than business such as investments, and second, profits of a business which is calculated in accordance with the practice of commerce arid of accountants. The relevancy of this distinction would presently be adverted to when examining the effect of the introduction of Section 13 by the Act of 1922. As the present case is not one which relates to profits of a business computed on the method of accounting regularly employed by the assessee the definition of 'income arising or accruing' in the first part of this quotation is relevant for the purpose of the present discussion.
12. Rowlatt, J. in 'LEIGH v. Inland Revenue Commissioners', (1928) 1 KB 73, observed at page 78 that :
''for income-tax purposes 'receivability' withoutreceipt is nothing; and before a good debt is paidthere is no such thing as income-tax upon it.The meaning of the section must be 'receivability speaking of a debt which has been received,and means the date on which it is paid as distinct from the date on which it was accruing.'
No doubt in that case the language of the statutewhich the learned Judge was construing containedthe word 'receivable'.
13. In 'LAMBE v. Inland Revenue Commissioned', (1934) 1 KB 178, Finlay J. defined income in the following words, at page 182 :
'Looking at the matter quite generally, one would suppose that- income means that which comes in, and that it refers to what is actually received. Income may be of various sorts, income under Schedule A and various Schedules, but none the less the tax is a tax on income. It is a tax on what in one form or another goes into a man's pocket. That is the general principle.'
The more important decision in my opinion on this point after the decision of the Privy Council in 'ST. LUCIA Usines and Estates Co. v. St. Lucia (Colonial Treasurer) (1924) AC 508, is the decision in 'DEWAR v. Inland Revenue Commissioners', (1935) Z KB 351, a decision of the Court of Appeal. The facts in that case are somewhat extraordinary. Under a will of the testator who died on April 11, 1930, the assessee was entitled to a legacy of 1,000,000/-, The executor's year expired on April 11, 1931, and the legacy became payable and carried thereafter interest at 4 per cent per annum. The estate of the testator was solvent and was quite able to meet all the legacies. In 1932 the legatee under the advice of his accountant allowed the question of interest on the legacy to stand ever and he did not at any time receive any sum in respect of interest. He was assessed to sur-tax in the sum of 5,0180 for the year ending April, 5, 1933, which included a sum of 40,000 representing interest at 4 per cent on the legacy. It was held that assessment on the amount of interest was not justified as the assessee did not receive the interest & therefore had no Income in respect of it which he could have been charged to tax. In that case, there was not even a default on the part of the executor to pay the legacy or any part of it and the legatee wilfully abstained from making a demand and receiving the amount. If he had even made a formal demand, the executor would have readily paid the amount or, at any rate, appropriated the amount to his use and deposited it at his discretion, either in a bank or elsewhere. Notwithstanding these circumstances which poult to the conclusion that it is income, the Court of appeal held the contrary. Lord Hanworth M. B. after referring to Section 100 of the Indian Income-tax Act which contains the words that the assessee should submit a correct statement in writing containing the amount of the profits or gains 'arising' to him, from each and every source; chargeable according to the respective schedules, observed :
'If the interest on the legacy in this case has not arisen to the respondent, if he had not become the dominus of this sum. if it does not He to his order in the hands of his agent, can it be said that it has arisen to him? I think the answer definitely upon the facts must be; No, it has not.'
The decision in 'ST. LUCIA'S CASE' (1924) A C 508 , and the test laid down by Lord Wren-bury was applied and at page 366, the Master of the Rolls concluded by observing:
'The Attorney General had said that it is a tax not only on income but on capital, and Lord Mac-naughten, answering that, said that income-tax is a tax on income and not meant to be a tax on anything else. Again that is not intended to be an exhaustive definition and must be treated in the sense in which it is used. But all those observations tend in this direction, that you must find something which is in the enjoyment of the subject. He could make use of the money which lies abroad to his use. It is in that sense in his enjoyment. Upon the present facts there is no enjoyment by him, there is no gain by him, he has derived no profit and there is nothing in his hands which will answer the test of what you mean by 'income'.'
Maugham L. J. at page 371 refers to the fact thatthere was no default in payment and also advertsto the circumstance that the assessee voluntarilygave up his right to receive the payment of interest.Yet the conclusion of the learned Lord Justice is:
'For my part, I accept the view that there hasbeen no default in payment, but I understandthe finding in para 11 (5) of the Special case'the appellant has for the present for reasons of his own 'voluntarily' waived his right to receive the payment of interest', as meaning no more than this, that he has not claimed such interest For the reasons given, in particular by the Master of the Rolls, who has dealt with those authorities in some detail, I am of opinion that the cases were correctly decided and that they do not depend or relate solely to cases where there has been a default in payment by a debtor. I think they have a wider range than that and include cases where the debtor, if there is a debtor for some reason other than default, and without any act on behalf of the creditor which might be alleged to amount to an exercise of dominion over the debt, has not in fact paid the sum of interest in question during the year of assessment.'
This principle was again applied by Lawrence J. an 'WOODHOUSE v. Commissioners of Inland Revenue', (1938) 20 TC 673, which related to a case of annuity and as the annuity was not paid to the appellant assessee though the company was solvent and was in a position to meet the investments in full, it was held that the amount not paid was hot chargeable to income-tax. The distinction between commercial accounts and other cases was adverted to by Lawrence, J. in the judgment where he observed :
'In this case in my Judgment the matter is governed by the decision of the Court of Appeal in DEWAR v. Commissioners of Inland Revenue', (1935) 2 KB 351. The Court is dealing in this case with an annuity, and not with 'Commercial accounts'. The Commissioners have decided the case against the appellant on the ground that he, the taxpayer, could have obtained payment of this annuity had he wished but he voluntarily left the money with the company, and he could have obtained it at any time if he so desired. It is clear from the decision in 'DEWAR'S CASE' (1935) 1 KB 351, that that is not sufficient. The Commissioners have not found in this ease that the annuity was paid to the appellant, or that he received it. or that he enjoyed it, or that he exercised dominion over it.'
14. The decision in 'COMMISSIONER OP INLAND REVENUE v. HAMILTON RUSSEL'S UXECUTORS', (1943) 1 All ER 474 : 25 TC 200, on which reliance was placed on behalf of the Income-tax Commissioner may be considered here in order to follow the chronological order of the decisions. There the decision in 'DEWAR'S CASE', (1935) 2 K B 351, was distinguished. The question really was concerned in that case with the ownership of the income which was admittedly in existence, (i.e.) whether it belonged to A or B and not whether, as in the 'DEWAR'S CASE' (1935) 2 KB 351, the income 'existed at all' which could be brought for assessment. It is unnecessary to burden this judgment by a detailed examination of the facts of that case as in the judgment of Luxmoore, L. J. at page 476 in the concluding paragraph on that page, the distinction between the two classes of cases, i.e., between the 'DEWAR'S CASE', (1935) 2 K B 351, and the case which arose for decision before him was clearly pointed out. It was stated:
'The question determined in 'DEWAR'S CASE' (1935) 2 KB 351, was in effect whether income existed which could be brought into assessment. That question was answered in the negative because the interest, although admittedly exigible in law, was never paid or claimed and, therefore, had no existence. In the present case there was unquestionably income in existence, namely, the interest which accrued due on thetrust investments and the accumulations during the period from April, 5, 1938, and January 18, 1939. Consequently the question is not 'Is there any income?' but 'To whom did the income, which admittedly existed, belong'. In our Judgment there can only be one answer to this question. It belongs to G. L. Hamilton-Ressel.'
The decision in 'COMMISSIONERS of Inland Revenue v. Lebus', (1946) 1 All ER 476, also applies the principle of 'DEWAR'S CASE' (1935) 2 KB 351, and distinguishes the decision in 'COMMISSIONERS of Inland Revenue v. Hamilton-Ressel's Executors', (1943) 1 All ER 474. The facts were: a partner of a firm bequeathed to his trustees one quarter share of the profits of the business on trust to pay what they received in respect of it to the widow. The widow's share of the profits amounted to a large sum during the year of assessment but as the business was not in a flourishing state owing to financial stringency it was unable to pay the amount. The widow was assessed to surtax on the amount though it was not received by her. The Court of Appeal held that the amount was no assessable. Lord Oreene, M. R., drew a distinction at page 460 between the possession of profits of the remaining partners to carry on the business from the point of view of assessability and the profits to which the widow was entitled to receive from the firm. The widow was entitled to an equal one-quarter share of the profits from the partners and receive it. The argument of the Crown was that the partners carried on the bust-ness as trustees for her. The Master of the Rolls dealt with this contention in the following passage :
'It is said they are trustees for her of one-quarter share of the profits of the business. What does that mean? If it means that she is beneficially interested in the business and its assets, that is one thing; but, with all respect, it is quite untrue. She is not. If on the other hand, all it means is that she is entitled to call for one-quarter share of the profits and receive it, it means something totally different. If it means only the latter, then I cannot myself see how she can be said to have received any income, unless and until she has received her share of the profits. The Crown puts her, in substance, in exactly the same position as if she had been a partner for these purposes. The argument failed to realise why it is that a partner has not received his share of profits nevertheless is liable to taxation in respect of those profits. It is because he is a Joint owner of the business and its assets. As soon as the accounts show a profit the partnership has made a profit for income-tax purposes. On the other hand, a person who is only entitled to payment by the partners of a share of the profits has no proprietary interest in anything whatsoever unless and until it is paid over.'
These decisions fully support the position taken upon behalf of the assessees. A similar view wastaken in Indian Courts in 'S. M. CHITNAVIS v.Commissioner of Income-tax C. P. & Berar', (1939)3 ITC 321 FB, and by Sadasiva Ayyar J. inhis dissenting Judgment in 'SECRETARY to theBoard of Revenue, Income-tax, Madras v. Aruuachalan Chettiar', 44 Mad 65.
15. It has been strenuously argued by Mr. Rama Rao Sahib on behalf of the Income-tax Commissioner that this test would not apply to the case of profits of a business which are computed on the basis of accounts maintained by an assessee on mercantile accountancy system. In such a case very often the receipts and the expenditure are not actual receipts' or actual expenditure but are notional. If that be the case and if the profits of a business were assessed even though not received and are merely notional receipts how could it be justified as income and as chargeable to tax on the principle of the decisions above referred to? The answer to this contention in my opinion has been foreshadowed by Lord Wrenbury in 'ST. LUCIA's CASE', (1924) A C 508, and by Qreene, M. R. in 'COMMISSIONERS of Inland Revenue v. Lebus', (1946) 1 All EB 476, and even by Lord Hanworth M. B. in the 'DEWAR's CASE', (1935) 2 K B 351. Where the commercial accountancy prevails, it is an exception to the normal rule that the income must be some money which is at the disposal of the assesses and which he could call and use at any time. Section 13 of the Act introduces this exception and the scheme of Sections 3, 4, 6 and 13 was critically examined by Iqbal Ahmad, C. J. in a Full Bench decision in 'COMMISSIONER of Income-tax v. Shingari Bai', ILR (1945) AH 577. The Learned Judge explained the difference between the two systems of accountancy at page 577 in the following passage :
'Under this system (the mercantile accountancy system) the net profit or loss is calculated after taking into account all the income and all the expenditure relating to the period, whether such income has been actually received or not and, whether such expenditure has been actually paid or not. That is to say, the profit computed under this system is the profit actually earned, though not necessarily realised in cash, or the loss computed under this system, is the loss actually sustained, though not necessarily paid in cash. The distinguishing feature of this method of accountancy is that it brings into credit what is due immediately it becomes legally due and before it is actually received; and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. The 'mercantile accountancy system' is the opposite of the 'cash system of book-keeping' under which a record is kept of actual cash receipt and actual cash payments, entries being made only when money is actually collected or disbursed. In actual business practice, however, the systems of book-keeping followed in many cases are such that they can be called neither the full 'mercantile accountancy 'system' nor the cash basis of book-keeping. They are simply mixtures of the two systems and are styled as 'Hybrid Systems of Book-keeping'.'
Bearing these considerations in mind, the learned Judge, after examining in detail all the provisions of the Act summarized his conclusion at page 584 in these terms :
'From an examination of Sections 3, 4, 6, 10 and 13 the conclusions that I draw are these. The charge of Income-tax is, in accordance with and subject to the provisions of the Income-tax Act, a charge on all income, profits and gains of the assessee of the year by reference to which it is to be calculated. The income, profits and gains of an assessee are taxable, subject always to the provisions of the Act, from whatever source they are derived, whether as a matter of origin or of geography, provided they accrue or arise to or are received by the assessee in British India, or are deemed so to accrue or arise or to be received. Receipt, either actual or deemed as such is not made by income-tax law a condition precedent to taxability. Under the head of source 'business' what are charged are the profits and gains of the business; and that profit and those gains do not escape tax by reason only of the fact that they are nob received in the accounting year in money or the equivalent of money, or are not 'deemed' to be so received. They are taxable, it they have arisen 'or accrued', or are under the Act 'deemed' to have 'arisen' or 'accrued', to the assessee in the accounting year, Just as much as if they had been 'received' or were 'deemed' to have been 'received' in that year. Finally, so far as is material for our present purpose, the assessee is given a choice of the manner in which the calculation of his profits and gains shall be made by reference to the system of accounting which he has himself adopted for the purpose of his own business. Where the assessee has himself chosen a 'mercantile' basis, then the Income-tax Officer is 'bound' to concede that basis to the assessee, provided the assessee's accounts, regularly kept on that, basis, afford a proper and sufficient means of deducing what the profits or gains on that basis have been. In such a case the Income-tax Officer has no option but to do what he has done in the present case, that is to say, to take the assessee's own method of accounting and to compute from it what profits or gains had 'arisen' or 'accrued' to (not merely been 'received by) the assessee according to it. For the purpose of reaching these conclusions, I have deliberately excluded from my mind Section 10 (2) (xi) which was only added to the section by the Income-tax (Amendment) Act, 1939. If it should be the case that the 1922 Income-tax Act, as unamended in this respect, left it open for a case possibly to arise, in spite of Section 48-A of the Act, in which the assessee might become liable to pay tax on profits or gains of his business which he never ultimately received, I should still be unable to find in that circumstance a sufficient reason for confining the operation of the charge of tax only to money or its equivalent actually received or deemed to have been actually received by the assessee, in the face of the plain language of the Income-tax Act to the effect that the receipt of money is not the sole test of chargeability.'
Of course, Section 10 (2) (xi) which was added by the Amending Act, 1939, makes it clear that where the accounts are maintained on cash basis deduction for bad debts is permissible to the extent provided by that sub-clause. I respectfully agree with the reasoning and conclusion of the learned Judge Iqbal Ahmad, C. J. and I am also of opinion that the principle of Section 13 stands on a different footing and is really an exception to the rules contained in the earlier sections regarding the income which is chargeable to tax.
16. In the light of these principles it is clear that in the present case the test of an income as defined by the Act and as interpreted by the decision examined is not satisfied. The learned counsel for the Income-tax Commissioner does not seriously dispute the principle of those decisions but he strongly presses upon us the argument that even applying that test the sum in question was really owned by the assessees and was in fact admitted by the mills and admitted by them also that they were holding the moneys for the benefit of the assessees since the claim of the mills was that they were entitled to apply the amount for the discharge of the debts due by the managing agents to the Mills; and, he, therefore, argued that under those circumstances it is money really in the hands of the Mills and at the disposal of the managing agents which they could have called upon either to pay it to themselves or to adjust it towards the debts. But the attitude taken by the directors was that they would not pay the amount unless the question of writing off the indebtedness was decided either by arbitration or by the general body. They had kept the money in suspense and resisted the claim made by the managing agents it is, therefore, money which was not available and which was at the disposal of the managing agents. They could not have called up the money as if it was money lying in their bank account or money held by an agent on their behalf and for their benefit and use. This case on the facts, if any, is stronger from the point of view of the assesses than the facts in 'DEWAR's CASE', (1935) 2 K B 351. There the assessee voluntarily abstained from calling the money which he would have got readily as the estate was solvent. As there is conclusive finding in the present case, that the resolution of the board of directors was not collu-sive in nature, it must be held that the sum in question was not income assessable to tax.
17. The second question therefore must be answered in the affirmative and in favour of the assessee.
18. The decision in this case, it has been agreed, governs the decision also in Referred Cases Nos. 32 and 56 of 1947. The assessee is entitled to his costs in R. C. 76/46 which we fix at Rs. 250/- and no costs in R. C. 32 and 56/47.
19. 'Referred Case No. 78 of 1946': This case relates to the assessment year 1943-44 and also relates to the commission and remuneration of the managing agents which amounted to a sum of Rs. 2,20,702. Two questions were referred to us and are set out in the statement of the case. As there is no impediment for drawing this amount from the mills as in the other case, the Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal decided the claim against the assessee. The amount seems to have been credited also in the accounts of the mills to the credit of the assessee. I have already found that no accounts were maintained by the assessee and there is no cash basts for the previous assessment. In these circumstances, the amount was rightly assessed to tax. There is another question in this case which relates to a sum of Rs. 81,023. That is covered by the second question referred to us in this reference. This sum it was claimed is exempt from taxation on the ground that it represents really commission on sales carried on in a native state. But this claim was rejected by all authorities concerned and on an examination of the facts it turned out that it does not really represent commission on sales but really remuneration fixed by a later arrangement for the managing agents on the nett profits earned by the mills at 5 per cent. The argument therefore that it was really commission on sales does not arise as the facts are not as assumed by the assessees.
20. The result therefore is that the first question referred to us in this case must be answered in the affirmative and against the assessees and the second question in the negative and against the assessees. The assessees have failed in this reference and are bound to pay costs to the Income-tax Commissioner which we fix at Rs. 250/-.
21. VISWANATHA SASTRI J.: These four references have arisen [out on the assessment of the film of K. R. M. TT. Thyagaraja Chetty a Co., hereinafter referred to as the firm', to income-tax for the assessment years 1942-43 and 1943-44, and to excess profits tax for the year 1942-43.
22. The firm, consisting of a father and his two sons, is the managing agent of a limited company running a cotton mill known as the Sree Meenakshi Mills, Ltd., Madura. Under Article 130 of the Articles of Association of the Company, the management of the business of the company, vested in the firm as managing agent, subject to the general supervision of the directors. Under Article 135, the managing agent was empowered to exercise all such powers and do all such acts and things as might be exercised or done by the company which were not expressly directed or required to be done by the directors, under the terms of the managing agency agreement, the firm was empowered to have charge and custody on behalf of the company of all tne property, the books of account and papers and documents of the company. The firm was given full
'liberty to retain, re-imburse and. pay themselves-out of the funds of the company all charges and expenses and all the costs and expenses of providing and maintaining offices for the company .....and all monies expended by them on behalf of the company and all sums due to the said firm for commission or otherwise.'
23. During the year of account ending 31-3-1942, the firm was entitled, as managing agent, to a monthly remuneration of Rs. 1,000/- and a commission of 10 per cent. of the net profits of the company and a small percentage on sales of yarn effected by the company. The commission earned by the firm and payable to it during the year of account ending 31-3-1942 amounted to Rs. 2,26,850-5-0. The firm was indebted to the company in the sum of Rs. 2,04,058-11-8 at the end of the year of accounting ending 30-3-1942. On 30-3-1942. it is stated that the firm wrote a letter to the directors of the company to the effect that the debt due by the firm should be remitted and written off the books of the company and the commission of 10 per cent. of the profits and the percentage. on sales of yarn should be paid over to the firm. This letter is not part of the printed record and was not placed before us. A further communication. bearing date 30-3-1942 from the firm to the company contained a proposal that the firm should hold a general supervision of the affairs of the company and that the purchase of cotton and raw materials and the sale of yarn and other products should be entrusted to other agencies from-1-4-1942, the firm foregoing a half of the 10 percent. commission on net profits and the entire percentage of commission in regard to sales of goods. On 30-3-1942 the directors resolved that the sum of Rs. 2,26,850-5-0 earned by, and payable to, the-firm as managing agency commission for the account year 1941-42 should be kept in suspense till, the question of writing off the debt due by the firm to the company was decided, which matter was directed to be placed before the next meeting of the directors. By another resolution dated 30-3-1942, the Board of Directors accepted the proposal of the firm and agreed that Sundaram and Company, Ltd., of which Sundaram Chettiar, one of the sons of Thyagaraja Chettiar and a partner, of the firm, was the managing director, should be paid the commission of 1/2 per cent. on all purchases and a commission of 5 per cent. of the-profits of the Company even before allowing for depreciation and that Manickavasagam and Company, Ltd., of which Manickavasam Chettiar, another son of Thyagaraja Chettiar and a partner of the firm, was the managing director, was to get 1 per cent. commission on all sales effected on behalf of the company. With regard to the year of account ending. 31-3-1943, a sum of Rs. 2,20,702/-was earned by the firm as its managing agency commission of 5 per cent. on the profits of the company, the remaining 5 per cent. of the profits and the percentage commission on sales and purchases having gone to the limited companies, each managed by a partner of the firm. This sum of Rs. 2,20,702/- was credited to the firm in the accounts of the company while the sum of Rs. 2,26,850-5-0 earned in the year of account 1941-42 was meant to be kept in what was styled a 'suspense account', in the proceedings of the directors. Out of the sum of Rs. 2,20,702/- representing the profits of the managing agency commission earnedby the firm in the year of account 1942-43, thefirm claimed that a sum of Rs. 81,023/- was earned in Indian States outside British India, for work done in connection with the business of the company in those places. The firm had Other sources of income besides the managing agency commission, in the shape of an insurance agency and afirming factory run in the name of the wife ofone of the partners. There is now no controversyregarding the taxation of the income Of the firm from these other sources.
24. In the proceedings for the assessment of the firm to income-tax for the assessment years 1942-43 and 1943-44, the firm claimed (1) that no part of the sum of Rs. 2,26,850-6-0 earned in 1941-42 andpurporting to be kept in 'suspense account' represented the firm's income, profits and gains of that year; (2) that the above income had neitheraccrued nor arisen, nor had it been received by the firm in the year of account 1941-42; (3) that therefore, neither income-tax nor excess profitstax was payable in respect of the said sum; (4) that the sum of Rs. 2,20,702/- earned by the firm as its managing agency commission in the year ofaccount 1942-43 was not assessable as the income of that year by reason of the crediting of the sum to the firm in the books of account of the company without its actual receipt by the firm; and (5) thatin any event the sum of Rs. 81,023/- out of the sum of Rs. 2,20,702/- was not assessable to tax by reason of Section 14, Sub-section (2) Clause (c) of the Income-tax Act as the income of the year of account 1942-43, as it accrued or arose to the firm in Indian States and was not remitted to, or received in, British India. The Income-tax Officer and the Ap-pellate Assistant Commissioner negatived these contentions of the firm and assessed it to income-tax for the assessment years 1942-43 and 1943-44 and to excess profits tax for the year 1942-43 on an amount which included the aforesaid sum of Rs. 3,26,850-5-0 in the income, profits and gainsof the year of account 1941-42 and to income-tax for the year 1943-44 on a sum which included thesum of Rs. 2,20,702/- in the profits and gains of the year of account 1942-43. The Appellate Tribunal held that the sum of Rs. 2,26,850-5-0 was notassessable either to income-tax or to excess profits tax as the income profits and gains of the firm for the year of account 1941-42, but rejected the other contentions of the firm. The questions referred to us have been set out in the judgment of my learned brother and need not again be repeated.
25. The contention of Mr. Alladi Krishnaawami Ayyar for the firm is that there must be an actual or constructive receipt of money as 'income' by the tax-payer before he could be charged with income-tax and that in this case there was no arising or accrual of 'income' to the firm, much less a receipt thereof, in either of the two account years 1941-42 and 1942-43. He argued that the firm's accounts had been kept only on a cash basis and therefore only such sums as were received by the firm either in each or by adjustment in the accounts, could be considered to be its income, profits and gains liable to be assessed to tax and not debts which had become due but had not been paid ever to, or received by, the firm. With reference to the year of account 1941-42 he argued that whatever be the basis of accounting, the sum of Rs. 2,26,850-5-0 kept in suspense by the company in the year of account could, in no sense, be considered to be the income of the firm, as it had no control or dominion over the money and it could not have drawn out the money at its will. This sum, it was said, was in no event liable to income-tax or excess profits tax. Lastly he contended that the sum of Rs. 81,023/- out of the sum of Rs. 2,20,702/- earned by the firm in the year of account 1943-43 accrued or arose, in Indian States outside British India and not having been brought into, or received in British India, was not liable to tax. This last contention was confined to the year of account 1942-43. Mr. C. S. Rama Rao Sahib, for the Revenue authority, disputed the correctness of every one of these assertions. The arguments before us have covered a very wide ground and have centred round the concept of 'income, profits and gains,' and the mode of ascertaining or computing them for purposes of income-tax. Before dealing with the legal contentions, it is desirable to clear the ground by a reference to certain features of the case relating to the accounts on the basis of which the income, profits and gains of the firm have to be ascertained.
26. Though the managing agency of the Sree Meenakshi Mills, Ltd., is its main source of income, the firm has an insurance agency and a ginning factory at Rajapalayam run 'benami' in the name of the wife of the managing partner, as additional sources of income. In the assessment order for the year 1942-43, the income tax officer stated, that the firm maintained and produced some account but it does not appear whether it related to the firm's business as a whole or only to a portion of its business. In this Court, however, the firm's learned counsel stated that it was the company that kept the accounts of the firm by opening ledger pages for the remuneration and commission paid to the firm and that this account showed that only cash payments were made to the firm except for adjustment entries in respect of a few minor items. It was stated that the firm had no accounts of its own except the entries relating to the firm in the books of account kept for the company by the firm. It is argued that the method of accounting regularly adopted by the firm was on a cash basis. Unfortunately for this argument, which appears to have been implicitly accepted by the Tri-bunal, a perusal of the assessment orders based on the returns furnished by the firm, for the assessment years 1940-41 and 1941-42, shows that the firm's method of accounting accepted by the department was the mercantile basis. No accounts of the firm were produced in respect of the managing agency business and the return of income made by the firm was accepted in the assessment year 1940-41 and also in the year 1941-42 subject to the disallowance of certain deductions claimed. Though no accounts were kept by the firm for its business receipts from all sources, still, since the firm was the managing agent of the company and kept the accounts of the company which included payments made to or amounts drawn by, the firm as managing agent from time to time, the ledger follo of the firm in the books of the company, would be accounts of the firm and these accounts were kept on a cash basis. So ran the argument of the learned counsel for the firm. It is clear that the accounts of the company were not kept on a cash basis. Indeed, this very sum of Rs. 2,26,850-5-0 which has not been paid to the firm has been debited as a revenue expenditure of the company and as having been paid to the firm in the accounts of the company kept by the firm and has also been allowed as a deduction in computing the profits and gains of the company for purposes of income-tax for the year of account 1941-42. The mere fact that the firm drew its monthly remuneration and managing agency commission from the company in cash, subject to a few adjustment entries, does not mean that the company, or the firm, kept its accounts on a cash basis. Even in an account kept on a mercantile basis it is not unusual to find cash credits and debits. There is no material Or evidence in support of the assertion of the firm accepted by the Tribunal that the firm was being assessed on a cash basis in the prior years. Such evidence as there is in the case leads to the contrary conclusion. It is the method of accounting adopted by the assessee. it is his system of book-keeping, it is his choice of the cash basis or the mercantile system of accountancy as his habitual mode of keeping accounts that is relevant under Section 13 of the Act. Neither the mode of accounting adopted by the company nor the assessee's choice for a particular year determines the method of accounting of the firm under B. 13 of the Act. The answer to the question referred to us in Referred Case No. 56 of 1947 must be in negative and against the assessee. I hold that there is no material for the finding of the Tribunal that the firm was being assessed oh a cash basis in the years prior to the year of account 1941-42. Indeed, the findings of the Tribunal on this point with regard to years of account 1941-42 and 1942-43 are mutually inconsistent and self-contradictory. On a cash basis it is clear that the calculation must be based on actual receipts in the year of computation is respect of the year of account 1942-43, the Tribunal has held that the sum of Rs. 2,20,702/- earned as managing agency commission by the firm was assessable to income-tax, though the amount merely stood as a credit to the firm in the books of the company and had not been drawn by the firm.
27. Even so, it is contended by the learned advocate for the firm, that no income in the shape of managing agency commission accrued Or arose to the firm during the two years of account now in question. In his characteristic style. Lord Mac-naghten begged to remind people half a century ago, that income-tax was a tax on 'income' and was not meant to be a tax on anything else: 'LONDON County Council v. Attorney General', (1901) AC 26 . The same exhortation has how been repeated by the tax-payer's learned counsel, though Lord Macnaghten was merely repelling the contention of the Attorney General that income-tax could be levied on capital.
28. The word 'income' used in Section 3 of the Income-tax Act of 1918 has been expanded into 'income,'profits and gains' in Section 4 of the Act of 1922. Income-tax is levied in respect of the total income of the previous year under Section 3 of the Act subject to the provisions of the other Sections. Section 4 refers to the total income of any previous year of any person as including all 'income, profits and gains' from whatever source derived, the rest of the section not being now material. The legislature has not defined the term 'income, profits and gains' and the task of definition has baffled the Courts. The Judicial Committee, after a not very successful attempt at definition by recourse to figures of speech in 'COMMR. of income-tax v. Shaw Wallace & Co.', 59 Cal 1343 and alter making a tautologous observation that 'anything which can properly be described as income is taxable under the Act unless expressly exempted' in GOPAL NARAIN SINGH v. Commr. of Income-tax B & O', 14 Pat 552 had finally to reconcile itself in 'KAMAKSHYA narain SINGH v. Commr. of Income-tax, B & O', 22 Pat 713 to the position that the word 'income' was a word of the broadest connotation and impossible of definition in any precise formula. The English Courts, however, had evolved, many years ago, a working rule that the term 'profits and gains' in connection with income-tax, was to be understood in its natural and ordinary sense, in a sense which no commercial man would misunderstand, 'profits and gains' were ascertained on ordinary principles of commercial trading by setting off against the receipts, the expenditure or obligations to which they have given rise and which were necessary lor earning the receipts. See per Lord Selbourne L. C. in MERSEY Docks and Harbour Board v. Lucas', (1883) 8 AC 891 at pp. 903-904; per Lord Herschell in 'RUSSEL v. Town and County Bank', (1888) 13 AC 418 at p. 424, per Lord Halsbury L. C. in 'GRESHAM Life Assurance Society v. Styles', (1892) A C 309 at p. 315 ; per Lord Buckmaster in NAVAL Colleiry Co., (1897) Ltd. v. Inland Revenue Commrs.', (1928) 12 Tax Cas, 1017, . The expression 'receipts' in the above context does not mean only cash receipts; or even sums Which are receivable immediately. In ordinary commercial practice where goods are sold on credit, say of three or six months, or even more, traders are in the habit of treating the debt so created as part of the profits of the year in which the debt is incurred. The obligations so incurred are treated as firm obligations and as good as cash in hand. If expectations are disappointed, an allowance for bad debts, if claimed, will be granted. 'ABSALOM v. Talbot', (1944) AC 204, Thus, apart from any express provision a deduction for debts proved to be bad is implicit in the very idea of profits & gains according to this mode of accounting. See 'COMMR. of Income-tax C.P. & Berar v. S. M. Chitnavis', 59 I. A. 290 . Similarly, where a trader, in the course of his trade, acquires, or receives, a new and valuable asset other than cash which is not immediately realisable, that asset, for the purpose of computing the annual profits or gains accruing or arising to him from his trade, should be valued as at the end of the accounting period in which it was acquired or received, even though it be neither realised nor is realisable till at a later date. GOLD Coast Selection Trust Ltd., v. Humphreys', (1948) AC 459; 'HARRISON v. Cronk & Sons, Ltd.' (1937) AC 185. Conversely, an item becomes a debt due from the business and an admissible set-off against the receipts side of the account on the day on which it becomes a debt due from the business, though the date of its actual payment has not arrived. This method of accountancy is generally Known as the 'mercantile accountancy system' or 'the book profits system' as distinct from the cash system of book-keeping.
29. The distinction between the two methods ot accounting is well brought out in the following passage from the Judgment of Sir Iqbal Ahmad C. J. in 'COMMISSIONER of Income-tax v. Shingari Bai', ILR (1945) All 577 F.B.:
'Under this system (Mercantile Accountancy System) the net profit or loss is calculated after taking into account all the income and all the expenditure relating to the period, whether such income has been actually received or not and, whether such expenditure has been actually paid or not. That is to say, the profit computed under this system is the profit actually earned, though not necessarily realised in cash, or the loss computed under this system is the loss actually sustained, though not necessarily paid in cash. The distinguishing feature of this method of accountancy is that it brings into credit what is due immediately it becomes legally due and before it is actually received; and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. The 'mercantile accountancy system' is the opposite of the 'cash system of book-keeping' under which a record is kept of actual cash receipts and actual cash payments, entries being made only when money is actually collected or disbursed.'
There was nothing in the Income-tax Act of 1918 against the adoption of this system of mercantileaccountancy by a trader in computing his income for purposes of assessment to income-tax. Section 13 of the Income-tax Act of 1922 expressly recognises this system as a basis for the computation of profits and gains.
30. Reliance was placed by the learned Advocate for the assessee on the decision of the Full Bench of this Court in 'SECRETARY to the Board of Revenue, Income-tax Madras v. Arunachalam Chettiar,' 44 Mad 65 ., where Wallis C. J. who delivered the leading judgment of the Court observed that Section 9 of the Income-tax Act of 1918 was identical with the corresponding provision in Schedule D of the English Act relating to taxation of business profits and purporting to follow the decisions of the English courts, held that interest becoming due to a money lending business in the year of account but not realised in cash or by adjustment in the accounts was not liable to tax. With greatest respect to the learned Chief Justice, he was under a misapprehension as to the English Law and practice with reference to the computation of business profits and gains for purposes of income-tax. I have already referred to the leading English decisions. In any case, this decision is no longer of any authority in view of the assessability of 'profits and gains' under the Act of 1922 and the provision contained in Section 13 of the Income-tax Act of 1922. The case of 'S. M. CHITNAVIS v. Commissioner of Income-tax, C.P. & Berar', 3 ITC 321 FB decided by a Full Bench of the Nagpur High Court was next relied upon. This decision was reversed on appeal by the judicial Committee in the case reported in 'COMMISSIONER of Income-tax, C. P. & Berar v. S. M. Chitnavis', 59 I. A. 290 . Further, I am of opinion that the decision was erroneous in so far as it decided that unrealised interest, though credited to the interest 'katha' in the accounts of a money lending business kept on a mercantile basis, could not be 'income, profits and gains' of the money-lending business under the Act of 1922. The decision in 'JAGMANDAR DAS v. Commissioner of Income-tax', 57 All 737 cited by the learned counsel for the assessee to the effect that interest unrealised in the year of account can never be taken into account for the purpose of income-tax, has been rightly overruled by the later decision of the Allahabad High Court in 'COMMISSIONER of Income-tax v. Shingari Bai', ILR (1945) All 577
31. The Indian Legislature has, in recognition of the system of mercantile accountancy as a proper basis for the computation of the income, profits and gains for income-tax purposes, enacted Section 13 of the Act of 1922 and superseded the decisions cited by the learned counsel for the assessee. It is significant that in Section 10 of the Act, relating to 'business, profession or vocation', the words 'profits and gains' alone are used without the word 'income', thereby indicating that the system of mercantile accountancy is more appropriate to reflect the true income in such cases than a cash system of book-keeping, though the latter method is not prohibited. Under Section 13 of the Act it is incumbent on the Income-tax Officer to compute the profits and gains of the assessee in accordance with the method of accounting regularly employed by him. Even when there is such a method of accounting, it is the duty of the Income-tax Officer to consider whether the income, profits and gains can be properly deduced therefrom and to proceed according to his judgment on the question. 'COMMISSIONER of Income-tax v. Sarangpur Cotton .', ILR (1938) Bom 239 (P.C.).
32. I have held that the firm's contention that its accounts were regularly kept on a cash basis is without any foundation. No accounts of the firm for the years of account 1941-42 and 1942-43 were produced. The entries in the books of the company showed that the accounts of the company were kept by the firm on the mercantile accountancy basis. The assessments of the firm for the years 1940-41 and 1941-42 were based on the returns sent by it and these assessments proceeded on the basis of the mercantile accountancy system. In these circumstances, the Income-tax Officer and the Appellate Assistant Commissioner, came to the conclusion that the mercantile accountancy system would truly reflect the income, profits and gains of the firm during the years of account now in question and assessed the firm, to income-tax on the profits and gains computed according to that system. On the footing that no accounts were maintained, or that no method of accounting was regularly employed by the firm, the Income-tax Officer was entitled, under the proviso to Section 13, to make the computation of the income, profits and gains of the firm upon such basis and in such manner as he might determine to be just and proper in the circumstances. As a result of the combined operation of Sections 3 and 4 of the Act, all income, profits and gains accruing or arising to the firm in the years of account 1941-42 and 1942-43, though not received, are assessable to tax in the succeeding assessment years. The revenue authority considered that the sums of Rs. 2,26,850-5-0 and Rs. 2,20,702/- were profits and gains of the managing agency that had accrued to the firm in the two years of account above referred to. This position is contested by the learned counsel for the assessee on the ground that no 'income, profits or gains' had accrued to the firm but only a debt or liability of the company to the firm had come into existence and that tax was not attracted.
33. In a taxing enactment which selects the income, profits and gains of a tax-payer as the measure of his liability, it stands to reason that only the true income, profits and gains should be included in his assessment and income is not to be attributed to a tax-payer by a fiction unless the Act sanctions such a course. It is true that mere expectations, anticipations or possibilities cannot be cashed in for the purpose of charging the tax. At the same time, the right of the State to charge tax cannot be made to depend solely on the way the tax-payer chooses to frame or exhibit his accounts for purposes of income-tax. 'EDINBURGH Life Association Co. v. Lord Advocate', (1910) AC 143, 'GLENBOIG Union Fire Clay Co., Ltd. v. Inland Revenue', (1922) 12 TC 427. There is nothing in Sections 3 and 4 of the Act which makes 'receipt' (either actual or 'deemed') a necessary condition of chargeabiltty. Section 10 of the Act deals with the 'profits and gains' of a business, profession or vocation, on the same footing. Section 10 (2) (xi) of the Act recognises the mercantile accountancy system as a proper mode of computation of the profits and gains of a business or vocation. The assessee is a flrm consisting of a father and his two sons, formed for the purposes of making profits by carrying on a business (Compare Section 4 of the Partnership Act). One of the firm's business, perhaps its main business, was the managing agency of the company. As managing agent, the flrm ran the mills, bought and sold goods and kept accounts on behalf of the company. It is no doubt true that, as pointed out by my learned brother during the arguments, a managing agency is spoken of as an office in Sections 37-A to 87-C of the Companies Act. It is however significant the company has not deducted the tax even on the monthly remuneration of Rs. 1000/- paid to the firm, which it would be bound to deduct under Section 18 of the Act if the remuneration were regarded as a salary. On the other hand the monthly remuneration of Rs. 1,000/-, the commission of 10 per cent. on the nett profits and the percentage of commission on sales of goods, have all been treated as profits of the managing agency business both by the company and the firm. If the remuneration is viewed as a salary then, under the provisions of 6. 7 of the Act, the managing agency commission would be liable to tax in addition to the monthly salary. In TATA Hydro Electric Agencies Ltd. v. Commr. of Income-tax Bombay Presidency & Aden', ILR (1937) Bom 388 Lord Macmillan treated the profits and gains of a managing agent remunerated by a percentage of the profits of the company as business profits to which Section 10 of the Income-tax Act would be applicable and the managing agency itself as a business. That the remuneration of a managing agent can be considered to be part of the profits of the managing agent's business for the purpose of excess profits tax is recognised in Section 7(2) (b) of Act XV of 1940. In the case of traders carrying on business and even in respect of persons pursuing a profession or vocation, Section 10 read with Section 13 allows the computation of profits on an earnings basis that is to say, the trade debts which fall due to the tax-payer during the year are credited and allowance is made for bad debts. This method of accounting is permissible even in the case of profits and gains which do not fall under Section 10 but under the residuary Section 12 which, according to my learned brother, would apply to the managing agency profits. Where the accounts of a trader are not systematically kept on a cash basis so as to constitute it his method of accounting within the meaning of Section 13, it is open to the revenue authority to take into account book debts owing to him as part of his income, at least where the book debts fall due during the year in respect of which he is making his return, subject to the allowance for bad and doubtful debts. Subject to such allowance, book debts can properly be regarded as part of a trader's income. Section 13 of the Act recognises the legality of such a mode of computation of income, profits and gains even in cases to which Section 12 of the Act applies.
34. There is no rule in the English statute corresponding to Section 13 of the Act. Rule 3(1) of the pules applicable to cases I and II of Schedule D of the English Act provides that in computing the amount of profits and gains to be charged, no sum shall be deducted in respect of any debts except bad debts proved to be such. The rule that traders must, include book debts owing to them but still unpaid, depends on the taxation of their income in the sense of the profits and gains of their trade or business, and upon the terms of R. 3(1) above referred to, which imply that book debts must be included in the return with a corresponding deduction for bad debts. The ascertainment of the profits and gains of a trade or business necessarily involves an account with credit and debit items and in order to ascertain the profits of any trade or business such an account has to be taken. USHER'S Wiltshire Brewery Ltd. v. Bruce', (1915) AC 433 at p. 458. Where tax is levied upon a definite sum which is ascertained and without deduction of any amount, as for example, upon interest of money under Schedule D. Clause (1), Sub-Clause (b) of the English Act, no such account need be taken, specific sum of money alone being the subject of taxation. It is open to the tax payer to treat such a sum of interest as part of his income only when it has been actually received by him. Where trade debts are concerned it has been held by the House of Lords in the decisions already referred to, that trade debts which have accrued due in the year of account and which have not been paid, must be included for the purpose of ascertaining whether or not the person has earned a profit for the year, just as stock-in-trade at the beginning and end of the year is taken into account for the same purpose. The general principle is that an item becomes a trade receipt at the date on which it becomes due to the business irrespective of the date of its actual payment. 'ABSALSOM v. Talbot, (1944) AC 204, This principle has been extended not only to monies due for goods sold out even for services rendered. In 'DAILUAINE-TALISKER Distilleries Ltd. v. Inland Revenue', (1930) 15 TC 613 a case not cited before us, Lord Clyde observed:
'It is elementary that a profit and loss account is not an account of receipts and expenditure 'in cash' only; its purpose is to show how the business stands, for better or for worse, on the operations of the year. Thus, if goods have been sold or delivered to a customer within the year, the sum due by the customer is credited into the business and debited to the customer and enters the profit and loss account at the end of the year, whether payment in cash (or otherwise) has been received within the year or not'.
Lord Bands added the following observations :
'In the present case we are not dealing with the price of goods but with payment for services rendered, but, as it appears to me, the same principle must apply. If there is a book debt for such services rendered during the year standing in the books of the business, this falls to be taken into account in estimating the profits of the year. In neither case does it matter whether non-payment is the result of default or of agreement to postpone payment. The book debt comes into account in estimating the profits of the year. The debt has accrued, and in estimating profits which have accrued, the debt must be taken into account'.
If these principles are correct and are applicable to the present case, they determine the answers to the questions that arise for reference against the firm.
35. Mr. Alladi Krishnaswami Ayyar for the as-sessee strongly combated this position by relying upon certain decisions, English and Indian, to which reference should now be made. In St. LUCIA Usines and Estates Co. v. St. Lucia', (1924) AC 508, the Judicial Committee had to consider whether a company was liable to pay income-tax upon 'income' accruing and arising in the year 1921. The sum in question was interest on the purchase price of land which fell due in 1931 but was not paid in that year. The Judicial Committee held that the amount was not chargeable to income-tax in respect of the year 1921. Lord Wrenbury delivering the judgment of the Board observed as follows:
'The words 'income arising or accruing' are not equivalent to the words 'Debts arising or accruing'. To give them that meaning is to ignore the word 'Income'. The words mean 'money arising or accruing by way of income'. There must be a coming in to satisfy the word 'income'.'
It is obvious that the learned Lord was not attempting a, general definition of assets under the Income-tax law and was alive to the distinction between 'income' as used in Section 4 of the Ordinance in question in that case and the 'profits and gains' of a trade or business. It is elementary that the profits and gains of a trade or business are taxable although they do not, in the true sense, come in as money; and Lord Wrenbury himself recognised this rule and observed :
'It does not follow that income is confined to that which the tax-payer actually receives. Where income-tax is deducted at the source the taxpayer never receives the sum deducted but it accrues to him. It is said, and truely, that a commercial company, in preparing its balance sheet and profit and loss account, does not confine itself to its actual receipts -- does not prepare ft mere cash account -- but values its book debts and its stock in trade and so on and calculates its profits accordingly. Prom the practice of commerce and of accountants and from the necessity of the case this is so. But this is far from establishing that income arises or accrues from (as above instanced) an investment which fails to pay the interest due.'
It will be seen that the Judicial Committee was dealing with a case where the only provision under which the tax could be charged was a provision relating to 'Income' arising or accruing. There was no provision for the ascertainment of profits and gains and for taxation of profits and gains when so ascertained. On the other hand there was a proviso to Section 4 Sub-s. (i) of the Statute that
'in respect of income derived from sources out of the colony only so much of such income as is received in the colony shall be chargeable to tax'
and this proviso was relied upon by the Board to assist and confirm their interpretation of the body of the Section as referring to monies 'coming in' to the tax payer. The words of the Judicial Committee show that where it is necessary to calculate profits, it is necessary to take into account book debts. Under the Indian Income-tax Act, profits and gams as such are expressly included as the subject of tax whether they fall under Section 10 or under Section 13. In 'RAMAKUMAR KEDARNATH v. Commissioner of Income-tax : 5ITR261(Bom) it was held by the Bombay High Court that the decision in 'St. LUCIA case', 1924 AC 508 turned on the language of the ordinance under construction in that case and wag not an authority governing the assessment of profits and gains under the Indian income-tax Act.
36. Before I consider the other cases cited by the counsel for assessees which arose under the English Income-tax Act, it is necessary to analyse briefly the statutory provisions on whose construction the. decisions turned. Under Section 100 of the English Income-tax Act of 1918, every person chargeable under the Act
'shall submit a return of the amount of profits or gains arising to him, from each and every source chargeable according to the respective schedules.'
This provision is and has been interpreted as being subject to the schedules. Schedule D Clause (i) omitting portions not relevant to the present, case, runs, as follows :
'Tax under this schedule shall be charged in respect of (a) the annual profits or gains arising or accruing (1) to any person residing in the United Kingdom from any kind of property whatever, etc. (2) to any person residing in the United Kingdom from any trade, profession, employment or vocation, whether the same be carried on in title United Kingdom or elsewhere, (b) All interest of money, annuities and other annual profits or gains not charged under Schedules A, b, a or e.'
Under the rule applicable to Schedule D, case I
'the tax shall extend to every trade carried on in tile United Kingdom or elsewhere........and shall bo computed, on the amount of the balance of the profits or gains' etc.
Under Section 1(a) of the rules applicable to case III
'the tax shall extend to any interest of money, whether yearly or otherwise, or any annuity or other annual payment..... whether the same is received and payable half-yearly or at any shorter or more distant periods.'
Under Rule 3 of Schdule D Case IV -- Interest arising, from foreign securities fell to be treated on a remittance basis and the tax had to be computed
'on the full amount so far as the same can becomputed, of the sums which have been or willbe received in the United Kingdom.'
Observe that the words 'accruing or arising' are-used in connection with profits and gains of a trade and not in connection with interest, annuities or other annual payments which are all charged only if 'received'.
37. The observations of Lord Lindley in 'GRE-SHAM Life Assurance Society v. Bishop', (1902) AC 257. were relied upon by the counsel for the assessee particularly the following off-quoted passage in the judgment :
'But to constitute a receipt of anything there must be a person to receive and a person from whom he receives, and something received by the former from the latter, and in this case that something must be a sum of money. A mere entry in an account which does not represent such a transaction does not prove any receipt, whatever else it may be worth.'
The case turned on the construction of the words 'sums received in the United Kingdom' within the meaning of Rule 2 of the Rules applicable to-case IV Schedule D of the English Income-tax Act, 1842 cited above. This was not a decision with reference to the assessment of the gains and profits of a business, profession or vocation. The question arose with reference to a liability to tax based on a remittance of foreign income and all that was decided was, that there could not be a remittance of income unless there was an actual receipt, whicb need not necessarily be in the shape of money or goods in value, but might consist of a settlement or adjustment of mutual accounts, without money passing and repassing. Income or profits arising abroad from foreign securities and retained or expended there might be shown in the accounts of a. company in the United Kingdom, to which the income or profits accrue, but such mention in the accounts was in no sense a receipt of these profits and involved no liability to taxation under B. 2 of the Rules applicable to case IV Schedule D. This was all that 'GRESHAM Life Assurance Society v. Bishop', (1902) AC 287, at p. 298 decided. See the observations of Lord Halsbury at page 292 of the report. In such cases the income is assessed to tax in the year of receipt of the remittance in the United Kingdom even though the income might have accrued or arisen abroad earlier and might have been accumulated there by the assessee, 'SCOTTISH Widow's etc., Society v. Farmer', (1905) 5 TC 502; 'SCOTTISH Provident Institution v. Farmer', (1912) 6 TC 34. It is here necessary to point out that in 1914 the necessity for receipt in the United Kingdom of income from foreign possessions. including stocks and securities, was done away with and thereafter the only words descriptive of income were 'arising or accruing'. In a case not cited to us, but which arose after the above change in the law, the Court of Appeal held that income from foreign possessions in the shape of stocks and shares may 'arise', though the tax-payer is not in a position to enjoy it and may in fact, be prevented by law from drawing the money from abroad. It was a case of interest and dividends arising to a British tax-payer from investments in Germany consisting of securities, stocks or shares. The interest and dividends bad been paid to the credit of the British Tax-payer in a German bank but owing to the War and for the duraitoin of the war, the money could notlegally be drawn out by him. Nevertheless the Court held that the income arose during the year when the money was paid into the German Bank to the credit of the tax-payer and not in the year when they were remitted to England after the end of the war. The following observations of Lawrence L.J. are pertinent :
'It is also important to bear in mind that this is not a case where there has been a default in payment on the part of the persons or body liable to pay the interest and dividends as in the ST. LUCIA Cape', (1924) AC 508 and 'LEIGH'S Case', (1928) 1 KB 73. What has happened here is that the interest and dividends have been duly paid to an agent of the owners competent to give a valid discharge to the payers, but the owner's right of disposal over such interest and dividends has been suspended or restricted during the war'.
'SIMPSON v. Maurice's Executors', (1929) 14 TC 580.
38. In 'LEIGH v. Inland Revenue Commissioner, (1928) 1 KB 73. Rowlatt J. referring to the charge-ability of interest income, under the particular provisions of the English Act above referred to, observed that' 'receivability' without receipt was nothing for income-tax purposes. 'LAMBE v. Inland Revenue Commrs.', (1934) 1 K B 178, was a case similar to the previous one and Finlay J. held that where interest on a loan had not been paid and might never be paid, the amount of interest due ought not to be included in computing the tax-payer's income for income-tax purposes during the year during which it was payable. In 'DEWAR v. Commissioner of Inland Revenue', (1935) 2 KB 351 the tax-payer was entitled to claim, payment in a particular year of interest on a legacy from the executors but did not claim and did not receive any interest. The Court of Appeal held that the legatee had not 'received' any interest in respect of which he could be taxed. The legatee decided not to press for payment of interest and to allow the question to stand over though there was enough money in the estate for payment of interest, if it had been demanded. Mr. Alladi Krishnaswami Ayyar claims that this decision is decisive in favour of the assessee in this case, but I am unable to accept this contention. The case had to be decided not under Schedule D Clause (1) Sub-clause (a) but under Schedule D Clause (1) Sub-clause (b) which did not contain the words 'profits or gains arising or accruing' but limited the charge to 'interest received and payable'. The leading Judgment was that of the Master of Rolls whose reasons may thus be summarised. The legatee made no demand for payment of the legacy. The money representing the sum of interest had not been appropriated to the legatee or to his use by the executors. No personal debt or obligation had arisen as it could not be said that there was a debt when there had been no demand on the executors. The words of the charging provision were 'received and payable' and these words could not be expanded into 'accruing or arising'. The following passage from the Judgment of the Master of the Rolls bring out the reasons for his conclusion.
'The word 'payable' there does not mean; if, you like to put out your hand and ask for the money it will then be payable to you; it is dealing with a sum which, whether yearly or otherwise. is in fact received, whether it is payable and in fact received half-yearly or at any shorter or more distant periods. That is the rule which applies here. Can it be said here that there has arisen a personal debt or obligation? Something more is required than the mere fact that there is a capacity on the part of the estate to pay the money if to should be demanded. The rule does not say, and it cannot be said, that there is a debt when there has been no demand.' (Page 363 )
Earlier in the Judgment occurs the following passage :
'if the interest on the legacy in this case has not. arisen to the respondent, if he has not become the dominus of this sum, if it does not lie to his order in the hands of his agent, can it be said that it has arisen to him? I think the answer definitely 'upon the facts' must be; No, it has not'. (Page 362).
The learned Master of the Rolls was quite alive tothe distinction between trade profits and gains andinterest income, in the matter of chargeabuity, when-he discussed the case of 'St. LUCIA USINEA andEstates Co. v. St. Lucia', (1924) ac 508 ,Romer L. J. observed that for purposes of income-tax, one does not take an account of income onthe footing of wilful default, and the only question.in the case was what income had been received bythe assessee. These observations, of course, mustbe taken with the context of the case which referred only to the chargeability of interest incomereceived by the assessee. Maugham L.J. after referring to some of the cases cited above, expressedhis conclusion in these words:
'I do not regard those decisions as limited tocases where there is a debt and the debtor hascommitted default. I think in the present casetwo circumstances may be accurately stated inregard to the sum of 40,000 which, it is said,can be brought into charge. The first is that thesum of 40,000 was not, during the year ofassessment, a debt due by the executors to Mr.Dewar, and secondly, that the sum in questionmay never be paid or received at all.'
No liability and no debt had arisen in the absenceof demand and in those circumstances no interestcould be said to have been received by the legateeon the debt so as to make him chargeable. DEWAR'sCase', (1935) 2 KB 351, in my opinion, goes nofurther.
39. It is unnecessary to refer at length to the case of 'WOODHOUSE v. Inland Revenue Commr.', (1936) 20 Tax Cas 673 where Lawrence, J. merely purported to follow 'DEWAR's Case', (1935) 2 K B 351. But the following observation of the learned Judge is significant: 'The Court is dealing in this case with an annuity, and not with commercial accounts'. The next case cited was 'COMMISSIONER of Inland Revenue v. Hamilton-Russell's-Executors', (1943) 1 All ER 474, where it was held that the accumulations of a fund by the trustees of a settlement for the benefit of a legatee who had attained the age of 21, represented the income of the legatee and were assessable to tax. The Testator's direction as to accumulation of income was legally unenforceable after the beneficiary attained the age of 21 and though the income accumulated by the trustees had not been paid over to the beneficiary, still the income of the fund was held to be the income of the beneflciary and assessable to tax. Referring to 'DEWAR's Case', (1935) 2 KB 351 the Court observed:
'The question determined in 'DEWAR's CaSe', (1935) 2 KB 351 was in effect whether income existed which could be brought into assessment. That question was answered in the negative because the interest, although admittedly exigible in law, was never paid or claimed and, therefore, had no existence. In the present case there was unquestionably income in existence, namely, the interest which accrued due on the trust investments and the accumulations during the period from April 5, 1938, and Jan. 18, 1939. Consequently the question is not 'Is there any income?' but 'To whom did the income, which admittedlyexisted, belong? In our judgment there can only be one answer to this question. It belongs to G. L. Hamilton-Russell (the beneficiary).'
'The last of the cases to be noticed in this connection is the decision in 'COMMISSIONER of Inland Revenue v. Lebus', (1946) 1 All EB 476. There the widow of a deceased partner was entitled to an one-fourth share of the profits of a business carried on by the surviving partners. The deceased partner bequeathed to the trustees of his Will one quar-ter share of the profits of the business on trust to pay what they received in respect of it to his widow. During the year of account the firm's profits were declared at a considerable sum, but owing to financial stringency, the firm was unable to pay the widow a one-fourth share or any part of the sum due. It was held that the widow could not be said to have received her share of the profits and she was not liable to sur-tax in respect of the amount of such profits. The Court of Appeal followed 'DEWAR's Case', (1935) 2 K B 351 and distinguished the case in 'COMMISSIONER of In-Jand Revenue v. Hamilton-Russet's Executors', (1943) 1 All ER 474. The reasons for the conclusion of the Court might thus be summarised. Mrs. Lebus was not a partner in the business; none of its assets belonged to her; nor were the surviving partners trustees of the business or any of the assets for her. All that she was entitled to was to call upon the partners to pay her a share of the profits. The partners, on the other hand, owned the entirety of the assets and realised the profits in the sense that the profits resulted in an accretion to the value of the assets which belonged to them. The fact that the profits were not released and paid over in cash to the partners did not affect the revenue. As soon as the accounts show a profit, the partnership has made a profit for income-tax purposes. The widow of the deceased partner cannot be said to make a profit if the partners default to pay her. She could not go to the partnership till and take her share of the profits. She is an outsider 'vis a vis' the partnership assets. She has not realised a profit unless and until the profit is paid to her. She cannot be put in the same position as if she were herself a partner. It must be remembered that Mrs. Lebus was assessed under Schedule D Clause (b) and Case III, R. I Clause (a) quoted above, where receipt of income, actual or constructive, was essential to attract tax, while the partners would ba assessed under Schedule D Clause (1) (a) Sub-clause (2) and the rule applicable to Schedule D case I, on the profits and gains of the business arising or accruing to them irrespective of receipt.
40. The English decisions cited above have no bearing on the computation of the profits and gains accruing or arising to a person. It is necessary, in this connection, to bear in mind the warning repeatedly given by the Judicial Committee that English decisions given on the language of the English statute, which is not 'in pari materia' with the Indian Income-tax Act, are not useful guides in this country. Vide 'COMMISSIONER of Income-tax v. Fletcher', ILR (1938) Mad 1. (PC) 'GOPAL NARAIN SING'S Case 14 Pat 552; 'SHAW Wallace and Co's Case', 59 Cal 1343 ; 'BEJOY SING v. Commr. of Income-tax', 60 Cal 1029 ; COMMR. of Income-tax, Bombay Presidency Aden v. Chunilal B. Mehta', ILR (1938) Bom 752 ; 'ALL India Spinners Association, Mirzapur v. Commr. of Income-tax, Bombay Persidency and Bind & Baluchistan', ILR (1945) Bom 153 (PC); 'COMMISSIONER of Income-tax v. Mahaliram Bamjidas', ILR (1940) Cal 215
41. Reference has also been made by the learned Advocate for the assessee to two Indian decisions. 'NARAYANAN Chettiar v. Commissioner of income-tax : (1941)2MLJ175 and 'KAMAKSHYA NARAIN SING v. Commissioner of income-tax, B & O : 10ITR177(Patna) in support of his contention that actual receipt was necessary to attract tax, in the Madras case, this Court held that an adjustment or remittance of money representing foreign profits, to an account or to a place, against the wishes of the assessee and in spite of his objections, could not be said to be payment or remittance to, or receipt by, the assessee of the foreign profits in the year in which the money was so adjusted or remitted, Pour years later, the assessee accepted the arrangement that had been made previously against his wishes and it was held that the sum must be held to have been received by the assessee in the year in which he accepted the arrangement and not previously. The case was one of remittance or receipt of foreign profits. In the Patna case, royalties had been paid by a lessee into the banking account of his lessor as directed by the Court of Wards on behalf of the lessor. The sum so paid got mixed up with other monies of the lessor in the hands of his bankers. The bank account was operated upon by the lessor only in the subsequent year. The lessor had entered the royalties in a suspense account as he claimed to enforce a forfeiture of the lease. It was contended on behalf of the lessor that the royalties paid by the lessee into the bank account did not constitute his income in the year of such payment. The Court negatived the contention and held that, for purposes of income-tax, the royalties were income of the lessor in the year in which they were paid into his bank account, though the rights of parties, which were in dispute and which had to be decided by the Civil Courts, would not be affected by the decision in the Income-tax proceedings. This decision is an authority for the position that the mere entry of a sum in the 'suspense account' of the tax payer is not conclusive of the real nature of the receipt and the revenue authority can ignore a 'suspense account' if it is not bona fide. The first case related to foreign remittance and the second, to rents or royalties payable and paid under mining leases.
42. The position in the present case has now to be analysed. The firm carried on business which actually yielded profits in the two years of account now in question, its main source of income was the managing agency commission earned from the mills. It had other sources of income as well, it kept the accounts of the mills and had plenary powers of management of the affairs of the company subject to the general supervision of the directors. It operated upon the funds and bank accounts of the company. It had the right, expressly conferred upon it by the managing agency agreement, to retain, re-imburse and pay itself out of the funds of the company all sums due to it for commission and remuneration. It was drawing the monthly remuneration of Rs. 1,000/- in cash, sometimes in advance and sometimes on the due dates. It was paying itself the commission earned in the previous years. In 1941-42, the first year of account with which we are concerned, the commission at the rate of 10 per cent. of the company's profits amounted to the unprecedented figure of Ra 326,850-5-0 and the conditions of the market were such that the commission was expected to swell higher in the next year. Indeed, the managing agency commission for the next year payable only on the basis of 6 per cent of the profits of the company amounted to Rs. 2,20,702/-. The firm debited the company with the sum of Rs. 2,26,850-5-0 as an outgoing of the company's business and as an item of revenue gains of the company after deducting this eum. The company was assessed to income-tax for the account year 1941-43 on the profits arrived at after such deduction. Similarly, in the year of account 1942-43, the sum of Rs. 2,20,702/- was debited in the company's accounts as an outgoing and as a revenue expenditure of that year and the profits and gains of the company were computed after deducting the said sum from the receipts. The profit and loss account of the company prepared on the above basis by the firm as managing agent, was accepted by the directors of the company and by the Income-tax authorities for the years of account 1941-42 and 1942-43.
43. The firm had to bear a heavy burden of income-tax on the profits and gains of its managing agency in the year of account 1941-42. On 30-3-1942, the penultimate date of the year of account, the firm is stated to have written a letter to the directors of the company -- letter itself has not been placed before us -- to the effect that the firm's indebtedness to the company amounting to Rs. 2,04,058-11-8 should be written off and that the commission of Rs. 2,26,850-5-0 earned by the firm in 1941-42 would be drawn by them in full. With a view to split up the mounting profits of the managing agency, another proposal was made by the firm in a letter 30-3-1942, that the managing agency commission of 10 per cent. on the profits of the company and a percentage on all sales and purchases of goods effected on behalf of the company, should be divided between the firm and two other agencies. The two agencies in contemplation were two private limited companies managed and controlled by two of the partners of the firm, who are, as already stated, a father and his two sons. With remarkable alacrity the directors purported to decide at 10 a. m. on 30-3-1942 itself that the commission of Rs. 2,26,850-5-0 earned by, and payable to, the firm, should be kept in suspense pending a decision on the question of the writing off of the debt due by the firm to the company and that the question should be taken up for consi-deration at the next meeting. It was also noted that the firm objected to the postponement of payment. It is significant that though on 30-3-1942 the directors resolved to consider the question of writing off the debt due by the firm to the company, nothing further was done with reference to this matter till 1945. About what happened later on, we have no information. As regards the other pro-posal of the firm with reference to the division of the managing agency commission, the directors promptly accepted the proposal and agreed to distribute the managing agency commission between the firm and the two private limited companies controlled and managed by two of the partners of the firm. The managing agency commission payable to the firm for the year of account 1942-43, after the splitting up of the commission into three parts, amounted to Rs. 2,20,702/-. This sum is credited to the firm in the accounts of the company and, for no apparent reason, has not been drawn. The firm had not taken in previous years, and was under no obligation to take in the years of account now in question, the permission of the directors to draw the managing agency commission earned by it. It is only when the managing agency profits swelled in magnitude and at the very end of the year of account 1941-42 that the firm took it into its head to remind the directors about the firm's ancient indebtedness and invited a suspense account entry. That these ingenious devices have been purposely resorted to for the purpose of reducing the liability of the firm to income-tax is obvious and it is not surprising that the Income-tax Officer and the Appellate Assistant Commissioner came to the conclusion that these proceedings were all a collusive make-believe, indeed the Appellate Tribunal was of this opinion when it dealt with the assessment for 1943-44 though they came to a different conclusion in respect of the year 1942-43.
44. In this Court, however, it is argued for the assessee that a tax-payer is not bound to continue in the same condition of things as would always subject him to tax and that this case must proceed on the basis that the finding of the Appellate Tribunal that there had been no collusion between the company and the managing agent in respect of the year 1942-13 is not open to challenge. I am not sure whether this is the case in view of the terms of the reference in Referred Case No. 76 of 1946 which are wide and comprehensive. Assuming: this to be the true position, how does the matter stand? The company became a debtor to the firm in the respective sums of Rs. 2,36,850-5-0 and Rs. 2,20,702/- during the years of account 1941-42 and 1942-43. There was no doubt or dispute about the quantum of the managing agency commission. The respective amounts had been earned and debited as an item of revenue expenditure in the accounts of the company during the two years. The company had unequivocally admitted its liability to pay these sums to the firm. These sums had been earned by the firm and had accrued to it as the profits and gains of the managing agency in the two years of account. With regard to the sum of Rs. 2,26,850-5-0 earned in the year of account 1941-42, taking the proceedings of the directors dated 30-3-1942 at their face value, the company admitted liability for this sum to the firm, earmarked this sum as belonging and payable to the firm and even agreed to pay it as soon as the question of writing off the debt due to the company by the firm was settled. The directors did not have and did not even claim, a right to have a set oft of the managing agency commission against the debt due to the company by the firm but merely desired to keep the amount of the managing agency commission in suspense for a short time till the question of writing off the debt due to the company by the firm was settled. The firm had asserted its right to, and demanded payment of, the full amount of the managing agency commission which had finally been ascertained and fixed and which had become a debt payable to the firm by the company. The firm could have drawn the amount without reference to the directors once the sum had been earned and entered in the company's' accounts and accepted by everybody concerned, including the directors, as a proper item of revenue expenditure. The gratuitous reminder to the directors about the ancient indebtedness of the firm, at the end of the year of account, the invitation of a suspense account entry with regard to the managing agency commission, and the self-imposed restraint on the withdrawal of the managing agency commission by the firm, are all, in my opinion, ineffective proceedings resorted to for the purpose of obscuring the real position. I have already repelled the contention that the firm kept its accounts on a cash basis and pointed out that the firm had been assessed on a mercantile basis in the years 1940-41 and 1941-42 and that the firm produced no accounts in the two years of account now in question. In these circumstances, the income-tax officer who had the duty of charging to tax the profits and gains of the firm under sections, 3 4 10 and 12 of the Act was entitled to treat these two sums of Rs. 2,26,850-5-0 and Rs. 2,20,702/-as business profits and gains that had accrued to the firm, in the years of account 1941-42 and 1942-43. The fact that the sums had not been drawn by the firm does not affect the question when it is indubitably established that the two sums have been earned by the firm and had been appropriated to it by the company. The company was a debtor to the firm in respect of these sums and was under a legal obligation to pay the sums to the firm whenever demanded. Indeed, the firm as managing agent could, but for the self-denying role assumed by it, have perfectly legitimately drawn, at its will, these sums. The company had no legal right to claim, and in fact did not claim, a set off of the managing agency commission towards the debt due by the firm to the company in the proceedings of the directors dated 30-3-19-12. The reference to a 'suspense account' in respect of the sum of Rs. 2,26,850-5-0 is, in my opinion, misleading. There is nothing to show what was meant by the parties themselves. It is an expression in common use in banking business where a person whose money is held in suspense is entitled to withdraw it any moment he likes, though he neither gets a pass book nor is entitled to draw any cheques or to be paid interest in respect of the amount. 'OFFICIAL ASSIGNEE OF MADRAS v. Rajam lyer', 33 Mad 299 , affirmed on appeal in 36 Mad 499 . In other businesses, sums received are sometimes kept in a suspense account in order to meet possible claims or losses in connection with a particular transaction. TAXES COMMISSIONER v. Melbourne Trust', (1941) AC 1001. There is nothing of the kind in the present case and all that we have is the application of a nick-name to what was in truth and in fact the money of the firm. The company, or rather the firm, which kept the company's accounts, had already entered this sum as an item of revenue expenditure and had cast the profit and loss account of the company on that footing. The company had given this sum the final impress of an expenditure properly incurred and stamped it with the character of an outgoing of the business. The sum had irrevocably entered the debit side of the company's account as a disbursement of managing agency commission to the firm and had been appropriated to the firm's dues and the same sum could not again be entered in a suspense account at a later date. The sum, therefore, belonged to the firm and had to be included in the computation of the profits and gains that had accrued to it unless the firm had regularly kept its accounts on a cash basis, which is not the case here. There is no analogy between the present case and a case where a sum of money received or realised but the title to which is in dispute, is kept in suspense pending decision or adjudication as to the title. There is not even this apparent obstacle of a suspense account so far as the sum of Rs. 2,20,702/- earned by the firm as its managing agency commission in the year of account 1942-13. This sum is duly credited to the firm in the accounts of the company of that year. For these reasons I hold that the two sums of Rs. 2,26,850-5-0 and Rs. 2,20,702/- were assessable to income-tax as part of the profits and gains that had accrued to the firm during the years of account, 1941-42 and 1942-43.
45. The only question that yet remains to be considered is the second question referred to us in Referred Case No. 78 of 1946, viz., 'Whether on the facts and circumstances of the case, the applicants are entitled to exemption of the sum of Rs. 81,023/-. It is claimed by the firm that the managing agency commission at the rate of 5 per cent on the profits of the company under the terms of the altered arrangement agreed to between the firm and the directors on 30-3-1942, amounted to Rs. 2,20,702/- for the year of account 1942-43 and that the firm is entitled to exemption from tax in respect of Rs. 81,023/- out of this sum as representing its earnings attributable to the supervision work done in Indian States. Mr. Alladi Krishna-swami Ayyar relied on the cases in 'SARUPCHAND HOOKUMCHAND v. Commissioner of Income-tax', 6 ITC 108 and in re: 'HIRALAL kalyanMUL : 11ITR128(Bom) , and argued that the businesses of the company and the managing agent were transacted in different places including Indian States and that the manging agency commission was earned as and when and where, the transactions by way of sale of the goods manufactured by the company took place. He argued that the profits of each branch and the commission due to the firm on the basis or such profits, were all kept separately in each branch and that the profits earned by the firm in Indian States had not been brought into, or received in, British India. He claimed that the sum of Rs. 81,023/- represented the managing agency commission earned in Indian States in the year of account 1942-43 on the basis of the sales of goods effected in those states during that year. This argument fails on the facts. Under the arrangement entered into between the firm and the directors on 30-3-1942, a private limited company controlled by one of the partners of the firm was appointed as the sole buying agent of the company and another private limited company con-trolled by another partner of the firm was appoint-ed as the sole selling agent of the company and the commission payable on purchases and sales was payable, and paid, to these two private limited companies. What the firm did was merely to supervise the work of these limited companies and to attend to the business of the company at Madura. It wa for this work and this work alone that the firm was paid a monthly remuneration of Rs. 1,000/-and a commission calculated at 5 per cent of the entire profits of the company. The managing agency agreement was entered into at Madura, the Managing agency business was carried on at Madura, and the profits were earned and payable at Madura. The purchases and sales of goods were not effected by the firm in the account year 1942-43 but by the two limited companies controlled and managed by two of the individual partners of the firm. No part of the managing agency commission arose or accrued to the firm in any Indian state and therefore the exemption from tax granted by Section 14, Sub-section (2) Clause (c) of the Act is not attracted.
46. I would answer the questions referred to us in Referred Case No. 76 of 1946, Referred Case No. 32 of 1947 and Referred Case No. 56 of 1947 in the negative and against the assessee. I would answer the two questions referred to us in Referred Case No. 78 of 1946 in the affirmative and against the assessee. Though I differ from my learned brother in the answer to the second question referred to us in Referred Case No. 76 of 1946 and the only question referred to us in Referred Case No. 32 of 1947, his opinion, which happens to agree with that of the Appellate Tribunal, prevails under Section 66-A (1) of the Income-tax Act.