G.R. Jagadisan, J.
1. The following question has been referred to us under Section 66(2) of the Indian Income-tax Act:
Whether on the facts and in the circumstances of the case the Tribunal was justified in sustaining the inclusion of the sum of Rs. 72,315 in the assessable income of the assessee for the assessment year 1953-54
2. The assessee is a firm of partnership carrying on business as Managing Agents of a textile mill at Coimbatore called ' The Coimbatore Spinning and Weaving Company, Ltd.'. It will be convenient to refer to the managed company in this judgment as the company. The assessee firm was appointed as managing agents for a period of twenty years from 1st October, 1944. Clause (3) of the Managing Agency Agreement provided the following remuneration for/the services to be rendered by the Managing Agents:
(a) an office remuneration of Rs. 1,500 per mensem ;
(b) a commission at the rate of 1 per cent. on all purchases of cotton and stores and 2 per cent. on all capital expenditure incurred from time to time ;
(c) a commission at the rate of 10 per cent. on the net profits of the company as defined in another clause of the agreement. The commission is to be paid to the firm yearly and should be payable and paid immediately after the accounts of the company have been closed at the end of each year. (Vide Clause 4(c) of agency agreement).
3. The assessee was following the financial year as the accounting year, but the company was adopting the year ended on the 30th June as its accounting year. The company, however, changed its accounting year as the calendar year on and from the year 1953. For that year, it prepared two balance-sheets and profit and loss accounts, one for the year ending 30th June, 1953 and the other for the period from 1st July, 1953 to 31st December, 1953. The balance-sheet and the profit and loss account for the year ended 30th June, 1953, were considered and passed at the general body meeting of the company held on 31st December, 1953. In respect of the accounting year ended 31st March, 1953, the assessee firm submitted its return of income, showing the remuneration obtained under the managing agency agreement as Rs. 2,12,041.
4. The break-up of this figure is as follows:
Rs.(1) One per cent. on purchases of cotton and stores .. 1,99,682(2) 2 per cent. on capital expenditure .. 12,359Total .. 2,12,041
Though the assessee returned this sum of Rs. 2,12,041 as its remuneration for the assessment year 1953-54(previous year ending 31st March, 1953) from the company as per the terms of the managing Agency agreement, the Income-tax Officer, apparently in conformity with the previous practice adopted by the Department, substituted for this sum the amount of Rs. 1,18,999 made up as under ;
(a) Remuneration for the period 1st April, 1952 to 30th June, 1952, Rs. 46,684 ;
(b) Remuneration for the period 1st July, 1952 to 31st March, 1953, Rs. 72,315.
5. Later on the sum of Rs. 72,315 was modified as a result of action taken under Section 35 of the Act as Rs. 73,417. This figure was worked out by the assessee's auditors. The details of the amount, Rs. 72,315 are : (1) 2 per cent. commission on capital expenditure, Rs. 815 and (2) one per cent. commission on cotton and stores purchases, Rs. 71,500, total Rs. 72,315.
6. The assessee did not dispute the inclusion of the sum of Rs. 46,684 but contended that the other sum of Rs. 72,315 should not be included. The assessee submitted that it had waived its right to receive the said amount from the managed company in view of the fact that the company had suffered losses. The contention, therefore, was that this sum of Rs. 72,315 though it accrued or arose as income payable to it, by reason of the waiver it should not be treated as taxable income. The Income-tax Officer held that the sum of Rs. 72,315 had become due to the assessee from the managed company prior to the alleged act of waiver on the part of the assessee and that the assessee cannot get rid of the tax obligation by waiving his right to an income which had already arisen to him. In the result, he rejected the claim of the assessee for the exclusion of the sum of Rs. 72,315.
7. There was an appeal to the Appellate Assistant Commissioner and he affirmed the view of the Officer. He held that the commission became due to the assessee firm under the agreement as and when purchases of cotton were made and the capital expenditure had been incurred, and that the waiver by the assessee six months after remuneration had been earned would not help the assessee to have that amount excluded from tax. There was a further appeal to the Tribunal by the assessee, but that also failed. The question set out above has been referred at the instance of the assessee on an application preferred to this Court under Section 66(2) of the Act.
8. It seems to be clear that the assessee's only contention before the Department and the Tribunal was based upon the alleged waiver of its right to the amount of Rs. 72,315. Evidence of this act of waiver is furnished by the following resolution passed at the Directors' meeting of the company held on 13th December, 1953.
Resolved that the action of the Managing Agents in waiving the commission due to them on purchases and capital expenditure amounting to Rs. 80,437 in view of the loss sustained by them be recorded with thanks.
9. It seems to us that it is wholly unnecessary to go into the question of waiver. We are expressing no opinion on the point whether the assessee could claim the benefit of the exclusion of the disputed amount by reason of the alleged waiver subsequent to the end of the accounting year, viz., 31st March, 1953. If it can be said that the income accrued or arose to the assessee on 31st March, 1953, a subsequent act of waiver would mean nothing and would leave the assessee's liability to tax unaffected. The tax is attracted at the moment when the income accrues or arises and it would not do for any assessee to contend that it did not get the benefit of the income in the sense that it did not obtain a payment of the amount from the persons from whom it was due in order to be free from the clutches of taxation. The act of waiver might be an act of generosity on the part of the assessee, but the Department would be within its rights in bringing that amount to tax.
10. The real point that arises for consideration in the present case is not the question of waiver but the question whether the sum of Rs. 72,315 constituted income which accrued or arose to the assessee during the accounting year. We have already pointed out that the company's accounting year till it was changed into the calendar year was the year ending 30th June. The assessee's rights to the managing agency commission for the period 1st July, 1952 to 30th June, 1953 would arise only after 30th June, 1953. The managing agency commission cannot be split up even before the company's accounting year is completed. On 31st March, 1953, the assessee had not completed its service to the company for the full year as contemplated and provided for under the managing agency agreement. Whether the managing agency will continue or not after 31st March, 1953 could not have been predicted on that date. It might have been open to the managing agents themselves to have given up or relinquished their agency, in which case they would not be entitled to the commission even for the period for which they have rendered service. The point need not be laboured further in view of the decision of the Supreme Court in Cotton Agents, Ltd. v. Commissioner of Income-tax : 40ITR135(SC) . In that case the facts were these. The Cotton Agents, Ltd., Bombay, a limited liability company, registered under the Indian Companies Act, was the assessee. The assessment year was 1946-47 and the accounting year was the year ending with Diwali, 1945 (October 18, 1944 to November 4, 1945). The assessee paid a sum of Rs. 5,00,000 to another company called the Nemani group who were the managing agents of another limited company as the price for securing the managing agency rights. The assessee company, therefore, became the managing agents of the third company in the place of the Nemani group. Under the terms of the agreement the assessee company became entitled to the emoluments of the managing agents from 1st April, 1944. The managing agency commission from 1st April, 1944 to 31st December, 1945 amounted to Rs. 2,20,433 and from January, 1945 to 31st March, 1945 to Rs. 67,959. The case of the assessee company was that for the assessment year 1946-47 it was liable to pay tax only on the commission of Rs. 67,959 which it had earned by working as managing agents of the mills company and that it was not liable to pay tax on the sum of Rs. 2,20,433. This contention of the assessee company was not accepted by the Department, but the Tribunal accepted it. The assessee also pleaded that as the managing agency commission was based on the sales, the commission accrued to the managing agents as and when the sales were made. The Tribunal expressed the view that the 3 per cent. commission on sales made when the Nemani group was the managing agent accrued to that group and not to the assessee, that a debt was created in favour of the Nemani group on every sale during its period of managing agency and that only the payment of the debt was deferred till the accounts of the company were passed at a general meeting and that therefore the commission prior to the close of the year 1944 was assessable in the hands of the Nemani group and thereafter in the hands of the assessee company. The Department's contention was that the whole of the managing agency commission accrued to the assessee. The following question of law was referred to the Bombay High Court for decision:
Whether on the facts and circumstances of the case the managing agency commission at 3 per cent. on sales made by the new Swadeshi Mills of Ahmedabad, Ltd., between April 1, 1944 and December 31, 1944 accrued to Shivanarayan Surajmal Nemani, or to the assessee
11. The Bombay High Court held that the matter was concluded by the decision of the Supreme Court in E. D. Sassoon & Co., Ltd. v. Commissioner of Income-tax : 26ITR27(SC) . On appeal to the Supreme Court the decision of the Bombay High Court was affirmed. At page 141, Das, J., observed as follows:
It has been argued before us that the decision (Sassoon's case : 26ITR27(SC) required reconsideration because it failed to make a further distinction ; a distinction which, it is stated, arises in law, between the right to receive payment and the creation of a debt. We consider it unnecessary to consider such a distinction, if any such exists, in the present case. On our view of the managing agency agreement, the commission of the managing agents became due at the end of the financial year and that is when it accrued ; and there were neither any debt created nor any right to receive payment when each transaction of sale took place. We were also addressed at some length on the further question whether managing agency is service and, if so, whether it must be for one full year or whether apportionment is permissible. These questions do not fall for decision in the present case and we express no opinion thereon. We have proceeded in this case on the footing that the managing agency work of the assessee company constituted business within the rule of the decision in Lakshminarayan Ram Gopal & Son, Ltd. v. Government of Hyderabad : 25ITR449(SC) and on that footing we have decided the question of accrual.
12. The principle laid down by the Supreme Court is that the managing agency commission based upon percentage of sales or purchases does not accrue de die in diem as and when each transaction takes place, but only at the end of the year when the transactions during the year have got to be taken note of and the commission fixed. The very fact that the commission is payable only after the company's accounts are closed each year would seem to imply necessarily and inevitably that it would not be open to the managing agents to claim remuneration on a proportionate basis in a case where the service is not for the period of the year. Having regard to the terms of the managing agency agreement, to which we have already adverted, we are of opinion that in the present case the assessee did not become entitled to the sum of Rs. 72,315, representing the portion of the managing agency commission during its accounting year ended 31st March, 1953. The Department was therefore not right in including the amount in the year in question for purposes of tax. It is no doubt true that the Department has been following the procedure of splitting up the managing agency commission into portions and including such portions in the assessee's income as would fall within the scope of each accounting year. But this system appears to be clearly wrong particularly in view of the decision of the Supreme Court. This does not, however, mean that the assessee would escape taxation with regard to this amount of Rs. 72,315. It would be open to the Department to re-open the assessment of the assessee to the extent to which it is permissible in law and make the correct computation of income in the light of the decision of the Supreme Court in Cotton Agents, Ltd. v. Commissioner of Income-tax : 40ITR135(SC) .
13. In the result, the question is answered in favour of the assessee. As the assessee has failed to raise the proper contention before the Department and the Tribunal, it would not be entitled to costs.