1. In T.C. No. 432 of 1975, the following is the question that has been referred to this court under Section 256(1) of the I.T. Act, 1961 :
' Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in reducing the quantum of penalty levied under Section 273(c) of the Income-tax Act of 1961 '
2. In T.C, No. 433 of 1975, the following question has been referred :
' Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that to the extent of Rs. 76,429 the managing agency commission accrued to the assessee only after March 31, 1970, and hence was not assessable in the assessment year 1970-71 ?'
3. The assessee is a private limited Company. Whether the amount of Rs. 76,429 is assessable in 1970-71 or 1971-72, is not likely to be of any consequence, because ordinarily the tax rates leviable on companies are more or less uniform, whatever be the total income of the company. However, in the present case, the question assumes 'some significance because of the penalty proceedings. We shall first set out the facts relating to the assessment proceedings before going into the penalty proceedings.
4. The assessee entered into an agreement with M/s. Simco Meters Ltd. on 12th April, 1962, under which it was appointed as the managing agent for a period of 10 years from 27th September, 1961, that being the date of the incorporation of the managed company. Clause 3 of the agreement provided that the assessee should be paid for its work as managing agent remuneration as detailed therein. It was to be at the rate of 10 per cent, on the first Rs. 10 lakhs of net profit or fraction thereof of the managed company, and thereafter, the percentage of net profit payable as remuneration went on going down on a progressively reduced scale. In the absence of or inadequacy of profits, the agent was to be paid such minium remuneration per year as may be fixed by the Government, and the managing agent could draw the same in twelve equal instalments on the last working day of the month for which the remuneration was due. Any amount due over and above the minimum remuneration was to be drawn by the managing agent after the audited balance-sheet and profit and loss account of the company for the relative year had been laid before the company in general meeting.
5. The minimum remuneration was fixed at Rs. 24,000 per year with the approval of the Government of India. The assessee received this sum of Rs, 24,000 from M/s. Simco Meters Ltd. during the relevant previous year ending March 31, 1970. The total remuneration calculated at 10 per cent, of the net profits, under the terms of the agreement, came to Rs, 1,00,429. The balance of Rs. 76,429, after giving credit to the sum of Rs. 24,000, was paid to the assessee-company by M/s. Simco Meters Ltd., subsequent to September 7, 1970, on which date the general body meeting of the managed company approved the statement of accounts and affairs.
6. The assessee filed a return disclosing its income on the basis that the managing agency remuneration assessable on it, was only Rs. 24,000 and alter claiming the deduction due with respect to the income, the balance of the income disclosed in the return was Rs. 22,279. The ITO determined the total income as Rs. 98,726. In doing so, he made an addition of Rs. 76,429 on the ground that the remuneration to that extent was due to the assessee for the period ending on 31st March, 1970, and was, therefore, assessable for the assessment year 1970-71.
7. The assessee appealed to the AAC and contended before him that this sum of Rs. 76,429 became due only after the managed company had approved the audited statement of accounts in the meeting held on September 7, 1970, and, therefore, was not assessable as its income for the assessment year under consideration. The AAC rejected this contention and confirmed the order of assessment.
8. The assessee appealed to the Appellate Tribunal, The Tribunal after referring to certain decisions cited before it and having regard to the fact that the managing agency agreement entered into between the assessee and the managed company had not fixed the date of accrual, held that the remuneration of Rs. 76,429 accrued only after 31st March, 1970, and hence was not liable to be taxed in its hands for the assessment year under consideration. It is this order of the Tribunal that has given rise to the question whether the sum of Rs. 76,429 accrued to the assessee as managing agency remuneration only after 31st March, 1970, so as not to be assessed in the assessment year 1970-71.
9. The question as to when the managing agency remuneration is liable to be assessed, has been considered by the Supreme Court in some cases. Before referring to the decisions, it may be useful to refer to the relevant provisions of the Companies Act. Prior to the Companies Act of 1956, the managing agency remuneration fell under two parts ; one was the monthly remuneration called office allowance, and the other was based on net profits and sometimes on the turnover either by way of sale or by way of purchase or both. Section 354 of the Companies Act, 1956, provided that the managing agent shall not be paid any office allowance and, therefore,what was previously paid as monthly remuneration was no longer available. The remuneration calculated on the net profits of the company could alone be contracted for. It was provided in Section 348 of the Companies Act, that a company shall not pay to its managing agent in respect of any financial year beginning at or after the commencement of the Act, by way of remuneration, any sum in excess of ten per cent, of the net profits of the company for that financial year. It is this maximum of 10 per cent, which was reduced when the profits went up. The procedure for determining the net profit is to be found in Section 349. Section 353 provides that the remuneration payable to the managing agent for any financial year or part thereof shall not be paid to him until the accounts of the company for such financial year have been audited and laid before the company in general meeting. Under the proviso to that section, the minimum remuneration, if any, payable in pursuance of Section 198 may be paid to the managing agent in such suitable instalments as may be specified either in the articles of the company or in a resolution passed by the company at the annual general meeting, or in the managing agency agreement executed by the company. Section 198 provided that the total managerial remuneration payable by a public company or a private company which is a subsidiary of a public company shall not exceed the eleven per cent, of the net profits of that company. Thus there is a ceiling on the managing agency remuneration fixed under Section 348 read with Section 198 of the Companies Act. Section 353 regulated the time when the remuneration was to be paid. However, these provisions do not deal with the time of accrual of remuneration which is relevant for the purpose of income-tax. It is on this aspect of accrual that the decisions of the Supreme Court throw light.
10. In E. D. Sassoon & Co. Ltd. v. C1T : 26ITR27(SC) , the question of assessability of the managing agency remuneration when there was an assignment of the managing agency agreement in the course of a year arose for consideration. Sassoon & Co. were the managing agents of certain textile mills. Under the managing agency agreement, the managing agents were entitled to receive a commission on the annual net profits which was due on the 31st of March every year. The managing agent assigned the office to another company by name Agarwal & Co, and the accounts of the managing agency commission payable to the managing agent for the calendar year were made up in 1944. Sassoon & Co. were the managing agents up to 1st December, 1943, and, thereafter, Agarwal & Co. The question was whether in the assessment year 1944-45 Agarwal & Co. was liable to pay tax on accrual basis on the whole of the commission, or whether the tax was payable by Agarwal & Co, and Sassoon & Co. on proper apportionment being made between them having regard to the period during which they rendered service. The Supreme Court held that the managing agency remuneration was not liable to apportionment in proportion to the services rendered by each one of them, but that Agarwal & Co. was liable to pay tax on the whole commission. The majority of their Lordships considered that the remuneration payable by the managed company to the managing agents arose only on the completion of the definite period of service, and that it was a condition precedent for the recovery of any wages or salary that the services or duties should be completely performed. The right to receive the remuneration or commission would, according to their Lordships, arise only at the end of the year which was the terminus ad quem for the making up of the accounts and ascertaining the net profits earned by the managed company. This decision established the proposition that the managing agency remuneration did not accrue de die in diem or daily, but only at the end of the year.
11. In Morvi Industries Ltd. v. CIT : 82ITR835(SC) , the assessee was the managing agent of its own subsidiary company. The managing agent was entitled to receive an office allowance of Rs. 1,000 per month and a commission on net profits and an additional commission on purchases and sales. During the calendar years 1954 & 55, the managed company suffered loss and the assessse earned commission only on the sale of cloth and yarn for those two years. Under Clause 2(e) of the managing agency agreement, commission was due to the assessee on 31st December, 1954, 31st December, 1955, respectively, and it was payable after the annual accounts of the managed company were passed in the general meetings held in November, '55, and July, '56, respectively. Prior to the annual general meetings in November, '55, and July, '56, the board of directors resolved to relinquish the managing agency commission on sales and office allowance because the managed company was suffering losses in the past years. The question was whether the managing agent was still liable to be assessed on the remuneration due to it, but forgone by it. The Tribunal held that the relinquishment was after it had become due and was of no effect. The further finding of the Tribunal was that the amount forgone by the assessee could not be said to be expenditure incurred wholly and exclusively for the purpose of the managing agent's business. The High Court agreed with these findings. The Supreme Court held that the commission, had under the agreement accrued to the assessee on December 31, 1954, and December 31, 1955, and the fact that the payment was deferred till after the accounts were passed by the managed company in its annual general meetings did not affect the accrual of the income. As the income was given up unilaterally by the assessee after accrual, it was held that it could not escape liability to tax. At page 838, it is stated that Clause 2(e) of the managing agency agreement in that case provided that the commission due to the agent yearly on the 31st day of December or any other date on which the company's yearly accounts were closed in each and every year. Having regard to this specific provision in the managing agency agreement, the Supreme Court pointed out that the commission was due on 31st December of every year, though it was payable only after the annual general meeting of the company. The distinction between the amount accruing to an assessee and the assessee's right to receive it, was pointed out.
12. This problem came to be considered, again in CIT v. Birla Gwalior (P.) Ltd. : 89ITR266(SC) . The assessee in that case was also a managing agent of two companies. The managing agent was entitled to an office allowance and also commission. No date was fixed for the payment of commission in the managing agency agreement. The assessee gave up the managing agency commission due for the previous years relevant for the assessment years 1954-55, to 1956-57 after the end of the previous years but before the accounts were made up by the managed companies. The Appellate Tribunal held that the commission given up was not the managing agent's real income and that in any event it had been given up on grounds of commercial expediency and was, therefore, an allowable deduction under Section 10(2)(xv) of the Indian I.T. Act, 1922. The High Court on a reference came to the conclusion that the commission forgone was not the real income. When the matter came to be considered by the Supreme Court, there were two questions which were considered by the Supreme Court.
13. One was whether the commission forgone by the assessee was allowable as a revenue expenditure and the other was whether the office allowance forgone was allowable as a revenue expenditure under Section 10(2)(xv). The Supreme Court pointed out at page 270 :
' As mentioned earlier, no due date was fixed for the payment of the commission under the managing agency agreements. The commission receivable could have been ascertained only after the managed company made up its account.'
14. Reference was made to the decision in Morvi Industries Ltd. v. CIT : 82ITR835(SC) , and it was pointed out at page 273 in relation to that decision:
' In arriving at the conclusion that the income in question accrued on the 31st December, 1955, and 31st December, 1956, this court primarily took into consideration the terms of the agreement. '
15. It was also pointed out that the decision in Morvi Industries' case emphasised the fact that the real question for decision was whether the income had really accrued or not.
16. The question for consideration is whether the present case falls within the scope of the principle in Morvi Industries' case or CIT v. Birla Gwalior (P.) Ltd. : 89ITR266(SC) . In the present case we have already referred to the terms of the managing agency agreement under which there is a specific provision relating to the minimum remuneration being payable to the managing agent at the end of every month. As regards the rest of the commission, there is no specific provision as to when it accrues. In the absence of such a provision, we have to take it that it accrues at a time when it became payable to the assessee. As pointed out by the Supreme Court in CIT v. Skoorji Vallabhdas and Co. : 46ITR144(SC) , if an income did not result at all, there could not be a tax even though ia bookkeeping an entry is made about a hypothetical income which did not materialise. In the case of cash system of accounting the problem which is now before us was not likely to arise as the receipt is synonymous with accrual in such cases. However, in the case of mercantile system of accounting where the amount under the contract is due to an assessee even though its payment is postponed, the liability to tax arises at the time when the amount is due, though the amount is actually paid subsequently. Where the contract is silent as to when the amount becomes due then it is not possible to treat the amount as being due on the last date of the accounting year. In such a case, the date of accrual will be the same as the date of the right to receive it. In the present case, the income did not accrue at all to the assessee on or before March 31, 1970, so that there is no question of it being assessed in the assessment year 1970-71, The result is that the question in T.C. No. 433 of 1975 has to be and is answered in the affirmative and in favour of the assessee.
17. Now turning to the reference in T.C. No. 432 of 1975, relating to the levy of penalty, the question arose on account of the deficiency in the payment of the advance tax. A notice u/s. 210 of the I.T. Act was issued to the assessee calling upon it to pay the advance tax of Rs. 6,806 on the estimated income of Rs. 10,470. The assessee paid the instalments in response to the said notice. However, it filed a return on September 24, 1970, disclosing an income of Rs. 22,297 and the tax payable thereon amounted to Rs. 13,145. The assessment was completed on a total income of Rs, 98,730 and the tax payable was Rs. 56,019. In the assessment so made, the sum of Rs. 76,429 was added as the managing agency remuneration. The ITO noting that the tax payable even on the income as returned exceeded the advance tax demanded from and paid by the assessee by more than 33-1/3 per cent, initiated action for levy of penalty for the assessee's failure to send a revised estimate of income and payment of advance tax on the basis of such revised estimate as required by Section 212(3A). The assessee submitted his objections to the proposal to levy penalty and the ITO held that even on the basis that a sum of Rs. 76,429 was not included, the assessee should have filed a revised estimate under Section 212(3A) and, therefore, levied a penalty of Rs. 4,031. The AAC confirmed the order of the ITO. On further appeal, the Tribunal held that the sum of Rs. 76,429 which was included in the assessment was not liable to be included. With reference to the balance of the income, the Tribunal considered that the minimum penalty leviable was only Rs. 305 and, therefore, confirmed the levy of a penalty of Rs. 305. It is to this part of the order of the Tribunal relating to the penalty, that the question reproduced above was raised and referred to this court.
18. The applicability of the provisions of Section 273(e) is not in dispute, and the only point to be considered is whether the Tribunal was justified in computing Rs. 305 as the minimum penalty leviable. If the sum of Rs. 76,429 was not taken as assessable in the year of assessment under consideration, then it is not in dispute that the sum of Rs. 305 would be the minimum penalty leviable. As we have held Rs. 76,429 was not assessable in this year, we are satisfied that the Tribunal did not commit any error of law in computing the minimum penalty of Rs. 305. The position would have been different if we had accepted the contention of the--revenue that the sum of Rs. 76,429 was also assessable in the year of assessment under consideration. Consequently, the question as regards the penalty is answered in the affirmative and in favour of the assessee. The assessee is entitled to its costs. Counsel's fee Rs. 500 (one set).