SRINIVASAN J. - The assessees are the managing agents of a public limited company, the Investment Trust of India Ltd. The assessments of the assessee company for the years 1955-56, 1956-57 and 1957-58 were reopened under section 34(1)(b) of the Act for the reason that at the time of the original assessments of the company, the company had not returned as part of its income the managing agency commission which had accrued to it. The assessee company disputed the action under section 34(1)(b) contending that the assessee had waived the amounts that would have been due to it under the managing agency agreement for the three years in question. This contention was repelled by the Income-tax Officer, who held that the managing agency commission had accrued to the company and that the alleged waiver amounted only to a gift. Before the Appellate Assistant Commissioner it was urged that the assessee company waived the managing agency commission due to it in order to strengthen the finances of the managed company and that since there was no likelihood of the commission ever being received by it after such waiver, it was not liable to be taxed. The appellate authority, while accepting the position that the commission amounts were not received by the assessee company, found that there was no resolution of the company waiving the commission during any of these years. There was no correspondence between the managing company and the managed company which formed the basis of a valid waiver and the only indication of such waiver was found in the statements of accounts of the managed company as a note to the audited revenue account of that company. For these reasons, the assessments were confirmed. The further appeal to the Tribunal also failed. The Tribunal took the view that the non-receipt or waiver of the commission after the managing company, the assessee, had become entitled, that is to say, after the income had accrued to it, amounted only to an application of the income and that, therefore, the income was rightly brought to tax. It is in these circumstances that on the application of the managing company, the assessee, the following questions were referred to this court for determination :
'(1) Whether the Income-tax Officer was entitled to reopen the assessments for the years 1955-56, 1956-57 and 1957-58 under the provisions of section 34(1)(b) ?
(2) Whether the assessee are liable to pay tax on the sums of Rs. 5,428, Rs. 5,308 and Rs. 11,620 being the managing agency commission received for the assessments of the years 1955-56, 1956-57 and 1957-58 ?'
Mr. Venkatraman, learned counsel for the assessee, contends that the assessee did not become entitled to the amount of managing agency commission in any year till the date on which the managed companys accounts were certified by the companys auditors, and according to him, the waiver had taken place at that time, so that no part of the commission accrued to the assessee. The managing agency agreement had been produced before us. Clause 4 of this agreement states that in addition to a monthly office allowance payable to the assessee :
'The said managing agents shall, during their tenure of office, be paid in every year in which the company declares a dividend of not less than four per cent.... a commission equal to ten per cent. of the net profits of the company for that year.'
How the net profits should be computed is set out in that clause and the last sentence of that clause reads : 'The said commission shall become payable to the managing agents on the companys auditors certifying the companys annual balance-sheet.' It is upon this last sentence that the learned counsel relies in pressing his argument that the income by way of managing agency commission did not accrue to the assessee till the date on which the companys annual balance-sheet was certified by the companys auditors. We are unable to agree with this interpretation of the relevant clause. The earlier sentence which we have extracted above clearly confers the right upon the managing company to receive a commission equal to ten per cent. of the net profits for the year. Undoubtedly, the company as the managing agents became entitled to the managing agency commission on the net profits of the company for the year in question; that is to say, it became entitled to the managing agency as on the last day of the year. The postponement of the payment till the accounts of the company were duly certified by the auditors does not in the circumstances justify the interpretation of this clause as amounting to laying down that the accrual of the income itself was postponed to that date.
We asked the learned counsel to inform us on what dates the so called waiver was indicated and in what manner; whether by a resolution or by an agreement or by correspondence between the managed company and the managing company. Learned counsel concedes that there is no correspondence or resolution or any other documentary evidence of waiver. Nor, except for the statement that was made before the Appellate Assistant Commissioner, and here, that the waiver was for the reason that the finances of the managed company had to be built up, is there any material to support that statement. The audited accounts of the managed company, the Investment Trust of India, for the three years in question have been placed before us. At the end of the revenue account of each year, the following statement finds place :
'The managing agents have waived the commission due to them on the profits.'
These accounts bear the dates 20th October, 1953, 17th November, 1954, and 3rd November, 1955. Taking these statements at their face value and assuming that they represented the exercise of the right of the assessee to waive what was due to it, the waiver must be deemed to have taken place on the dates set out. These dates are of some significance, for the accounting year of the assessee ends with the 30th June of every year in question. In respect of each of these years therefore the so called waiver has been effected on dates long subsequent to the close of the accounting year. The question is whether if the managing agency commission had accrued to the assessee immediately upon the close of its accounting year, that is, the 30th June of each year, the waiver, which was done long subsequent to the close of the accounting year, is anything more than a disposal of the income which had accrued to it, or would it justify the claim that there was no accrual at all till the date the waiver was made ?
Learned counsel has referred to Commissioner of Income-tax v. Shoorji Vallabhdas and Co. as supporting his contention. That was a case where the assessee was the managing agent of two shipping companies and under the terms of the agreement was entitled to receive ten per cent. of the freight charged. At the end of the year in question, the assessee in fact credited itself in its books of account with the amounts which were due to it by way of commission and debited the managed company. During the year, however, the assessee desired to have the managing agency transferred to two private companies and, in order to achieve this end, agreed to accept commission only at the rate of 2 1/2 per cent. and to give up the balance of the commission. The department however claimed to be entitled to assess the entire amount on the ground that this amount had already accrued to it and that the agreement after the close of the previous year to give up a portion of that income could not take it out of chargeable income. Their Lordships of the Supreme Court held on the above material that the subsequent agreement really effected an alteration in the terms of the original agreement and if that were so, the mere fact that a larger amount had been credited in the books of account was not sufficient to lead to the conclusion that such larger amount had in fact accrued to the assessee. Though the actual agreement altering the rate of commission was arrived at after the close of the accounting year, it was clear from the facts therein that even during the course of the year the assessee company had expressed a desire to resign from the managing agency and the managing company was asked to accept a reduced rate of commission. That was eventually agreed to. Clearly then the view that was taken was that the alteration of the rate of commission was made on foot of an agreement during the course of the accounting year itself so that only the reduced rate of commission accrued to the assessing company. We may refer also to two earlier cases. In commissioner of Income-tax v. Hari Vallabhadas Kalidas & Co., it was held by the Supreme Court that where the managing agency agreement contained provisions which gave an option to the managing agents to receive commission at different rates, coupled with a liability to give up a portion of the commission in certain contingencies, and where as a result of their agreeing to the modification of the agreement, the managing agents voluntarily relinquished a portion of the commission it was only the reduced amount that had accrued as the income. The following sentence in the headnote is significant :
'On the other hand, under the original agreement, the managing agents were entitled to receive commission only at the end of the year, and before then the agreement was varied modifying its terms as from the beginning of the accounting year.'
It follows that, if during the course of the year, the terms of the agreement were varied, the income that accrues could be only on the basis of the altered agreement.
This case was referred to in Commissioner of Income-tax v. Chamanlal Mangaldas and Co.
These cases do not support the assessees claim in the reference before us. As we have pointed out, there is no evidence of any agreement of any description which operated to alter the rate of commission or give up the commission due to the assessee. No such agreement or transaction which could be regarded as an agreement was entered into during the accounting year. If after the accrual of the income, according to the terms of the managing agency agreement, the managing agents purported to give up any part of that income, that cannot be regarded as affecting the terms of the agreement whereunder such income had accrued to it. It follows that the view taken by the department and the Tribunal that the income had accrued to the assessee in the instant case and that the waiver operated only as a disposal of that income is correct.
We may mention that the learned counsel for the assessee did not press question No. 1. It is accordingly answered in the affirmative and against the assessee. In the view that we have expressed, the second question is also answered against the assessee. The assessee will pay the costs of the department. Counsels fee Rs. 250.