K.C. Sen, J.
1. In this reference under Section 66(1) of the Income Tax Act 1922, the following question of law has arisen for opinion of this Court:-
Whether on the facts and in the circumstances of thecase, the sum of Rs. 29000/- was rightly held to be the income of the assesses?
2. The Rungta Sons Limited [hereinafter described as the assessee) was the Managing Agent of several companies. The assessment year was 1952-53 and the corresponding accounting year ended on the 5th July 1951. The managed companies, viz., Oriental Industrial Engineering Company Limited, Orient Batteries Limited, Rungta Engineering and Construction Company Limited, Variety Engineering Works Limited, Bengal General Trading Company Limited and M. G. R. Iron and Steel Company Limited were liable to pay Managing Agency remuneration and commission to the assessee company during the accounting yearas aforesaid amounting to Rs. 29,000/- only. The accounting year of all the managed companies closed on the 5th July 1951. On the 16th December 1952, the shareholders of the assessee company passed a resolution for-going the receipt of the allowance. There were other resolutions of the same nature made by the assessee Company on several dates. The assessee company claimed that the aforesaid amount of Rs. 29,000/-, which had beenforgone by it, should not be treated as income in computing its total income. The Appellate Tribunal held that the intention of foregoing was arrived at, much later than the closing of the accounting year, during which the remuneration had already accrued to the assessee and there-fore after accrual, if it had relinquished the claim of the receipt that would only mean a diversion of the profit and, therefore, could not be excluded from the total in-come. It was urged by the assessee company before the Appellate Assistant Commissioner that the Income TaxOfficer made all error in adding Rs. 29,000/- in respect of managing agency commission receivable by the appellant from various companies, as it was waived and therefore it should be deemed as 'not received'. The assessee simply wanted to make out that since the right to receive the remuneration was waived, it was not liable to tax. The Appellate Assistant Commissioner found that the waiver of the commission and remuneration took place long after the close of the accounting year in question on the 5thJuly, 1951 and, therefore, the Income clearly accrued to the appellant during the' period under account and subsequent waiver of the claim to receive this income couldnot have any effect on its assessment during the assessment year. This order of the Appellate Assistant Commissioner was affirmed by the Income Tax Appellate Tribunal. Their decision ES pointed out before hinges on the fact that as the relinquishment of remuneration was effected beyond the accounting year it could not be in any circumstances be treated as a bar to the assessibility of the said amount towards Income-tax.
3. Mr. Meyer the learned Counsel appearing for the assessee company has mainly urged before us that in so far as there was no accrual of income to the assessee as a result of the final settlement with the managed companies, the amount of Rs. 29,000/- is not liable to taxation. Further he argues that the principle which should govern cases like this is that unless and until the money is received actually and not notionally, the question of assessibility could not arise. It is also contended that insuch cases it is not necessary that the negotiations oughtto have been completed during the accounting year as there is a difference between the actual earning of the income and its accrual. We shall indicate his other contentions later on.
4. In the first instance it is necessary to refer to the relevant provisions of the Income-tax Act 1922 which should govern the question of assessibility of income in cases like this. Section 4 inter alia runs as follows:
'(1) Subject to the provisions of this Act, the total income of any previous year of any person includes all income, profits and gains from whatever source derived which-
(a) are received or are deemed to be received in the taxable territories in such year by or on behalf of such person, or-
(b) if such person is resident in the taxable territories during such year,
(i) accrue or arise or are deemed to accrue or arise to him in taxable territories during such year..........'
5. In this case the provisions of Section 4(1)(b)(i) quoted above are relevant, as we have to decide the question whether the income which is said to have accrued during the accounting year in question, within the meaning of this clause is liable to assessment to tax, if beyond that period the accrued income is relinquished or foregone. According to Murray's Oxford Dictionary 'accrue' means 'to arise or spring as a natural growth or result'. 'Arising' means 'coming into existence or notice or presenting itself.' According to the ordinary Dictionary meaning both the words mean 'to become a present and enforceable right'' and 'to become a present right of demand'. It was observed in the case of Rogers Prath Shellac Co. v. Secretary of State : AIR1925Cal34 that both the words are used in contradistinction to the word 'receive' and indicate a right to receive. They represent a stage anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less inchoate. From this observation it appears that income may accrue at a point of time prior to its quantification or computation which is not a condition precedent to accrual. Thus according to the Section 4(1)(b)(i) the income which accrues or is deemed to have accrued is liable to tax. It is not disputed in the instant case that the assessee company maintains mercantile system of accounting and under such system there is no receipt actual or constructive by reason of entry in the accounts. According to Section 4(1)(b)(i) the unrealised income is assessed not on the ground of constructive receipt but on the ground that it accrues or arises at that date. 'Broadly speaking, the mercantile system of accounting makes unrealised income taxable but it does not make unrealised Income realised' (vide 'Income Tax' By Kanga and Palkhivala, 4th Edition, Vol. I, page 160).
6. Regard being had to the position in law indicated before it is now necessary for us to consider whether the relinquishment of the accrued or 'deemed to have accrued' income beyond the accounting period Is liable to income tax.
7. Mr. Meyer has in support of his contention In the first Instance cited before us the decision of the Bombay High Court reported in Commissioner of Income Tax, Bombay City v. Shoorji Vallabdas and Co. : 36ITR25(Bom) . In order to appreciate the points of law decided in this case, it is necessary to set out the facts. Theheadnote runs as follows:-
'The assesses was a firm consisting of three partners acting as Managing Agents to several Shipping Companies. Under agreements with the Shipping Companies M. S. Company and N. D. S. Company the assesses was entitled to 10 per cent commission on the freights charged to shippers. For the period April 1 to December 31, 1947, the asses-see was accordingly entitled to claim commission of Rs. 1,71,885/- from M. S. Company and Rs. 2,56,815/-from the N. D. S. Company, and in the books of account of the assessee for the financial year 1947-1948 entries were made relating to its commission.
Meanwhile, the assessee had floated two private Com-panics S. V. Limited and P. Limited in which the three partners had a controlling interest. On November 20, 1947,the assessee wrote identical letters to the Shipping Companies M. S. Company and N. D. S. Company requesting them to allow the assessee to resign and accept the newly floated concerns as their Managing Agents.
At the meeting of the Board of Directors of the M. S.Company it was resolved in consultation with the Managing Agents that in consideration of the Company agreeing to change the Managing Agency, the Managing Agents will give a letter to the Company as per the draft placed before them. In the draft letter it was stated that the Managing Agents could not agree to a reduction in the remuneration already fixed, but voluntarily agreed to areduction in the commission to be fixed by an agreementbetween the Board and the Company. On 30th December, 1947, the M. S. Company passed a resolution appointingS. V. Limited as their Managing Agents from January 1, 1948 for a term of 20 years, it was, however, only onDecember 30, 1946, when the annual general meeting ofM. S. Company held that the commission of the assessee was fixed at 2 1/2 per cent in respect of 10 per cent forthe period April 1 to December 31, 1947.
At the meeting of the Board of Directors of the N. D.S. Company held on December 1, 1947, the assessee informed the meeting that it was agreeable to accept 2 1/2 percent as commission in respect for 10 per cent, of the freight, earnings from April 1 to December 31, 1947. The, Annual General meeting of N. D. S. company was held on December 30, 1947 and P. Limited was appointed theManaging Agent from January 1, 1947.
In the assessment year for the year 1948-49, of theincome of the assessee for the previous year ended on March, 31, 1948, the two sums of Rs. 1,71,885A andRs. 2,56,815/- entered in the books of account maintain-ed on the mercantile system of account, were brought to tax on the ground that they were earned and accrued to the assessee in the previous year but the assessee con-tended that the amounts were never received by the firmand did not represent the income of the firm.'
It will be noticed from the above facts that the bilateralcontract regarding reduction of the rate of commissionwas made in the accounting year ending on the 31st March, 1948. It was accordingly decided by their Lordships of the Bombay High Court that the question whether the income accrued or not was not a mere matter of cogency of the entries made in the account books of the assesseebut was essentially one of substance and of the realnature of what happened. A mere book entry was not conclusive of the question whether the assessee had be-come entitled to the sums or not. It was also held thatwhat happened between the assessee and the Shipping Companies were in the nature of business transactions; and that the agreement on the part of the assessee to receive 2 1/2 per cent commission instead of 10 per cent was a matter of business expediency and was nothing short of bargaining and reaching an agreement with the shipping companies in its own interests and for its own benefit. In cases of this kind what was to be considered was the real commission to which the Managing Agents (the assessee in this case) became entitled in consequence of the agreement between the parties. Therefore the two sums to the extent of Rs. 1,36,903/- and Rs. 2,60,625/- were not the income of the assessee in the previous year.
8. Analysing this decision it appears that although the assessee was entitled to a commission of 10 per cent, it was disentitled to it by virtue of a bilateral agreement between the Managing Agent and the managed companies and that such an agreement did really take place during the accounting year as pointed out before. Mr. Meyer has laid great stress upon this decision and has called upon us to decide the instant case in favour of his client in view of the fact that under resolutions of the assessee company it 'disentitled' itself from the benefit of income by way of commission. According to him this decision should apply to the present case as a general principle has been enunciated that unless the assessee is entitled to a certain income it cannot be assessable to tax. The line of distinction between the facts of this reported decision and of the instant case appears to be that in the former the relinquishment was done on the basis of a bilateral agreement in the accounting year, but in the latter relinquishment was made beyond the accounting period without there being any satisfactory material la the record to show that it was based on a bilateral contract between the assessee and the managed companies as pointed out before. The decision in each case should be made on the background of the facts disclosed and it seems to us that the decision by the Bombay High Court was made as stated above, only because the agreement was entered into in the year of account. This decision was affirmed in appeal by the Supreme Court as reported in Commissioner of Income-tax, Bombay City v. Shoorji Vallabh Das & Co. : 46ITR144(SC) . Their Lordships of the Supreme Court were pleased to hold on the facts as stated before, that the subsequent agreement had altered the, rate of commission in such a way as to make the Income which really accrued to the assessee different from what had been entered in the books of account. This was not a case of gift by the assessee to the managed companies of a portion of income which had already accrued, but an agreement to receive a lesser remuneration than what had been agreed upon. The assessee had, in fact, received only the lesser amount in spite of entries in the account books, and this lesser amount alone was taxable. According to their Lordships of the Supreme Court, Income Tax is a levy on income. Though the Income Tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about 'hypothetical in-come which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted atall, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account.
9. Mr. Meyer has relied upon the decision of the Supreme Court ami has invited our attention to the observation by that Court, as follows:
'If income does not result at all, there cannot be a tax, even though in book Keeping, an entry is made on 'hypothetical income' which does not materialise.'
10. It has already been pointed out by us that the decision of the Bombay High Court was made on the particular facts involved in the case and their Lordships of the Supreme Court in deciding the legal principle in the appeal had in their mind the patent facts that the major portion of the commission was relinquished during the year of account on the basis of a bilateral contract entered into in that year. If such elements were present in the instant case, the principle decided by the Supreme Court would certainly have applied. In this connection the observations of the Supreme Court from the bottom of page 147 may be quoted:-
'The Bombay High Court relied upon an earlier decision of the same Court reported in Commissioner of Income-tax v. Chamanlal Mangaldas and Co. : 29ITR987(Bom) and held that the events during the accounting years were themselves sufficient to show that the income neither accrued to the assessee firm nor was received by it so as to become assessable. The decision of the Bom-bay High Court was approved by this Court in Commissioner of Income Tax Bombay North v. Chamanlal Mangaldas and Co. : 39ITR8(SC) .
In Commr. of Income Tax v. Chamanlal Mangaldas and Co. : 29ITR987(Bom) , the assessee was also the Managing Agent of a Company, and under the agreement was entitled to receive commission at a certain rate. By another agreement the commission earned by the Managing Agent for the Calendar year 1950 was reduced by Rupees one lakh. That agreement took place during the previous year, and the resolution of the Board of Directors of the Managing Company was also in the previous year. It was, however, made final on April 8, 1951 at a meeting of the Board of Directors, but was beyond the previous year. The High Court of Bombay held that by reason of the resolution during the currency of the previous year, the right of the assessee to commission ceased to be under the original agreement and depended upon and arose only after the decision of the Board of Directors to reduce the commission. The assessee was, therefore, not held liable on the larger sum which, it was held, was only a hypothetical income which it might have earned if the old agreement had continued to subsist.......'
Mr. Meyor has advanced the argument as pointed before, that their Lordships have decided in the aforesaid case a general principle of law that unless and until the income has resulted there cannot be any liability to tax. We are, however, of opinion that their Lordships of the Supreme Court do not appear to have enunciated a general principle regarding relinquishment of commission beyond the year of account as their Lordships have approved of the decision of the Commr. of Income-tax v. Chamanlal Mangaldas and Co. : 29ITR987(Bom) wherein the agreement to relinquish the commission was made during the accounting year and the decision was that if there isany relinquishment during the currency of the previous year the right, of the assessee to commission ceased to be under the original agreement and depended upon and arose only after the decision of the Board of Directors to-reduce the commission. In this Supreme Court decision it appears that the agreements between the Shipping Companies and the Managing Agents took place within the previous year and by virtue of this agreement their Lordships held that this relinquishment was not a gift by the assessee firm to the managed company. The reduction was a part of the agreement entered into by the assessee: firm to secure a long term managing agency arrangements for the two companies which it had floated. Thus it appears-that their Lordships of the Supreme Court were rot oblivious of the fact that if arrangements are made during the 'previous year' and if as a sequel thereof the assesses becomes disentitled to the previously agreed commission and the reduction thereof, the original entry into the account books of the accrued income will not be liable-to tax. It has already been pointed out before that in the instant case the relinquishment was made beyond the year of account and as such the principle decided by their Lordships of the Supreme Court cannot be invoked, in aid of the assessee.
11. A large number of cases has been cited before us by both the parties. We shall however refer to some of them for our conclusion whether the submission made by Mr. Meyer that there is no difference between cases where relinquishment takes place within or without the accounting period and that the criterion for assessability to tax is when the income is actually received in the year of account. Mr. S. Mukherjee the learned counsel for the respondent contends that in this particular case the argument of Mr. Meyer is not sustainable in view of the fact that that question relating to accrual of income-has been finally decided by the Supreme Court. He has referred us to the case of E.D. Sassoon and Co. Ltd v. Commissioner of Income Tax, Bombay City, : 26ITR27(SC) . It was decided in this case that income must be held to accrue at the date when it be-came due. Mr. Mukherjee has, next cited the decision of the Supreme Court reported in : 1SCR258 , Commissioner of Income-tax, Madras v. K. R. M. T. T. Thiagraja Chetty and Co. The decision in this case is that the mere fact that the amount due to the assessee has been carried to 'suspense account' in the debtors' book or that the debtor withheld payment on account of pending dispute, cannot be held to mean that the income has not accrued to the assessee. The facts are that the assessee firm was the Managing Agent of a limited company. Under the Managing Agency agreement the assessee was entitled to a certain monthly remuneration, a commission of 10 per cent on net profits of the company and a small percentage on sales and purchase. During the year of account ending 31st March 1942 the assessee became entitled to a commission of Rs. 2,26,350. On the 30th March, 1942, the assessee wrote to the managed company requesting that a certain debt which the assessee owed the company for a long time past, should be written off. The Directors of the managed company, however, decided by a resolution that instead of making payment to the managing company the aforesaid sum should be kept in the 'suspese account'. On these facts the question arose whether in the assessment year 1942-43 the assessee was liable to pay tax on the aforesaid sum. Here also it appears that the mercantile system of account was maintained by the assessed Their Lordships decided that the sum of Rs. 2,26,850/- was income which had accrued to the assessee, that if did not cease to be the income by reason of the fact that it was carried to 'the suspense account' by a resolution of the Directors and was there-fore assessable to tax.
12. From the above decision it appears that although no payment was made to the assessee and the amount was transferred to the 'Suspense Account' of the managed company, yet the aforesaid amount was liable to assessment to income tax by virtue of the provisions of Section 4(1) (b) of the Act.
13. Having considered the above Supreme Court decision, we are of the view that the main contention of Mr. Meyer cannot be accepted. He has, however, referred us to certain English decisions in support of his contention that it is immaterial whether any arrangement was arrived at regarding the payment or non-payment of the remuneration etc. in the accounting year 'or beyond the same. The first case which is referred to us is reported in 1954 35 Tax Cases 649, Severne v. Dadswell. The facts are as follows:-
'The respondent was granted a licence to mill flour in October 1941 and carried on the trade of flour milling until September 1945. As he had not been a miller at the outbreak of the war, he was not entitled to the benefit of a remuneration agreement, whereby millers were compensated by the Ministry of Food for losses incurred under war time arrangements for the purchase of wheat and sale of fiour. Having, however been informed by the Ministry in 1943 and twice later that the remuneration of Millers who had begun milling during the period of control was under consideration, he made a claim in 1949 on the same basis as that laid down in the remuneration agreement and received payment in settlement.'
The Commissioners on these facts came to the conclusion that the assessee was not liable for payment of income tax and excess profit tax, as such an income was not received during the accounting period. Further, they came to the conclusion that the payment was in the nature of exgratia payment. On appeal to the High Court of justice (Chancery Division) it was held that if on the discontinuance of a trade a payment for work already done has not been finally settled, accounts can be reopened so as to bring in a payment for such work, even though it is gratuitous, which is made thereafter. In deciding this matter Mr. Justice Roxburgh referred to several previous decisions. The first case which was referred to by his Lordship is reported in (1928) 12 Tax Cas. 768, Issac Holden and Son Ltd. v. Commissioners of Inland Revenue. This case is known as Woolcombers' case. It was held that the total amount of commission received for the year ended 30th June 1918 under the terms of the final settlement which arose from the trade in that year, must be included in arriving at the profit of that period for the purpose of computing the company's liability to excess profit duty. The next case which was referred to is reported in (1946) 1 All ER 546 at p. 549, Northern Aluminium Co. Ltd. v. Commissioner of Inland Revenue.
14. The last mentioned two decisions were also referred to us by Mr. S. Mukherjee in, order to show that they did not apply to the facts of the instant case, inasmuch as they refer to the Excess Profit Tax and the in-come Tax Acts of England, the language whereof is not the same as that used in the Income Tax Act, 1922. Northern Aluminium Co. Ltd. case, 1946-1 All ER 546 referred to above shows that the price for which the goods were sold in the accounting period was so much, and that price later on was increased by virtue of some understanding or something which might fall short of a contractual obligation. There the increased pries was held to be refer-able to the original transaction and, therefore, the accounts must be reopened in order to bring the increase into the profits of the company in the accounting period.
15. The reason for referring these cases to us by Mr.Meyer was to strengthen his argument that if these wasan accretion to the income during the accounting periodby a subsequent contract resulting in assessability to tax,the same principle as to non-assessability to tax should beapplied, if under an arrangement the income said to haveaccrued, is relinquished. The argument by Mr. Meyer hasconsiderable force but it seems to us that the principlesdecided in the English cases cannot be attracted to thepresent case, as it has not been pointed out to us thatthe provisions of the Excess Profit Duty Act as applicablein Britain are equivalent to the provisions which are contained in the Indian Income-tax Act as stated before. Furthermore upon consideration of all the decided cases itappears that if the amount is to be taxable as income, thebasic conception to be kept in view is that the right toreceive must come into existence in the relevant previousyear and that income can be held to arise or accrue tothe assessee, only when the assessee obtains a right toreceive the income. It seems to us however on a consideration of the Supreme Court decisions referred to before, which we are bound to follow, that the question ofnon-assessability could only arise if the relinquishment ismade in the accounting year. These decisions in our opinion are sufficient for negativing the contention raised bythe assessee.
16. It is accordingly not necessary to multiply a good lot of cases which have been referred to us for a decision in this reference. The instant case however may be considered from another point of view as urged by Mr. S. Mukherji. He has submitted that in all the English decisions referred to us, the root or germ as to accretion of income was in the accounting year and if such a root or germ fructifies in the subsequent years that could be taken into account and not otherwise. This argument which appears to be correct has in its support the principle discussed in Article 261 at page 147 of Halsbury's Law's of England, Third Edition, volume 20. It runs as follows:
'Where accounts may be re-opened: Closely affiled to the question of the year in which receipts are to be brought in or expenses allowed is the question of reopening trade accounts. It is now established that trading accounts for a year or period may be reopened and amended. For example, where a transaction included in the accounts for any year or period whether as a receipt or an expense is not settled in amount during the said year or period, and is subsequently settled at a figure different from that shown in the account, the account may be reopened and the figure subsequently ascertained, inserted in place of the original figure, and the balance of profit as so revised will form the basis for assessment to income tax. In certain cases trade receipts have been related hack to the period in which goods were delivered or service rendered as a result of which money became payable, or deductions for trade expense have been subsequently disallowed and reduced in amount. In other instances accounts have not been reopened.'
17. The principle as quoted above does not militate against the legal principles involved in the instant case, although it appears to us that the English Cases laying down the general rule that receipt is the sole test of taxability and income which has accrued, but has not been received cannot be brought to charge, and secondly that It is the income of the year of receipt and not of the year when It arises or accrues, would be misleading under the Income-tax Act, which contains provisions which are not to be found in the English Statutes (Vide, observation in the case of Commissioner of Income Tax v. Singari Bai : AIR1945All102 .
18. In the above premises we are of the view that the decision of the Tribunal was correct and our conclusion is summarised as follows:-
1) In the instant case, the unrealised income is liable to assessment of tax, not on the ground of constructive receipt but on the ground that it accrued during the relevant accounting year which ended on the 5th July, 1951.
2) The mere fact that the income was foregone by the assessee beyond the accounting year by resolutions in meetings of the shareholders, cannot entitle the assessee to an exemption from liability to tax.
It was decided inter alia by the Supreme Court in the case of : 46ITR144(SC) that where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might in certain circumstances, have been made in the books of account. This decision was made on the facts that there was a bilateral contract between the Managing Company and the Managed Company during the accouting year, whereby the assessee disentitled itself from receiving the contractual commission, hich obviously did not result in income during the accounting year. Such is not the case here, as no reliable evidence was placed before the Tribunal to show that the relinquishment was done on the basis of some direct negotiations between the assessee and the Managed Company, with respect to the sum of Rs. 29,000/-, during the accounting year.
3) The real test is that if the amount is to be taxable as income the basic conception to be kept in view is that the right to receive the income must come into existence in the relevant previous year and that income can be held to arise or accrue to the assessee only when the assessee obtains a right to receive the income. In other words, if the root or germ as to accretion of income was in the accounting year and if such a root or germ regarding accretion of income fructifies in the subsequent years, the account for the relevant previous year may be reopened and the figure subsequently ascertained may be inserted in place of the original figure for the purpose of assessability to tax. The same principle applies to taxability of a larger or lesser amount than the amount due under an agreement and the entire amount due thereunder, may also be subsequently given up under the said conditions, in order that the amount due under the agreement may not be taxable. Such is not the case here, as the resolutions of the assessee quoted In the statement of the case to not show conclusively that the sum of Rs. 29,000/- due under the agreement was foregone on account of some reasons rooted in the previous year. Regard being had to the above decision, the last submission by Mr. Meyer that the case should be dealt with under Section 66 (4) of the Act, as the Tribunal has failed to make any statement whether the relinquishment of commission was made on the ground of commercial expediency -- need not be taken into consideration. It appears to us that the matter was considered by the Tribunal in its judgment and it found that such a plea was not sustainable on the evidence adduced. We are of opinion that no step under Section 66(4) is required to be taken, as this Court is satisfied that the statements in this case are sufficient to enable it to deter-mine the question raised thereby. Apart from this consideration it appears that the assessee never raised any question on this point in his application under Section 66(1) of the Act.
19. In the result the question is answered in the affirmative.
20. The applicant will pay costs to the respondent.
Sankar Prasad Mitra, J.
21. I agree.