Skip to content


Commissioner of Income-tax Vs. Birla Gwalior P. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 187 of 1963
Judge
Reported in[1970]78ITR788(Cal)
ActsIncome Tax Act, 1922 - Section 10(2)
AppellantCommissioner of Income-tax
RespondentBirla Gwalior P. Ltd.
Appellant AdvocateB.L. Pal and ;B. Gupta, Advs.
Respondent AdvocateR.C. Deb, ;D. Pal and ;R.P. Murarka, Advs.
Cases Referred(Cal.) and Rungta Sons (Private) Ltd. v. Commissioner of Income
Excerpt:
- .....there is a dovetailing about them which cannot be ignored. their lordships held that it was the real income of the assessee for the accounting year that was liable to tax and that the real income could not be arrived at without taking into account the amount forgone by the assessee.' we are satisfied that in respect of the assessment years 1954-55, 1955-56 and 1956-57, the assessee-company surrendered the remuneration due to it in respect of the managing agency of national bearing co. ltd. for reasons of commercial expediency and it was justified in claiming that these amounts be not included in its total income for these years. following the decision of the bombay high court in kashiparekh & co.'s case and the decision of the president of the tribunal in respect of the assessee for.....
Judgment:

Sabyasachi Mukharji, J.

1. This is a reference under Section 66(2) or the Indian Income-tax Act, 1922, for determination of the following question :

'Whether, on the facts and in the circumstances of the case, the sum of rupees one lakh, eleven thousand, seven hundred and seventy-nine, said to have been forgone by the assessee as managing agency commission was allowable as a revenue expenditure under Section 10(2)(xv) of the Indian Income-tax Act, 1922, for the assessment year 1954-55? '

2. The assessment year concerned in this reference is 1954-55, the corresponding previous year being the financial year ended 31st March, 1954. The assessee, the Birla Bros. (Gwalior) Ltd. (now Birla Gwalior Private Ltd.), is a private limited company and acts as managing agents of several other limited liability companies. Under the managing agency agreement between the assessee-company and the managed company, the assessee-company was entitled to receive a commission @ 12 1/2 per cent. on the net profits of the managed company together with a sum of Rs. 18,000 for office allowance. The accounting year of both the managed company and the managing agents ended on the 31st of March, each year. On the basis of the calculations of the net profits earned by the managed company, pursuant to the agreement between the parties, the managing agency remuneration that the assessee-company would have been entitled to for the assessment year 1954-55 was Rs. 1,11,779. For the accounting year ending on 31st March, 1954, the directors of the assessee-company passed a resolution on 8th November, 1954, agreeing to forgo the commission due to the assessee-company. The managed company's accounts were passed by the auditors on 4th December, 1954, and later adopted in the general meeting. In this year the commission was agreed to be given up by the assessee-company before the accounts of the managed company were finally made up.

3. During the course of the assessment, for the assessment year 1954-55, the assessee claimed that the amount of the managing agency commission which had become due to it from National Bearing Co. Ltd., at the end of the previous, year should not be included in its total income as the assessee had agreed to forgo the amounts on grounds of commercial expediency. The Income-tax Officer held that the managed company had earned a substantial profit. He was of the opinion there could be no valid reasons for the assessee agreeing to give up the commission it was entitled to. He, therefore, added back the commission due to the assessee-company @ 12 1/2 per cent. on the net profits of the managed company for this year and added back the amount of Rs. 1,11,779 to the assrssee's total income for the assessment year 1954-55.

4. The assessee preferred an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner was of the opinion that the managing agency commission has accrued to the assessee at the end of the accounting year. The Appellate Assistant Commissioner, therefore, was of the opinion that such remuneration had accrued to the assessee as its income and the voluntary forgoing of the commission amounted to a gift by the assessee of the income that had already accrued to it. The Appellate Assistant Commissioner further held that, as the managed company had made sufficient profits, it could not be said that the waiving of the commission was with a view to nursing the investment in the hope of better future yields. He, therefore, upheld the order of the Income-tax Officer.

5. There was a further appeal before the Income-tax Appellate Tribunal. The appeals in respect of the assessment years 1954-55, 1955-56 and 1956-57 together with the appeals for the assessment years 1953-54 and 1957-58 were heard and disposed of by a consolidated order dated 3rd July, 1962.

6. As a good deal of controversy has arisen in this case on the question of what was actually decided by the Income-tax Appellate tribunal it would be necessary to set out in detail the actual decision of the Tribunal. It appears from the order of the Tribunal which are from pages 25 onwards in the paper book that two different contentions were made on behalf of the assessee before the Tribunal. It was contended, firstly, that the forgoing of the remuneration was done by the assessee for reasons of commercial expediency, as the managed company had suffered losses in the past and had been carrying forward heavy unabsorbed depreciation for which no adequate provision had been made in the balance-sheets for the three assessment years under appeals. It was, therefore, claimed that such forgoing of the remuneration was allowable as a deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922. The arguments and the submissions made on behalf of the assessee in this context are set out from the beginning of paragraph 3 of page 26 of the order of the Income-tax Tribunal up to the middle of page 27 of the said order.

7. The first argument 'as mentioned' hereinbefore ends with the following sentencd:

'Relying on the decision of the Supreme Court in the case of Commissioner of Income-tax v. Chandulal Keshavlal & Co., : [1960]38ITR601(SC) , the learned representative urged that the remuneration forgone was an expenditure incurred by the assessee for the purposes of his business and, as such, was allowable under Section 10(2)(xv).'

8. Thereafter, the Tribunal at page 27 deals with the argument on behalf of the assessee when reliance was placed on the decision of the Bombay High Court in the case of H. M. Kashiparekh & Co. Ltd. v. Commissioner of Income-tax, [1960] 39 I.T.R. 706 (Bom.). The facts of the said case are thereafter set out. After setting out the rival contentions at page 28 the Tribunal observed as follows:

' Therefore, the question that is being agitated before us has not been considered by the Supreme Court. That is, where the assessee's accounts were kept on the mercantile system and the managing agency remuneration had become due to the assessee before the closing of the accounting year, can the assessee, by subsequently giving up the remuneration due to it, claim it as a deduction under the provisions of Section 10(2)(xv) The decision of the Bombay High Court in Kashiparekh & Co.'s case cited above is a complete answer to this question. Their Lordships said at page 722 of the report that 'if the year in which income was earned is chosen as the year of taxability, the subsequent settlement of the liability must relate back to the year in which the income was earned... .The accrual of the commission, the making of the accounts... .and the forgoing of the commission at the time of the making of the accounts are not disjointed facts. There is a dovetailing about them which cannot be ignored. Their Lordships held that it was the real income of the assessee for the accounting year that was liable to tax and that the real income could not be arrived at without taking into account the amount forgone by the assessee.' We are satisfied that in respect of the assessment years 1954-55, 1955-56 and 1956-57, the assessee-company surrendered the remuneration due to it in respect of the managing agency of National Bearing Co. Ltd. for reasons of commercial expediency and it was justified in claiming that these amounts be not included in its total income for these years. Following the decision of the Bombay High Court in Kashiparekh & Co.'s case and the decision of the President of the Tribunal in respect of the assessee for the assessment year 1952-53, we direct that the additions of Rs. 1,11,779, Rs. 2,37,801 and Rs. 3,22,482 made in the total income of the assessee for the assessment years 1954-55, 1955-56 and 1956-57 respectively be deleted.'

9. On this it appears that the revenue made an application for reference under Section 66(1) of the Indian Income-tax Act, for referring a question of law to this court. The following question was suggested in the application for reference by the revenue to the Tribunal:

'Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,11,779 said to have been forgone by the assessee as managing agency commission was allowable as a revenue expenditure under Section 10(2)(xv) of the Indian Income-tax Act, 1922, for the assessment year 1954-55 ?'

10. In the respondent's reply before the Tribunal the assessee suggested 'that in the event the Tribunal agrees to refer a case to the High Court, then only the following questions should be referred to the High Court:

'(a) Whether, on the facts and in the circumstances of the case, the amount of Rs. 1,11,779 representing managing agency commission forgone by the assessee stood to be included in the assessment for 1954-55?

(b) If the answer to the foregoing question is in the affirmative did the forgoing of the said sum of Rs. 1,11,779 amount to expenditure laid out wholly and exclusively for the purpose of the business and deductible under Section 10(2)(xv) in the assessment for 1954-55?

(c) If the answer to the immediately foregoing question is in the negative, was the said amount of Rs. 1,11,779 which was forgone in the previous year relevant to the assessment year 1955-56, expenditure deductible under Section 10(2)(xv) in the assessment of that previous year ?'

11. The Tribunal by its order dated 24th of April, 1963, rejected the said application. The Tribunal observed :

'Although the question of allowability of the amounts specifically mentioned in the reference applications as expenditure under Section 10(2)(xv) of the Indian Income-tax Act, 1922, had been raised and argued by the assessee-company's representative before the Tribunal, still without deciding that issue the Tribunal had gone by the real income theory as enunciated by a series of decisions of the Bombay High Court which had ultimately received the blessings of the Supreme Court in the case of Commissioner of Income-tax v. Shoorji Vallabhdas and Co., : [1962]46ITR144(SC) '.

12. The Tribunal was of the opinion that the question suggested by the revenue was misconceived and did not refer the question asked for. Thereafter, the revenue made an application to this court and as directed under Section 66(2) of the Indian Income-tax Act, the Tribunal has referred the above-mentioned question to this court.

13. In the statement of the case, at page 3, the Tribunal observed as follows :

' To the departmental, representative's contention that the remuneration having accrued at the close of the accounting year, if the assessee chose to forgo a part of it, it would amount to a voluntary giving up of a part of its income and would really be an application of its income, the Tribunal held that any remuneration earned which was given up for reasons of commercial expediency was expenditure incurred for the purpose of the business and was allowable under Section 10(2)(xv). Relying on the decision of the Bombay High Court in the case of H. M. Kashiparekh & Co. Ltd. v. Commissioner of Income-tax, the Tribunal held that it was the real income of the assessee for the accounting year that was liable to be taxed and that the real income could not be arrived at without taking into account the amount forgone by the assessee. The Tribunal was satisfied that in respect of the assessment years 1954-55, 1955-56, and 1956-57 the assessee-company had. surrendered the remuneration due to it in respect of the managing agency of National Bearing Co. Ltd., for reasons of commercial expediency, and it was justified in claiming that these amounts be not included in its total income for these years. The Tribunal, therefore, directed that the addition of Rs. 1,11,779 be deleted from the total income of the assessee-company for the assessment year 1954-55.'

14. It was contended by Mr. R. C. Deb, learned counsel for the assessee, that we should decline to answer the question referred to this court inasmuch as, according to him, the Tribunal had decided the question of inclusion of Rs. 1,11,779 in the total income of the assessee on the basis of real income theory under Section 10(1) of the Indian Income-tax Act. The question posed before this court is whether such amount was allowable as -deduction under Section 19(2)(xv) of the Indian Income-tax Act, 1922, It was contended that any answer given to the question referred to this court would be academic as it would not resolve the controversy between the parties. The decision of the Tribunal that it should not be included in the real income of the assessee has not been challenged nor has it been referred for adjudication to this court. Mr. B. L. Pal, learned counsel for the revenue, on the other hand, contends that, though two different contentions, were urged before the Tribunal, the Tribunal has chosen to pose the question as mentioned before at page 28 :

'That is, where the assessee's accounts were kept on the mercantile system and the managing agency remuneration had become due to the assessee before the closing of the accounting year, can the assessee, by subsequently giving up the remuneration due to it, claim it has a deduction under the provisions of Section 10(2)(xv) '

15. According to Mr. Pal the Tribunal has chosen to answer that question. by saying that such amounts were deductible under Section 10(2)(xv) and the Tribunal has, according to Mr. Pal, wrongly relied on the decision of the Bombay High Court in the case of H, M. K.ashiparekh & Co. Mr. Pal has urged that, unlike Kashiparekh's case, the Tribunal has not thought it. irrelevant or unnecessary to answer the question under Section I0(2)(xv) of the Indian Income-tax Act, 1922. The Tribunal has only considered the allowability of deduction under section I0(2)(xv) of the Income-tax Act, and in considering that, according to M. Pal, the Tribunal has wrongly relied on or referred to the decision of the Bombay High Court in the case of Kashiparekh & Co. Mr, Pal urged that the Tribunal has not really decided the question of deletion of income on the ground of real income theory or on the basis of Section 10(1) of the Indian Income-tax Act, 1922.

16. Even in a case where a question has been directed to be referred to this court under Section 66(2) of the Indian Income-tax Act, 1922, the court may refuse to answer the said question if it is academic or if the court considers that it does not arise out of the order of the Tribunal. Reference may be made for this proposition to the decision of the SupremeCourt in the case of Lakshmiratan Cotton Mills Co. Ltd. v. Commissioner of Income-tax, : [1969]73ITR634(SC) . It is also necessary to reiterate that in finding out what the Tribunal has really decided we must refer to the Appellate order of the Tribunal. It is not necessary, therefore, to really consider what the Tribunal has said in the order refusing to refer the question to this court or in the statement of the case. Reading the order of the Tribunal it is clear that two separate contentions were made before the Tribunal on behalf of the assessee as has been set out before. The first contention was about the allowability of this expenditure on the ground of commercial expediency under Section 10(2)(xv) of the Income-tax Act. The other contention was that, inasmuch as the giving up of this remuneration was done due to commercial expediency, prior to the final making out of the accounts, the amounts given up or forgone do not form the income of the assessee and as the assessee's real income is liable to be taxed, these amounts should not be included in the income of the assessee. For this, reliance was placed on the decision of the Bombay High Court in the case of Kashiparekh & Co. The Tribunal, when it observed that the decision of the Bombay High Court in Kashiparekh & Co. is a complete answer to the question before it, in our opinon, was really saying that in view of the decision of the Bombay High Court the question of allowability under Section 10(2)(xv) of the Income-tax Act, 1922, does not arise. A reference to the said case will make the position clear. What had happened in the said decision of Kashiparekh & Co. was that the assessee who had maintained his accounts on the mercantile system was the managing agent of a paper mill company. Under the managing agency agreement it was under a duty to forgo up to one-third of its commission where the profits of the managed company were not sufficient to pay a dividend of 6 per cent. For the accounting year ending March 31, 1950, the assessee earned a commission of Rs. 1,17,644 but as a result of the resolution passed by the managed company and the assessee-company, the assessee gave up a sum of Rs. 97,000 in December, 1950. The Appellate Tribunal held that the maximum amount the assessee was bound to forgo was only Rs. 31,215 and included the balance of the amount forgone, viz., Rs. 57,785, in the taxable income.

17. The Tribunal, however, found that the sum of Rs. 57,785 was also given up for reasons of commercial expediency. Originally, the following questions were referred to the court:

'(i) Whether the order of the Commissioner of Income-tax under Section 33B(1) during the pendency of the proceedings under Section 34 of the Act is illegal or void ?

(ii) Whether the amount of Rs. 97,000 surrendered by the assessee-company could be allowed as a revenue deduction under Section 10(2)(xv) of the Act?

(iii) If the answer to question (ii) is in the negative, whether the sum of Rs. 57,785 (Rs. 97,000--Rs. 39,215) could legally be included in the assessee-company's total income for the assessment year ended 31st. March, 1950?'

18. This reference, it appears, came up for hearing originally before-Chagla C. J. and Tendolkar J. and their Lordships by their order directed a further supplementary statement of the case to be filed before the court. Such supplementary statement having been filed the reference finally came up for hearing before S. T. Desai J. and V. S. Desai J. of the Bombay High Court. After discussing the principles, the Bombay High Court observed that the sum given up should not be included in the real income of the assessee. They, therefore, kept the questions Nos. 1 and 2 as they were originally and reframed the third question as :

'Whether the sum of Rs. 57,785 could legally be included in the assessee's income for the assessment year 31st March, 1950 ?

After reframing the question in the manner indicated, the court answered it in the negative and in that view of the matter the court observed that it was not necessary to answer the first two questions. It would be clear, therefore, that what the Bombay High Court did was to hold that the sum given up could not be included in the real income of the assessee. Having held that, the Bombay High Court observed that the question whether it should be allowed as a deduction under Section 10(2)(xv) of the Income-tax Act, 1922, need not be answered. It appears that after posing the question in the instant case the Tribunal observed that the decision of the Bombay High Court is a complete answer to this question. It appears to us that this H. M. Kashiparekh's case can only be a complete answer to the question posed in the sense that if it is not to be included in the real income of the assessee, the question of the allowability of the said amount forgone as a deduction under Section 10(2)(xv) of the Income-tax Act, 1922, does not arise. It further appears that, in any event, the Tribunal decided the question whether this sum should be included in the real income of the assessee, as the Tribunal observed as follows : 'Their Lordships held 'it was the real income of the assessee for the accounting year that was liable to be taxed and that the real income-should not be arrived at without taking into account the amount forgone by the assessee'.'

19. The Tribunal further observed that they were satisfied that the said remuneration due to it in respect of the managing agency of National Bearing Co. Ltd. was given up by the assessee for reasons of commercial expediency and it was justified in claiming that the sum be not included in its total income for these years. The question of deduction under Section 10(2)(xv) arises after the amounts have been included in the total income of the assessee. Non-inclusion is in the income-tax law a thing different from the deduction. The Tribunal has chosen to express that it should not be included in the total income of the assessee. The Tribunal has further observed that these amounts should be deleted from the income of the assessee. It appears that the Tribunal has proceeded on the theory of real income and has decided the case on the provisions of Section 10(1) of the Indian Income-tax Act, 1922. It appears to us, therefore, reading the order of the Tribunal as a whole, that though the two contentions were raised before the Tribunal, the Tribunal has mainly decided the question on the theory of real income and has held that these amounts do not form the real income of the assessee, inasmuch as, according to the Tribunal, these remunerations were forgone on grounds of commercial expediency.

20. Therefore it appears to us that the question posed before this court does not challenge that finding. In that view of the matter, whatever answer is given to the question referred to this court would really be of an academic nature because the finding of the Tribunal that it is not to be included in the real income of the assessee would remain. Reading the order of the Tribunal as a whole, it appears to us that apart from the question of Section 10(2)(xv), the Tribunal has also decided, in any event, whether these amounts should be included in the real income of the assessee under Section 10(1) of the Indian Income-tax Act, 1922. Once it is decided that these amounts do not form part of the real income of the assessee which is liable to tax, the question of deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922, really becomes irrelevant and any question dealing with it would be purely of an academic nature in this reference. In that view of the matter, we decline to answer the question referred.

21. Mr. Pal then contended that the question under Section 66(2) of the Income-tax Act, 1922, should be refrained to include whether these amounts could be included in the real income of the assessee and for this Mr. Pal drew our attention to the decision of the Supreme Court in the caseof Commissioner of Income-tax v. Smt. Anusuya Devi, : [1968]68ITR750(SC) . There the Supreme court observed that :

'The power to reframe a question may be exercised to clarify some obscurity in the question referred, or to pinpoint the real issue between the taxpayer and the department or for similar other reasons.'

'It cannot be exercised', the Supreme Court observed further, 'for reopening an enquiry on questions of fact or law which has been closed by the order of the Tribunal.'

22. At page 756 the Supreme Court observed that

'If the Tribunal refuses to state a case under Sub-section (1) of Section 66 on the ground that no question of law arises, and the High Court is not satisfied with the correctness of that decision, the High Court may, in exercise of the power under Section 66(2), require the Tribunal to state a case, and refer it. When the Tribunal is not invited to state a case on a question of law alleged to arise out of its order, the High Court cannot direct the Tribunal to state it on that question : See Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd., : [1961]42ITR589(SC) The reason of the rule is clear.'

23. According to the Supreme Court 'the High Court cannot hold that the decision of the Tribunal refusing to state a case on a particular question is incorrect if the Tribunal was not asked to consider whether the question arose out of its order and whether it was a question of law.' Here, there is no obscurity in the question framed in this reference. The question is clear. The Tribunal has held, as mentioned hereinbefore, that these amounts do not constitute the real income of the assessee and should not be included in the total income of the assessee. That finding is there and it has not beenchallenged by the revenue in the form of a question. This controversy cannot be brought in within the ambit of the present question before thiscourt by exercising the power of reframing the question. To do so would not really be reframing the question pending before the court but raising a new question. The Tribunal was not asked by the revenue to consider whether this question of the real income should be referred to this court. The assessee's suggestion that such a question should be referred was refused by file Tribunal. Thereafter, there was no application under Section 66(2) of the Act to refer that question. In that view of the matter we would not to justified in reframing the question in the manner asked for by Mr. Pal.

24. Mr. Pal drew our attention to the decision of the Supreme Court in the case of Commissioner of Income-tax v. Shoorji Vallabhdas &. Co., and the decision of the Supreme Court in the case of Commissioner of Income-tax v. A. Gajapathy Naidu, : [1964]53ITR114(SC) and Commissioner of Income-tax v. Swadeshi Cotton and Flour Mills (P.) Ltd., : [1964]53ITR134(SC) Reliance was also placed by counsel of both sides on. the decision of the Bombay High Court in the case of H. M. K.ashiparekh & Co. Ltd. and the decision of the Supreme Court, where the said decision of the Bombay High Court was approved in the case of Poona Electric Supply Co. Ltd. v. Commissioner of Income-tax, : [1965]57ITR521(SC) . Mr. Pal also placed great reliance on the decisions of this court in the case of Rungta Sons Ltd. v. Commissioner of Income-tax, [1964] 54 I.T.R. 447 (Cal.) and Rungta Sons (Private) Ltd. v. Commissioner of Income-tax, [1966] 62 I.T.R. 468 (Cal.) .

25. As mentioned hereinbefore, in our opinion, on a proper reading of the order of the Tribunal as a whole, it is manifest that the Tribunal had held following the decision of the Bombay High Court in H. M. Kashiparekh & Co. Ltd., that in determining the real income of the assessee the amount forgone by the assessee could not be included. The question referred to this court does not challenge the correctness of that finding. Therefore, it is not necessary for us to express any opinion on the question whether the Tribunal was justified in relying on the decision of H. M. Kashiparekh's case and in holding that the sum forgone should not be included in the income of the assessee. In these circumstances, it is not necessary for us to discuss or deal in detail with the various authorities mentioned hereinbefore and cited at the Bar.

26. In the facts and circumstances of this case, we, therefore, decline to answer the question referred pursuant to the order under Section 66(2) of the Indian Income-tax Act, 1922, as the answer will be of an academic nature in the facts and on the circumstances of this case.

27. On the facts and in the circumstances of this case, each party will bear and pay its own costs.

Sankar Prasad Mitra, J.

28. I agree.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //