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Rungta Sons (Private) Ltd. Vs. Commissioner of Income-tax. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 182 of 1961
Reported in[1966]62ITR468(Cal)
AppellantRungta Sons (Private) Ltd.
RespondentCommissioner of Income-tax.
Cases Referred and Shri Ambica Mills Ltd. v. Commissioner of Income
Excerpt:
- .....of law have been referred to us :'1. whether, on the facts and in the circumstances of the case, office allowance receivable by the company from the managed companies was income of the company for the year 1954-55 even though it was surrendered by a resolution passed before the end of the accounting perio ?2. whether, on the facts and in the circumstances of the case, managing agency commission and office allowance received by the assessee-company from m. g. r. iron & steel works ltd. was income of the assessee-company for the assessment year 1954-55 even though it was surrendered by the assessee-company, just because the resolution surrendering the commission and the allowance was passed after the end of the accounting perio ?'these questions have arisen under the following.....
Judgment:

MUSUD, J. - In this reference under section 66(1) of the Income-tax Act 1922, the following two questions of law have been referred to us :

'1. Whether, on the facts and in the circumstances of the case, office allowance receivable by the company from the managed companies was income of the company for the year 1954-55 even though it was surrendered by a resolution passed before the end of the accounting perio ?

2. Whether, on the facts and in the circumstances of the case, managing agency commission and office allowance received by the assessee-company from M. G. R. Iron & Steel Works Ltd. was income of the assessee-company for the assessment year 1954-55 even though it was surrendered by the assessee-company, just because the resolution surrendering the commission and the allowance was passed after the end of the accounting perio ?'

These questions have arisen under the following circumstances :

The assessee is a private limited company managing other companies as managing agents and also doing business in minerals. The assessment year in question is 1954-55 and the corresponding previous year is 2010 Ratha Jatra ending on July 11, 1953. The assessee-company was entitled to office allowance and managing agency commission from the following companies at the rates mentioned against their names :

Rs.

(a)

Rungta Engineering Construction Co. Ltd.

I.

Office allowance

6,000

II.

Minimum commission

6,000

(b)

Orient Industrial Engineering Co. Ltd.

I.

Office allowance

6,000

II.

Minimum commission

6,000

(c)

Bengal General Trading Co. Ltd.

I.

Office allowance

3,000

II.

Minimum commission

3,000

(d)

Orient Potteries Ltd.

I.

Office allowance

3,000

II.

Minimum commission

3,000

(e)

M. G. R. Iron & Steel Works Ltd.

I.

Office allowance

3,000

II.

Minimum commission

3,000

By a resolution dated 5th July, 1953, the assessee-company relinquished its rights to receive the managing agency commission and allowances in respect of the first four companies. Similarly, the assessee, by a resolution dated 30th September, 1953, gave up office allowance and minimum commission in respect of M. G. R. Iron & Steel Works Ltd. The total sum payable to the assessee as office allowance and minimum commission in respect of the aforesaid five companies amounted to Rs. 42,000. The Income-tax Officer included the whole amount of Rs. 42,000 in the total income of the assessee on the ground that the sum had already accrued to the assessee. The Appellate Assistant Commissioner, on appeal, confirmed the order of the Income-tax Officer. The Appellate Tribunal, however, partly allowed the appeal of the assessee, holding that, in respect of the first four companies, the assessee-firm was entitled to deduction of the managing agency commission and rejecting the other contentions of the assessee in respect of other claims.

Mr. Sankar Ghosh, learned counsel for the assessee, has challenged the decision of the Appellate Tribunal on the following grounds :

1. The office allowance amounting to Rs. 18,000 receivable by the assessee from M/s. Rungta Engineering Construction Co. Ltd., Orient Industrial Engineering Co. Ltd., Bengal General Trading Co. Ltd. and Orient Potteries Ltd. in the accounting year ending on July 11, 1953, but relinquished by the companys resolution dated July 5, 1953, on grounds of commercial expediency, should not have been included in the total income of the assessee, inasmuch as the principles decided in Commissioner of Income-tax v. Shoorji Vallabhdas & Co. should have been followed in the instant case as it has been done by the revenue in excluding commission payable by the said four companies.

2. The office allowance and also commission amounting to a total sum of Rs. 6,000 which the assessee was entitled to receive from M. G. R. Iron & Steel Works Ltd. should not have been included in the assessees total income as the said amount has not been received by the assessee in pursuance of its resolution dated 30th September, 1953.

At the outset he has referred to the said Supreme Court decision in Commissioner of Income-tax v. Shoorji Vallabhdas & Co. the facts of which may be stated as follows :

The assessee-firm was the managing agent of two shipping companies and was entitled to receive as commission at the rate of 10% of the freight charged under its managing agency agreement. Between April 1, 1947, and December 31, 1947, the amounts of commission at the rate of 10% were Rs. 1,71,885 from Malabar Steamship Co. Ltd. and Rs. 2,56,815 from the New Dholera Steamship Ltd., which were credited in the books of account of the assessee-firm to itself with a corresponding debit to the shipping companies. In early 1947, the assessee-firm floated two private companies. In November 20, 1947, the assessee-firm expressed its desire to resign from the managing agency and to have the two private limited companies appointed on the same term. The assessee at this stage agreed to forgo the previous rate of 10% and accept a reduced rate of 2.5% of the total freight. On December 30, 1947, at the extraordinary general meetings of the managed companies the two private limited companies were appointed as managing agents with effect from January 1, 1948. The relevant accounting year ended on March 31, 1948, and, thereafter, at the annual general meetings of the two managed companies held in December, 1948, the commission was formally reduced from 10% of the freight to 2.5%. As a result the assessee-firm gave up 75% of its earnings during the relevant years of account which amounted to Rs. 1,36,903 (Malabar Steamship Co. Ltd.) and Rs. 2,00,625 (New Dholera Steamship Ltd.). The said sums of money given up by the assessee were claimed as an expenditure under section 10(2) (xv) of the Income-tax Act, 1922, but were disallowed. The Income-tax Officer and the Appellate Assistant Commissioner rejected the contention of the assessee but the Appellate Tribunal and, thereafter, the Bombay High Court on reference, set aside the order of the Income-tax Officer. The appeal was dismissed by the Supreme Court and Hidayatullah J., holding that the High Court was right in coming to the conclusion that on the facts of the case the larger income neither accrued nor was received by the assessee-firm and, as such, not taxable, has stated at page 148 :

'Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, namely, the accrual of the income or its receipt; but 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 as entry is made about a hypothetical income, 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 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... Here too, the agreements within the previous year replaced the earlier agreements and altered the rate in such a way as to make the income different from what had been entered in the books of account. A mere book-keeping entry cannot be income, unless income has actually resulted and, in the present case, by the change of the terms the income which accrued and was received consisted of the lesser amounts and not the larger.'

Mr. Ghosh has argued that following the same principle the Income-tax Officer should have held the office allowances payable to M/s. Rungta Engineering Construction Co. Ltd., Orient Industrial Engineering Co. Ltd., Bengal General Trading Co. Ltd., and Orient Potteries Ltd., amounting to a total sum of Rs. 18,000, should not have been included in the total income as the said amount had neither accrued nor received by the assessee, inasmuch as by resolution dated July 5, 1953, the assessee had relinquished its rights within the accounting year to receive the allowances. In support of his arguments he has referred us to the respective agreements between the assessee-firm and the said four companies, which although not included in the paper-book were relied on by both the parties. He has drawn our attention to clause 3 of the agreement between the assessee-firm and the Orient Industrial Engineering Co. Ltd. dated 25th April, 1953, the relevant provisions of which are stated as below :

'3. The remuneration of the agency company as such managing agents shall be as follows :

(i) An office allowance of Rs. 500 per month commencing from the date of incorporation; and

(ii) A commission of 10% of the net yearly profits of the company calculated in accordance with the provision of section 87(c) (3) of the Act provided that in case of absence or inadequacy of profits, a minimum payment of Rs. 6,000 for a whole year shall be made on this account by the company to the managing agents in lieu of the commission aforesaid...'

Mr. Ghosh has wanted us to construe that the remuneration of the assessee-firm comprised both the commission and office allowance and that the proviso to clause 3(ii) should equally govern clause 3(i) and, as such, the office allowance is also payable and can only accrue at the end of the year. As the office allowance has been given up within the accounting year, he has submitted, that, like the claim in respect of commission, the office allowance also has not accrued within the accounting year and, as such, should not be made taxable. In our opinion this contention cannot be accepted. Clause 3 of the agreement clearly provides that the agency company will be entitled to receive commission in the shape of office allowance of Rs. 500 per month and a commission of 10% of the net yearly profits which in no case would be less than Rs. 6,000 for the whole year. The proviso specifically mentions the case of commission and nothing in the proviso can be referable to the case of monthly allowance for the office. Further, the proviso is added to clause 3(ii) and not to clause 3(i). Thus, it cannot be construed that the assessee-firm is entitled to office allowance only at the end of the year. This conclusion follows from the obvious fact that the office allowance and the commission do not stand on the same footing, inasmuch as the office allowance has specifically been quantified as 'Rs. 500 per month', and the commission from its very nature cannot be ascertained or paid except at the end of the year. The office allowance, therefore, payable to the said four companies, had accrued at the end of every month and, as such, the relinquishment of such allowance on July 5, 1953, would not entitle the assessee to claim deduction of the said Rs. 18,000. But as the accounting period expires on July 11, 1953, and the date of the resolution relinquishing the office allowance is July 5, 1953, the assessee is entitled to claim deduction of the office allowance for the last month only.

Mr. Ghoshs next argument is that both the office allowance and the commission payable to the assessee-firm under its agreement with M. G. R. Iron and Steel Works Ltd. should have been excluded from its total income by the Income-tax Officer inasmuch as the office allowance and the commission receivable from M. G. R. Iron and Steel Works Ltd. have been given up by the assessee in pursuance of its resolution dated 30th September, 1953. Mr. Ghosh has frankly stated that there is nothing to show that in the relevant previous year ending on July 11, 1953, there has been any root or germ which would be referable to the assessees subsequent decisions relinquishing the office allowance and the commission in September, 1953. Adopting the principles laid down in the aforesaid Supreme Court cases, Commissioner of Income-tax v. Shoorji Vallabhdas and Co. and Rungta Sons Ltd. v. Commissioner of Income-tax, we hold that the said sum of Rs. 6,000 has already accrued within the previous year and, as such, has rightly been included in the total income of the assessee. In view of the above Supreme Court decision and our construction of clause 3 of the agreement, as stated above, it is not necessary for us to discuss the two other cases which Mr. Ghosh has cited, namely, E. D. Sassoon and Co. Ltd. v. Commissioner of Income-tax and Shri Ambica Mills Ltd. v. Commissioner of Income-tax.

For the reasons stated above, the answers to the questions of law under reference may be stated as follows :

1. Yes; but the office allowance payable for the last month by M/s. Rungta Engineering Construction Co. Ltd., Orient Industrial Engineering Co. Ltd., Bengal General Trading Co. Ltd. and Orient Potteries Ltd. is not the income of the assessee and should be excluded from the assessees total income.

2. Yes.

Each party to bear and pay the costs of this reference.

MITTER J. - I agree.


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