CHAKRAVARTTI. C.J. - This is a reference under section 66(1) of the Income-tax Act, made by the Income-tax Appellate Tribunal, of a question of law arising under section 7 of the Act. Broadly stated, the question is whether when a person employed by a company is allowed a commission under the terms of his employment, but he actually draws the commission not in the year when it is earned and is credited in the employers books but in a subsequent year, such commission is assessable as the income of the year in which it becomes due or whether such amounts as are actually drawn are assessable as the income of the years when they are drawn. The question has arisen out of the following facts.
The assessee, Sri Bhuban Mohan Banerjee, is employed under G.D. Banerjee & Co. Ltd., Calcutta, as the manager of its Kanpur branch. He draws a monthly salary with free board and lodging and is also entitled to a commission of ten per cent. of the companys net profits from the Kanpur Branch. It would appear that during one of the relevant assessment years his monthly salary was Rs. 125, but during the remaining three years it was Rs. 150. In the Bengali year ending on the April 12, 1940, relative to the assessment year 1940-41, the company credited the assessee in its books with Rs. 47,801 as commission payable to him. Similarly, in the Bengali year ending on the April 13, 1941, relative to the assessment year 1941-42, the assessee was credited with a further sum of Rs. 13,401 as commission. The company in its own assessment for the years 1940-41 and 1941-42 claimed these amounts of commission as expenditure and was allowed a deduction. The assessee, however, did not draw the major part of the amounts credited to him, but drew only Rs. 1,200 in the first of the two years and Rs. 4,800 in the second. He had thus a large credit balance in the books of his employer. The next four years are blank as respects commission, because none was earned or cresited to his account. In the year ending in April, 1943, however, which was relative to the assessment year 1943-44, the assessee drew from his employer, besides his salary,a sum of Rs. 31,340 which necessarily came out of the amount of commission lying on his credit. Similarly, in the year ending on the April 13, 1944, relative to the assessment year 1944-45, he drew, besides his salary, a sum of Rs. 40,000. So much however was not lying to his credit at the time and the result of the drawal was that his account with his employer was overdrawn by Rs. 9,162, the balance of the commission credited to him in previous years and lying undrawn being only Rs. 30,838. The next accounting year with which we are concerned is the year ending in April, 1948, relative to the assessment year 1948-49. The opening debit balance in that accounting year was Rs. 1,523. The assessees earnings during the year were Rs. 1,800 on account of salary and Rs. 3,169-8-0 as commission, but he drew out in all only a sum of Rs. 2,385. The result was that the year closed with a credit balance of Rs. 1,061 in his favour. In the next accounting year, that is the year ending in April 1949, relative to the assessment year 1949-50, his earnings were Rs. 1,800 on account of salary and Rs. 620 on account of commission. He had thus available to him those two amounts as also the credit balance of Rs. 1,061; but against those amounts due to him, he drew out only a sum of Rs. 1,650, leaving a credit balance of Rs. 1,931 at the end of the year.
It was in July, 1951, that the assessee first submitted a return and he did so voluntarily. The returns he submitted were for the years 1943-44 to 1949-50. For all the years, the Income-tax Officer assessed the amount of salary as salary, but he also assessed certain further sums which he called 'drawal during the year against commission already adjusted in his account.' These sums were described as income from other sources. The amounts thus brought under assesment as income from other sources were Rs. 31,340 for the accounting year ending on the April 13, 1943, and Rs 30,838 for the accounting year ending on the April 13, 1944. These sums, it will be noticed, were the sums which the assessee withdrew as commission during the two relevant accounting years. In respect of the accounting year ending on the April 13, 1948, relative to the assessment year 1948-49, the Income-tax Officer included in the assessment an amount of Rs. 2,385 as commission withdrawn and income from other sources. It will be recalled that this amount was the whole of the sum actually drawn out by the assessee during that particular accounting year. What the Income-tax Officer, therefore, did was that be assessed Rs. 1,800 as a salary and a further sum of Rs. 2,385 as commission. With respect to the next accounting year, that is the year ending on the April 13, 1949, relative to the assessment year 1949-50, the Income-tax Officer proceeded in the same way. He assessed Rs. 1,800 as the assessees salary and a further sum of Rs. 1,650 as withdrawn against commission already adjusted. It will again be noticed that the whole of the amount actually withdrawn was charged and brought under assessment as commission, whereas the salary was brought in separately, obviously on the accrual basis.
From what I have stated, it will be clear that in making the assessments, the Income-tax Officer paid on regard to either section 7 of the Act or to section 34. He treated the amounts of commission as income from other sources, chargeable under section 12 of the Act and proceeded on the footing that they were liable to be brought under assessment in the years in which they were actually withdrawn. Besides that the amounts concerned were described as 'drawal during the year against commission already adjusted in his account' and that they were treated as income from other sources, no indication was available in the assessesment order as to the basis on which the Income-tax Officer proceeded. In his appeals to the Appellate Assistant Commissioner, the assessee appears to have contended that, like his employer who followed the mercantile method of accounting, he too should be treated as having followed that method, although he actually kept no accounts at all and that the amounts of commission could be brought under assessment only as income of the years when they accrued due. The same contention appears to have been urged before the Income-tax Appellate Tribunal when the assessments were taken to that body on further appeal. The contention was rejected by both the Appellate Assistant Commissioner and the Appellate Tribunal, though for somewhat different reasons. The Appellate Assistant Commissioner observed that if the assessee had really observed the mercantile system of accounting, he would have submitted returns of his income earned by him as commission when that income accrued, and that, not having done so, he could not have it both ways. The Appellate Tribunal disposed of the contention briefly, saying that while the assessee claimed that he should be treated as a person keeping accounts according to the mercantile system, it appeared that he had submitted no returns of income for the relevant assessment years when the income had accrued to him. What inference the Tribunal desired to draw from the omission of the assesee to submit returns earlier is not clear, but the reason on which they actually based their decision appears from what they stated later. They stated that if sums, so large as Rs. 47,801 and 13,401 were really available to him in the years in which they appeared to have been credited, it was wholly incredible that the assessee should have left the amounts with his employer without withdrawing them. The Tribunal, therefore, concluded that the two sums of commission had not been at all made available to the assessee in the years 1941-42 and 1942-43 in which credits in his favour appeared in his employers books and that they had been made available only when he had actually received the amounts from the company. It is again not clear what the Tribunal meant by saying that the amounts of commission had not been made available to the assessee. No one couple explain whether the meaning was that the credit entries or whether it was that although certain amounts were credited to the assessee, he would actually not be able to get the amounts if the wanted to withdraw them, his employer being unable to pay.
After the Tribunal had decided against the assessee in respect of all the assessment years, he asked for a reference to this Court of three questions of law. The Tribunal thought that a question of law did arise and they framed their own question in the following terms :
'Whether on the facts and in the circumstances above set out, the assessees commission income from G. D. Banerjee & Co. Ltd., was properly assessed as his income in the years in which he drew it, instead of in the years in which it became due to him ?'
Before dealing with the question, I should like to point out that it does not appear to me to be wholly accurate in respect of all the accounting years. The reference concerns the assessment years 1943-44, 1944-45, 1948-49 and 1949-50. The question, as framed, presupposes that in the accounting year, relative to each one of those assessment year, a certain amount was withdrawn by the assessee as commission, although he had earned it and it had been credited to him in an earlier year. That position is certainly not correct with respect to the accounting year relative to the assessment year 1948-49 and it is partially incorrect in respect of the accounting year relative tot he next assessment year, namely, 1949-50. For the accounting year relative to the assessment year 194-49, the assessee has been assessed on Rs. 1,800 as his salary and on Rs. 2,385 as commission drawn by him. It will be remembered from what I said a few moments ago that the assesses earnings in the accounting year relative to the assessment year 1948-49 were Rs. 1,800 for salary and Rs. 3,169-8-0 for commission. He drew out in all only an amount of Rs. 2,385. Since the amount of the salary was separately assessed, the amount Rs. 2,385 must obviously be referred to the amount of commission earned during that very year, because the year opened with a debit balance. In that year, therefore, the withdrawal of the commission amount was not withdrawal of an amount which had become due in an earlier year and which was lying adjusted in the adjusted in the accounts. There is a similar inaccuracy in respect of the next accounting and assessment years, but to what extent the sum of Rs. 1,650 is affected by the inaccuracy will require a somewhat elaborate arithmetical operation which I do propose to undertake.
To revert now to the question referred. Mr. Mitra, who appears for the assessee, made it clear at the very beginning of his argument that he did not propose to contend that his client should have been given the benefit of the mercantile system of accounting. He based his contention entirely on section 7 of the Act and argued that under the very words of that section, the amounts of commission fell to be assessed in the years in which they had become due and not in the years in which the amounts or parts of them had been actually paid and received. On behalf of the Commissioner of Income-tax, Mr. Meyer contended that section 7 provided for alternative modes of assessment, the income contemplated by the section being assessable either when it accrued due or when it was actually received. At one stage of his argument Mr. Meyer contended that to assess an assessee in one or the other of the two modes lay in the option to the assessee. It was also contended that even assuming that the basis of liability was receipt, the commission had also been received when it had been credited in the books of the company. For what purpose this last contention was advanced is not clear, because Mr. Meyers concerns was to defend the assessment of the various amounts in the years in which they had been physically received.
While Mr. Mitra insisted that the only section applicable was section 7 of the Act, Mr. Meyer made no attempt to support the assessment as made under section 12. Both sides expressed some surprise, which we share, that section 12 would have been thought of at all and that section 34 should have been forgotten. If the Income-tax Officer had only proceeded under section 34 when it appeared from the returns submitted to him that various amounts of commission had escaped assessment in the proper assessment years, the contentious proceeding which arose and has been running up till today might have been avoided.
Section 7 of the Act, as amended in 1939, has been characterised as 'cumbrous and abscure' and I should think that no section of the Act deserved that description better. The amended section so far as is material reads thus :
'The tax shall be payable by an assessee under the head salaries in respect of any salary or wages, any annuity, pension or gratuity, an any fees, commissions, perquisites or profits in lieu of, or addition to, any salary or wages, which are due to him from, whether paid or not, or are paid by or on behalf of, the Government, a local authority, a company, or any other public body or association, or any private employer and for the purposes of this sub-section advances by way of loan or otherwise of income chargeable under this head shall be deemed to be salary due on the date when the advance is received.'
The material words of the section are : 'The tax shall be payable by an assessee.... in respect of any salary or...commissions...in lieu of or in addition to any salary or wages, which are due to him from, whether, paid or not, or are paid by or on behalf, of the Government..or any private employer.' The crucial words among the words which I have called material are 'which are due to him from, whether paid or not, or are paid by or on behalf or.' Before the amendment of 1939, the words were 'received by him..which are paid by or on behalf of the Crown.' It is clear that the only basis then contemplated by the section was the receipts basis and it is said that many of the assesses contrived to escape payment of tax or to reduce its incidence by either postponing the actual drawal of their salary or commission or by accelerating the drawal. The drawal was so timed that it might not attract any tax at all or even if it did attract tax, it might attract it at a lower rate. It was chiefly to plug that loophole that the section was amended, so as to make salary or commission due but not paid, taxable equally with salary or commission paid. In carrying out that intention, however, and putting it into words, the Legislature adopted a form of expression which it is by no means easy to construe.
To take the first block of the words which I have described as crucial, they are 'which are due to him from, whether paid or not.' It appears to me that those words cover all sums which are due, irrespective of whether they are paid or not paid and, therefore, of amounts due, the portion due and paid as well as the portion due and not paid, are both covered. When amounts are due from the employer to the employees, they may be due and may be paid off. They may also be due and remain wholly unpaid. Lastly, they may be due and may be paid in part while a part remains unpaid. All these various contingencies are, to my mind, amply covered by was intended to be added or is actually added by the next block or words namely, 'or are paid by or on behalf of ?' If it be said that those words were used in order to cover sums due and paid, that purpose has already been served by the first block of words, as I have just explained. If the amounts contemplated by the second block of words are amounts due from employer, then in order to bring in such amounts which are actually paid, the second block or words was not at all necessary, sums due and paid being already covered by their first block of words. Mr. Mitra contended that while the true intention of the second block of words was not too clear, it might be that the Legislature had in contemplation payments made by a party from whom salary or commission was not due, but who served only as the actual payer through whom the real employer liable to pay made the payment. He instanced the case of an official serving one Government being lent to another and being paid by the latter. I do not, however, think that the construction suggested by Mr. Mitra solves the difficulty, because the second block of words contains not only the expression, 'paid by', but also the expression, 'or on behalf of.' It was also suggested that payments which the second block or words had in contemplation might be payments of amounts which could not be said to be amounts due from the employer, such as occasional gratuities, if they could be treated as income at all. I do not think that it is possible to solve the problem by trying to think out the concrete types of payment to which the second block of words might be applicable. An easier and more legitimate approach would be to take the words, as they are, not forgetting their juxtaposition with the first block of words and see what they can possibly mean as a matter of language, irrespective of the actual kinds of payment to which they might be applicable in practice.
It seems to me that the words which I have called crucial can be said to fall into two broad divisions. The first division, or what I have earlier called the first block of words, contemplates amounts which are due. The second division or block contemplates amounts which not due. Amounts due which are contemplated by the first block fall into two sub-divisions, namely, due amounts paid and due amounts not paid, but in both cases amounts which are due. Amounts which are due are not in the contemplation of the second block at all, whether they be paid or not paid. The second block contemplates amounts which are not due and are paid without being due. With respect to such amounts, the description 'whether paid or not' would be clearly inappropriate and the statement 'are paid' was necessary, because the basis here contemplated is actual payment. I am not quite sure whether those words were not introduced with the object of making room for payments of the kind referred to in the last part of the paragraph. The last part says, 'and for the purposes of this sub-section, advances by way of loan or otherwise of income chargeable under this head, shall be deemed to be salary due on the date when the advance is received.' Advances of income by way of loan or otherwise are not payment of sums which are due. When such advances are made, what is paid is money not due. It appears to me that the words 'are paid by or on behalf of' were added for the purpose mainly if not wholly, for covering advances of salary or other payments by way of loan or otherwise before they became due. Whether any other kinds of payment which could be said to be covered by the words are also conceivable, I need not pause to enquire.
In a sense, the whole of the first paragraph of section 7 deals with amounts which are due. The first block of the words which I have called crucial contemplates amounts which are due in fact. The second block contemplates amounts which are not due in fact, but which are made due by the last words of the paragraph by means of a fiction, because it is said that hey also shall be deemed to be salary due on the day when the advances are received. This fiction, however, should not obscure our vision and prevent us from seeing the distinction between the two blocks of the crucial words. In my view, if any of the kinds of payment contemplated by section 7(1) becomes due, then irrespective of whether it is or is not paid in the year in which it becomes due, it must be brought under assessment as the income of that year. There can be no question of assessing it as the income of the year when it is actually paid, if it is not drawn in the year in which it becomes due. The payment basis is relevant only for the kinds of payment contemplated by the second block of words, namely payments of amounts which are not due, for example, advances by way of loan or otherwise of income chargeable under section 7.
I do not think that it is possible to hold that section 7 intends to give an option either to the Income-tax Officer to assess the income in the year of accrual or in the year of receipt according to his choice or to the assessee to offer it when it becomes due or when it is received, as he may please. Mr. Meyer realised that since the section undoubtedly made salary or commission due, whether paid or not, assessable in the year in which it became due, it would be extraordinary if, nevertheless, the Income-tax Officer had been given power to refuse to assess the income in the year in which it had become due, even if the assessee offered it for assessment. As I said earlier, he subsequently put his contention in a different way and said that the option given by the section had been given not to the Income-tax Officer but to the assessee. Once again, I am unable to agree. It would be strange indeed, if a taxing statute, after laying down that a particular amount would become chargeable to tax in a certain contingency, proceeded to enact that the person liable to be charged could have an option not to have it assessed at the time when the contingency attracting tax arose, but at some other time. As far as I can see, section 7(1) does not deal with and does not contemplate any alternatives at all and no question of any option of either the Income-tax Officer or the assessee arises. It deals with and contemplates different kinds of income or payment, chargeable in different circumstances or contingencies . It is addressed to the amounts themselves and not to either the assessees or the taxing officer and its object is to declare the taxability of he amounts in the circumstances specified. The object is not to confer any option on anybody.
Reverting now to the question referred in the present case, so far as the assessment years 1943-44 and 1944-45 are concerned, the amounts received in the relevant accounting years had become due earlier. They were therefore not liable to be included in the assessments for those assessment years. As regards the assessment year 1948-49, the question does not seem to me to arise, because the whole of he commission amount included in the income of the relevant accounting year was earned in that very year and was not either wholly or in part accumulated or arrear commission of any previous year. As respects the last assessment year, the amount of Rs. 1,650 is referable only in part to commission which had been earned in a previous year, but what that part is no one has determined.
In the result, the question referred should, in my opinion, be answered in the following way :
As respects assessment years 1943-44 and 1944-45 - 'No.'
As respects the assessment year 1948-49, the question does not arise.
As respect the assessment year 1949-50 - 'No.', as to the part coming out of commission earned in previous years and lying to the credit of the assessee.
The assessee is entitled to his costs of this reference.
LAHIRI, J. - I agree.
Reference answered accordingly.