1954 (5) TMI 2 - SC - Income Tax

Accrual of Income - managing agency commission - computation of taxable income - enforceability of the claim for a proportionate share of the remuneration by the assignor from the very date of assignment - whether the money so received accrued by way of remuneration for the year s work and became taxable income - joint income of the assignor and the assignee or the sole income of the assignee - distinction between right to receive the income and right to the ownership of the income - HELD THAT - A distinction exists in law between the right to receive or get payment of a certain amount of money and the right to the money itself. The right to enforce payment of money may belong to one person. But the beneficial right in that money may belong wholly or partially to another. Benami contracts are familiar examples of such a case. Instances of joint rights in money or money s worth enforceable only at the instance of one out of the persons entitled in special situations are easily conceivable. A term in a managing agency agreement between the principal and the agent as to the person to whom the remuneration is payable or is to become due can only have been meant as a protection of the principal in respect of multiplicity of claims against himself and cannot settle the substantive rights between persons who may have contributed to earn the remuneration. It is urged that this as well as clauses 1 and 3 of the managing agency agreement show that the assignor and the assignee are to be treated as one entity and that on assignment the assignee becomes the managing agent as if his name had been inserted in the managing agency agreement from the beginning and that the continuity of the managing agency was preserved thereby and that whoever satisfies the description of the managing agent at the time when the commission for the year becomes due is also the person entitled to the amount by way of remuneration--not as per this argument by virtue of any mutual arrangement between the assignor and the assignee but--by the very terms of the managing agency which is the source of income. It is urged therefore that this feature stamps the managing agency as an income-bearing asset. In substance therefore this argument amounts to saying that by virtue of this clause the service of the assignee subsequent to the date of assignment can be tacked on to the service of the assignor for the earlier portion of the year so as to constitute it service for the entire year which earns the remuneration as the sole property of the assignee i.e. that the assignment has to be given retrospective operation from the commencement of the year in respect of the work so far done. But if this clause is to be construed as having such retrospective operation it must on the very terms of the underlined portion become so operative from the original commencement of the agreement itself and not from any particular date or event thereafter. There is no reason to confine such retrospective operation only to the inchoate advantage for remuneration arising from partly finished work of the year. The underlined portion of the clause if it is to have retrospective effect at all is comprehensive enough to take within its ambit every other claim which may have accrued but remained unpaid commencing from the initial stage of the agency. On this construction therefore the right to every such claim would pass to the assignee. Such a result would obviously be untenable and no reason exists why the retrospective operation to be imputed to this clause should be confined to the limited extent which serves the argument put forward in this behalf by the appellant-Sassoons. It appears to me therefore quite clear on a fair reading of the entire clause 10 of the managing agency agreement that the only effect thereof is to bring about the result specifically stated in the second portion of that clause (which has been side lined) i.e. that on assignment the assignee firm shall be entitled to demand and obtain from the principal company a fresh managing agency agreement in its own favour for the residue of the term outstanding and with like powers authorities remuneration and emoluments and subject to the like terms and conditions. In my opinion all that the clause 10 taken as a whole means is no more than that the assignee is entitled to demand a fresh agreement on the same terms and that even without a fresh agreement being formally executed as between the principal mill company and the assignee-company their mutual rights and obligations will be governed by the old agreement for the residue of the term with the assignee-company s name substituted for the assignor-company s name. Such effect can only be prospective and not retrospective. There can be no doubt however that though any mere clause in the managing agency agreement that the employer is to be responsible only to the assignee for the payment of the entire year s remuneration is not by itself enough to vest in the assignee a beneficial right to the remuneration of the year such a right may arise by virtue of a specific or implied term as between the transferor and the transferee either as part of the deed of transfer or independent thereof. It is on account of the insistence on this view that as I apprehend learned counsel for the Sassoons disclaimed the above mentioned special term between the assignor and the assignee as being superfluous. He seems to have sought thereby to obviate the consequence of the contention that the assignor s share of remuneration became the assignee s by virtue of the specific assignment thereof operating thereon on its accrual and that hence it remained the taxable income of the assignor. Since however in my view that was not the basis of the judgment of the High Court as explained above and since such an argument is not in my opinion open having regard to the statement of the case by the Income-tax Appellate Tribunal as well as of the statements of the appellants and respondents herein I do not consider it necessary to deal with that argument. In my view therefore the continuous and successive functioning by both the assignor and the assignee under the managing agency agreement was the effective source of the year s income. That income accrued on the completion of the year and was the joint income of both the assignor and the assignee. The prior assignments in the course of the year operated as assignments of this future right to a share of the income. It is only by virtue of inter se arrangement between the assignor and the assignee resulting from the transactions of assignment that the assignee had the right to collect the entire income. Nevertheless the share in this income which accrued to the Sassoons on the completion of the year remained the taxable income of the Sassoons and they were rightly taxed in respect thereof. The very strenuous arguments of learned counsel for Sassoons to counter the above view are based on the insistence that the managing agency is like property which per se produces income and on ignoring the distinction between right to receive the income and right to the ownership of the income and on treating the former as settling the question of the person to whom income accrues. In my opinion these arguments are unsustainable and the conclusion reached by the learned Judges of the Bombay High Court is correct. The appeals are therefore liable to be dismissed. I express no opinion on any of the other points raised. Appeals allowed.

Summary

Issues Involved:
1. Whether the managing agency commission was liable to be apportioned between the assignor company and the assignee.
2. Whether any income had accrued to the assignor company on the dates of the respective transfers of the managing agencies.
3. Whether the assignment of managing agency rights transferred the right to future income to the assignee.
4. Whether the assignee or assignor is liable to pay tax on the income received after the assignment.
5. Whether Section 36 of the Transfer of Property Act applies to the apportionment of the commission.
6. Whether Section 26(2) of the Indian Income-tax Act applies to the case.

Analysis:

1. Whether the managing agency commission was liable to be apportioned between the assignor company and the assignee:
The High Court held that the managing agency commission for the year accrued as the joint income of both the assignor and the assignee and was thus apportionable between them. This was based on the understanding that the entire remuneration for the year accrued on the completion of the year, i.e., on the 31st December 1943, and that when it accrued, it accrued to both the assignor and the assignee together.

2. Whether any income had accrued to the assignor company on the dates of the respective transfers of the managing agencies:
The argument was made that no part of the managing agency commission for the broken periods of 1943 was earned by the assignor company (Sassoons) and that the contract of employment was an entire and indivisible contract. Therefore, the Sassoons had not earned any commission for the broken periods and were not liable to tax in respect of the same. The Supreme Court agreed with this argument, stating that the Sassoons did not have any vested right to the income until the completion of the year, and thus no income had accrued to them on the dates of the respective transfers.

3. Whether the assignment of managing agency rights transferred the right to future income to the assignee:
The High Court held that the assignment operated to transfer the assignor's share of the future income to the assignee. This was based on the principle that the assignment of a future right is valid and becomes operative by attaching itself to the right when it springs up. The Supreme Court, however, disagreed, noting that the assignor had not earned any income for the broken periods, nor had any income accrued to them, and what was transferred to the assignee was merely the expectancy of earning a commission.

4. Whether the assignee or assignor is liable to pay tax on the income received after the assignment:
The High Court held that the income received by the assignee included the assignor's share of the income, which continued to be the taxable income of the assignor. The Supreme Court, however, concluded that since no income had accrued to the assignor at the dates of the transfers, the income received by the assignee was entirely their own and not attributable to the assignor.

5. Whether Section 36 of the Transfer of Property Act applies to the apportionment of the commission:
Section 36 of the Transfer of Property Act, which deals with the apportionment of rents, annuities, pensions, dividends, and other periodical payments, was considered. The Supreme Court noted that this section applies in the absence of a contract or local usage to the contrary and is relevant only as between the transferor and the transferee. Since the deeds of assignment and transfer executed by the Sassoons in favor of the transferees transferred all the rights and benefits under the agency agreement to the transferees, there was no question of apportionment of any commission between the Sassoons and the transferees.

6. Whether Section 26(2) of the Indian Income-tax Act applies to the case:
Section 26(2) of the Indian Income-tax Act, which deals with the succession to a business, was considered. The Supreme Court concluded that this section does not help the transferees because it is only when the person succeeded has acquired an actual share of the income, profits, or gains of the previous year that he is liable to tax in respect of it. Since no part of the commission had accrued to the Sassoons at the dates of the transfers, Section 26(2) was not applicable.

Conclusion:
The Supreme Court allowed the appeals, concluding that the Sassoons had not earned any income for the broken periods, nor had any income accrued to them. The income received by the transferees was entirely their own and not attributable to the Sassoons. Each party was ordered to bear their own costs.