TMI Blog1958 (10) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... s managing agents to several shipping companies, two of them being the Malabar Steamship Co. Ltd., and New Dholera Steamships Ltd. By an agreement dated September 16, 1938, the firm was appointed managing agents of the Malabar Steamship Co. Ltd., (hereafter referred to as the Malabar Company). That agreement has been supplemented from time to time. According to the agreement dated December 7, 1943, the remuneration of the managing agents was fixed to be 10 per cent. (ten per cent.) on the freight charged to shippers and the agreement came into force as from 1st September, 1943. A copy of the said agreement is marked annexure 'A' and forms part of the case. Similarly by an agreement dated June 8, 1946, the assessee firm was appointed managing agents of New Dholera Steamship Ltd. (hereafter referred to as the Dholera Company). According to clause 2 thereof, the managing agents were to receive as and by way of remuneration of their services in relation to the shipping business of the company 10 per cent. of the gross freight charged to the shippers. Clause 5 provided that all moneys belonging to the company shall be retained by the managing agents in their own hands or pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nuary, 1948, provided you appoint Messrs. Shoorji Vallabhdas Ltd., Messrs. Pratapsinh Ltd., as your managing agents from the said date for a term of 20 years upon the same terms and conditions as are contained in our managing agency agreement . (underlined by us)*. The suggestion, therefore, was that the new managing agents were to be remunerated at the rate of 10% on the freight charged to shippers. A copy of the letter addressed to the directors of the Malabar Steamship Co. Ltd. is marked annexure 'C' and forms part of the case. 5. In the case of the Malabar Company, two shareholders addressed a letter on November 27, 1947, to the board of directors of that company complaining that while the managing agency firm got a flat managing agency commission , shareholders did not get any return on their shares and hence opposed the transfer of the managing agency from the firm to the private limited company of Shoorji Vallabhdas Ltd. A copy of the said letter is marked annexure 'D' and forms part of the case. The more important portion of the said letter is as follows: We would, therefore, suggest that if any new managing agency agreement is to be made, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the managing agents of the company for a term of 20 years from the 1st day of January, 1948. 6. In the case of the Dholera Company, a meeting of the board of directors was held on December 1, 1947. The minutes of the said meeting are recorded in Gujerati and an agreed translation of a portion of it is as follows: The managing agents informed the meeting that they desired Messrs. Pratapsinh Limited to be appointed managing agents of the company in their place, and that Messrs. Shoorji Vallabhdas Co., were agreeable to accept 2 per cent. as the managing agency commission instead of 10 per cent. of the freight earnings during the year. The directors were requested to accept the new managing agents, Messrs. Pratapsinh Limited, for a period of 20 years from the 1st of January, 1948. The board also resolved at the said meeting to call an extraordinary general meeting of the shareholders of the company on the 30th December, 1947, to consider the special resolution by which it was to appoint Pratapsinh Ltd., as the managing agents. In due course that meeting was held and Pratapsinh Ltd., was appointed from January 1, 1948, as managing agents of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly similar in the case of the Dholera Company. The annual report dated December 9, 1948, made by the directors to the shareholders of the said company contains the following: Your directors have to inform you that according to their suggestion the previous managing agents Messrs. Shoorji Vallabhdas Co., had agreed to charge managing agency commission at 2 per cent. instead of 10 per cent. on the freight earnings of S.S. 'Jayhind' for the period April 1, 1947, to December 31, 1947, after which Messrs. Pratapsinh Limited were appointed your managing agents. The previous managing agents have charged their normal 10 per cent. commission on the freight earnings of the S.S. 'Jaybrahma' which was being run in partnership with the Malabar Steamship Company Ltd. But they have shown their readiness to accept 2 per cent. commission if that is the sense of this general meeting. The accounts will be adjusted according to your decision. 9. As already stated, the result of this forgoing of the 75 per cent. of the commission earned was that an amount of ₹ 1,36,903, was given up by the assessee company in favour of the Malabar Company and ₹ 2,00,625, in favour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber accepted both the contentions for the reasons recorded by him in his order dated March 7, 1956, a copy of which is marked annexure 'G' and forms part of the case. In his opinion, the decision of their Lordships of the Bombay High Court in the case of Chamanlal Mangaldas* fully applied to the facts of the present case. This conclusion of his is based upon his opinion contained in the following extract from his order: In my opinion, the earlier agreements by which the assessee became entitled to commission at the rate of 10 per cent. can be mutually modified and the real commission that accrued or arose to the assessee is as mutually and finally agreed to between the parties. 12. Since the two members of the Bench that heard the appeal of the assessee firm differed in opinion, they stated the following points: Whether on the facts and in the circumstances of the case the two sums of ₹ 1,36,903 and ₹ 2,00,625 are income of the assessee and if so, whether it is an expense of the assessee allowable under section 10(2)(xv) of the Indian Income- tax Act? The case was referred to the President as provided by section 5A(7) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt the decision was in favour of the assessee. The three judgments turned a good deal on the effect of a decision of this court. The arguments before us also have revolved round that decision almost as a spindle and it will be necessary for us to ascertain the ratio decidendi of that case. Of this more hereafter. The assessee, in this reference under section 66(1) made at the instance of the Commissioner of Income-tax, is the firm of Messrs. Shoorji Vallabhdas Co. The assessment year is 1948-49 and the previous year ended on 31st March, 1948. During that previous year the assessee firm consisted of three partners and its business consisted of acting as managing agents to several shipping companies. We are concerned in this reference with only two of the shipping companies, viz., the Malabar Steamship Co. Ltd. and the New Dholera Steamship Co. Ltd. Under agreements with the two companies, the managing agents were entitled to 10 per cent. commission on the freight charged to shippers. According to the agreements with the two companies, the assessee firm would have become entitled to claim commission of ₹ 1,71,885 from the Malabar Steamship Co. Ltd. and ₹ 2,56,815 fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lution passed at that meeting is as follows: 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 and in the draft letter it was stated: We cannot agree to a reduction in the managing agency remuneration as already fixed. If the said letter is interpreted as a handle to refuse the change in the managing agency, we are prepared to continue the managing agency in the same firm name and on the same terms as before although as rightly pointed out by the shareholders, we can get the resolution passed because of our predominant voting majority. However, it is not our desire to vote against the wishes of the shareholders. We, however, place the following for your consideration: That whilst we will continue to insist on our right to receive the full managing commission, however, in order to put the company on a firm financial basis, and because we are interested both as shareholders and managing agents in the prosperity of the company, we shall voluntarily agree to a reduction in the managing agen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany from 1st January, 1948, in place of the assessee firm of Shoorji Vallabhdas Co. So far, therefore, as this company is concerned, very little can be said as not done before 31st December, 1947. In case of the Malabar Steamship Company what happened was that it addressed letters to the shareholders in view of the understanding or arrangement or agreement to which we have already made some reference. The material part of that letter stated: The Chairman informed the meeting that when the managing agents applied for change of managing agency from themselves to their private limited company, the directors of the company received letters from some of the shareholders asking the directors to oppose the change as the change was only beneficial to the managing agents without any benefit to the company and the shareholders suggested that if the change was to be sanctioned, the managing agents should charge only 2?% commission instead of 10 per cent. commission on the freight earnings for the period from April 1, 1947, to December 31, 1947. The Chairman further informed the meeting that pursuant to the desires of the shareholders they asked the managing agents to agree to the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is clear that the arrangement or understanding or agreement with this company was that the accounts were to be adjusted after knowing the sense of the shareholders at the general meeting which was being called. The two amounts of ₹ 1,36,903 and ₹ 2,00,625 were treated by the Income-tax Officer as commission earned by the assessee and he brought them to tax on the ground that they represented the income of the assessee firm accrued to it by way of managing agency commission for the accounting year. The contention of the assessee before the Income-tax Officer was that the amounts were never received by the firm and did not represent the income of the firm. The other contention raised on behalf of the assessee was that in any event the amounts should be allowed by way of deduction as an item of expenditure under the provisions of section 10(2)(xv). The Appellate Assistant Commissioner confirmed the decision. The matter was carried in appeal to the Tribunal and as we mentioned at the outset the Judicial Member and the Accountant Member took divergent views. In the opinion of the Accountant Member, both the contentions of the assessee failed. He distinguished the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... instead of at the rate of 10%. It has been strenuously argued before us by Mr. G.N. Joshi, learned counsel for the Revenue, firstly that what the assessee did was in the eye of income-tax law nothing else than a voluntary gift by the assessee firm to the shipping companies of which they were the managing agents. It is also argued that even if the court were not satisfied that what happened was a voluntary gift there was no finalised agreement binding on both the parties in the accounting year as erroneously decided by the President of the Tribunal. It is said that if the agreement took place in the subsequent year (in December, 1948) the effect of that agreement only was that the assessee firm gave up what had already accrued to it by virtue of the entries in the assessee's books. The argument has proceeded that whether the amount was given up after 4 months or a year or in the accounting year or thereafter is not the crucial matter for the consideration of the court. The moment the amounts were credited in the books of account of the assessee (though not in the books of the company) it became the assessee's income and in the eye of income-tax law they were as good as re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel is that this is not a case in which there was any modification of the managing agency agreement. It is a case of something voluntarily given up. Now, in the present context, this distinction sought to be drawn on behalf of the Revenue is rather too fine. It is a question essentially one of the real nature of what happened. It is a question of substance and not of mere book entries. We have not to permit ourselves to indulge in any overrefined distinction and would prefer to lay emphasis on the business aspects of what was done rather than any doctrinaire concept or sheer technicality and when we look at the transactions as a whole we see no reason to treat these as gifts or voluntary giving up of income by the assessee but business transactions of hard-headed businessmen who would not be and were in fact not willing to lose any part of their income unless circumstances required them to do so. The idea of a gift or voluntary giving up of something which was earned could have been farthest from the intention of the assessee. It was nothing short of a matter of bargaining and reaching an agreement with the shipping companies in their own interest and for their benefit. It was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at was the real income and not any hypothetical income which the assessee might have earned if the old agreement had continued to subsist. In the case before us, it is the contention of Mr. Palkhivala that the assessee firm is not liable to be taxed on any hypothetical income but can only be taxed on what it received in pursuance of the agreement with the shipping companies. It was said that the term of the agreement relating to 10% commission had been modified or varied by substituting 2?% commission in place of the same. The learned Chief Justice emphasises at the very outset of his judgment in the case of Chamanlal Mangaldas* that in fact the assessee company had only received the lesser amount in the circumstances of that case. The argument relating to voluntary gift was urged before the court in that case and repelled. The argument about the income having accrued after the closing date of the accounting year was also pressed before the court in that case and does not appear to have found favour with the court, although there are observations in that judgment which would suggest that the court was considering whether the variations had taken place during the accounting year. Bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies and what happened in the end of 1948 was merely a crystallisation of the quantum to be charged by the assessee company. It is said that quantification took place in 1948 which related back to the year 1947. The argument ran that even if we were to assume that the date of the quantification which was 1948 was the relevant date for decision, there would be no accrual of any income till the commission was fixed at 2?%. Now, as we have already mentioned, Mr. Joshi's argument is that even if it be held that there was an agreement that agreement was subsequent to the relevant period which was the accounting year. The argument on the other hand is that there was at the worst a conditional agreement, if not a finalised agreement, during the accounting year. It will be convenient here to deal with the case of the two companies separately and we shall first take up the case of the Malabar Steamship Co. It is not necessary for us to rehearse what we have already stated in the earlier part of our judgment nor is it necessary for us to dwell on the matter at any length. We have already set out the resolution of the board of directors of the 27th November, 1947, and what the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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