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Morvi Industries Limited Versus Commissioner of Income-Tax (Central) , Calcutta

1971 (10) TMI 5 - SUPREME Court

Unilateral relinquishment of managing agency commission after its accrual - appellant could claim deduction of the amounts under section 10(2)(xv) of the Act if the amounts had represented an expenditure laid out or expended wholly and exclusively for the business of the appellant - nothing to show that the amounts were relinquished for the purpose of the appellant's business - Dated:- 5-10-1971 - Judge(s) : A. N. GROVER., H. R. KHANNA. and K. S. HEGDE. JUDGMENT The judgment of the court was del .....

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matter relates to the assessment years 1956-57 and 1957-58, the corresponding accounting years for which ended on June 30, 1955, and June 30, 1956, respectively. The appellant-company was appointed as the managing agent of Shree Ramesh Cotton Mills Ltd., Morvi (hereinafter referred to as the managed-company ), as per agreement dated December 30, 1946. The managed-company was a 100% subsidiary of the appellant-company. Under the terms of the agreement, the appellant-company was entitled to receiv .....

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9 for the assessment year 1956-57 and Rs. 1,963 for the following year. Besides these amounts, the appellant was entitled to Rs. 12,000 per annum for each of the two years as fixed office allowance. The total amounts which the appellant was entitled to receive from the managed-company were Rs. 50,719 and Rs. 13,963 for the two years. The managed-company s accounting year closed on the 30th day of December and that of the appellant-company on the 30th day of June every year. Clause 2(e) of the ma .....

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he company and by the company in general meeting. According to the above clause, the commission was due on the 31st day of December every year and it was payable immediately after the annual accounts of the managed company had been passed in the general meeting. The annual general meetings of the managed company were held to adopt the accounts on November 24, 1955, and July 21, 1956, respectively, with regard to the assessment years in question. The amounts of commission in terms of the above cl .....

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payable in terms of clause 2(e) of the agreement. On behalf of the appellant, it was stated that the managed-company had been suffering heavy losses in the past years and, therefore, the appellant did not consider it proper to charge any commission or the fixed office allowance and had, consequently, relinquished the same. The Income-tax Officer included the sums of Rs. 50,719 and Rs. 13,963 in the total income of the appellant for the two assessment years in question. The Income-tax Officer too .....

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te Assistant Commissioner and the Income-tax Appellate Tribunal affirmed the order of the Income-tax Officer. According to the Tribunal, the commission became due to the appellant yearly on the last day of the accounting year of the managed-company, though the actual payment was deferred to a later date. Postponement of the actual payment after the income had accrued was held to be inconsequential. Likewise, the relinquishment of the income after it had become due, in the opinion of the Tribunal .....

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at of the appellant-company became weaker. The relinquishment was consequently held to be not for the benefit of the appellant. At the instance of the appellant, the Tribunal referred the following two questions to the High Court: (1) Whether, on the facts and in the circumstances of the case, the sums of Rs. 50,719 and Rs. 13,963 forgone by the assessee by its directors resolution dated April 4, 1955, and June 19, 1956, respectively, were liable to be included in its total income for the accoun .....

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became due, the case strictly came within the ambit of section 4(1)(b)(i) of the Act. The relinquishment, it was further observed, was a unilateral act of the appellant. As regards the second question, the High Court found that the relinquishment had not been made for the purpose of facilitating the legitimate commercial undertaking or by way of commercial expediency. The appellant s case was thus held to be not covered by section 10(2)(xv) of the Act. Mr. Maheshwari has assailed the findings o .....

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oncerned, we find that, according to clause 2(e) of the managing agency agreement reproduced above, the commission for the two years in question became due to the appellant on the 31st day of December, 1954, and the 31st day of December, 1955. The appellant also became entitled to receive fixed office allowance of Rs. 12,000 for each of the two years. It, therefore, can be said that the income of Rs. 50,719 had accrued to the appellant on 31st December, 1954, and of Rs. 13,973 on the 31st Decemb .....

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on is resident in the taxable territories during such year, accrue or arise or are deemed to accrue or arise to him in the taxable territories during such year. The dictionary meaning of the word accrue is to come as an accession, increment, or produce: to fall to one by way of advantage: to fall due . The income can thus be said to accrue when it becomes due. The postponement of the date of payment has a bearing only in so far as the time of payment is concerned, but it does not affect the accr .....

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ductions. The accrual of an income is not to be equated with the receipt of the income. That the two, accrual and receipt of income, have different connotations is also clear from the language of section 4 of the Act. Clause (a) of sub-section (1) of section 4 of the Act deals with the receipt of income while the accrual of income is dealt with in clause (b) of that sub-section. The appellant-company admittedly was maintaining its account, according to the mercantile system. It is well known tha .....

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ounts in question are actually disbursed. Where accounts are kept on mercantile basis, the profits or gains are credited though they are not actually realised, and the entries thus made really show nothing more than an accrual or arising of the said profits at the material time. The same is the position with regard to debits made. (See Indermani Jatia v. Commissioner of Income-tax). In the case of Commissioner of Income-tax v. Shoorji Vallabhdas and Co., Hidayatullah J. (as he then was), speakin .....

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