TMI Blog1974 (1) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... on the facts and in the circumstances of the case, the amount of Rs. 2,04,947 was allowable as deduction of selling commission in the assessment for the assessment year 1955-56 ? " Most of the facts may be taken from the statement of the case prepared by the Tribunal. The assessee is a limited company, named Messrs. Shree Krishna Gyanoday Sugar Ltd., Dalmianagar. The assessment year in question is 1955-56, the corresponding previous year of the assessee being from August 1, 1953, to July 31, 1954. The company carries on manufacturing business of sugar and distillery products. On February 25, 1949, an agreement was entered into between the assessee and another company called the Ashoka Marketing Ltd., appointing the latter as the selling agents for the sale of the products of the former as per terms incorporated in the agreement, a copy of which is annexure " A " to the statement of the case. The agent-company was entitled to a commission of 1 per cent. on the sales of sugar and 2 1/4 per cent. on the sales of distillery products. The commission was to be calculated on the gross invoice value of the products. The assessee had to consign, transmit and deliver to the selling agents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee-company. The assessment order in this case is dated March 30, 1960. Just five days before, probably when the assessment proceedings were going on, the assessee-company claimed dedution of the amounts aforesaid by its letter dated March 25, 1960, a copy of which is annexure " F ". The Income-tax Officer held that on the facts and in the circumstances of the case the deduction could not be claimed or allowed. The Appellate Assistant Commissioner, on appeal, affirmed the view of the Income-tax Officer. When the matter was, in second appeal, before the Appellate Tribunal, reference was made to the assessment of the two amounts in the hands of Ashoka Marketing Ltd. on behalf of the assessee-appellant, and it was contended that the amounts, therefore, ought to have been allowed as deductions in the assessment of the assessee-company. I may state here that the Tribunal attached no importance to this aspect of the matter and rightly so. We were further informed at the Bar that the addition of the two amounts in the assessment of Ashoka Marketing Ltd. is sub judice and is under challenge in further proceedings. Be that as it may, the question for consideration in this case is wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract law it was open to the parties to vary any term of the agreement by mutual consent. As mentioned in the letter dated August 2, 1954 (annexure " B "), the assessee-company was noticing its bad position, and, therefore, about the beginning of the preceding sugar season, which was in the midst of the accounting year, mutual negotiations had started in terms of the agreement dated February 25, 1949, subject to the ratification by the boards of both companies, in respect of the difficulties of the assessee-company in paying commission on sales stipulated under the agreement. It is further stated in this letter that the matter was not finalised during the accounting year, but it was mutually agreed that the position might be review at the end of the year. The agreement was also sought to be amended as per draft enclosed with the letter. It is not quite correct to say that the amendment of the agreement was de hors the remission of the commission amount for the year in question : it was a part and parcel of the same negotiations and the variation of the agreement. The suggestion in the letter, therefore, was that the agent-company might charge from the assessee-company for the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of the term of the agreement came before the close of the accounting year or after: the two were part and parcel of the same transaction. It was not a case where the agent-company had forgone its claim on commission leaving intact the liability of the assessee-company. In the eye of law, the liability incurred earlier was obliterated later by mutual consent of the parties. That being so, the liability to pay the commission was no longer there, and, therefore, the assessee-company could not claim it as a business expense under section 10(2)(xv) of the Act. I am not concerned in this case whether the sums in question could be taxed in the hands of Ashoka Marketing Ltd. It will be beyond the scope of this reference to express any opinion in that regard. The Tribunal has relied upon a decision of the Bombay High Court in Commissioner of Income-tax v. New Jehangir Vakil Mills Co. Ltd. and referred to two decisions of the Supreme Court in Commissioner of Income-tax v. Chamanlal Mangaldas Co. and Commissioner of Income-tax v. Shoorji Vallabhdas and Co. I shall presently deal with them as also with a few more. However, I want to emphasise at this stage that the Tribunal does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of the agreement between the parties by mutual consent and also for commercial expediency. In my opinion, the Tribunal has not correctly appreciated the facts and ratio of the decision of the Supreme Court in the case of Chamanlal Mangaldas Co. The income-tax authorities in that case had held that the entire sum of Rs. 2,00,000 was taxable income, having accrued as commission during the previous year and out of it a sum of Rs. 1,00,000 was a mere voluntary surrender which could not affect the taxability of the whole amount of commission accruing to the managing agents. The Tribunal, however, held that as a result of the agreement between the managing agents and the managed-company the right of the managing agents to claim full remuneration had been taken away as from January 1, 1950, and it was not a voluntary relinquishment on the part of the managing agents. Therefore, what was taxable was the amount of Rs. 1,00,000 and odd and not the other lakh. The facts of the other civil appeal which was before the Supreme Court were similar. The discussion at page 13 would show that the amounts payable under the agreement could be determined at the end of the year. An entry to tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the Judicial Member and opined that, even though the actual reduction took place after the year of account was over, there was, in fact, an agreement to reduce the commission even during the currency of the account year, and the larger income neither accrued nor was received by the assessee-firm. The assessment was, therefore, reduced by deleting the extra commission from computation. The High Court agreed with the view of the President and answered the first question in the negative and, therefore, declined to answer the second question as to the deductibility of the amounts under section 10(2)(xv) of the Act. Hidayatullah J. (as he then was) approved the decision of the Bombay High Court which, in its turn, had relied upon its earlier decision in the case of Commissioner of Income-tax v. Chamanlal Mangaldas Co. This decision of the Bombay High Court was approved by the Supreme Court in the case of Chamanlal Mangaldas Co. The learned judge said at page 148: " 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o give up a part of the commission and the forgoing of the commission at the time of the making of the accounts are not disjointed facts. There is a dovetailing about them which cannot be ignored. " I, respectfully, adopt the reasoning of the learned judge and apply them mutatis mutandis to the facts of the instant case. Mr. B. P. Rajgarhia, learned counsel for the revenue, cited before us the decision of the Supreme Court in Poona Electric Supply Co. Ltd. v. Commissioner of Income-tax. The ratio of this case and passages from it have been quoted with approval in a later decision of the Supreme Court in Commissioner of Income-tax v. Birla Gwalior (P.) Ltd. In the case of Morvi Industries Ltd. v. Commissioner of Income-tax, it is no doubt true that by resolution of the board of directors of the managing agency company, the assessee relinquished its commission on sales and office allowance, because the managed company had been suffering heavy losses in the past years. This was done after the commission had become due but before it had become payable in terms of clause 2(e) of the agreement. The Tribunal held that the relinquishment by the assessee of its remuneration after it had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y had accrued to the appellant-company. As such, the appellant could not escape the tax liability for those amounts. " On a review of several authorities, Hegde J. has said in the case of Birla Gwalior (P.) Ltd. after laying strees on some lines which Khanna J. has quoted in the judgment in the case of Morvi Industries Ltd. 8 from the decision of the Supreme Court in Shoorji Vallabhdas and Co.: "Hence it is clear that this court in Morvi Industries' case did emphasise the fact that the real question for decision was whether the income had really accrued or not. It is not a hypothetical accrual of income that has got to be taken into consideration but the real accrual of the income." On a parity of reasoning, I have no doubt in my mind that what has to be allowed as a business expense is either the actual amount expended or the real liability incurred. But a liability incurred which in law justifiably could be and was given a go-by was not a real liability of the expenditure; it was a hypothetical liability and became non-existent on variation of the terms of the agreement by mutual consent of the parties for the purpose of commercial expediency. That being so, I have no doubt ..... 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