TMI Blog1950 (4) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... ing year ending with 31st. March, 1942. The assessees are the firm of Messrs KRMTT Thiagaraja Chetty Co. They were originally members of an undivided Hindu family and after partition in the family they constituted themselves into a firm. They are the managing agents of Sri Meenakshi Mills, Ltd., Madura, and under the terms of the managing agency agreement then in force the managing agents were entitled to remuneration of ₹ 1,000 per mensem and per cent, commission on sales of yarn, waste cotton, etc., made by the mills and 10 per cent, commission on the net profits of the mills before allowing for depreciation. There is no dispute now with reference to the remuneration of ₹ 1,000 per mensem and with regard to the sum of ₹ 12,000, the remuneration earned at that rate per mensem, during the accounting year and the assessees do not dispute their liability to pay income-tax. The dispute is confined to the commission on sales and the 10 per cent, commission on the net profits of the mills. The amounts which the assessees were entitled to under these two heads during the accounting year amounted to ₹ 2,26,850-5-0. There is no dispute regarding the amount. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he resolution of the Board of Directors passed at its meeting on 30th March, 1942, was collusive and that the income which accrued to the assessees whether received or not Was chargeable to income-tax, particularly as there was no dispute regarding the actual amount payable to the assessee's firm under the terrrs of the managing agency agreement and in respect of the working for 1941-42. 5. When once the income had accrued, as it did, according to the Income-tax Officer, its disposal did not affect the liability of the income to assessment under the Act. The refusal of the mills to permit the managing agents to withdraw the amount was not an absolute refusal or denial of their right but the Board of Directors while admitting the right of the managing agents to receive the income claimed that they were entitled to apply it for the discharge of the prior indebtedness of the managing agents. On appeal this decision was affirmed by the Appellate Assistant Commissioner. On a further appeal to the Tribunal by the assessees the Tribunal disagreed with the view of the Income-tax Officer and the Appellate Assistant Commissioner. The Tribunal on a consideration of the facts and circum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is final and it cannot now be reopened by the Income-tax Commissioner. 8. The first question relates to the point whether the previous assessments were on cash basis. It is now beyond dispute that the assessee himself maintained no accounts. Under Section 13 of the Act Income, profits and gains shall be computed for purposes of Sections 10 and 12, in accordance with the method of accounting regularly employed by the assessee: provided that if no method of accounting has been regularly employed or if the method employed is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine. If, therefore, the assessee himself had maintained any accounts and had adopted either the method of mercantile system or cash basis the Income-tax Officer will be bound to compute his income on a particular basis adopted in the accounts, unless the conditions of the proviso are satisfied in which case liberty is given to the Income-tax Officer to assess the income in any manner he deems proper. From an examination of the accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the accounts maintained by the managing agents for purposes of their transactions, unless cash was received they would not be liable to pay tax on the amount which admittedly was not received by the assessees. The first question therefore must be answered in the negative and against the assessees. This leads me on to the consideration of the more difficult question raised by the second of the two questions above set forth. 9. The main argument advanced on behalf of the assessees by their learned counsel, Mr. Alladi Krishnaswami Ayyar, is that the amount in dispute was not income of the assessees which had accrued or arisen in the accounting year. It is no doubt true, says the learned counsel, that under the terms of the managing agency agreement the amount was earned by the assessees during the accounting year but as the directors refused to pay the amount until the question of writing off the prior indebtedness of the assessees to the mills was decided and kept the amount in suspense without even crediting it to the assessees it cannot be treated as income of the assessees which would be chargeable to income-tax under the provisions of the Income-tax Act. In support of thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion amounted to ₹ 2,26,850-5-0. In order to constitute income, according to the learned counsel for the assessees, it must be established that the assessees had dominion over the sum and that it lay to their order in the hands of their agent or banker. It must be money available for the assessee's use and deposited at their direction and under their control either with a bank or with another person who holds the money on their behalf. Actual receipt may not be necessary but there must be potential receipt in the sense that it was at their disposal and they were at liberty to enjoy it. A mere right to receive an amount from a third person would not, according to the learned counsel, be income though it may be a debt. There must be an incoming to constitute an income and it is not a mere debt which could be reduced to possession by appropriate proceedings. In other words, it must be possible to predicate that the sum was as good as receipt though not actually received and was not a mere claim to receive something from a third person. On the facts of the present case it was argued on behalf of the assessees that the Board of Directors bona fide refused to pay the amount to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on behalf of the assessees is the decision of the Judicial Committee in St. Lucia Usines and Co. v. St. Lucia (Colonial Treasurer) [1924] A.C. 508. The Judicial Committee were there construing the Income-tax Ordinance of 1910 of St. Lucia. In that case the assessees sold their property situated in St. Lucia and ceased to reside and carry on business in that State. Under the deed of sale of one of the properties part of the purchase price was left unpaid and was secured by a vendor's lien and the purchaser covenanted to pay in November 30, 1921, the sum with interest at 6 per cent. He did not pay the interest and the assessee was obliged to sue and obtain a judgment. The interest was not paid. The company, i.e., the assessee, was held by the revenue authorities of St. Lucia liable to pay tax for the year 1921 on the interest which accrued due but was not paid. Under Section 3 of the ordinance every person receiving income or to whom income shall accrue shall in respect of such income pay an annual income-tax at certain defined rates; and Section 4, sub-section (1), of the Ordinance provided that the income in respect of which income-tax is imposed shall include (a) certain in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actual receipts-does not prepare a mere cash account-but values its book debts and its stock-in-trade and so on and calculates its profits accordingly. From the practice of commerce and of accountants and from the necessity of the case this is so. But this is far from establishing that income arises or accrues from (as above instanced) an investment which fails to pay the interest due. This passage, it may be noticed, really deals with two situations, One, income arising or accruing from sources other than business such as investments, and second, profit of a business which is calculated in accordance with the practice of commerce and of accountants. The relevancy of this distinction would presently be adverted to when examining the effect of the introduction of Section 13 by the Act of 1922. As the present case is not one which relates to profits of a business computed on the method of accounting regularly employed by the assessee the definition of income arising or accruing in the first part of this quotation is relevant for the purpose of the present discussion. 13. Rowlatt, J., in Leigh v. Inland Revenue Commissioner [1928] 1 KB 73 observed at page 77 that for incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If he had even made a formal demand, the executor would have readily paid the amount or, at any rate, appropriated the amount to his use and deposited it at his discretion either in a bank or elsewhere. Notwithstanding these circumstances which point to the conclusion that it is income, the Court of Appeal held the contrary. Lord Hanworth, M.R., after referring to Section 100 of the Income Tax Act which contains the words that the assessee should submit a correct statement in writing containing the amount of the profits or gains arising to him, from each and every source chargeable according to the respective schedules, observed :- If the interest on the legacy in this case has not arisen to the respondent, if he has not become the dominus of this sum, if it does not lie to his order in the hands of his agent, can it be said that it has arisen to him ? I think the answer definitely upon the facts must be; No, it has not. 16. The decision in St Lucia's case [1924] AC 508 (PC) and the test laid down by Lord Wrenbury was applied and at page 366, the Master of the Rolls concluded by observing :- The Attorney-General had said that it is a tax not only on income but o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where he observed :- In this case in my judgment the matter is governed by the decision of the Court of Appeal in Dewar v. Commissioners of Inland Revenue [1935] 2 KB 351. The Court is dealing in this case with an annuity, and not with commercial accounts. The Commissioners have decided the case against the appellant on the ground that he, the taxpayer, could have obtained payment of this annuity had he wished, but he voluntarily left the money with the company, and he could have obtained it at any time if he so desired. It is clear from the decision in Dewar's case [1935] 2 KB 351 that that is not sufficient. The Commissioners have not found in this case that the annuity was paid to the appellant, or that he received it, or that he enjoyed it, or that he exercised dominion over it. 18. The decision in Hamilton-Russell, Executors v. Commissioners of Inland Revenue [1943] 1 AER 474; 25 Tax Cas. 200 on which reliance was placed on behalf of the Income-tax Commissioner may be considered here in order to follow the chronological order of the decisions. There the decision in Dewar's case [1935] 2 KB 351 was distinguished. The question really was concerned in that case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm. The widow was entitled to an equal one-quarter share of the profits from the partners and receive it. The argument of the Crown was that the partners carried on the business as trustees for her. The Master of the Rolls dealt with this contention in the following passage :- It is said they are trustees for her of one-quarter share of the profits of the business. What does that mean? If it means that she is beneficially interested in the business and its assets, that is one thing; but, with all respect it is quite untrue. She is not. If, on the other hand, all it means is that she is entitled to call for one-quarter share of the profits and receive it, it means something totally different. If it means only the latter, then I cannot myself see how she can be said to have received any income, unless and until she has received her share of the profits. The Crown puts her, in substance, in exactly the same position as if she had been a partner for these purposes. The argument failed to realise why it is that a partner who has not received his share of profits nevertheless is liable to taxation in respect of those profits. It is because he is a joint owner of the business and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture has been actually paid or not. That is to say, the profit computed under this system is the profit actually earned, though not necessarily realised in cash, or the loss computed under this system is the loss actually sustained, though not necessarily paid in cash. The distinguishing feature of this method of accountancy is that it brings into credit what is due immediately it becomes legally due and before it is actually received; and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. The 'mercantile accountancy system' is the opposite of the 'cash system of book-keeping' under which a record is kept of actual cash receipts and actual cash payments, entries being made only when money is actually collected or disbursed. In actual business practice, however, the systems of book-keeping followed in many cases are such that they can be called neither the full 'mercantile accountancy system' nor the cash basis of book-keeping. They are simply mixtures of the two systems and are styled as 'Hybrid Systems of Book-keeping.' 21. Bearing these considerations in mind, the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee according to it. For the purpose of reaching these conclusions, I have deliberately excluded from my mind Section 10(2)(xi), which was only added to the section by the Income-tax (Amendment) Act, 1939. If it should be the case that the 1922 Income-tax Act, as unamended in this respect, left it open for a case possibly to arise, in spite of Section 48A of the Act, in which the assessee might become liable to pay tax on profits or gains of his business which he never ultimately received, I should still be unable to find in that circumstance a sufficient reason for confining the operation of the charge of tax only to money or its equivalent actually received or deemed to have been actually received by the assessee, in the face of the plain language of the Income-tax Act to the effect that the receipt of money is not the sole test of chargeability. Of course, Section 10(2)(xi) which was added by the Amending Act, 1939, makes it clear that where the accounts are maintained on cash basis deduction for bad debts is permissible to the extent provided by that sub-clause. I respectfully agree with the reasoning and conclusion of the learned Judge Iqbal Ahmad, C.J., and I am also o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s costs in Referred Case No. 76 of 1946 which we fix at ₹ 250 and no costs in Referred Cases Nos. 32 and 56 of 1947. Referred Case No. 78 of 1946. 25. This case relates to the assessment year 1943-44 and also relates to the commission and remuneration of the managing agents which amounted to a sum of ₹ 2,20,702. Two questions were referred to us and are set out in the statement of the case. As there is no impediment for drawing this amount from the mills as in the other case, the Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal decided the claim against the assessee : The amount seems to have been credited also in the accounts of the mills to the credit of the assessee. I have already found that no accounts were maintained by the assessee and there is no cash basis for the previous assessment. In these circumstances, the amount was rightly assessed to tax. There is another question in this case which relates to a sum of ₹ 81,023. That is covered by the second question referred to us in this reference. This sum it was claimed is exempt from taxation on the ground that it represents really commission on sales carried on in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nthly remuneration of ₹ 1,000 and a commission of 10 per cent, of the net profits of the company and a small percentage on sales of yarn effected by the company. The commission earned by the firm and payable to it during the year of account ending 31st March, 1942, amounted to ₹ 2,26,850-5-0. The firm was indebted to the company in the sum of ₹ 2,04,058-11-8 at the end of the year of account ending 31st March, 1942. On 30th March, 1942, it is stated that the firm wrote a letter to the directors of the company to the effect that the debt due by the firm should be remitted and written off the books of the company and the commission of 10 per cent, of the profits and the percentage on sales of yarn should be paid over to the firm. This letter is not part of the printed record and was not placed before us. A further communication bearing date 30th March, 1942, from the firm to the company contained a proposal that the firm should hold a general supervision of the affairs of the company and that the purchase of cotton and raw materials and the sale of yarn and other products should be entrusted to other agencies from 1st April, 1942, the firm foregoing a half of the 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for the assessment of the firm to income-tax for the assessment years 1942-43 and 1943-44, the firm claimed (1) that no part of the sum of ₹ 2,26,850-5-0 earned in 1941-42 and purporting to be kept in suspense account represented the firm's income, profits and gains of that year; (2) that the above income had neither accrued nor arisen, nor had it been received by the firm in the year of account 1941-42 ; (3) that, therefore, neither income-tax nor excess profits tax was payable in respect of the said sum; (4) that the sum of ₹ 2,20,702 earned by the firm as its managing agency commission in the year of account 1942-43 was not assessable as the income of that year by reason of the crediting of the sum to the firm in the books of account of the company without its actual receipt by the firm; and (5) that in any event the sum of ₹ 81,023 out of the sum of ₹ 2,20,702 was not assessable to tax by reason of Section 14, sub-section (2), clause (c), of the Income-tax Act as the income of the year of account 1942-43, as it accrued or arose to the firm in Indian States and was not remitted to, or received in, British India. The Income-tax Officer and the Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthority, disputes the correctness of every one of these assertions. The arguments before us have covered a very wide ground and have centred round the concept of income, profits and gains and the mode of ascertaining or computing them for purposes of income-tax. Before dealing with the legal contentions, it is desirable to clear the ground by a reference to certain features of the case relating to the accounts on the basis of which the income, profits and gains of the firm have to be ascertained. 33. Though the managing agency of the Sree Meenakshi Mills Ltd., is its main source of income, the firm has an insurance agency and a ginning factory at Rajapalayam run benami in the name of the wife of the managing partner, as additional sources of income. In the assessment order for the year 1942-43, the Income-tax Officer stated that the firm maintained and produced some account but it does not appear whether it related to the firm's business as a whole or only to a portion of its business. In this Court, however, the firm's learned counsel stated that it was the company that kept the accounts of the firm by opening the ledger pages for the remuneration and commission paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidence as there is in the case leads to the contrary conclusion. It is the method of accounting adopted by the assessee, it is his system of book-keeping, it is his choice of the cash basis or the mercantile system of accountancy as his habitual mode of keeping accounts that is relevant under Section 13 of the Act. Neither the mode of accounting adopted by the company nor the assessee's choice for a particular year determines the method of accounting of the firm under Section 13 of the Act. The answer to the question referred to us in Referred Case No. 56 of 1947 must be in the negative and against the assessee. I hold that there is no material for the finding of the Tribunal that the firm was being assessed on a cash basis in the year prior to the year of account 1941-42. Indeed, the findings of the Tribunal on this point with regard to years of account 1941-42 and 1942-43 are mutually inconsistent and self contradictory. On a cash basis it is clear that the calculation must be based on actual receipts in the year of computation. In respect of the year of account 1942-43, the Tribunal has held that the sum of ₹ 2,20,702 earned as managing agency commission by the firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng off against the receipts, the expenditure or obligations to which they have given rise and which were necessary for earning the receipts. See per Lord Selbourne, L.C., in Mersey Docks and Harbour Board v. Lucas [1881] LR 8 App. Cas. 891, 903-904 ; per Lord Hershell in Russell v. Aberdeen Town and County Bank [1888) 13 App. Cas. 418, 424 per Lord Halsbury L.C., in Gresham Life Assurance Society v. Styles [1892] AC 309, 315; per Lord Buckmaster in Naval Colliery Co. Ltd. v. Inland Revenue [1928] 12 Tax Cas. 1017, 1047, 1048. The expression receipts in the above context does not mean only cash receipts; or even sums which are receivable immediately. In ordinary commercial practice where goods are sold on credit, say of three or six months, or even more, traders are in the habit of treating the debt so created as part of the profits of the year in which the debt is incurred. The obligations so incurred are treated as firm obligations and as good as cash in hand. If expectations are disappointed, an allowance for bad debts, if claimed, will be granted : Absalom v. Talbot [1944] AC 204, 215. Thus, apart from any express provision, a deduction for debts proved to be bad is implicit i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Income-tax Act of 1918 against the adoption of this system of mercantile accountancy by a trader in computing his income for purposes of assessment to income-tax. Section 13 of the Income-tax Act of 1922 expressly recognises this system as a basis for the computation of profits and gains. 37. Reliance was placed by the learned advocate for the assessee on the decision of the Full Bench of this court in Board of Revenue v. Arunachalam Chettiar [1920] ILR 44 Mad. 65 FB where Wallis, C.J., who delivered the leading judgment of the Court, observed that Section 9 of the Income-tax Act of 1918 was identical with the corresponding provision in Schedule D of the English Act relating to taxation of business profits and purporting to follow the decisions of the English Courts, held that interest becoming due to a money-lending business in the year of account but not realised in cash or by adjustment in the accounts was not liable to tax. With the greatest respect to the learned Chief Justice, he was under a misapprehension as to the English Law and practice with reference to the computation of business profits and gains for purposes of Income-tax. I have already referred to the lead ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring Co., Ltd ILR 1938 Bom. 239 PC 6 ITR 36 . 39. I have held that the firm's contention that its accounts were regularly kept on a cash basis is without any foundation. No accounts of the firm for the years of account 1941-42 and 1942-43 were produced. The entries in the books of the company showed that the accounts of the company were kept by the firm on the mercantile accountancy basis. The assessments of the firm for the years 1940-41 and 1941-42 were based on the returns sent by it and these assessments proceeded on the basis of the mercantile accountancy system. In these circumstances, the Income-tax Officer and the Appellate Assistant Commissioner came to the conclusion that the mercantile accountancy system would truly reflect the income, profits and gains of the firm during the years of account now in question and assessed the firm to income-tax on the profits and gains computed according to that system. On the footing that no accounts were maintained, or that no method of accounting was regularly employed by the firm, the Income-tax Officer was entitled, under the proviso to Section 13, to make the computation of the income, profits and gains of the firm upon such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... true that, as pointed out by my learned brother during the arguments, a managing agency is spoken of as an office in Sections 87-A to 87-C of the Companies Act. It is however significant the company has not deducted the tax even on the monthly remuneration of ₹ 1,000 paid to the firm, which it would be bound to deduct under Section 18 of the Act if the remuneration were regarded as a salary. On the other hand, the monthly remuneration of ₹ 1,000, the commission of 10 per cent, on the net profits and the percentage of commission on sales of goods, have all been treated as profits of the managing agency business both by the company and the firm. If the remuneration is viewed as a salary then, under the provisions of Section 7 of the Act, the managing agency commission would be liable to tax in addition to the monthly salary. In Tata Hydro-Electric Agencies Ltd ILR 1937 Bom. 388, 399 (PC); 5 ITR 202., Lord Macmillan treated the profits and gains of a managing agent remunerated by a percentage of the profits of the company as business profits to which Section 10 of the Income-tax Act would be applicable and the managing agency itself as a business. That the remuneration of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definite sum which is ascertained and without deduction of any amount, as for example, upon interest of money under Schedule D, clause (1), sub-clause (b), of the English Act, no such account need be taken, a specific sum of money alone being the subject of taxation. It is open to the tax-payer to treat such a sum of interest as part of his income only when it has been actually received by him. Where trade debts are concerned it has been held by the House of Lords in the decisions already referred to that trade debts which have accrued due in the year of account and which have not been paid must be included for the purpose of ascertaining whether or not the person has earned a profit for the year, just as stock-in-trade at the beginning and end of the year, is taken into account for the same purpose. The general principle is that an item becomes a trade receipt at the date on which it becomes due to the business irrespective of the date of its actual payment : Absalom v. Talbot [1944] AC 204, 215. This principle has been extended not only to monies due for goods sold but even for services rendered. In Dailuaine-Talisker Distilleries Ltd. v. Inland Revenue, [1930] 15 Tax Cas. 613 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd 'income'. 43. It is obvious that the learned Lord was not attempting a general definition of what is taxable under the income-tax law and was alive to the distinction between income as used in Section 4 of the Ordinance in question in that case and the profits and gains of a trade or business. It is elementary that the profits and gains of a trade or business are taxable although they do not, in the true sense, come in as money; and Lord Wrenbury himself recognised this rule and observed :- It does not follow that income is confined to that which the taxpayer actually receives. Where income-tax is deducted at the source the tax-payer never receives the sum deducted but it accrues to him. It is said, and truly, that a commercial company, in preparing its balance sheet and profit and loss account, does not confine itself to its actual receipts-does not prepare a mere cash account-but values its book debts and its stock in trade and so on and calculates its profits accordingly. From the practice of commerce and of accountants and from the necessity of the case this is so. But this is far from establishing that income arises or accrues from (as above instanced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he United Kingdom or elsewhere; (b) All interest of money, annuities and other annual profits or gains not charged under Schedules A, B, C or E. Under the rule applicable to Schedule D, Case I, the tax shall extend to every trade carried on in the United Kingdom or elsewhere.... ........and shall be computed on the amount of the balance of the profits or gains etc. Under Rule 1(a) of the rules applicable to Case III the tax shall extend to any interest of money, whether yearly or otherwise, or any annuity or other annual payment..............whether the same is received and payable half-yearly or at any shorter or more distant periods . Under Rule 2 of Schedule D, Case IV, interest arising from foreign securities fell to be treated on a remittance basis and the tax had to be computed on the full amount so far as the same can be computed, of the sums which have been or will be received in the United Kingdom. Observe that the words accruing or arising are used in connection with profits and gains of a trade and not in connection with interest, annuities or other annual payments which are all charged only if received. 46. The observations of Lord Lindley in Gresham Life A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to us, but which arose after the above change in the law, the Court of Appeal held that income from foreign possessions in the shape of stocks and shares may arise , though the tax-payer is not in a position to enjoy it and may in fact, be prevented by law from drawing the money from abroad. It was a case of interest and dividends arising to a British tax-payer from investments in Germany consisting of securities, stocks or shares. The interest and dividends had been paid to the credit of the British tax-payer in a German bank but owing to the war and for the duration of the war, the money could not legally be drawn out by him. Nevertheless the Court held that the income arose during the year when the money was paid into the German Bank to the credit of the tax-payer and not in the year when they were remitted to England after the end of the war. The following observations of Lawrence, L.J., are pertinent : - It is also important to bear in mind that this is not a case where there has been a default in payment on the part of the persons or body liable to pay the interest and dividends as in the St. Lucia case [1924] AC 608 and Leigh's case (supra ). What has happened her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the Master of the Rolls bring out the reasons for this conclusion :- The word 'payable' there does not mean : if you like to put out your hand ask for the money it will then be payable to you; it is, dealing with a sum which, whether yearly or otherwise, is in fact received, whether it is payable and in fact received half-yearly or at any shorter or more distant periods. That is the rule which applies here. Can it be said here that there has arisen a personal debt or obligation ? Something more is required than the mere fact that there is a capacity on the part of the estate to pay the money if it should be demanded. The rule does not say, and it cannot be said, that there is a debt when there has been no demand. (Page 363). Earlier in the judgment occurs the following passage :- If the interest on the legacy in this case has not arisen to the respondent, if he has not become the dominus of this sum, if it does not lie to his order in the hands of his agent, can it be said that it has arisen to him ? I think the answer definitely upon the facts must be : No, it has not. (page 362). 48. The learned Master of the Rolls was quite alive to the distin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... KB 351 CA the Court observed : - The question determined in Dewar's case [1935] 2 KB 351 CA was in effect whether income existed which could be brought into assessment. That question was answered in the negative because the interest although admittedly exigible in law, was never paid or claimed and, therefore, had no existence. In the present case there was unquestionably income in existence, namely, the interest which accrued due on the trust investments and the accumulations during the period from April 5, 1938, and January 18, 1939. Consequently the question is not 'Is there any income ?' but 'To whom did the income, which admittedly existed ' belong ?' In our judgment there can only be one answer to this question. It belongs to G.L. Hamilton-Russell (the beneficiary) . 50. The last of the cases to be noticed in this connection is the decision in Inland Revenue v. Lebus [1943] 1 All. ER 476 CA. There the widow of a deceased partner was entitled to an one-fourth share of the profits of a business carried on by the surviving partners. The deceased partner bequeathed to the trustees of his will, one-quarter share of the profits of the business on tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n on the language of the English Statute, which is not in pari materia with the Indian Income-tax Act, are not useful guides in this country : vide Commissioner of Income-tax v. Fletcher [1987] 5 ITR 428; ILR 1938 Mad. 1 (PC.) ; Gopal Saran Narain Singh's case [1935] 3 ITR 237 ; ILR 14 Pat. 552, 559 ; Shaw Wallace Co's. case [1932] ILR 59 Cal. 1343 (PC); Bejoy Singh Dudhuria v. Commissioner of Income-tax [1933] 1 ITR 135 ; ILR 60 Cal. 1029 (PC) ; Chunilal Mehta's case [1938] 6 ITR 521 ; ILR 1938 Bom. 752 (PC); All India Spinners Association's case [1944] 12 ITR 482 ; ILR 1945 Bom. 153 (PC); Commissioner of Income-tax v. Mahaliram Ramjidas [1940] 8 ITR 442 ; ILR [1940] 2 Cal. 215 (PC). 52. Reference has also been made by the learned advocate for the assessee to two Indian decisions, Narayanan Chettiar v. Commissioner of Income-tax [1941] 9 ITR 509 ; [1941] 2 MLJ 172 and Kamakshya Narain Singh v. Commissioner of Income-tax [1942] 10 ITR 177 , in support of his contention that actual receipt was necessary to attract tax. In the Madras case, this Court held that an adjustment or remittance of money representing foreign profits, to an account or to a place, against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pon it by the managing agency agreement, to retain, reimburse and pay itself out of the funds of the company all sums due to it for commission and remuneration. It was drawing the monthly remuneration of ₹ 1,000 in cash, sometimes in advance and sometimes on the due dates. It was paying itself the commission earned in the previous years. In 1941-42, the first year of account with which we are concerned, the commission at the rate of 10 per cent, of the company's profits amounted to the unprecedented figure of ₹ 2,26,850-5-0 and the conditions of the market were such that the commission was expected to swell higher in the next year. Indeed, the managing agency commission for the next year payable only on the basis of 5 per cent, of the profits of the company amounted to ₹ 2,20,702. The firm debited the company with the sum of ₹ 2,26,850-5-0 as an outgoing of the company's business and as an item of revenue expenditure and computed the income, profits and gains of the company after deducting this sum. The company was assessed to income-tax for the account year 1941-42 on the profits arrived at after such deduction. Similarly, in the year of account 194 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmission, the directors promptly accepted the proposal and agreed to distribute the managing agency commission between the firm and the two private limited companies controlled and managed by two of the partners of the firm. The managing agency commission payable to the firm for the year of account 1942-43, after the splitting up of the commission into three parts, amounted to ₹ 2,20,702. This sum is credited to the firm in the accounts of the company and, for no apparent reason, has not been drawn. The firm had not taken in previous years, and was under no obligation to take in the years of account now in question, the permission of the directors to draw the managing agency commission earned by it. It is only when the managing agency profits swelled in magnitude and at the very end of the year of account 1941-42 that the firm took it into its head to remind the directors about the firm's ancient indebtedness and invited a suspense account entry. That these ingenious devices have been purposely resorted to for the purpose of reducing the liability of the firm to income-tax is obvious and it is not surprising that the Income-tax Officer and the Appellate Assistant Commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm by the company. The firm could have drawn the amount without reference to the directors once the sum had been earned and entered in the company's accounts and accepted by everybody concerned, including the directors, as a proper item of revenue expenditure. The gratuitous reminder to the directors about the ancient indebtedness of the firm at the end of the year of account, the invitation of a suspense account entry with regard to the managing agency commission, and the self-imposed restraint on the withdrawal of the managing agency commission by the firm, are all, in my opinion' ineffective proceedings resorted to for the purpose of obscuring the real position. I have already repelled the contention that the firm kept its accounts on a cash basis and pointed out that the firm had been assessed on a mercantile basis in the years 1940-41 and 1941-42 and that the firm produced no accounts in the two years of account now in question. In these circumstances, the Income-tax Officer who had the duty of charging to tax the profits and gains of the firm under Sections 3, 4, 10 and 12 of the Act was entitled to treat these two sums of ₹ 2,26,850-5-0 and ₹ 2,20,702 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he sum, therefore, belonged to the firm and had to be included in the computation of the profits and gains that had accrued to it unless the firm had regularly kept its accounts on a cash basis, which is not the case here. There is no analogy between the present case and a case where a sum of money received or realised but the title to which is in dispute, is kept in suspense pending decision or adjudication as to the title. There is not even this apparent obstacle of a suspense account so far as the sum of ₹ 2,20,702 earned by the firm as its managing agency commission in the year of account 1942-43. This sum is duly credited to the firm in the accounts of the company of that year. For these reasons I hold that the two sums of ₹ 2,26,850-5-0 and ₹ 2,20,702 were assessable to income-tax as part of the profits and gains that had accrued to the firm during the years of account 1941-42 and 1942-43. 56. The only question that yet remains to be considered is the second question referred to us in Referred Case No. 78 of 1946, viz., whether on the facts and circumstances of the case, the applicants are entitled to exemption of the sum of ₹ 81,023. It is claim ..... X X X X Extracts X X X X X X X X Extracts X X X X
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