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TMI Blog1950 (4) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... 43, corresponding to the accounting 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 ½ 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessees. He was of opinion that the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s was not collusive but bona fide 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g. Of course, if cash basis was adopted in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mills and managing agency agreement and arrived at the figure that the remuneration and commission 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax law. 12. The leading case, which in my opinion, strongly supports the contention urged 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) 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 purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, there was not even a default on the part of the executor to pay the legacy or any part of it and the legatee wilfully abstained from making a demand and receiving the amount. 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 te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts in full, it was held that the amount not paid was not chargeable to income-tax. The distinction between commercial accounts and other cases was adverted to by Lawrence, J., in the judgment 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n at page 480 between the position of profits of the remaining partners to carry on the business from the point of view of assessability and the profits which the widow was entitled to receive from the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tem) the net profit or loss is calculated after taking into account all the income and all the expenditure relating to the period, whether such income has been actually received or not and, whether such expenditure 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t case, that is to say, to take the assessee's own method of accounting and to compute from it what profits or gains had 'arisen' or 'accrued' to (not merely been 'received' by) the assessee 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... answered in the affirmative and in favour of the assessee. 24. The decision in this case, it has been agreed, governs the decision also in Referred Cases Nos. 32 and 56 of 1947. The assessee is entitled to his 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 ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pended by them on behalf of the company and all sums due to the said firm for commission or otherwise". 29. During the year of account ending 31st March, 1942, the firm was entitled, as managing agent, to a monthly 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shape of an insurance agency and a ginning factory run in the name of the wife of one of the partners. There is now no controversy regarding the taxation of the income of the firm from these other sources. 31. In the proceedings 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, su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 accrued, or arose, in Indian States outside British India and not having been brought into, or received in, British India, was not liable to tax. This last contention was confined to the year of account 1942-43. Mr. C.S. Rama Rao Sahib, for the revenue authority, 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in an account kept on a mercantile basis it is not unusual to find cash credits and debits. There is no material or evidence in support of the assertion of the firm accepted by the Tribunal that the firm was being assessed on a cash basis in the prior years. Such 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 contrad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Courts, however, had evolved, many years ago, a working rule that the term " profits and gains " in connection with income-tax was to be understood in its natural and ordinary sense, in a sense which no commercial man would misunderstand. "Profits and gains" were ascertained on ordinary principles of commercial trading by setting 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure 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 bookkeeping ' 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." There was nothing in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income-tax Officer to compute the profits and gains of the assessee in accordance with the method of accounting regularly employed by him. Even when there is such a method of accounting, it is the duty of the Income-tax Officer to consider whether the income, profits and gains can be properly deduced therefrom and to proceed according to his judgment on the question : Commissioner of Income-tax v. Sarangpur Cotton Manufacturing 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation of the profits and gains of a business or vocation. The assessee is a firm consisting of a father and his two sons, formed for the purpose of making profits by carrying on a business. (Compare Section 4 of the Partnership Act), One of the firm's businesses, perhaps its main business, was the managing agency of the company. As managing agent, the firm ran the mills, bought and sold goods and kept accounts on behalf of the company. It is no doubt 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd upon the terms of rule 3(1) above referred to, which imply that book debts must be included in the return with a corresponding deduction for bad debts. The ascertainment of the profits and gains of a trade or business necessarily involves an account with credit and debit items and in order to ascertain the profits of any trade or business such an account has to be taken : Ushers Wiltshire Brewery Ltd v. Bruce [1915] AC 433. 458. Where tax is levied upon a 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Judicial Committee held that the amount was not chargeable to income-tax in respect of the year 1921. Lord Wrenbury delivering the judgment of the Board observed as follows :- "The words 'income arising or accruing' are not equivalent to the words 'debts arising or accruing'. To give them that meaning is to ignore the word 'income'. The words mean 'money arising or accruing by way of income'. There must be a coming in to satisfy the word '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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rding to the respective schedules." This provision is and has been interpreted as being subject to the schedules. Schedule D, clause (1), omitting portions not relevant to the present case, runs as follows : -"Tax under this schedule shall be charged in respect of (a) the annual profits or gains arising or accruing (i) to any person residing in the United Kingdom from any kind of property whatever, etc. (ii) to any person residing in the united Kingdom from any trade, profession, employment or vocation, whether the same be carried on in the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome is assessed to tax in the year of receipt of the remittance in the United Kingdom even though the income might have accrued or arisen abroad earlier and might have been accumulated there by the assessee: Scottish Widows' etc. Society v. Farmer [1909] 5 Tax Cas 302; Scottish Provident Institution v. Farmer [1911] 6 Tax Cas. 34. It is here necessary to point out that in 1914 the necessity for receipt in the United Kingdom of income from foreign possessions, including stocks and securities, was done away with and thereafter the only words descriptive of such income were "arising or accruing." In a case not cited 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 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e words "profits or gains arising or accruing" but limited the charge to "interest received and payable." The leading judgment was that of the Master of the Rolls whose reasons may thus be summarised. The legatee made no demand for payment of the legacy. The money representing the sum of interest had not been appropriated to the legatee or to his use by the executors. No personal debt or obligation had arisen as it could not be said that there was a debt when there had been no demand on the executors. The words of the charging provision were " received and payable" and these words could not be expanded into "accruing or arising". The following passages from the judgment 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 persona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "The Court is dealing in this case with an annuity, and not with commercial accounts." The next case cited was Inland Revenue v. Hamilton-Russell [1943] 1 All. ER 474 CA, where it was held that the accumulations of a fund by the trustees of a settlement for the benefit of a legatee who had attained the age of 21, represented the income of the legatee and were assessable to tax. The testator's direction as to accumulation of income was legally unenforceable after the beneficiary attained the age of 21 and though the income accumulated by the trustees had not been paid over to the beneficiary, still the income of the fund was held to be the income of the beneficiary and assessable to tax. Referring to Dewar's case [1935] 2 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same position as if she were herself a partner. It must be remembered that Mrs. Lebus was assessed under Schedule D, clause 1(b), and Case III, rule 1, clause (a), quoted above, where receipts of income, actual or constructive, was essential to attract tax, while the partners would be assessed under Schedule D, clause (1)(a), sub-clause (2), and the rule applicable to Schedule D, Case I, on the profits and gains of the business arising or accruing to them irrespective of receipt. 51. The English decisions cited above have no bearing on the computation of the profits and gains accruing or arising to a person. It is necessary, in this connection, to bear in mind the warning repeatedly given by the Judicial Committee that English decisions given 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipt and the revenue authority, can ignore a "suspense account" if it is not bona fide. The first case, related to foreign remittance and the second to rents or royalties payable and paid under mining leases. 53. The position in the present case has now to be analysed. The firm carried on business which actually yielded profits in the two years of account now in question. Its main source of income was the managing agency commission earned from the mills. It had other sources of income as well. It kept the accounts of the mills and had plenary powers of management of the affairs of the company subject to the general supervision of the directors. It operated upon the funds and bank accounts of the company. It had the right, expressly conferred upon 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 a.m. on 30th March, 1942, itself that the commission of ₹ 2,26,850-5-0 earned by, and payable to, the firm should be kept in suspense pending a decision on the question of the writting off of the debt due by the firm to the company and that the question should be taken up for consideration at the next meeting. It was also noted that the firm objected to the postponement of payment. It is significant that though on 30th March, 1942, the directors resolved to consider the question of writing off the debt due by the firm to the company, nothing further was done with reference to this matter till 1945. About what happened later on, we have no information. As regards the other proposal of the firm with reference to the division of the managing agency commission, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any admitted liability for this sum to the firm, earmarked this sum as belonging and payable to the firm and even agreed to pay it as soon as the question of writing off the debt to the company by the firm was settled. The directors did not have and did not even claim, a right to have a set-off of the managing agency commission against the debt due to the company by the firm but merely desired to keep the amount of the managing agency commission in suspense for a short time till the question of writing off the debt due to the company by the firm was settled. The firm had asserted its right to, and demanded payment of, the full amount of the managing agency commission which had finally been ascertained and fixed and which had become a debt payable to the 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of the kind in the present case and all that we have is the application of a nick-name to what was in truth and in fact the money of the firm. The company, or rather the firm, which kept the company's accounts, had already entered this sum as an item of revenue expenditure and had cost the profit and loss account of the company on that footing. The company had given this sum the final impress of an expenditure properly incurred and stamped it with the character of an outgoing of the business. The sum had irrevocably entered the debit side of the company's account as a disbursement of managing agency commission to the firm and had been appropriated to the firm's dues and the same sum could not again be entered in a suspense account at a later date. The 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 titl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sole buying agent of the company and another private limited company controlled by another partner of the firm was appointed as the sole selling agent of the company and the commission payable on purchases and sales was payable, and paid, to these two private limited companies. What the firm did was merely to supervise the work of these limited companies and to attend to the business of the company at Madura. It was for this work and this work alone that the firm was paid a monthly remuneration of ₹ 1,000 and a commission calculated at 5 per cent, of the entire profits of the company. The managing agency agreement was entered into at Madura, the managing agency business was carried on at Madura and the profits were earned and payable at Madura. The purchases and sales of goods were not effected by the firm in the account year 1942-43 but by the two limited companies controlled and managed by two of the individual partners of the firm. No part of the managing agency commission arose or accrued to the firm in any Indian State and therefore the exemption from tax granted by Section 14, sub-section (2), clause (c), of the Act is not attracted. 57. I would answer the question re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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