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TMI Blog1975 (9) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... ances of the case, the Tribunal was justified in law in reducing the income of the assessee from Rs. 58,000 to Rs. 10,200? " At the time of making the reference, the Tribunal found that a question of law did arise so far as the question which has been actually referred to us is concerned but the remaining two questions were not referred to the High Court because the Tribunal felt that those two questions merely pertained to questions of fact and appreciation of evidence and there was no question of law. Thereafter, the Commissioner of Income-tax, Gujarat II, has filed the income-tax application requesting that the two questions which were not referred by the Tribunal should also be considered or a statement of the case should be called for from the Tribunal regarding these two questions. The facts leading to this reference are as follows. The assessment year under consideration is assessment year 1963-64. The assessee is an individual and the previous year, that is, the accounting period, is the calendar year 1962. Prior to January 1, 1962, the assessee was carrying on his own business as an individual and the business was of manufacture and sale of chemicals. With effect from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove this amount of Rs. 48,752 it was found by the Income-tax Officer that no amount had been withdrawn by the assessee for his household expenses in the year of account and an amount of about Rs. 5,000 was added and ultimately the Income-tax Officer came to the conclusion that Rs. 53,200 should be added as the income of the assessee taking it as a round figure. When the matter was taken in appeal before the Appellate Assistant Commissioner and ultimately the matter was decided ex parte though on merits, the Appellate Assistant Commissioner upheld the conclusion of the Income-tax Officer regarding this amount of Rs. 53,200. Before the Tribunal the explanation given on behalf of the assessee was that in the calendar year 1961 he had withdrawn a sum of Rs. 59,409 and kept the amount with him and from that amount he had utilised an amount of Rs. 4,500 to Rs. 4,700 for the purpose of his household expenses and the balance amount was utilised for the purpose of liquidating his liabilities in the calendar year 1962. Particulars as regards the date of withdrawal and the amount withdrawn were supplied by the assessee before the Income-tax Officer but he had not led evidence in support of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amount of Rs. 38,000 has been properly explained by the assessee. Under these circumstances the Tribunal was right in holding that question No. (1) which was not referred to us, namely, regarding Rs. 38,000, was a pure question of fact and that no question of law had arisen regarding this amount of Rs. 38,000. As regards the second question which has not been referred to us, once it is found that the question as regards the amount of Rs. 38,000 is purely a question of fact and not of law, the consequential question regarding the reduction of the income from Rs. 58,000 to Rs. 10,200 was also purely a consequential question of fact. Of course, if we come to the conclusion that the amount of Rs. 4,800 could not be deducted, then that amount will be added back at the appropriate stage but that depends upon a consideration of a pure question of law. We, therefore, come to the conclusion that Income-tax Application No. 2 of 1975 should be rejected with no order as to costs. As regards the main question which is referred to us, it must be borne in mind that this amount of Rs. 4,800 was on the basis of remuneration to be paid to the assessee as a director and the remuneration was on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions cannot help the particular assessee in respect of income under the head " Salaries ". We find reference to the real income principle in H. M. Kashiparekh & Co. Ltd. v. Commissioner of Income-tax . The assessee was a limited company and it maintained its accounts on the mercantile system. It was the managing agent of a paper mill company. Under the managing agency agreement it was under a duty to forgo up to one-third of its commission where the profits of the managed company were not sufficient to pay a dividend of 6 per cent. For the accounting year ending March 31, 1950, the assessee earned a commission of Rs. 1,17,644, but as a result of resolutions passed by the managed company and the assessee-company, the assessee gave up a sum of Rs. 97,000 in December, 1950. The Appellate Tribunal held that the maximum amount the assessee was bound to forgo was only Rs. 39,215 and included the balance of the amount forgone, viz., Rs. 57,785, in the taxable income of the assessee. The Tribunal at the same time held that the sum of Rs. 57,785 was given up for reasons of commercial expediency. On these facts the Bombay High Court held that it was the real income of the assessee-company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rialise. 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 be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry, to that effect might, in certain circumstances, have been made in the books of account. This was not a case of a gift by the assessee to the managed companies of a portion of income which had already accrued, but an agreement to receive a lesser remuneration than what had been agreed upon. The assessee had, in fact, received only the lesser amount in spite of the entries in the account books, and this lesser amount alone was taxable. The decisions of the Supreme, Court in Commissioner of Income-tax v. Harivallabhadas Kalidas & Company and Commissioner of Income-tax v. Chamanlal Mangaldas & Company also turn on the same principles as the decision in Commissioner of Income-tax v. Shoorji Vallabhdas & Co. It was found in Commissioner of Income-tax v. Harivallabhadas Kalidas & Co., that the managing agent's commission did not accrue as and when the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber 31, 1954, and December 31, 1955, respectively. By resolutions of its board of directors dated April 4, 1955, and June 19, 1956 (that is after the commission had become due but before it had become payable) the assessee relinquished its commission on sales and office allowance because the managed company had been suffering heavy losses in the past years. On these facts the Supreme Court held that the commission had become due to the assessee on December 31, 1954, and December 31, 1955, and the fact that payment was deferred till after the accounts had been passed in the meetings of the managed company, did not affect the accrual of the income. Since the amounts of income for the two years were given up unilaterally by the assessee after they had accrued to it, it could not escape liability to tax on those amounts. It was observed by the Supreme Court : " Income accrues when it becomes due. The postponement of the date of payment does not affect the accrual of income. The fact that the amount of income is not subsequently received by the assessee would not also detract from or efface the accrual of the income, although non-receipt may, in appropriate cases, be a valid ground f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of each year of account of the company ......... a monthly remuneration of Rs. 1,250 plus commission at the rate of five per cent. on the net profits made by the company ". The commission was to become due and be paid to him yearly and he was to be entitled to draw the same immediately after the annual accounts of the company of each year were made up and the accounts were laid before the company in general meeting, subject to the provision that the assessee would be entitled to draw his minimum remuneration in monthly instalments of Rs. 1,250. For the accounting year ended December 31, 1959, the company credited to the assessee a remuneration of Rs. 1,250 every month, but on December 31, 1959, the company debited the assessee with a sum of Rs. 15,000 which represented the salary for the whole year in pursuance of a resolution of the board of directors dated May 9, 1960, to the effect : " In view of the company not making any profit, the company decides to stop payment of remuneration of Rs. 15,000 per annum to the managing director (the assessee) for the year 1959 ". In respect of the assessment year 1960-61, the assessee claimed that he was not entitled to remuneration for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Supreme Court in Commissioner of Income-tax v. Shoorji Vallabhdas & Co. was cited and relied upon by the Supreme Court in Commissioner of Income-tax v. Birla Gwalior (P.) Ltd. : " Income-tax is a levy on income. Though the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping an entry is made about a ' hypothetical income ' which does not materialise. 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 be, said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might; in certain circumstances, have been made in the books of account. " Now, this passage from Shoorji Vallabhdas & Co.'s case is in the context of income falling under the head " Profits and gains of business or profession" and not under the head " Salaries ". T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be given up is the period during which an appropriate relief must be given by way of deduction to the assessee concerned because if that were not to be done, the very basic principle of accrual is violated. That principle is that though not received on the basis of accrual, it is due to be received and the tax is payable and has to be paid on that basis. If subsequently it becomes clear that that amount is not to be received though accrued earlier and is not going to be received at all, it is in the fitness of things that corresponding deduction for the amount waived or written off should be given to the assessee in the year of account in which such amount is written off or waived or debited. It is on this basis that in the system of mercantile account keeping, bad debts are written off and deductions are allowed on the basis of bad debts being written off in the year, in which the debt is written off by the assessee concerned. It is true, as Mr. Kaji has urged before us, that so far as the " salaries " are concerned, the income chargeable under the head "salaries" shall be computed after making the deductions set out in section 16 and the deduction of the type that we are pointi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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