TMI Blog1954 (5) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... nsferors and the transferees within the chargeable accounting period. It is not the work done or the services rendered by the person but the income received or the income which has accrued to the person within the chargeable accounting period that is the subject-matter of taxation. That is the proper method of approach while considering the taxability or otherwise of income and no considerations of the work done for broken periods or contribution made towards the ultimate income derived from the source of income nor any equitable considerations can make any difference to the position which rests entirely on a strict interpretation of the provisions of Section 4(1)(a) of the Income-tax Act. The result therefore is that the question referred by the Tribunal to the High Court must be answered in the negative. All the appeals will accordingly be allowed. - C.A. 3 OF 1953 - - - Dated:- 14-5-1954 - Judge(s) : JAGANNADHADAS., N. H. BHAGWATI., S. R. DAS JUDGMENT The judgment of Das and Bhagwati, JJ., was delivered by BHAGWATI, J.--These appeals arise out of two judgments and orders of the High Court of Judicature at Bombay in Income-tax References Nos. 23, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived by the transferees. The entire amounts of the managing agency commission received by the transferees were assessed by the Income-tax Officer for the assessment year 1945-46 as the income of the transferees. The transferees appealed to the Appellate Assistant Commissioner who confirmed the orders of the Income-tax Officer. When the matter was taken in further appeal to the Income-tax Appellate Tribunal, the Tribunal by its order dated the 28th December, 1949, accepted the transferees' contention that the managing agency commission received by them should be apportioned on a proportionate basis and the transferees should be made liable to pay tax only on the commission earned by them during the period that they had worked as the managing agents of the respective companies. The Income-tax Officer and the Excess Profits Tax Officer appear to have discovered that the amounts of the managing agency commission earned by the Sassoons prior to the dates of the respective transfers were not brought to tax and therefore issued on the 29th June, 1946, notices under Section 34 of the Indian Income-tax Act and Section 15 of the Excess Profits Tax Act upon the Sassoons on the ground t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er in the circumstances of the case was the managing agency commission liable to be apportioned between the assessee company and the assignee observing that in its opinion the question was not when the managing agency commission accrued but the real question was to whom it accrued. This reference was made by the Tribunal in R. A. No. 474 of 1950-51 and R. A. No. 475 of 1950-51 referring the question of law thus framed in regard to the managing agency commission of the E. D. Sassoon United Mills Ltd. and the Elphinstone Spinning Weaving Mills Ltd., the whole of the managing agency commission having been paid respectively to Messrs. Agarwal Company and to Chidambaram Mulraj Co. Ltd. in the year 1944. This was Income-tax Reference No. 27 of 1951. The Commissioner of Income-tax/Excess Profits Tax, Bombay City, also required the Tribunal to refer to the High Court the question of law arising out of its order in the appeal of Messrs. Agarwal Company in which the Tribunal had held as above that the managing agency commission should be apportioned between the Sassoons and the transferees. The statement of the case was accordingly submitted by the Tribunal on the 12th January, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted Mills Ltd. was entered into on the 24th February, 1920, by Sir Edward Sassoon and others carrying on business in partnership in the style and form of Messrs. E. D. Sassoon Co. The managing agency was transferred with the consent of the company by E. D. Sassoon Company to the Sassoons and another managing agency agreement was executed between the company and the Sassoons on the 2nd October, 1934, appointing and recognising the latter, as the agents of the company from the 1st January, 1921, for the residue of the period and upon the same terms and conditions set out in the original agreement dated the 24th February, 1920. Under clause 1 of that agreement the Sassoons and their assigns were appointed the agents of the company for a period of 30 years from the date of the registration thereof and thereafter until they resigned or were removed from office by a special resolution of the company. Under clause 2 the remuneration of the Sassoons and their assigns was fixed at a commission of 7 1/2 per cent. per annum on the annual net profits of the company after making all proper allowances and deductions from revenue for working expenses chargeable against profits, provided howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as managing agents of the company for the unexpired residue of the term created by the said agreement dated the 24th February, 1920, as also the said agreements dated the 24th February, 1920, and the 2nd October, 1934, and all their rights and benefits as managing agents under the said agreements and Messrs. Agarwal Company agreed to be the managing agents of the company from the 1st December, 1943, in place and stead of the Sassoons for the said unexpired residue of the term with like powers, authorities, remuneration and emoluments as were contained in the said agreements. It may be noted that even though the letter recording the agreement of transfer expressly provided that the transferees would be entitled to receive the commission payable by the company under the managing agency agreement on the profits for the calendar year 1943 no such term was incorporated in the deed of assignment and transfer. The original agreement entered into by the Elphinstone Spinning Weaving Mills Co. Ltd. was with Messrs. Hajee Mahomed Hajee Esmail Company and was dated the 24th July, 1919. The managing agency was transferred with the consent of the company by Messrs. Hajee Mahomed Hajee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceived included the Sassoons' share of commission in respect of which they were not liable to tax but the Sassoons. The High Court adopted this test of the services rendered by the Sassoons as well as the transferees during the whole of the year and considered the proportions of the services rendered by the Sassoons and the transferees as the managing agents of the companies as decisive of the portions of the managing agency commission earned respectively by each. The parenthood of the income received by the transferees was considered to be the real test of the apportionability of the amounts of the managing agency commission and the total amount of the managing agency commission was thus apportioned between the Sassoons and the transferees in the proportion of 11 to 1 in the case of the E. D. Sassoon United Mills Ltd. and 5 to 7 in the case of the Elphinstone Spinning and Weaving Mills Co. Ltd. the transfers of the managing agencies having been made with effect from the 1st December, 1943, and the 1st June, 1943, respectively. The income was held assessable to tax not on the basis of receipt but on the basis of accrual. The receipt by the transferees was considered of no cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on under the terms of the managing agency agreements, the transferees received the same in their own right even though they had not rendered the services to the company for the whole of the calendar year 1943. It was contended that in any event, whatever be the position as between the companies and the transferees, the Sassoons had not earned any part of the managing agency commission which had been paid by the companies to the transferees and were not liable to tax in respect of the same. It was on the other hand urged on behalf of the transferees that even though under the terms of the deeds of assignment and transfer they were paid by the companies the whole of the managing agency commission for the calendar year 1943 they had merely earned the commission or remuneration for the period of actual services rendered by them to the company and the portions of the managing agency commission proportionate to the services actually rendered by the Sassoons to the companies had accrued to the Sassoons though it had been ascertained and paid to the transferees in the year 1944. Even though the ascertainment and the payment came later it made no difference to the accrual of the income w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for misconduct he was not entitled to any part of the unpaid salary for the current year of his service. Lord Justice Cotton at page 360 posed the question as under :-- Can he sue for a proportionate part of the salary for the current year ? What he would have been entitled to if he continued in their service until the end of the year would have been pound 800, but in my opinion that would give him no right of action until the year was completed. Lord Justice Bowen observed at page 364 :-- As regards his current salary it is clear and established beyond all doubt by authorities.................. that the servant who is dismissed for wrongful behaviour cannot recover his current salary, that is to say, he cannot recover salary which is not due and payable at the time of his dismissal, but which is only to accrue due and become payable at some later date, and on the condition that he had fulfilled his duty as a faithful servant down to that later date. The case of Moriarty v. Regents Garage Engineering Company Limited was particularly relied upon by the learned counsel for the Sassoons. No question of dismissal or removal for misconduct arose in that case, bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essfully seeks in a higher Court a confirmation of the view of Mc Cardie, J., expressed in Moriarty's case as regards the injustice of denying the benefit of the Apportionment Act to a man who may have been guilty of misconduct. This rule applies not only when there is a sudden cessation of a contract of service by the unilateral act of the master or the servant but also when there is such cessation by mutual consent of the parties. In the former event the servant would be deprived of his proportionate wages by his own act or default or he would be able to sue his master for damages for wrongful dismissal, but no claim for proportionate salary or wages would survive under the contract of service. In the latter event the consensus of opinion between the master and the servant would be sufficient to terminate the contract of service and no claim for proportionate wages or salary would survive unless it was made an express term of the agreement thus arrived at between the parties. In either event there would be no question of the servant claiming from his master wages or salary for the broken period. Learned counsel for the transferees attempted to throw doubt on the correctnes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fully distinguished from Swabey's case, the authority of that case, on an article omitting the words 'at the rate of', remains unshaken. Swabey's case was referred to by Lord Sterndale, M. R., at page 777 in Moriarty's case and the learned Master of the Rolls stated that there was nothing in that case which would oblige the Court to hold that wherever there was power, mutual or onesided, to terminate an agreement in the middle of the year, there must, as a matter of necessity, be inferred a right to receive payment from day to day, and receive payment for the broken period. It really depended on the circumstances of each case whether to draw that inference or not. In any event we have not before us under the terms of the managing agency agreements any provision for payment of remuneration at the rate of any particular sum a year and the ratio of the four cases referred to by Palmer in the passage quoted above as also the observations of Lord Sterndale, M.R., at Page 777 in Moriarty's case set out above are sufficient to enable us to hold that when the remuneration or commission is expressed at so much per annum without anything more it would amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were employed as the agents of the company for this specified period and under the terms and conditions therein recorded. The now or the substituted managing agents were treated as if they had entered into the agreement with the company and their name had appeared in the original agreement in lieu of E. D. Sassoon Co. who were in the first instance appointed the agents of the company. These managing agents described as such were to be paid the remuneration specified in clause 2(a) of the agreement which was a commission of 7 1/2 per cent. per annum on the annual net profits of the company with a stipulation in regard to the minimum remuneration of ₹ 1,20,000 per annum. Clause 2(d) specified when the said commission was to become due to the managing agents and it provided that the commission was to be due to them yearly on the 31st March in each and every year during the continuance of the agreement. The commission was thus an annual payment calculated upon the annual net profits of the company and was to be due to the managing agents yearly on the 31st March in each and every year. Unless and until the annual net profits of the company were determined the 7 1/2 per cent. c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le year. It therefore followed as a necessary corollary that both the transferors and the transferees would be paid their remuneration or commission and both would be entitled to the proportionate commission for the respective periods during which they rendered services as managing agents to the company. This argument however ignores the fact that whatever be the position as between the transferor and the transferee, whatever be their arrangements inter se, whatever be the periods of the year during which they might have served the company in their capacity as the managing agents, the managing agents as described in the recitals and clauses 1 and 3 of the managing agency agreement were one entity and no severance of such periods of service during the course of a particular year was ever contemplated under the agreement. On assignment, the transferee became the managing agent as if its name had been inserted in the managing agency agreement from the beginning. For the future period the transferor effaced itself and the transferee took the place of the transferor and preserved the continuity of the managing agency so that whoever happened to satisfy the description of the managing ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t two months on the expiration of the term of the managing agency agreement. We see nothing in the terms of the managing agency agreement which would compel or induce us to hold that there must as a matter of necessity be inferred therefrom a right to receive remuneration or commission for a broken period. Learned counsel for Chidambaram Mulraj Co. Ltd. however sought to distinguish the terms of the managing agency agreement of the Elphinstone S. W. Co. Ltd. from those of the managing agency agreement of the E. D. Sassoon United Mills Co. Ltd. even though as stated before no such distinction was made either before the Income-tax authorities or the High Court. He contended that there was nothing in the agency agreement with the Elphinstone S. W. Co. Ltd. which corresponded with clauses 2(a), 2(d) and clause 10 of the agreement between the E. D. Sassoon United Mills and their managing agents. The only term which was to be found in the agency agreement of the Elphinstone S. W. Co. Ltd. was that the company was during the continuance of the agreement to pay to the managing agents who were there described as E. D. Sassoon Co. Ltd., their successors and their assigns by way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed : The word 'profits' has in my opinion a well-defined legal meaning, and this meaning coincides with the fundamental conception of profits in general parlance, although in mercantile phraseology the word may at times bear meanings indicated by the special context which deviate in some respects from this fundamental signification. 'Profits' implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets of the business at the two dates. This concept of the term was also adopted by Mr. Justice Mahajan as he then was in Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai Co., Bombay :-- Profits of a trade or business are what is gained by the business. The term implies a comparison between the state of business at two specific dates separated by an interval of an year and the fundamental meaning is the amount of gain made by the business during the year and can only be ascertained by a comparison of the assets of the business at the two dates, the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hose before us we would be justified in presuming that normally the accounts are made up every year and even though there may be a theoretical possibility of the accounts being cast half yearly or quarterly or even every month no such procedure would be adopted by the company. In any event it would be absurd to suggest that the profits of the company could accrue from day to day or even from month to month. The working of the company from day to day could certainly not indicate any profit or loss. Even the working of the company from month to month could not be taken as a reliable guide for this purpose. If the profit or loss has got to be ascertained by a comparison of the assets at two stated periods, the most businesslike way of doing it would be to do so at stated intervals of one year and that would be a reasonable period to be adopted for the purpose. In the case of large business concerns like these the working of the company during a particular month may show profits and the working in a particular month may show loss. The working during the earlier part of the year may show profit or loss and working in the later part of the year may show loss or profit which would go to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts to the respective companies, that the services thus rendered were the source of income and whatever income could be attributed to those services was earned by the Sassoons and accrued to them in the chargeable accounting period though it was ascertained and paid in the year 1944 to the transferees. The word earned has not been used in Section 4 of the Income-tax Act. The section talks of income, profits and gains from whatever source derived which (a) are received by or on behalf of the assessee, or (b) accrue or arise to the assessee in the taxable territories during the chargeable accounting period. Neither the word income nor the words is received , accrues and arises have been defined in the Act. The Privy Council in Commissioner of Income-tax, Bengal v. Shaw Wallace Co. attempted a definition of the term income in the words following :-- Income, their Lordships think, in the Indian Income-tax Act, connotes a periodical monetary return 'coming in' with some sort of regularity, or expected regularity from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Houses of Lords] that both the words are used in contradistinction to the word 'receive' and indicate a right to receive. They represent a state anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less inchoate. One other matter need be referred to in connection with the section. What is sought to be taxed must be income and it cannot be taxed unless it has arrived at a stage when it can be called 'income'. The observations of Lord Justice Fry quoted above by Mukerji, J., were made in Colquhoun v. Brooks, while construing the provisions of 16 and 17 Victoria Chapter 34, Section 2, Schedule 'D'. The words to be construed there were profits or gains, arising or accruing and it was observed by Lord Justice Fry at page 59 :-- In the first place, I would observe that the tax is in respect of 'profits or gains arising or accruing.' I cannot read those words as meaning 'received by'. If the enactment were limited to profits and gains 'received by' the person to be charged, that limitation would apply as much to all Her Majesty's subjects as to foreign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing or arising by rendering services or otherwise but he must have created a debt in his favour. A debt must have come into existence and he must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or in other words a debitum in prasenti, solvendum in futuro it cannot be said that any income has accrued to him. The mere expression earned in the sense of rendering the services etc. by itself is of no avail. If therefore on the construction of the managing agency agreements we cannot come to the conclusion that the Sassoons had created any debt in their favour or had acquired a right to receive the payments from the companies as at the date of the transfers of the managing agencies in favour of the transferees no income can be said to have accrued to them. They had no doubt rendered services as managing agents of the companies for the broken periods. But unless and until they completed their performance, viz., the completion of the definite period of service of a year which was a condition precedent to their being entitled to receive the remuneration or comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under which its services were not completed or paid for, as regards commission, until the conclusion of the relevant account that the profit in the form of commission was not ascertainable or earned, and did not arise, until that time and that the additional assessment which was made in the year in which the policies were underwritten should accordingly be discharged. The Special Commissioners allowed the assessee's contention and discharged the additional assessment. The decision of the Special Commissioners was confirmed on appeal by Macnaghten, J., in the King's Bench Division of the High Court. The Court of Appeal however reversed this decision and a further appeal was taken by the assessee to the House of Lords. The House of Lords held that on the true construction of the agreements, the commissions in question were earned by the assessee in the year in which the policies were underwritten, and must be brought into account accordingly and confirmed the decision of the Court of Appeal. It may be noted that the charge was on profits arising in each chargeable accounting period and the profits were to be taken to be the actual profits arising in the chargeable accountin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition that the commission had been wholly earned during the chargeable accounting period and the income had accrued to the assessee during that period. Learned counsel for the transferees also relied upon the decisions in Bangalore Woollen, Cotton and Silk Mills Co., Ltd. v. Commissioner of Income-tax, Madras, and Turner Morrison Co. Ltd. v. Commissioner of Income-tax, West Bengal, to show that as and when the sale proceeds were received by the company the profits made by the company were embedded in those sale proceeds and if that was so the percentage of the net profits which was payable by the companies to the managing agents as and by way of commission was similarly embedded in those sale proceeds. If the profits thus accrued to the company during the chargeable accounting period the commission payable to the managing agents also could be said to have accrued to them during that period. It is no doubt true that the accrual of income does not depend upon its ascertainment or the accounts cast by assessee. The accounts may be made up at a much later date. That depends upon the convenience of the assessee and also upon the exigencies of the situation. The amount of the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so support this conclusion. In the unreported decision of the High Court of Bombay in Commissioner of Excess Profits Tax, Bombay City v. Messrs. P. N. Mehta Sons, the managing agency agreement was couched in the very same terms as that of the E. D. Sassoon United Mills Co. Ltd. The managing agents were to be paid 10 per cent. of the net annual profits made by the company with a guaranteed minimum commission of ₹ 5,000 per annum. The accounting year of the company was the calendar year. The Tribunal had held that the annual profits could only be ascertained when the accounts of the company were made up and it was then that the 10 per cent. commission would accrue to the managing agents. The contention of the Department was that as the managing agents worked as such from day to day and helped the company to earn profits, profits accrued to them from day to day and not at the end of the year. This contention was negatived by the High Court ;-- It is only on the net annual profits that the managing agents are entitled to any commission. A company may have worked for six months at a loss, for the remaining six months it may make a large profit so as to wipe off the loss, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch it was done. We were invited by the learned counsel for the Sassoons to approach the question from another point of view and that was that what had been transferred by the Sassoons to the transferees was a source of income, viz., the managing agency which was to run for the unexpired residue of the term. It was urged that where a source of income was transferred any income which accrued from that source after the date of the transfer was the transferees' income and not of the transferors, and that it was immaterial (a) that at the date of the transfer there was an expectation that at a future date income would accrue, (b) that the transferor by the work before the transfer had contributed to create any income which might eventually accrue and (c) that because of the expectation of income a higher price had been paid for the transfer. Reliance was placed in this connection on the case of Commissioners of Inland Revenue v. Forrest. In that case the assessee purchased certain shares on the 25th November, 1919, and paid an excess price to cover the portion of the dividend accrued to date. A dividend of 10 per cent. for the period ending on 28th February, 1920, was decl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received the price of an expectancy of interest which was not the subject of taxation. It was not argued that the interest accrued de die in diem and the vendor was held not assessable in respect of the interest accrued at the date of the sale of the stock. Commissioners of Inland Revenue v. Pilcher, was the case of the sale of an orchard inclusive of the year's fruit crop. The assessee had valued the cherries which were on the trees at pound 2,500 and had put a man immediately in the orchard after he had purchased it at the auction. He commenced to pick the fruit on the 25th May, 1942, and completed the operations on the 12th June, 1942. He realised pound 2,903 as the price of the cherries. This sum was brought into the profit and loss account as a trading receipt and the contention of the assessee was that in computing his profits he was entitled to charge the sum of 2,500 being the purchase price of the cherries sold for pound 2,903 which sum had been brought into credit as a trading receipt. This contention was negatived and it was observed by Lord Justice Jenkins at page 332 :-- It is a well settled principle that outlay on the purchase of an income-bearing asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sassoons in their favour was an income-bearing asset consisting of the office of managing agents, the managing agency agreement and all the rights and benefits as such managing agents under the agreements and no part of the consideration paid by the transferees to the Sassoons could be allocated as a receipt of income by reason of their contribution towards the earning of the commission in the shape of services rendered by them as managing agents of the companies for the broken periods. What the transferees obtained under the deeds of assignment and transfer was the expectancy of earning a commission in the event of the condition precedent by way of complete performance of the obligation of the managing agents under the managing agency agreements being fulfilled and a debt arising in favour of the managing agents at the end of the stated periods of service contingent on the ascertainment of net profits as a result of the working of the company during the calendar year. The last case to which we were referred by the learned counsel for the Sassoons was The City of London Contract Corporation Limited v. Styles (Surveyor of Taxes). The part of the business taken over by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said to have accrued to the vendor. As a matter of fact such a contention was taken by the purchasers in Wigmore (H. M. Inspector of Taxes) v. Thomas Summerson and Sons Limited, where they declined to be assessed for tax in respect of income which had been accruing on the securities they had purchased in a period anterior to the date at which they did purchase. This contention however did not prevail and the vendors were held not assessable in respect of the interest accrued on the date of the sale of the stock. It is therefore clear that the Sassoons had not earned any income for the broken periods nor had any income accrued to them in respect of the same, and what they transferred to the transferees under the respective deeds of assignment and transfer did not include any income which they had earned or had accrued to them and which the transferees by virtue of the assignment in their favour were in a position to collect. If any debt had accrued due to the Sassoons by the respective companies at the dates of respective transfers of managing agencies such debt would certainly have been the subject matter of assignment. But if what was transferred by the Sassoons to the respecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the transferor and the transferee and it is only when there is no such contract to the contrary that the rents, annuities, pensions, dividends and other periodical payments in the nature of income become apportionable as between the transferor and transferee, deemed to accrue due from day to day and be apportionable accordingly. The deeds of assignment and transfer executed by the Sassoons in favour of the transferees transferred all the rights and benefits under the agency agreement to the transferees and there was no question of apportionment of any commission between the Sassoons and the transferees. In fact the transferees claimed to retain and did retain the whole of the commission which had been paid by the companies to them in the year 1944 and the Sassoons never claimed any part of it as having been earned by them. Whatever was their contribution towards the earning of that commission during the whole of the calendar year 1943 was the subject-matter of the assignment in favour of the transferees and that was sufficient to spell out a contract to the contrary as provided in Section 36 of the Transfer of Property Act. Section 26(2) of the Indian Income-tax Act also does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeals where the Commissioner of Income-tax, Bombay, has supported the Sassoons in Civil Appeal No. 3 of 1953 and the brunt of the attack in Civil Appeals Nos. 30 of 1953 and 31 of 1953 has been borne not by the Commissioner of Income-tax who is the appellant in both, but by the Sassons, the proper order should be that each party should bear and pay his own costs here as well as in the Court below. JAGANNADHADAS, J.-I am unable to agree with the judgment just delivered on behalf of both my learned brothers. It is with considerable regret that I feel constrained to write a separate judgment expressing the reasons for my not being able to agree with them in spite of my profound respect for their views. These three are appeals against a judgment of the Bombay High Court by leave granted under Section 66A(2) of the Indian Income-tax Act. They arise out of a set of facts mostly common. E.D. Sassoon Co., Ltd. now in voluntary liquidation (hereinafter referred to as the Sassoons) had the managing agency of three mills (1) E.D. Sassoon United Mills Ltd., (2) Elphinstone Spinning and Weaving Mills Co., Ltd., and (3) The Apollo Mills Ltd. With the consent of the mill companies and b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this Court that the entire net consideration for the three assignments was taken by them into their accounts as capital reserve. But this finds no mention in the Tribunal's statement of the case to the High Court. How the Sassoons made entries in their own accounts is not decisive and has not been relied on before us. On their objection being overruled, the Sassoons filed an appeal to the Income-tax Appellate Tribunal. The Tribunal rejected the appeal in view of the decision they had already given in the appeals filed by the two assignee-companies, Agarwals and Chidambarams. The three companies concerned obtained references to the High Court under Section 66 of the Indian Income-tax Act. The question referred by the Tribunal in each of the three cases was the same and is as follows : Whether in the circumstances of the case, was the managing agency commission liable to be apportioned between the assessee company and the assignee (or assignor, as the case may be). The High Court answered the question against the Sassoons and in favour of the other two. What the High Court held was in substance that (1) the managing agency remuneration for the year in question accrue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... together. This appears from the following passage of the judgment of the High Court : In order to levy income-tax it is not enough to enquire when a particular income accrues. What is more important and what is more pertinent is to enquire whose income it is which is sought to be taxed. Assuming that this particular income accrued on the 31st December and till 31st December there was nothing earned, even so, when the income does accrue the question still remains to be answered as to whose income it is which has accrued on the 31st December, 1943. It appears to me also that it is on the footing of the accrual on the completion of the year that the High Court dealt with the question of assignment of the income as appears from the following passage. And clearly one of the rights which E. D. Sassoon Co. Ltd. had was to receive the managing agency commission (share therein ?) when it accrued on 31st December...................... They transferred that right. From these passages it appears to me clear that the High Court proceeded on the view that income accrued at the end of the year to both together and that what passed to the assignee under the assignment includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endered by them to the respective mill companies for broken periods of the year up to the dates of the respective assignments. (2) Since no remuneration became a debt due to the Sassoons from any of the mill companies on the dates of the respective assignments, no taxable income accrued to them for the broken periods. (3) By the dates of the respective assignments, the Sassoons had only a bare expectancy, if any, to receive remuneration for the broken period and this expectancy could not be the subject-matter of any assignment. (4) The true legal position, therefore, is that what was assigned was an income-bearing asset, viz., the managing agency which was the source of income and which entitled the respective assignees to receive all the remuneration for the year payable under the managing agency agreement subsequent to the respective dates of assignment. Accordingly the same became in its entirety taxable income in the hands of the respective assignees and no portion of it accrued at any time as taxable income of the assignor Sassoons. In the view that I take of the High Court's judgment as to the date of accrual of the income and as to the scope of the question presented ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s statement, in Civil Appeal No. 3 of 1953]. But even if the contention be permissible and granting the view strenuously urged on behalf of the appellant-Sassoons that there is no accrual of income until there exists a right to receive it, I do not think that the clause in question has any relevancy so far as the date of accrual of income is concerned. Accrual of income for purposes of taxation does not depend on the question as to when the income becomes payable. It depends only on when a vested right to receive the income arises. [See Commissioners of Inland Revenue v. Gardner Mountain D' Ambrumenil Ltd.] The accrual is accordingly complete when the right to the remuneration becomes vested by the occurrence of all the events on which the remuneration depends. A mere clause that the remuneration shall be due at a later date, notwithstanding that all the events on which the remuneration depends have occurred, can only have the effect of postponing the liability for payment and not of postponing the vesting of the right to income. The requirement of lapse of further time after the occurrence of all the qualifying events is not in itself an additional event which imports any el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue is not concerned with the subsequent application of the profits. The destination of the profits or the charge which has been made on those profits by previous agreement or otherwise is perfectly immaterial. (Quoted out of an extract from the case in Gresham Life Assurance Society v. Styles.) It appears to me that these passages constitute a clear recognition of the principle that when once income accrues to a person, an assignment operative in respect thereof does not affect his taxability for that income. It may be mentioned that it is not seriously disputed that the consideration for each assignment included the value of the prospective advantage of collecting the remuneration for the entire year, i.e., in the sense that the actual consideration paid was higher than what it might have been if the assignment had taken place at the very commencement of the year. The only substantial question, therefore, which this case raises is whether the view taken by the High Court, that the remuneration for the year accrued as income both to the assignor and the assignee, is correct. It is apparently as an answer to this question that learned counsel appearing for the Sas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by another company, as contractors for public works. It was claimed that the assignee-company was entitled to deduction from their taxable income for a portion of the purchase price which may be attributed to the purchase of the right, title and interest to, and the benefit of, certain building contracts of the company, from the execution of which a portion of the net profits of the company arose. This was negatived on the ground that the entire purchase price was capital investment and that what all was received later on was income derived by the execution of the contracts so purchased. This, so far as it goes, may seem to suggest by implication that there may be a purchase of contracts yet to be executed and that the benefit of the entire profits therefrom is to be treated as income in the hands of the purchaser. The report of this case, however, does not indicate clearly whether the contracts, whose benefit was purchased were partially executed and if so, whether the partial execution was substantial or negligible. The statement of the facts of the case at page 241 of the report shows that the business which was purchased consisted entirely of partially executed or wholly un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... London Contract Corporation v. Styles be treated as an authority showing that in the case of an assignment of partially executed contracts the remuneration or profits relatable to such partial execution is necessarily the income of the assignee. The question thus raised has, therefore, to be examined on principle. On such examination it appears to me that the argument advanced in this behalf is based on a fundamental misconception. Income of the kind with which we are concerned in this case does not arise by virtue of any mere ownership of an asset. What produces income is not the ownership of the managing agency but the actual work turned out for the benefit of the principal. It is not the fact of a company having obtained the right to work as a managing agent that produces the income but it is the continuous functioning of the company, as the managing agent, in terms of the contract of agency, that produces the income. Hence, it is the rendering of the service of the managing agency or the carrying out of the managing agency business, which is the effective and direct source of income. This is not to say that work or service is the subject of taxation. It is the remuneration t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and the remuneration to be income by way of profits or gains from the business. The income, therefore, falls under head No. (4) and the computation thereof has to be made under Section 10 of the Income-tax Act. Sub-section (1) of that section runs as follows : The tax shall be payable by an assessee under the head profits and gains of business, profession or vocation in respect of the profits or gains of any business, profession or vocation carried on by him. Now, in computing the taxable income of the assignee, can it reasonably be said that the remuneration for the entire year is the income of the assignee and that it is the profits and gains of the business carried on by the assignee, when as a fact he stepped into the position of the managing agent only on some date in the course of the year by virtue of the assignment. It appears to me that before income can be attributed under this head to an assessee, it must relate to the business carried on by the assessee himself. In the present case, therefore, the profits and gains of the whole year seem to me clearly to relate to the business carried on both by the assignor and the assignee taken together and are hence taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of both, there can be no doubt that such remuneration would be apportionable between them on some equitable basis on the principle that joint property is normally severable. To such a situation Section 26(2) of the Income-tax Act would also clearly apply. That section no doubt indicates nothing as to the principle of apportionment. But there is no difficulty in the present case since it is agreed that the apportionment, if any, is to be timewise. This also prima facie is the only equitable way of apportionment on the facts of this case. At this stage it becomes necessary to notice certain provisions of the relevant managing agency agreements which have been strongly relied on as supporting the view contrary to what I have indicated above. Reliance has been placed on two provisions of the managing agency agreement between the Sassoon United Mills Ltd. and the Sassoons which are relevant only in the appeal relating to the Agarwals. The first of these provisions is the one already noticed in another context, viz., clause 2(d) of the agency agreement which runs as follows : The said commission shall be due to the said firm yearly on the 31st day of March in each and every year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income accrues to him alone. That must depend on the substantive rights, if any, applicable to a particular situation. A term in a managing agency agreement between the principal and the agent as to the person to whom the remuneration is payable or is to become due can only have been meant as a protection of the principal in respect of multiplicity of claims against himself and cannot settle the substantive rights between persons who may have contributed to earn the remuneration. The second provision relied on is clause 10 of the managing agency agreement with which the case of Agarwals is concerned. Clause 10 of the agreement runs as follows : It shall be lawful for the said firm to assign this agreement and the rights of the said firm hereunder to any person, firm or company having authority by its constitution to become bound by the obligations undertaken by the said firm hereunder and upon such assignment being made and notified to the said company the said company shall be bound to recognise the person or firm or company aforesaid as the agents of the said company in like manner as if the name of such person, firm or company had appeared in these presents in lieu of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is to have retrospective effect at all, is comprehensive enough to take within its ambit every other claim which may have accrued but remained unpaid, commencing from the initial stage of the agency. On this construction, therefore, the right to every such claim would pass to the assignee. Such a result would obviously be untenable and no reason exists why the retrospective operation, to be imputed to this clause, should be confined to the limited extent which serves the argument put forward in this behalf by the appellant-Sassoons. It appears to me, therefore, quite clear on a fair reading of the entire clause 10 of the managing agency agreement that the only effect thereof is to bring about the result specifically stated in the second portion of that clause (which has been side lined), i.e., that on assignment, the assignee firm shall be entitled to demand and obtain from the principal company a fresh managing agency agreement in its own favour for the residue of the term outstanding and with like powers authorities remuneration and emoluments and subject to the like terms and conditions. In my opinion all that the clause 10 taken as a whole means is no more than that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration on the completion of a whole year's work this clause necessarily implied divisibility of contract and of the remuneration in the year of assignment since the assignment necessarily took place with the consent of the principal mill company. (Vide Section 87-B(c) of the Indian Companies Act). This argument was advanced to support the contention that the Sassoons' share of the year's income accrued on the very date of assignment. Since, however, in my view that was not the basis of the judgment of the High Court as explained above and since such an argument is not, in my opinion, open, having regard to the statement of the case by the Income-tax Appellate Tribunal as well as of the statements of the appellants and respondents herein, I do not consider it necessary to deal with that argument. In my view, therefore, the continuous and successive functioning by both the assignor and the assignee under the managing agency agreement was the effective source of the year's income. That income accrued on the completion of the year and was the joint income of both the assignor and the assignee. The prior assignments in the course of the year operated as assignments o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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