Appeals Nos 2093 and 2084 of 1970
Appeals from the judgment and order dated January 28 1964 of the Calcutta High Court in Income tax Reference No 104 of 1960
B P Maheshwari for the appellant in both the appeals
ST Desai P L Juneja and R N Sachthey for the respondent in both the appeals
The Judgment of the Court was delivered by KhannaJ
This judgment would dispose of two Civil Appeals Nos 2083 and 2084 of 1970 which have been filed on certificate 972 granted by the Calcutta High Court and are directed against the Judgment of that Court whereby it answered the questions referred to the Court under Section 661 of the Indian Income tax Act 1922 hereinafter referred to as the Act for two assessment years against the assessee appellant and in favour of the respondent
The assessee is a Limited Company and the matter relates to the assessment years 1956 57 and 1957 58 the corresponding accounting years for which ended on June 30 1955 and June 30 1956 respectively
The appellant Company was appointed as the Managing Agent of Shree Ramesh Cotton Mills Ltd Morvi hereinafter referred to as the managed company as per agreement dated 30 12 1946
The managed company was a 100 subsidiary of the appellant company
Under the terms of the agreement the appellant company was entitled to receive a fixed office allowance of Rs 1000 per mensem plus a commission at the rate of 1212 of the net profits an additional commission of 1  on all purchases of cotton and an equal amount on all sales of cloth and yarn
In the relevant years the managed company suffered losses and congruently the commission payable at 1212 of the net profits was nil but the commission on purchase of cotton at the rate of 1 12 and on sales of cloth and yarn at the same rate aggregated to Rs 38719 for the assessment year 1956 57 and Rs 1963 for the following year
Besides these amounts the appellant was entitled to Rs 12000 per annum for each of the two years as fixed office allowance
The total amounts which the appellant was entitled to receive from the managed company were Rs 50719 and Rs 13963 for the two years
The managed company s accounting year closed on the 30th day of December and that of the appellant company on the 30th day of June every year
Clause 2e of the Managing Agency Agreement dated 30th ember 1946 contained the following term as to when the commission would be due and payable  e The said commission shall be due to the Agents yearly on the thirty first day of December or any other date on which the Company s yearly account close in each and every year during the continuance of this Agreement and shall be payable and be paid immediate after annual accounts of the said Company has been passed by the Board of Directors and Auditors of the Company and by the company in General Meeting
According to the above clause the commission was due on the 31st day of December every year and it was payable imme diately after the annual accounts of the managed company had 973 been passed in the General Meeting
The Annual General Meetings of the managed company were held to adopt the accounts on November 24 1955 and July 21 1956 respectively with regard to the assessment years in question
The amounts of commission in terms of the above clause were due on 31st December 1954 and 31st December 1955 and were payable  immediately after the 24th of November 1955 and 21st of July 1956 respectively
The appellant company relinquished the managing agency commission for the assessment year 1956 57 as per resolution dated 4th of April 1955 of the Board of Directors and for the following year as per resolution dated 19th June 1956
The amounts of the commission were thus relinquished after they had become due but before they were payable in terms of clause 2e of the agreement
On behalf of the appellant it was stated that the managed company had been suffering heavy losses in the past years and therefore the appellant did not consider it proper to charge any commission or the fixed office allowance and had consequently relinquished the same
The Income tax Officer included the sums of Rs 50719 and Rs 13963 in the total income of the appellant for the two assessment years in question
The Income Tax Officer took the view that in so far as the fixed office allowance was concerned it had been given to the appellant to enable it to recoupe the expenses incurred on behalf of the managed company and the relinquishment was therefore made ex gratia
As regards the commission the Income tax officer held that it had become due to the appellant at the end of the accounting year of the managed company and if the commission had been foregone after it had become due it was taxable on accrual basis
The Appellate Assistant Commissioner and the Income tax Appellate Tribunal affirmed the order of the Income tax Officer
According to the Tribunal the commission became due to the appellant yearly on the last day of the accounting year of the managed company though the actual payment was deferred to a later date
Postponement of the actual payment after the income had accrued was held to be inconsequential
Likewise the relinquishment of the income after it had become due in the opinion of the Tribunal was inconsequential
Claim was ten made by the appellant that the amount relinquished should be treated as a permissible expenditure under section 102 xv of the Act
The above claim was rejected and it was observed that the total loss carried over at the end of year 1955 of the managed company was Rs 1495221 
As a result of foregoing the amounts of the managing agency commission according to the Tribunal the financial position of the managed company did not 974 become stronger while that of the appellant company became weaker
The relinquishment was consequently held to be not for the benefit of the appellant
At the instance of the appellant the Tribunal referred the following two questions to the High Court   1 Whether on the facts and in the circumstances of the case the sums of Rs 50719 and Rs 13963foregone by the assessee by its Directors  resolution dated 4 4 1955 and 19 6 1956 respectively were liable to be included in its total income for the accounting years ending 30 6 1955 and 30 6 1956  2 If the answer to question No 1 be in the affirmative whether the assessee is entitled to claim an allowance of an equivalent amount as expenditure under the provisions of Section 10 2 xv of the Indian Income Tax Act  The High Court agreed with the view taken by the Tribunal
It was observed that the accrual of income was complete within the accounting year of the managed company and as no relinquishment had been done before the amount became due the case strictly came within the ambit of section 4 1 b i of the Act no relinquishment it was further observed was a unilateral act of the appellant
As regards the second question the High Court found that the relinquishment had not been made for the purpose of facilitating the legitimate commercial undertaking or by way of commercial expediency
The appellant s case was thus held to be not covered by section 102 xv of the Act Mr Maheshwari has assailed the findings of the High Court
Regarding the first question the learned counsel contends that as the amounts in question were never received by the appellant but were relinquished there arose no tax liability for those amounts
As regards the second question Mr Maheshwari submits that the relinquishment of the amounts should be construed as permissible expenditure under section 102 xv of the Act
There is in our opinion no substance in any of the above contentions
So far as the first question is concerned we find that according to clause 2e of the Managing Agency Agreement reproduced above the commission for the two years in question became due to the appellant on the 31st day of December 1954 and 31st day of December 1955
The appellant also became entitled to receive fixed office allowance of Rs 12000 for each of the two years
It therefore can be said that the income of Rs 50719 had accrued to the appellant on 31st December 1954 and of 975 Rs 13973 on 31st December 1955
The fact that the pay ment of the managing agency commission was deferred till after the accounts had been passed in the meetings of
the managed company did not affect the accrual of the income of those amounts on December 31 1954 and December 31 1955 respectively
According to Section 4 1 b i of the Act subject to the provisions of this Act the total income of any previous year of any person includes all income profits and gains from whatever source derived which if such person is resident in the taxable territories during such year accrue or arise or are deemed to accrue or arise to him in the taxable territories during such year
The dictionary meaning of the word accrue is to come as an accession increment or produce  to fall to one by way of advantage  to fall due
The income can thus be said to accrue when it becomes due
The postponement of the date of payment has a bearing only in so far as the time of payment is concerned but it does not affect the accrual of income
The moment the income accrues the assessee gets vested with the right to claim that amount even though it may not be payable immediately
There also arises a corresponding liability of the other party from whom the income becomes due to pay that amount
The further fact that the amount of income is not subsequently received by the assessee would also not detract from or efface the accrual of the income although the non receipt may in appropriate cases be a valid ground for claiming deductions
The accrual of an income is not to be equated with the receipt of the income
That the two accrual and receipt of income have different connotations is also clear from the language of Section 4 of the Act
Clause a of sub section 1 of Section 4 of the Act deals with the receipt of income while the accrual of income is dealt with in clause b of that sub section
The appellant company admittedly was maintaining its account according to the mercantile system
It is well known that the mercantile system of accounting differs substantially from the cash system of book keeping
Under the cash system it is only actual cash receipts and actual cash payments that are recorded as credits and debits whereas under the mercantile system credit entries are made in respect of amounts due immediately they become legally due and before they are actually received similarly the expenditure items for which legal liability has been incurred are immediately debited even before the amounts in question are actually disbursed
Where accounts are kept on mercantile basis the profits or gains are credited though they are not actually realised and the entries thus made really show nothing more than an accrual or arising of the said profits at the material time
The same is the position 976 with regard to debits made
See Indermani Jatia V Commis sioner of Income Tax UP 1 In the case of Commissioner of Income Tax Bombay City I vs Messrs Shoorji Vallabhdas and Co2 Hidayatullah J as he then was speaking for the Court observed Income tax is a levy on income
No doubt the Income tax takes into account two points of time at which the liability to tax is attracted viz the accrual of the income or its receipt but 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
The assessee firm who was the managing agent of two shipping companies in that case gave up 75 of the managing agency commission with a view to get the managing agency transferred to two private companies
It was held that 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
In the present case the amounts of income for the two years in question were given up unilaterally after they had accrued to the appellant company
As such the appellant could not escape the tax liability for those amounts
Coming to the second question we find that the appellant could claim deduction of the amounts under section 102 xv of  the Act if the amounts had represented an expenditure laid out or expended wholly and exclusively for the business of the appellant
There is however nothing to show that the amounts were relinquished for the purpose of the appellant s business
The present is not a case wherein the amounts due to the assessee were given up on grounds of commercial expediency or for advancing the business interest of the assessee
The conclusion of the learned Judges of the High Court in this respect in our opinion is well founded
The result is that the appeals fail and ire dismissed but in the circumstances without costs
Appeals dismissed


Summary:
The appellant a limited company was managing agent of another company
Under the terms of the agreement the appellant company was entitled to receive a fixed monthly sum as office allowance and commission at fixed rates on net profits and purchases and sales of cotton and yarn
The managed company s accounting year closed on the 30th day of December every year and that of the appellant company on the 30th day of June every year
Under cl 2e of the managing agency agreement the commission was due on the 31st day of December every year and it was payable immediately after the annual accounts of the managed company bad been passed in the General meeting
The Annual General meetings of the managed company were held to adopt the accounts for the relevant accounting years on November 24 1955 and July 21 1956 The amounts of commission in terms of the cl
2e were thus due  on 31st December 1954 and 31st December 1955 and were payable  immediately after 24th November 1955 and 21st July 1956 respectively
Since the managed company had suffered losses in the preceding years the appellant relinquished the commission as well as the office allowance by resolutions of the Board of Directors dated April 4 1955 and June 19
On these dates the amounts of commission relinquished had become due  but not payable 
The Income tax Officer in making the assessments for the 1955 56 and 1956 57 did not make any allowance for the amounts relinquished and included them in the total income of the appellant
According to the Income tax Officer the office allowance had been relinquished ex gratia and the commission had been relinquished after it had accrued
The Appellate Assistant Commissioner and the Appellate Tribunal confirmed the order of the Income tax Officer
In reference the High Court held  i that the accrual of income was complete within the accounting year of the managed company and as no relinquishment had been done before the amount became due the case came within the ambit of section 41bi of the Income tax Act 1922 ii that the relinquishment had not been made for the purpose of facili tating the legitimate commercial undertaking or by way of commercial expediency and the case was not then fore covered by section 102xv
In appeal to this Court HELD  i According to s 41 b i of the Act subject to the provisions of this Act the total income of any previous year of any person includes all income profits and gains from whatever source derived which if such a person is resident in the taxable territories during 971 such year accrue or arise of the deemed to accrue or arise to him in the taxable territories that year
The dictionary meaning of the word accrue  is to come as an accession increment or produce to fall to one by way of advantage to fall due  The income can thus be said to accrue when it becomes due
The postponement of the date of payment has a bearing only in so far as the time of payment is concerned but it does not affect the accrual of income
The moment the income accrues the assessee gets vested with the right to claim that amount even though it may not be payable immediately
There also arises a corresponding liability of the other party from whom the income becomes due to pay that amount
The further facts that the amount of income is not subsequently received by the assessee would also not detract front or efface the accrual of the income although the non receipt may in appropriate cases be a valid ground for claiming deductions
The accrual of an income is not to be equated with the receipt of the income
That the two accrual and receipt of income have different connotations is also clear from the language of section 4 of the Act
Clause a of sub section 1 of section 4 of the Act deals with the receipts of income while the accrual of income is dealt with in cl
b of that sub section 975 B E In the present case the accounts of the appellant company were maintained on a mercantile basis
Under this system the profits and gains are credited though not immediately realised and the entries thus made really show nothing more than an accrual or arising of the said profits at the material time
Further the amounts of income for the two years in question were given up unilaterally after they had accrued to the appellant company
As such the appellant could not escape the tax liability for those amounts
975 G H 976 E Indermani Jatia V CIT UP and CIT Bombay City I vs Ms Shoorji Vallabhdas  Co 46 ITR 144 applied
ii The appellant could claim deduction of the amounts under section 102xv of the Act if the amounts had represented an expenditure laid out or expended wholly and exclusively for the business of the appellant
There was however nothing to show that the amounts were relinquished for the purpose of the appellant s business or on grounds of commercial expediency
The High Court therefore rightly rejected the claim under section 10 2 xv976 F G