Appeals Nos 3 30 and 31 of 1953
Appeal from the Judgment and Order dated the 12th day of September 1951 of the High Court of Judicature at Bombay in Income tax Reference No 27 of 1951 arising out of the order dated the 23rd day of November 1949 of the Income tax Appellate Tribunal in Income tax Appeal No 122 of 1947 48
BJ M Mackenna D H Dwarka Das and Rajinder Narain with him for the appellant in C A No 3 of 1953
MC Setalvad Attorney General for India G N Joshi and P A Mehta with him for the respondent in C A No 3 and for the appellant in C A Nos 30 and 31
CK Daphtary Solicitor General for India R J Kolah N A Palkhiwala and 1
N Shroff with him for therespondent in C A No 30 R J Kolah N A Palkhiwala and I N Shroff for the respondent in C A No 3 1
316 1954
May 14
The judgment of Das and Bhagwati JJ was delivered by Bhagwati J Jagannadhadas J delivered a separate judgment
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 24 and 27 of 1951 made by the Income tax Appellate Tribunal under section 661 of the Indian Income tax Act and section 21 of the Excess Profits Tax Act
E D Sassoon and Company Ltd hereinafter refered to as the Sassoons were the Managing Agents of 1 E D Sassoon United Mills Ltd under Agreements dated the 24th February 1920 and the 2nd October 1934 2 Elphinstone Spinning and Weaving Mills Company Ltd under the Agreement dated 23rd May 1922 and 3 Apollo Mills Ltd under the Agreement dated the 23rd May 1922
The Sassoons agreed to transfer their Managing Agencies of the said Companies to Messrs Agarwal and Company Chidambaram Mulraj and Company Ltd and Rajputana Textile Agencies Ltd respectively by letters dated the 3rd September 1943 16th April 1943 and the 27th April 1943
The consent of the shareholders of the respective companies to the Agreements for transfer was duly obtained and the Managing Agencies were ultimately transferred to the respective transferees with effect from the 1st December 1943 1st June 1943 and 1st July 1943 respectively
The Sassoons executed in favour of Messrs Agarwal and Company Chidambarain Mulraj and Company Ltd and Rajputana Textile Agencies Ltd formal deeds of assignment and transfer and received from them Rs 5780000 Rs 1250000 and Rs 600000 respectively on transfers of the Manaoing Agencies and the net consideration viz Rs 7577693 received by them on such transfers was taken by them to the Capital Reserve Account
The accounts of the Managing Agency commission payable by the respective Companies to the Managing Agents for the year 1943 were made up in the year 1944 and Messrs Agarwal and Company received from the E D Sassoon United Mills Ltd a sum of Rs 2794504 Chidambaram Mulraj and Company Ltd received from the Elphiiistone Weaving and 317 Spinning Mills Company Ltd a sum of Rs 237602 and the Rajputana Textile Agencies Ltd received from the Apollo Mills Ltd a sum of Rs 382608 as and by way of such commission
For the assessment year 1944 45 and the chargeable accounting period 1st January 1943 to the 31st December 1943 the original income tax and excese profits tax assessments of the Sassoons were made or the 31st May 1945 at a total income of Rs 4648483
This income however did not include any part of the Managing Agency commission received 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 194546 as the income of the transferees
The transferees appealed to the Appellate Assistant Commissioner who confirmed the orders of the Income tax Officer
Wher 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 trans
ferees  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 that their income from the Managing Agency had escaped assessment
The Income tax Officer and the Excess Profits Tax Officer wanted to include in the assessable income of the Sassoons Rs 2851934 made up of Rs 2561629 in respect of the Managing Agency of the E D Sassoon United Mills Ltd for the period of 11 months from the 1st January 1943 to the 30th November 1943 Rs 99001 in respect of the Managing Agency of the 318 Elphinstone spinning and Weaving Mills Ltd for the period of five months from the 1st January 1943 to the 31st May 1943 and Rs 191304 in respect of the Managing Agency of the Apollo Mills Ltd for the period of six months from the 1st January 1943 to the 30th June 1943 contending that such Managing Agency commission had accrued to the Sassoons for services rendered so that on the dates on which the Agencies were transferred the Sassoons were entitled to such remuneration from the managed Companies in the form of commission for services rendered up to the dates of the transfers
In spite of the objection of the Sassoons the Income tax Officer and the Excess Profits Tax Officer determined these sums as their escaped incomes and assessed them accordingly
The Sassoons appealed to the Appellate Assistant Commissioner who dismissed the appeals and further appeals were taken to the Income tax Appellate Tribunal
The Incometax Appellate Tribunal relied upon its order dated the 28th December 1949 in the case of the transferees and confirmed the orders of the Appellate Assistant Com missioner
The Tribunal was of the opinon that the Managing Agency commission was earned for services rendered and therefore it was taxed in the hands of the person who carried on the business of the Managing Agency and not in the hands of the person to whom it was assigned and that therefore so far as the Sassoons were concerned the Managing Agency commission should be apportioned between them and their transferees
The Sassoons applied under section 661 of the Indian Income tax Act and section 21 of the Excess Profits Tax Act requesting the Tribunal to draw a statement of the case and refer the question of law arising out of the orders to the High Court for its decision
On the 12th January 1951 the Tribunal by its statement of the case referred to the High Court one question of law as arising out of its orders viz  whether 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 319 Tribunal in RA No 474 of 1950 51 and RA No 475 of 1950 51 referring the question of law thus framed in regard to the Managing Agency commission of the D Sassoon United Mills Ltd and the Elphinstone Spinning and Weaving Mills Ltd the whole of the Managing Agency commission having been paid respectively to Messrs Agarwal and Company and to Chidambaram Mulraj and Company 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 and Company in which the Tribunal had held as above that the Managing Agency comniission should be apportioned between the Sassoons and the transferees
The statement of the case was accordingly submitted by the Tribunal on the 12th January 1951 and the same question as above was referred to the High Court
This reference was Income tax Reference No 24 of 1951
A similar application was made by the Commissioner of Income taxExcess Profits Tax Bombay City for reference in the appeal of Chidambaram Mulraj and Company Ltd The Tribunal submitted its statement of case also on the same day and referred the very same question to the High Court
This reference was Income tax Reference No 23 of 1951
All these references came for hearing and final disposal before the High Court
Income tax References Nos
24 and 27 of 1951 were heard together and one judgment was delivered answering the question submitted to the High Court in both the references in the affirmative
Following upon this judgment the High Court also answered in the affirmative the question which had been referred to it by the Tribunal in Income tax Reference No 23 of 1951
The decision of the High Court was thus against the contentions which had been urged both by the Sassoons and the Commissioner of Income tax and the Sassoons as well as the Commissioner of Income tax obtained leave under section 66A3 of the Indian Income tax Act and 320 section 1331c of the Constitution for filing appeals to this Court
The appeal of the Sassoons was Civil Appeal No 3 of 1953 and it was filed against the Commissioner of Income tax Bombay City
The appeals of the Commissioner of Income tax against Messrs Agarwal and Company and Chidambaram Mulraj and Company Ltd respectively were Civil Appeal No 30 of 1953 and Civil Appeal No 31 of 1953
These appeals have come for hearing and final disposal before us
All the appeals raise one common question of law viz whether in the circumstances of the case the Managing Agency commission was liable to be apportioned between the Sassoons and their respective transferees in the proportion of the services rendered as Managing Agents by each one of them and the decision turns upon the question whether any income had accrued to the Sassoons on the dates of the respective transfers of the Managing Agencies to the transferees or at any time thereafter
This judgment will  over our decision in all the appeals
It will be convenient at this stage to set out the relevant clauses of the respective Managing Agency Agreements and the deeds of assignment and transfer
The original agreement with the ED Sassoon United 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 ED Sassoon and Company
The Managing Agency was transferred with the consent of the Company by E D Sassoon and 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 lst 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 321 the Company
Udder clause
2 the remuneration of the Sassoons and their assigns was fixed at a commission of 712 per cent
per annum on the annual net profit of the Company after making all proper allowances and deductions from revenue for working expenses charge the able against profits provided however that if in any year no such commission was earned or it fell short of Rs 120000 the Company was to pay to them a sum sufficient to make up the minimum remuneration of Rs 120000 per annum on account of such commission
The said commission was under clause 2d to be due to them yearly on the 31st of March in each and every year
during the continuance of the Agreement and was to be payable and to be paid immediately after the annual accounts of the Company had been passed by the shareholders
Under clause 3 the Sassoons and their assigns agreed with the Company that they
would be and act as the Agents of the Company during the said term for the said remuneration and upon and subject to the terms and conditions therein contained
Clause 10 of the Agreement provided as under  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 entered into this Agreement with the said Company and the said Company shall forthwith upon demand by the said firm enter into an Agreement with the person firm or Company aforesaid appointing such person firm or Company the Agents of the said Company for the then residue of the term outstanding under the Agreement and with the like powers and authorities remuneration and emoluments and subject to the like terms and conditions as are herein contained
 The letter dated the 3rd September 1943 recording the Agreement of transfer of the Managing Agency 322 322 provided that in the event of the transaction being com pleted in its entirety as therein stated the transferees would be entitled to receive the commission payable by the Company under the Managing Agency Agreement in the profits for the calendar year 1943
The deed of assignment and transfer executed between the Sassoons and Messrs Agarwal and Company in pursuance of this Agreement on the 26th January 1945 stated that the Sassoons thereby transferred to Messrs Agarwal and Company as from the lst December 1943 their office 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 and Company agreed to be the Managing Agents of the Company from the 1 st December J 943 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 Elphin stone Spinning and Weaving Mills Company Ltd was with Messrs Hajee Mahomed Hajee Esmail and Company and was dated the 24th July 1919
The Managing Agency was transferred with the consent of the Company by Messrs Hajee Mahomed Hajee Esmail and Company to the Sassoons and on the 23rd May 1922 another Managing Agency Agreement was executed by the Company in favour of the Sassoons their successors and assigns employing them the Agents of the Com pany from the 1st February 1922 for the unexpired Period of the term of 60 years commencing from the 3rd July 1919
Under clause 3 of the Agreement the Company was during the continuance thereof to pay to 323 the Sassoons their successors and assigns by way of remuneration a commission of ten per cent
on the net profits of the Company and a further sum of Rs 1500 per month
Under clause 6 the Sassooris their successors and assigns were to be at liberty to retain reimburse and pay themselves out of the moneys of the  Company inter alia all sums due to them for commission and otherwise
The deed of transfer executed by the Sassoons in favour of Chidambaram Mulraj and Company Ltd on the 2nd June 1943 stated that the Sassooins assigned and transferred the Agreement dated the 23rd May 1922 between themselves and the company for the unexpired residue of the term of sixty years specified therein and the full benefit and advantage thereof together with the benefit of the Agency and the office of the Agents thereunder and the right to receive the remuneration thereafter to become payable by the Company under or by virtue of the said Agreement and together with the benefit of all rights privileges powers and authorities given and conferred on the Sassoons there under
It is significant to observe that before the incometax authorities as also the High Court no distinction was drawn between the provisions of these two Agency Agreements in regard to the right of the Managing Agent to remuneration thereunder and the facts in so far as they related to all the Managing Agencies were treated as similar
The quantum also was not disputed in each case though the principle of apportionment was in dispute
The Sassoons were assesse for this escaped income on the basis that they had earned the income by rendering services as Managing Agents to the Companies for the respective periods that they continued to be the Managing Agents and the transferees had rendered the services for the balance of the periods completing the full year of accounting and had earned the proportionate commission and therefore the amount of commission which the latter actually received 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 325 become a debt due by the Companies to the Sassoons and it could not therefore be said to have accrued to them
The contract of employment was an entire  and an indivisible contract and the remuneration payable by the Companies to the Sassoons thereunder was payable at stated periods
It was a condition precedent to the Sassoons earning the remuneration that they fulfilled the terms of their employment completed the period for which the remuneration was payable to them and the service for the particular period was a condition precedent to their earning the remuneration for that period
The stated period was that of a year and no remuneration was payable to the Sassoons till the end of the year and unless and until they completed the period of the year they would not be entitled to any commission or remuneration for the year much less for the broken period
It was therefore contended that the Sassoons had not earned any commission for the broken periods and that not having earned the same they could not have assigned it to the transferees with the result that when the transferees were paid the commission 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 what
ever 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 asceertainment 326 and the payment came later it made no difference which could be referred to the accrual of the income back to the period during which the income was earn Ltded and accordingly whatever amount was earned by me the Sassoons durin g the respective periods that they had acted as the Managing Agents of the Companies had accrued to them during those periods and was received by the transferees only by virtue of the respective deeds of assignment and transfer
Having been received by the transferees by virtue of the assignment those portions of the Managing Agency commission received by them none the less constituted income which had accrued to the Sassoons and were liable to tax against the Sassoons the assignors and not against them the assignees
The position of an employee under an entire contract of service has been thus enunciated in Halsbury s Laws of England Hailsham Edition Vol 22 page 133 paragraph 221 When the contract of service is an entire contract providing for payment on the completion of a definite period of service or of a definite piece of work it is a con dition precedent to the recovery of any salary or wages in respect thereof that the service or duty shall be completely performed unless the employer so alters the contract as to entitle the servant to regard it at an end in which case the whole sum payable under the contract becomes due or unless there is a usage that the servant is entitled to wages in proportion to the time actually served
But when the contract though in respect of work terminating at a particular time is to be construed as providing that remuneration shall accrue due and become vested at stated periods such remuneration constitutes a debt recoverable at the end of each such period of service
 Section 219 of the Indian Contract Act also provides that in the absence of any special contract payment for the performance of any act is not due to the agent until the completion of such act
Our attention was drawn in this connection to the case of Boston Deep Sea Fishing and Ice Co vs Ansell1
327 In that case the defendant was employed as the managing director of the company for 5 years at a yearly salary
He was dismissed for misconduct before the expiration of the current year and claimed against the company damages for wrongful dismissal and the salary for the quarter which had expired before his dismissal
His claim for salary was disallowed and it was held that having been dismissed 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 8OO 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 vs Regents Garage  Engineering Company Limited1 was particularly relied upon by the learned counsel for the Sassoona
No question of dismissal or removal for misconduct arose in that case but the director whose remuneration was fixed at the rate of pound150 per annum ceased to be a director on settlement of disputes between himself and the company the director agreeing to accept payment of all money due to him upon his debentures and the debentures being paid off in the middle of the year
The director sued the company to recover a proportionate part of the pound 150 as his fees for the broken period
The Deputy County Court Judge gave judgment for the company 1 1921 2 KB 766 328 holding that the director was not entitled to remuneraion for a broken part of a year
The Divisional Court versed the decision of the Deputy County Court judge and there was a further appeal
It was held by the Court of Appeal that neither under the Agreement or under the articles was the director entitled to the he claimed
The question of the applicability of the Apportionment Act was sought to be raised before the appeal Court but was not allowed to be raised in appeal as it had not been done in the County Court
arriving at this decision Lord Sterndale MR stated the position as follows at page 774 it seems to me that upon the construction of the agreement it must fail
It is a payment per annum a payment for a year And unless he serves for the year the cannot get the payment
 The decision in Swabey vs Port Darwin Gold Mining to1 had been cited before the Court of Appeal in support of the proposition that the director was in such cases entitled to his proportionate remuneration for the broken period
The Learned Master of the Rolls however observed at page 777 There is nothing is Swabey vs Port Darwin Gold Mining Co1 in my opinion to oblige us to hold that wherever there is power mutual or one sided to terminate an agreement in the middle of the year there must as a matter of necessity be inferred a right to rceive payment from day to day and receive payment for the broken period
I do not think in this case there re circumstances which oblige me or induce me to raw that inference
 These authorities as well as the cases of Mapleson vs years2 and Sanders vs Whittle3 enunciate the well stablished principle that wages and salaries are not apportionable upon the sudden cessation of a contract of service which is stated to be still the law in Batt on the Law of Master and Servant 4th Edn at page 209 until a hardy litigant successfully seeks in a higher Court a confirmation of the view of McCardie J expressed in Moriarty s case4 as regards the injustice I I Meg
3 2 4  329 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 Part 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 correctness of the rule as enunciated above by citing a passage from Palmer s Company Precedents 16th Edition Vol 1 page 583 where the learned author discusses the question of apportionment in the case of director s remuneration payable at so much per annum Where the clause provides that a director is to be paid so much per annum the words at the rate of  being omitted and he vacates office before the end of a current year the question whether he can maintain a claim for an apportioned part of the remuneration for that year has given rise to some difference of opinion
In Swabey vs Port Darwin Gold Mining Company1 in the Court of Appeal the article was as follows and not as stated in the report The directors shall each receive by way of remuneration out of the funds of the Company in each year the sum of pound 2OO and the chairman in addition pound 100 per annum  The words at the rate of  were not present as appears from the articles registered at Somerset House
A director resigned in the course of a current year i 1889 I Meg
43 330 and was held entitled to an apportioned part of the remuneration for that year
But in Salton vs New Beeston Cycle Co1 where the article provided that the directors shall  be entittled to receive by way of remuneration in each year pound 5000 Cozens Hardy J held that a director who vacated office before the end of a current year was not entitled to any apportionment
This case was followed by Wright J in McConnell s Claim2 the words being each director shall be paid the sum of pound 300 per annum  and by Bruce J in Inman vs Acroyd and Bert1
See also Central de Kapp Gold Mines4
In these four cases the Court no doubt proceeded on the assumption that the report of Swabey s case5 was correct and that the article in that case contained the words at the rate of  Certainly Lord Alverstone C J acted on this assumption in Harrison vs British Mutoscope etc
 Co
There the words were the sum of E 1500 per annum
In the meantime Inman vs Acroyd7 had been taken to the Court of Appeal and affirmed but on the ground that it was by the articles left to the directors to apportion the remuneration at the end of each year
This case therefore really turned on the construction of the particular article and as it was carefully distinguished from Swabey s case5 the authority of that case on an article omitting the Words at the rate of  remains unshaken
 Swabey s case5 was referred to by Lord Sterndale M R at page 777 in Moriarty case3 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 one sided 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
i 1898 I Ch
775 2 1901 I Ch 728
3  on appeal 1901 I QB 613
4  235 J
5 1889 I Meg
6 Times Nov 10 7 1901 I QB 613
8 1921 2 HBD 766
331 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 1 set out above are sufficient to enable us to hold that when the remuneration or commission is ex pressed at so much per annum without anything more it would amount in law to a stipulation for the payment of remuneration per year and the servant would not be entitled to get any remuneration unless and until he has completely performed his contract and such performance would be a condition precedent to the recovery of any wages or salary for that definite period of service
That would be the position even if the remuneration was to accrue due and becomes vested at stated periods and unless the servant performed the condition and fulfilled his duty as a faithful servant down to that stipulated date or the stated period no salary would accrue due and become payable to him until at the end of such period of service
We shall now examine the terms of the Managing Agency Agreements with a view to see whether the Sassoons were entitled thereunder to remuneration or commission for the broken periods
The Agreement between the E D Sassoon United Mills Ltd and the Managing Agents was for a fixed period of 30 years from the date of the registration of the Company and thereafter until they resigned or were removed from their office by a special resolution of the Company and the appointment of the firm of E D 
Sassoon and Company and their assigns was for the whole period
E D Sassoon and Company and their assigns covenanted and agreed with the Company to be and act as such Agents for the remuneration and upon and subject to the terms and conditions therein contained
It was lawful for them to assign the agreement and their rights thereunder to any person firm or Company 1 1921 2 KBD 766
332 having authority by its constitution to become bound by these obligations and upon such assignment being made and notified to the Company the Company was bound to recognise such person firm or Company as the Agents of the Company in like manner as if the name of such person firm or Company had appeared in these presents in lieu of the names of the partners of E D Sassoon and Company and as if such person firm or Company had entered into the Agreement with the Company and the Company agreed upon demand to enter into an Agreement appointing such person firm or Company the Agents of the Company for the then residue of the term outstanding under the Agreement and with the like powers and authorities remuneration and emoluments and subject to the like terms and
conditions as therein contained
These provisions of the Agreement showed the continuity of the Managing Agents who were employed as the Agents of the Company for this specified period and under the terms and conditions therein recorded
The new 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 and Company 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 2a of the Agreement which was a commission of 71 per cent per annum on the annual net profits of the Company with a stipulation in regard to the minimum remuneration of Rs 120000 per annum
Clause 2d 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 712 per cent
commission could not be ascertained but the sum none the less became due on 333 the 31st March in each and every year following the close of the accounting year of the Company
The  amount of such commission did not become a debt  owing by the Company to the Managing Agents until the 31st March in each and every year and was to be paid immediately after the annual accounts of the Company had been passed by the shareholders
The postponement of the date of payment in this manner however did not prevent the amount of the commission thus ascertained becoming due to the Managing Agents and it was on the 31st March in each and every year that the amount of commission thus calculated at 71 per cent
 per annum on the annual net profits of the Company became due by the Company to the Managing Agents
Until and unless the accounting year of the Company had gone by and the Managing Agents had served the Company as their Agents for the full period no part of the Managing Agency commission which was payable per year in the manner aforesaid could become due to them and the performance of the service for the year was a condition precedent to the Managing Agents being entitled to any part of the remuneration or commission for the accounting year of the Company
The Managing Agency Agreement therefore was an entire and indivisible contract stipulating a payment of remuneration or commission per year and enjoined upon the Managing Agents the duty and obligation of rendering the services to the Company for the whole year by way of condition precedent to their earning any remuneration or commission for the particular accounting year
It was however urged that clause 10 of the Managing Agency Agreement itself contemplated a broken period because there was nothing therein to prevent the Managing Agents from assigning the Agreement and their rights thereunder at any time in a particular year during the continuance of the Agreement
If the Managing Agents therefore could assign the Agreement and their rights thereunder it could not be suggested that neither the transferors who could not complete the year of service nor the transferees who had also not rendered the services as the Managing Agents for the 334 whole of the accounting year could earn any remuneration or commission which would be payable to the managing Agents only if they rendered the services to the Company for the whole 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 I and 3 of the Managing Agency Agreement were one entity and no severance of I 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 Agents at the time when the commission for the accounting year became due to the Managing Agents thus described which was expressly stated to be due yearly on the 31st March in each and every year became entitled to receive the debt which thus became due and to the payment thereof after the annual accounts of the Company had been passed by the shareholders
The stipulation for the Company executing in favour of the new or the substituted Managing Agents an Agreement appointing them the Agents of the Company for the then residue of the term outstanding under the Agreement was merely consequential upon the earlier provision therein contained which stated in so many terms that the Company was bound to recognise such new or substituted Managing Agents in like manner as if their names had appeared in the 335 mid Agreement in lieu of the partners of ED Sassoon and Company and as if they had entered into the Agreement with the Company
The rights of such new or substituted
Agents were created by the very terms of clause 10 of the Agreement and the formal embodiment thereof in the fresh Agreement to be entered into by the Company with them merely confirmed the rights which had already been created in them under that clause
It was further pointed out that at the end of the Managing Agency Agreement if not earlier during the continuance thereof there would certainly be a broken period because the period of 30 years stipulated in clause I of the Agreement would certainly expire on some date in February 1950
The calendar year would expire on the 31st December 1949 and there would of necessity be between the date of the expiration of the calendar year and the date of the expiration of the term of the agreement a period of about 2 months which would certainly be a broken period and not a full year
What would happen however on the expiration of the period of the Managing Agency Agreement cannot affect the construction of the relevant terms of the Agreement which have reference to a year or years during the continuance of the Agreement
It is unnecessary to speculate as to whether by reason of the fact that E D Sassoon and Company must have received the full year s remuneration or commission at the end of the first accounting year of the Company ending with the 31st December 1920 they might just as well give up if need be their remuneration or commission for the last 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 and Company Ltd however sought to distinguish the terms of the Managing Agency Agreement of the Elphinstone Spinning and Weaving Company Ltd from those of the 336 Managing Agency Agreement of the E D Sassoon United Mills Company 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 Spinning and Weaving Company Ltd which corresponded with clauses 2a 2d 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 Spinning and Weaving Company 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 and Company Ltd their successors and their assigns by way of remuneration a commission of ten per cent
on the net profits of the Company and a further sum of Rs 1500 per month
There was besides clause 6 of the Agreement which conferred upon the Managing Agents the right of retainer and reimbursement in connection inter alia with all sums due to them for commission or otherwise
These terms it was submitted did not constitute the payment of remuneration or commission a payment per annum and it was not possible to argue that the Sassoons were not entitled to any remuneration or commission for a broken period thereunder
It may however be observed that the Managing Agency Agreement with which we are here concerned was the Agreement dated the 23rd May 1922 between the Company and the Sassoons and the Managing Agents there described were E D Sassoon and Company Ltd on behalf of themselves their successors and assigns
Clause 1 of the Agreement employed the Sassoons their successors and assigns the Agents of the Company from the 1 st February 1922 for the unexpired portion of the term of 60 years commencing from the 3rd July 1919 and it was these Managing Agents thus described viz the Sassoons their successors and assigns who were during the continuance of the Agreement to be remunerated by a commission of 10 per cent
on the net profits of the Company and the Company agreed to pay such commission to them
The 337 right of retainer and reimbursement reserved under clause 6 of the Agreement would not carry the transferees any further because it was in respect of all sums due to them for commission or otherwise
Unless and until the commission became due to them they had no such right of retainer
It would still have to be determined whether any sum became due to them by way of such commission
Whether any commission became due to them would depend upon the construction of clause 3 of the Agreement and under that clause the commission calculated at 10 per cent
of the net profits of the Company was to become due to them and was to be paid by the Company to them during the continuance of the Agreement
We have got to determine what is the full implication of this clause of the Agreement the commission of 10 per cent
on the net profits of the Company
 The word profits has a welldefined legal meaning as was observed by Lord Justice Fletcher Moulton at page 98 in The Spanish Prospect ing Company Limited1 The word Profits  has in my opinion a welldefined 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 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 vs Ahmedbhai Umarbhai and Company Bombay2 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 a year and the fundamental i 1911 i Ch D 92
44 2 1950 i8 ITR 472 at page 5o2
338 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 increase shown at a later date compared to the earlier date represents the profits of the business
 It was urged before us that there was nothing in the terms of the Agreement which provided that the profits were to be ascertained at the end of every year and there was nothing to prevent the Company if it so chose from casting its accounts and ascertaining the net profits half yearly or quarterly or even every month by preparing trial balance sheets in that manner
Theoretically speaking all this may be possible but we have got to construe the Agreements arrived at between business people in a business sense
Ordinarily in the case of business or trading concerns accounts of profits are not made except at stated intervals usually separated by a year
Particularly in the case of limited Companies incorporated under the Indian Companies Act the accounts are cast every year and the net profits earned by the Company are ascertained every year both for the declaration of dividends and for submitting the returns to the income tax authorities
Under section 131 Iof the Indian Companies Act of 1913 every Company was required once at least in every year and at intervals of not more than 15 months to cause the accounts to be balanced and a balance sheet to be prepared which was called the annual balance sheet
The first schedule to the Companies Act which contained the regulations by which unless excluded the affairs of the Company were to be governed provided under Regulation 106 the preparation once at least every year of the profit and loss account for the period and under the Regulation 108 for the balance sheet to be made out in every year and laid before the Company in general meeting
Having regard to the course of business which prevailed in this Company also so far as it is evidenced by the fact that the account of the Managing Agency commission was made up for the calendar year 1943 and was paid to Chidambaram Mulraj and Company Ltd who became the Managing Agents in place and stead of the Sasssoons in the year 1944 it is reasonable to assume that the 339 accounts of this Company were throughout made up at the end of every calendar year
The profit and loss of the Company was then ascertained and a commission of 10 per cent
on the net profits of the Company was paid to the Managing Agents of the Company for the time being
In the case of limited Companies like those 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 counterbalance the profit or loss as the case may be in the earlier part of the year
It may as well happen that the profits which the Company may appear to have earned during the earlier months of the year or even during the II months of the year may be considerably reduced or even wiped out during the later months or the last months of the year by reason of some catastrophe or unforeseen events
It would be therefore reasonable to assume that the profit or loss as the case may be should be determined at the end of every year so that on such calculation of net profits the Managing Agents may be paid their remuneration or commission at the percentage stipulated in the Managing Agency Agreement and 340 the shareholders also be paid dividends out of the net profits of the Company
We are sure that these were the considerations which weighed with the Managing Agents of this Company in not taking up any such contention before the Income tax authorities and the High Court that the remuneration or commission payable to them under the Managing Agency Agreement was not payable per year and the contention put forward before us in this behalf was a clear after thought
We would be therefore justified in treating the terms and conditions in regard to the payment of Managing Agency Commission in both these Managing Agency Agreements as on a par with each other stipulating for such payment per year on the net annual profits of the Companies
If this be the true construction of the Managing Agency Agreements it follows that the contract of service between the Companies and the Managing Agents was entire and indivisible that the remuneration or commission became due by the Companies to the Managing Agents only on completion of a definite period of service and at stated periods that it was a condition precedent to the recovery of any wages or salary in respect thereof that the service or duty should be completely performed that such remuneration constituted a debt only at the end of each such period of service and that no remuneration or commission was payable to the Managing Agents for broken periods
The question still remains whether the remuneration for the broken periods accrued to the Sassoons and the contention which was strenuously urged before us on behalf of the transferees was that the Sassoons had rendered the services in terms of the Managing Agency Agreements 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 341 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 vs Shau Wallace  Co1 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 production of a definite return excluding anything in the nature of a mere windfall Mukerji J has defined these terms in Rogers Pyatt Shellac  Co vs Secretary of State for India2  Now what is income The term is nowhere defined in the Act
In the absence of a statutory definition we must take its ordinary dictionary meaning that which comes in as the periodical produce of one s work business lands or investments considered in reference to its amount and commonly expressed in terms of money  annual or periodical receipts accruing to a person or corporation  Oxford Dictionary
The word clearly implies the idea of receipt actual or constructive
The policy of the Act is to make the amount taxable when it is paid or received either actually or constructively
i Accrues  arises  and I is received  are three distinct terms
So far as receiving of income is concerned there can be no difficulty it conveys a clear and definite meaning and I can think of no expression which makes its meaning plainer than the word  receiving  itself The words I accrue and arise also are not defined in the Act
The ordinary dictionary meanings of these words have got to be taken as the meanings attaching to them
Accruing  is synonymous with arising  in the sense i ILR at p 1352
2 at P 371 342 of springing as a natural growth or result
The three Expressions accrues I arises  and I is received  having been used in the section strictly speaking accrues  should hot be taken as synonymous with I arises  but on the distinct sense of growing up by way of addition for increase or as an accession or advantage while the word I arises  means comes into existence or notice or presents itself
The former connotes the idea of a growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable
It is difficult to say that this distinction has been throughout maintained in the Act and perhaps the two words seem to denote the same idea or ideas very similar and the difference only lies in this that one is more appropriate than the other when applied to particular cases
It is clear however as pointed out by Fry LJ in Colquhoun vs Brooks1 this part of the decision not having been affected by the reversal of the decision by the House of Lords2 that both the words are used in contradistinction to the word  receive  and indicate a right to receive
They represent a stage 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 vs Brooks1 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 I received by  If the enactment were limited to profits and gains received i at P 59
2 I889 14 APP
493 343 by  the person to be charged that limitation would apply as much to all Her Majesty s subjects as to foreigners residing in this country
The result  would be that no income tax would be payable upon profits which accrued but which were not actually received although profits might have been earned in the kingdom and might have accrued in the kingdom
I think therefore that the words I arising or accruing are general words descriptive of a right to receive profits
 To the same effect are the observations of Satyanarayana Rao J in Commissioner of Income tax Madras vs Anamallais Timber Trust Ltd1 and Mukherjea J in Commissioner of Income tax Bombay vs Ahmedbhai Umarbhai  Co Bombay2 where this passage from the judgment of Mukerji J in Roqers Pyatt Shellac  Co vs Secretary of State for India3 is approved and adopted
It is clear therefore that income may accrue to an assesee without the actual receipt of the same
If the assessee acquires a right to receive the income the income can be said to have accrued to him though it may be received later on its being ascertained
The basic conception is that he must have acquired a right to receive the income
There must be a debt owed to him by somebody
There must be as is otherwise expressed debitum in presenti solvendum in futuro See W section Try Ltd vs Johnson Inspector of Taxes4 and Webb vs Stenton and Others Garnishees5
Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him
The word earned even though it does not appear in section 4 of the Act has been very often used in the course of the judgments by learned Judges both in the High Courts as well as the Supreme Court
Vide Commissioner of Income tax Bombay vs Ahmedbhai Umarbhai  Co Bombay6 and Commissioner of Income tax Madras vs K R M T T Thiagaraja Chetty  Co7
i 18 ITR1 333 at P 342
5 II QBD 5i8 at pp
522 and 527  2 19501 SC R 335 at P 389
6 1950 SCR 335 at P 364
3 I ITC 363 at P 372
7 at P 533
4 1946 I AER 532 at P 539
344 It has also been used by the Judicial Committee of the Privy Council in Commissioners of Taxation vs Kirk1
The concept however cannot be divorced from that of income accruing to the assessee
If income has accrured to the assessee it is certainly earned by him in the sense that he has contributed to its production or the parenthood of the income can be traced to him
But in order that the income can be said to have accrued to or earned by the assessee it is not only necessary that the assessee must have contributed to its accruing 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 presenti 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 commission stipulated thereunder no debt payable by the Companies was created in their favour and they had no right to receive any payment from the Companies
No remuneration or commission could therefore be said to have accrued to them at the dates of the respective transfers
It was however urged that even though no income can be said to have accrued to the Sassoons at the date of the respective transfers which could be the 1 at p 592 345 subject matter of any assignment by them in favour of the transferees the moment the remuneration or commission was ascertained at the end of the calendar year and became a debt due to the Managing Agents under the terms of the Managing Agency Agreements it could be referred back to the period in which it was earned and the portions of the remuneration or commission which were earned by the Sassoons during the broken period could certainly then be said to be the income which had accrued to them during the chargeable accounting period
Reliance was placed is support of this position on Commissioners of Inland Revenue vs Gardner Mountain  D  Ambrumenil Ltd1
The assessee in that case carried on inter alia the business of underwriting Agents and entered into Agreements with certain underwriters at Lloyds under which it was entitled to receive as remuneration for its services in conducting the Agency commissions on the net profits of each year s underwriting
The Agreements provided that  accounts should be kept for the period ending 31st December in each year and that each such account shall be made up and balanced at the end of the second clear year from the expiration of the period or year to which it relates and the amount then remaining to the credit of the account shall be taken to represent the amount of the net profit of the period or year to which it relates and the commission payable to the Company shall be calculated and paid thereon
 The accounts for the underwriting done in the calendar year 1936 were made up at the end of 1938 and the question that arose was whether the assessee was liable to additional assessment in respect of the commission on under writer s profits from the policies underwritten in the calendar year 1936 in the year in which the policies were underwritten or in the year when the accounts were thus made up
The assessee contended that the contracts into which it entered were executory contracts 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 I 45 346
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 Commissioner 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 accounting period
The ratio of the decision was that the commission paid was remuneration for services completely performed in the particular year that the assessee had at the end of the year done everything it had to do to earn it and that it was remuneration for work done and completely done in the particular year though it was ascertained and paid two years later
Viscount Simon in his speech at page 93 stated that the assessee had acquired a legal right to be paid in futuro and that the principle was to refer back to the year in which it was earned so far as possible remuneration subsequently received even though it could only be precisely calculated
afterwards
Lord Wright in his speech at page 94 said that it was necessary to determine in what year the Commission was earned or in the language of the Act in what year the assessee s profits arose and observed at page 96  I agree with the Court of Appeal in thinking that the necessary conclusion from that must be that the right to the commission is treated as a vested right which has accrued at the time when the risk was underwritten It has then been earned though the profits resulting from the insurance cannot be then 347 ascertained but in practice are not ascertained until the end of two years beyond the date of underwriting
The right is vested though its valuation is postponed  and is not merely postponed but depends on all the contingencies which are inevitable in any insurance risk losses which may or may not happen returns of premium premiums to be arranged for additional risks reinsurance and the whole catalogue of uncertain future factors
All these have to be brought into account according to ordinary commercial practice and understanding
But the delays and difficulties which there may be in any particular case however they may affect the profit do not affect the right for what it eventually proves to be worth
 Lord Simonds in his speech at page 110 stated It is clear to me that the commission is wholly earned in year 1 in respect of the profits of that year s underwriting
If so I should have thought that it was not arguable that that commission did not accrue for income tax purposes in that same year though it was not ascertainable until later
 The fact that the account of the commission could not be made up until later did not make any difference to the position 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 vs Commissioner of Income tax Madras1 and Turner Morrison and Co Ltd vs Commissioner of Income tax West Bengal2 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
I 1950 is ITR 423
2 11953 348 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 income profits or gains may thus be ascertained later on the accounts being made up
But when the accounts are thus made up the income profits or gains ascertained as the result of the account are referred back to the chargeable accounting period during which they have accrued or arisen and the assessee is liable to tax in respect of the same during that chargeable accounting period
The computation of the profits whenever it may take place cannot possibly be allowed to suspend their accrual      The quantification of the commission is not a condition precedent to  its accrual Per Ghulam Hassan J in Commissioner of Income tax Madras vs K B M T T Thiagaraja Chetty and Co1
See also Isaac Holden and Sons Ltd vs Commissioners of Inland Revenue2 and Commissioners of Inland Revenue vs Newcastle Breweries Ltd3
What has however got to be determined is whether the income profits or gains accrued to the assessee and in order that the same may accrue to him it is necessary that he must have acquired a right to receive the same or that a right to the income profits or gains has become vested in him though its valuation may be postponed or though its materialisation
may depend on the contingency that the making up of the accounts would show income profits or gains
The argument that the income profits or gains are embedded in the sale proceeds as and when received by the Company also does not help the transferees because the Managing Agents have no share or interest in the sale proceeds received as such
They are not co sharers with the Company and no part of the sale proceeds belongs to them
Nor is there any ground for saying that the Company are the trustees for the business or any of the assets for the Managing Agents
The Managing Agents cannot therefore be said to have acquired a 1 at P 534
2 12 Tax Cases 768
3 12 Tax Cases 927
349 right to receive any commission unless and until the accounts are made up at the end of the year the net profits ascertained and the amount of commission due by the Company to the Managing Agents thus determined
See Commissioners of Inland Revenue vs Lebus1 
It is cleat therefore that no part of the Managing Agency commission had accrued to the Sassoons at the dates of the respective transfers of the Agencies to the transferees
The two decisions which were sought to be distinguished by the High Court in the judgments under appeal also support this conclusion
In the unreported decision of the High Court of Bombay in Commissioner of Excess Profits Tax Bombay City vs Messrs P N Mehta and Sons1 the Managing Agency Agreement was couched in the very same terms as that of the E D Sassoon United Mills Company 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 Rs 15000 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 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 and have a net profit to show
It is only as a result of the working of the Mills for the whole year that it will be possible to ascertain whether the Mills have worked at a loss or at a profit and what the profit was
Therefore the Managing Agents are only entitled to a commission on the result of the 1  1946 i AER 476  SC 27 Tax Cases 136
2 1950 ITRef
No 19 Of 1950
350 working of the Mills for a whole year
If the working shows a net annual profit which gives them a commission of more than Rs 15000 on the basis of 10 per cent
 they are entitled to that amount
If on the other hand the working does not show a profit which entitles them to a comnission of Rs 15000 they are in any case entitled to that amount
Therefore in our opinion the Tribunal rightly held that the accrual of the commission was at the end of the calendar year which was the year maintained by the Mills and not from time to time as contended by the Depart ment
 In the case of Salt and Industries Agencies Ltd Bombay vs Commissioner of Income tax Bombay City1 the question for the consideration of the Court no doubt was what was the place where the profits had accrued
In determining the place where the profits had accrued it was however necessary to find when the profits had accrued to the assessee and it was held that what was conclusive of the matter was the consideration as to when the right to Managing Agency com mission arose and when did the Company become liable to pay Managing Agency commission to the Managing Agents and it was further held that it was only when all the accounts of the working of the Company were submitted to the head office in Bombay and the profit was determined that it could be said that a right to receive a commission at the rate specified in the Managing Agency Agreement had arisen and the Managing Agents became entitled to a certain specified commission
These considerations are germane to the question which we have to decide in these appeals and support the conclusion which we have already arrived at that the right to receive the commission would arise and the income profits or gains would accrue to the Managing Agents only at the end of the calendar year which was the terminus a quo for the making up of the accounts and ascertaining the net profits earned by the Company
We fail to see how these cases which were relied upon by the Revenue before the High Court could be distinguished in the manner in which it was done
i iS ITR 58 351 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 vs Forrest 1
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 declared on the 13th May 1920
The contention of the assessee was that the dividend should be treated as capital in view of the terms of the contract of purchase and not included in the computation of his income
Under the provisions of the Incometax Act the dividends which were receivable by him were required to be included in the computation of his income
The learned Judges however discussed the legal effect of such a transaction of the purchase of shares
Lord Ormidale observed at page 709  The value of the shares had to be determined as a matter of bargain between the parties and the purchaser thought that it was not unreasonable that he should pay something over par for them because of the possibility not the certainty but the possibility of a dividend six months afterwards being paid upon the shares so purchased by him Lord Anderson observed at page 710 i 8 Tax Cases 704
352 He buys two things with his money
He buys in the first place a share of the assets of the industrial concern proportionate to the number of shares which he hat purchased and he also buys the right to participate in any profits which the Company may make in the future
Now when a transaction of this nature is entered into during the currency of the financial year of the industrial concern it is obvious that what happens is this that not only is a part of the assets purchased outright but that a chance is bought as well a chance of sharing in any profits which may be made during the currency of that financial year
 Wigmore H M Inspector of Taxes vs Thomas Summerson and Sons Limited 1 was the case of a vendor of war loan stock bearing interest payable without deduction of tax
The sale was effected on the 10th April 1923 with interest rights
The vendor was assessed for the year 1923 24 in respect of the amount of interest said to have accrued on the stock in the period between the last payment of interest
and the sale of the stock it being contended that the price received by the vendor on sale of stock included this interest
The purchasers said that they were not liable to tax in respect of the income which had been accruing on the security they had purchased in a period anterior to the date on which they purchased
It was observed that the truth of the matter was that the vendor did not receive interest and interest was the subject matter of the tax
But he 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 them and the vendor was held not assessable in respect of the interest accrued at the date of the sale of the stock
Commissioners of Ihland Revenue vs Pilcher 2 was the case of the gale of an orchard inclusive of the year s fruit crop
The assessee had valued the cherries which were on the trees at pound 2500 and had pat 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 i 9 Tax Cases 577
2 3 i Tax Cases 314
353 12th June 1942
He realised pound 2903 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 i 2500 being the purchase price of the cherries sold for pound 2903 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 is in the nature of capital outlay and no part of the capital so laid out can for income tax purposes be set off as expenditure against income accruing from the asset in question
 There is a further passage in the judgment of Jenkins L J at page 335 which is very instructive
It had been contended that the revenue should look at the transaction from the assessee s point of view and should consider it in a manner favourable to him
This contention was dealt with in the manner following One has to remember that this transaction concerned not merely Mr Pilcher but also the vendor of the orchard
Mr Pilcher was able to buy the orchard complete with the cherries from the vendor and by that means according to his own calculation the cherries stood him in pound 2500
It by no means follows that if he had been minded to buy the cherries from the vendor apart from the land as a separate transaction the vendor would have been willing to sell them to him for pound 2500 or at any price
The difference is obviously a material one from the vendor s point of view because dealing with the matter as he did he was selling a capital asset and the resulting capital receipt prima facie would attract no tax
If he sold the cherries separately in the way of trade he would at once have created an income receipt on which prima facie tax would have been exigible
Therefore the alteration in the form of the bargain required to make it more favourable to Mr Pilcheer from the tax point of view would have involved an alteration not merely of form but of substance owing to its adverse effect on 46 354 the tax situation of the vendor and it cannot be assumed that the bargain thus altered would have been one to which Mr Pilcher could have secured the vendor s agreement
 These observations throw considerable light on the situation obtainingin the cases before us
It will be remembered that the total amount of Rs 7577693 received by the Sassoons on the transfers of the Managing Agencies was taken by them to the  Capital Reserve Account
 No part of that amount was treated by them as a receipt of income and it is debatable whether any part of the same could have been allocated as a receipt of income even though the transferees had desired to do so
All that the transferees obtained under the deeds of assignment and transfer executed by the 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 vs Styles Surveyor of Paxes 1
The part of the business taken over by the assessee in that case consisted of unexecuted and partly executed contracts
The contracts were executed after the date of the purchase by the assessee and the 1 2 Tax cases
239 355 assessee sought to deduct the price paid for the contracts from the profits arising from their performance
This deduction was not allowed because whatever price the assessee paid for the purchase of the business was treated as the capital which had been invested for the purpose of acquiring that business and the assessee could not deduct from the net profits of the working of the business after the date of the purchase any part of the capital which had been thus invested by it
This result was achieved even though in the purchase of unexecuted contracts there was included the part of the work done towards the performance of the contracts by the vendors
The assessee derived the benefit from such partial execution of the contracts by the vendors nevertheless the value of such work was not treated as any income which had accrued to the vendors and which the assessee was entitled to deduct from its profits arising from the performance by it of those unexecuted contracts
Learned counsel on behalf of the transferees contended that all these cases were concerned with the question whether the income derived by the assessee out of the income bearing asset after the date of the purchase could be treated as a capital expenditure so far as it formed part of the consideration paid by the assessee to the vendors and in none of these cases were the Courts concerned with the question that arises before us viz whether any part of the income which was actually received by the assessees could be said to have accrued to the vendor
Even though the question did not arise in terms it is nonetheless involved in the consideration of the question whether the assessee was liable to pay the income tax on the whole of the income thus derived by him
As was pointed out by Jenkins L J in Commissioner of Inland Revenue and vs Pilcher1 quoted above the vendor s point of view cannot be neglected and once you come to the conclusion that the assesse alone is liable it necessarily follows that the vendor certainly has nothing to do with the same
If it were otherwise the vendor would certainly be liable to tax and no purchaser would miss the opportunity of avoiding his liability for that portion of i 31 Tax Cases 314 at P 335
356 the income which can be said to have accrued to the vendor
As a matter of fact such a contention was taken by the purchasers in Wigmore HM Inspector of Taxes vs Thomas Summerson and Sons Limited1 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 it what was transferred by the Sassoons to the respective transferees were merely expectations of earning commission and not any part of the commission actually earned by them or which had accrued to them under the terms of the Managing Agency Agreements what the transferees received from the Companies under the terms of the Managing Agency Agreements which were thus transferred to them would be their income and no part of such income could ever be said to have accrued to the Sassoons during the chargeable accounting period
In view of the above it is unnecessary to deal with the contention which was urged by the learned counsel for the Sassoons that ever be an assignment of income the assignee and not the assignor would be liable to pay the tax
He referred us to the case of the Commissioner of Income tax Bombay Presidency vs Tata Sons Ltd2 in support of this contention of his and he also referred us to note G  at page 209 in i 9 Tax Cases 577
2 357 Simon s Income tax 2nd Edn Vol
II where the ratio of Parkins vs Warwick HM Inspector of Taxes1 relied upon by the High Court in the judgments under appeal has been criticised
We do not however think it necessary to go into this question as in our opinion there were no debts due by the Companies to the Sassoons which were assigned under the respective deeds of transfer and assignment
The only question which remains to consider is whether section 36 of the Transfer of Property Act imports the principle of apportionment in regard to the commission received by the transferees herein
Section 36 of the Transfer of Property Act provides In the Absence of a contract or local usage to the contrary all rents annuities pensions dividends and other periodical payments in the nature of income shall upon the transfer of the interest of the person entitled to receive such payments be deemed as between the transferor and the transferee to accrue due from day to day and to be apportionable accordingly but to be payable on the days appointed for the payment thereof
 It may be noted that the section applies in the absence of a contract or local usage to the contrary and also applies as between the transferor and the transferee
There is no room for the application of these provisions as between the subject and the Crown
Vide The Commissioners of Inland Revenue vs Henderson s Executors2
The contract to the contrary must of necessity be as between 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 transfer claimed to retain and did retain 1 I943 2 i6 Tax CaseS 282 at P 291 358 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 subjectmatter 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 262 of the Indian Income tax Act also does not help the transferees because it is only when the person succeeded has acquired an actual share of the income profits or gains of the previous year that he is liable to tax in respect of it and as set out herein above no part of the commission actually accrued to or became a debt due by the Company to the Sassoons on the dates of the respective transfers of the Managing Agencies to the transferees
In order to attract the operation of section 262 the person succeeded must have had an actual share in the income profits or gains of the previous year and on the construction of the Agreements the Sassoons cannot be said to have acquired any share in commission for the broken periods
The whole difficulty has arisen because the High Court could could not reconcile itself to the situation that the transferee had not worked for the whole calendar year and yet they would be held entitled to the whole income of the year of account whereas the transfers had worked for the broken periods and yet they would be held disentitled to any share in the income for the year
If the work done by the transferors as well as the transferees during the respective periods of the year were taken to be the criterion the result would certainly be anomalous
But the true test under section 41a of the Income tax Act is not whether the transferors and the transferees had worked for any particular periods of the year but whether any income had accrued to the transferors and the transferees within the chargeable accounting period
It is not the work done or the services rendered by the person but the income 359 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 41a 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
But as regards the costs under the peculiar circumstances of these 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 the Income tax who is the appellant in both but by the Sassoons the proper order should be that each party should bear 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 66A2 of the Indian Income tax Act
They arise out of a set of facts mostly common
E D Sassoon and Company Ltd now in voluntary liquidation hereinafter referred to as the Sassoonal had the Managing Agency of three Mills 1 FD Sassoon United Mills Ltd 2 Elphinstone Spinning and We having Mills Company Ltd and 3 The Apollo Mills Ltd With the 360 consent of the Mill Companies and by virtue of clauses in the Managing Agency Agreements enabling thereunto the Sassoons transferred the Managing Agency of the three Mills to three other Companies during the course of the calendar year 1943 as follows 1 to Agarwal and Company Ltd hereinafter referred to as Agarwals on the 1st December 1943 2 to Chidambaram Mulraj and Company Ltd hereinafter referred to as Chidambarams on the 1st June 1943 and 3 to Rajputana Textile Agencies Ltd on the 1st july 1943
The assessments with which we are concerned are those of 1 Sassoons 2 Agarwals and 3 Chidam barams and relate to income by way of Managing Agency remuneration paid in the year 1944 by the Mill Companies to the respective assignee Companies for the calendar year 1943
For Sassoons and Agarwals the assessment year was 1944 45 and the accounting year was the calendar year 1943
For Chidambarams the assessment year was 1945 46 and the chargeable accounting period was from 1st July 1943 to 30th June 1944
The tax was assessed on the basis not of receipts but of accrual
The income tax authorities treated the total remuneration for the entire year 1943 in each case as income which accrued to the assigneeCompanies in the respective accounting periods
The assignee Companies objected on the ground that part of the remuneration up to the date of the respective assignments accrued to the assignor Company viz Sassoons and that they were therefore liable to be assessed only in respect of the balance of the remuneration referable to the portion of the calendar year 1943 subsequent to the respective dates of the assignments
The objection was overruled and the assessments were made
On appeals to the Income tax Appellate Tribunal their contention was accepted and the assessments were modified
It may be mentioned that the Rajputans Textiles Agencies Ltd does not appear to have filed any appeal to the Tribunal
Meanwhile presumably by way of caution the income tax authorities issued notices to the assignor Company viz Sassoons under section 34 of the Indian Income tax Act and assessed it in respect of the proportionate part 361 of the year s Managing Agency commission up to the date of the respective assignments
The Sassoons objected to this before the income taxauthorities but the objection was overruled
It has been stated to us in the case filed by the Sassoons 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 accrued as the joint income of both the assignor and the assignee and was apportionable between them and 2 the assignee Companies received the assignor s share of the joint income by virtue of the assignments of the assignor s share and hence to that extent it was not their taxable income but continued to be the taxable income of the assignor  There are thus three appeals one by the Sassoons against the Income tax Commissioner and the other two by the Income tax Commissioner against Agarwals and Chidambarams respectively
In the first of the appeals the Income tax Commissioner supports the position taken up by the Sassoons while in the other two the Commissioner is the appellant and contests the position taken by the 47 362 Agarwals and the Chidambarams
Thus it will be seen that though in form the three appeals are each between the Income tax Commissioner and one of the three Companies in fact they raise a controversy between the assignor Company the Sassoons on the one side and the two assignee Companies the Agarwals and the Chidambarams on the other the Commissioner supporting the Sassoons and opposing the other two
The arguments before us covered a wide range and were advanced on the assumption that what the High Court held was that the Sassoons became entitled on the
very date of the respective assignments to a proportionate share of the year s remuneration for the Managing Agency and that accordingly that share accrued to the Sassoons as their taxable income then and there and did not cease to be such notwithstanding the assignment thereof The case was accordingly debated before us as though the decision turned upon the question whether any income could accrue to the Sassoons on the dates of the respective transfers of the Managing Agency to the transferees
It is necessary therefore to clarify at the outset what the question was which was directly raised on the reference made to the High Court and what in the view of the High Court was the date When a share of the year s remuneration accrued to the Sassoons as its income
It appears to me that the judgment of the High Court taken as a whole is based only on the view that the entire Managing Agency remuneration for the year accrued on the completion of the year ie on the 31st December 1943 and that when it so accrued it accrued both to the assignor and to the assignee 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 363 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 and Company 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 included a future right of the assignor to a share in the remuneration when it accrued on the completion of the year and not on the view that the assignment operated as the transfer of a present right to such a share on the very date of the assignment
It is in view of the assumption that the remuneration for the year accrued only on the 31st December that the Income tax Appellate Tribunal also took care to say in making their reference to the High Court as follows  The question is not when the Managing Agency commission accrued
The real question is to whom it accrued
 It appears to me therefore that it is not correct to approach the consideration of this case as though the decision therein turns directly upon the question whether any income had accrued to the Sassoons on the dates of the respective transfers of the Managing Agency to the transferees
In the arguments before us considerable stress was laid by learned counsel appearing for the Sassoons on the fact that the Managing Agency Agreements with which we are concerned provide for annual remuneration for an year s work
It was pointed out that the remuneration payable was fixed as commission at a certain specified percentage of the net profits of the respective Mill Companies
So far as the Sassoons United Mills Ltd are concerned whose Managing Agency had been 364 assigned to Agarwals the commission was in terms stated in the Agency Agreement to be per annum and on the annual net profits of the Company
So far as Elphinstone Spinning and Weaving Mills CompanyLtd are concerned whose Managing Agency was assigned to Chidambarams
 the remuneration is merely stated in the corresponding Agreement to be a percentage of the net profits of the company but is not in terms stated to be per annum or on the annual net profits
But there can be no reasonable doubt that as a matter of construction the remuneration in the latter case also must be taken to be per annum and on the annual net profits notwithstanding some argument before us to the contrary
Having regard to this basic fact the following are in substance the arguments put forward before us by learned counsel for the assignor Sassoons
1 The Managing Agency commission was payable in respect of services for an entire calendar year and not for a portion thereof and therefore no commission became due to the Sassoons for the services rendered 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 and 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 365 the scope of the question presented on the references the first three of the above arguments do not appear to me to call for any examination
In the present case no question arises as to the enforceability of the claim for a proportionate share of the remuneration by the assignor from the very date of assignment
Nor does any question arise as to the non payability of remuneration on account of non completion of the work
The year s work has been completed by the assignee Company in continuation of that of the assignor Company
The total remuneration for the year has in fact been paid into the hands of the assignee Company
The only questions therefore are 1 whether the money so received accrued by way of remuneration for the year s work and became taxable income on the 31st December 1943 2 if so whether
it was the joint income of the assignor and the assignee or the sole income of the assignee and 3 whether the assignment operated to transfer the assignor s share of the income on its accrual
The answer to the first of the above questions seem to me to admit of no doubt
The remuneration was for the year s work
The year s work was completed on the expiry of the year
The right to receive the remuneration became therefore vested on the 31st December 1943
It is true that in Agarwal s case there is a clause  in the original Managing Agency Agreement that the Managing Agency commission shall be due yearly on the 31 st day of March in each and every year and shall be payable and be paid immediately after the annual accounts of the Mill Company have been passed by the shareholders
 It has been urged in reliance on this clause that the accrual of the income in so far as the case of Agarwals is concerned is not on the 31st December but on the 31st March next
In the first place such a contention in so far as it relates to the date of accrual is not permissible in view of the clarification in the order of reference made by the Tribunal to the High Court and in view of the specific and categorical language of some  of the grounds in the statements of the case filed
366 before us both by Sassoons and the Income tax Commissioner showing 31st December 1943 as the date of accrual of the entire remuneration
Vide paragraphs 191 26a and g of the Sassoons  statement and paragraphs 12 151 2 and 5 of the Income tax Commissioner 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 vs Gardner Mountain and D  Ambrumenil Ltd 1
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 itself an additional event which imports any element of contingency in the right
It appears to me therefore that the above clause which has been relied upon whatever the reason may be for the distinction which the language seeks to suggest between due and payable can have no bearing on the date of the accrual and cannot have the affect of postponing the accrual from the 31st December to 31st March
But even otherwise this does not at all affect
the final conclusion in this case reached by the High Court of Bombay
If the view of the High Court is correct that the ncome accrued both to the assignor and to the assignee after the completion of the year s work it seems to matter little whether that accrual is on the 31st December or on the 31st March next
1 367 by the High Court that the assignments operated to transfer to the assignee the assignor s share of the year s remuneration after it accrued to him as his income and whether it continues to remain the assignor s taxable income in spite of the assignment may also be shortly dealt with
If the High Court be right in its view that the remuneration accrued both to the assignor and to the assignee together whenever it may  be then it is clear that on the respective dates of the assignment the assignor bad a future right to a share of the remuneration on the completion of the year
If so there is ample authority for the position that the assignment of such a future right is valid and becomes operative by way of attaching itself to the right when it springs up
See Bansidhar vs Sant Lal 1 Misri Lal vs Mozhar Hossain 2 Palaniappa vs Lakshmanan 3 and Baldeo vs Miller 4 The validity of such an assignment as between the assignor and the assignee and the effect thereof on the assignor s future right may also be supported with reference to the principle of estoppel feeding title which finds recognition in section 43 of the Transfer of Property Act
For the further position ViZ that a person continues to be liable for tax in respect of accrued income notwithstanding assignment thereof operating on or after such accrual there is authority in Parkins vs Warwick 5
This view is confirmed by the following passages in the Privy Council case in Pondicherry Railway Co Ltd vs commissioner of Income tax Madras 6
 Profits on their coming into existence attract tax at that point and the revenue 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 vs Styles7
1 ILR1o All I33
2 ILR 3 I 4 IL R 5 25 Tax Cases gig
6 AIR 1931 PC i65 at 170
7 I892 AC 309 368 clear recongnition 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 ie 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 Sassoons put forward the argument No 4 above enumerated viz that the assignment of Managing Agency is the transfer of an income bearing asset and that all income received subsequent to the date of assignment is entirely the assignee s taxable income
It is the validity of this argument that now requires examination
The cases that have been relied on in support of this argument are the following  The Commissioners of Inland Revenue vs Forrest1 Wigmore vs Thomas Summerson2 and Commissioners of Inland Revenue vs Pilcher3
Commissioners of Inland Revenue vs Forrest1 is a case of purchase of certain shares and the income derived therefrom and is analogous to the second head of income chargeable to income tax under section 6 of the Indian Income tax Act viz Securities
The income therefrom is directly referable only to the ownership of the shares or securities
Mere lapse of time makes income payable and the taxation depends on the receipt of the income
Wigmore vs Thomas Summerson2 is also a case similar to the above
Commissioners of In
land Revenue vs Pilcher3 is the case of a sale of an orchard inclusive of the year s fruit crop which by the date of the sale does not appear to have become ripe
i 8 Tax Cases 704
2 9 Tax Cases 577 3 3T Tax Cases 314
369 enough to be treated as a severable item of property
This was a case of property whose
ownership itself in the ordinary course and by lapse of time gives rise to income and is analogous to head No 3 of section 6 of  the Indian Income tax Act
It is interesting to note that in this case the learned Judges make a distinction between fructus industriales and fructus naturales and point out that the fruits derived from the orchard being cherries are fructus naturales and not fructus industrials
That the result might have been different if it was fructus industriales appears clearly at least so far as Lord Justice Singleton and Lord Justice Tucker are concerned
In the case of fructus industriales the income does not arise by mere ownership but as a result of further investment and labour which may be the effective source of income
These decisions refer only to cases where the sole or effective source of income is mere ownership and taxability depends on receipt of the income
Another case that has been relied on before us is the City of London Contract Corporation vs Styles1
That was a case where one Company purchased as a going concern the business carried on 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 1 2 Tax Cases 239 370 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 unexecuted contracts and of the rights thereunder and the benefits to accrue therefrom
 If the business consisted of only unexecuted contracts this case is not an authority for the position contended for on behalf of the Sassoons
But in any case even if some of the contracts were partially executed there is nothing to show that the execution was of any such extent as to have become a substantial source of income
It may also be noted that this decision is a direct authority only on what is capital expenditure and what is revenue expenditure for pur poses of deduction
The point in the form relevant for the present case was not raised there and cannot be taken to have been decided
It is interesting to notice that in Simon s Income tax Vol 2 1949 Edn page 188 paragraph 222 the following passage appears
 In City of London Contract Corporation Ltd vs Styles1 where the Company acquired a business including a number of unexecuted contracts it was held that the sum paid for the contracts could not be deducted in computing the Company s profits on the ground that the whole of the purchase price of the business was a sum  employed or intended to be employed as capital in such trade 
 Similarly in Spicer and Pegler s Income tax and Profits tax 20th Edn at page 116 it is stated as follows   Cost of unexecuted contracts taken over with a business in arriving at the profits from the performance of the contracts and the case of City of London Contract Corporation vs Styles1 is quoted as authority
These standard textbooks also show that this case has been treated as having reference to unexecuted contracts and not to partially executed contracts and as being authority for the question as to what are Permissible deductions from taxable income of business concerns I 2 Tax CaseS 239
371 The above cases therefore cannot be treated as in any way supporting the contention put forward by learned counsel for the appellant Sassoons that in the case of an assignment of Managing Agency the entire remuneration for the year s work accrues as a matter of law to the assignee and is his sole income on the ground that the Agency is the source of income and that in this respect it is to be treated as an income bearing asset
No specific authority has been cited  before us covering the case of a Managing Agency nor can the case in City of London Contract Corporation vs Styles1 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 necesarily 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 that is the subject of tax and work is the source of the remuneration
Hence in such a case service or work is the source of income and not
the ownership of the right to work
The above legal position has been very succinctly brought out by Lord Finlay though in another context in John Smith  Son vs Moore2 in the following passage 1 2 Tax Cases 239
2 1921 2 AC I3 at 25
372 The business makes no profits
The profits are not fruits yielded by a tree spontaneously
They are the result of the operations carried on by the owner of the business for the time being Therefore on principle apart from authority it appears to me to be erroneous to treat the Managing Agency
Agreement as by itself the direct source of income and to treat it as an income producing asset
An examination of the provisions of the Indian Income tax Act clearly bears out this view
Sections 3 and 4 of the Income tax Act are the charging sections
The charge is in so far as it is relevant for purposes of this case on the income of the previous year a which is received by the assessee within the taxable territory or b which accrued or arose within the taxable territory to a resident assessee
As stated at the outset the assessment in the present case is based on accrual and not on receipt
Computation of the taxable income is governed by the provisions of Chapter III of the Act
Section 6 thereof enumerates the following heads of income as being chargeable to income tax
1 Salaries 2 Interest on securities 3 Income from property 4 Profits and gains of business profession or vocation 5 Income from other sources
The residual item 5 may for the present purposes be left out
Of the other four heads items 2 and 3 are the only items in which the taxable income is directly related to the ownership of an asset
In the present case the computation of the taxable income has no relation to those items but may conceivably fall under head No 1 or head No 4
At this stage it is necessary to observe that though so far in the above discussion the Managing Agency has been referred to as service and the commission therefor as remuneration for purposes of convenience the true nature of the functioning of a Managing Agent where it is a firm or a Company which so functions has been recently held by this Court in Lakshminarayan Ram Gopal and Son Ltd vs The Government of Hyderabad1 to be a business and the remuneration to be income by way of profits or gains from the business
The i Civil Appeals Nos 292 and 312 Of 1050 of the Suprem Court of India
373 income therefore falls under head No 4 and the com petation 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 taxable as income accruing to both and apportionable as such between them
The importance of not overlooking the significance of the phrase carried on by him in subsection 1 of section 10 though in a different context has been emphasised by the Privy Council in Commissioner of Income tax Bengal vs Shaw Wallace and Co1
A recent decision of this Court in the Liquidators of Pursa Limited vs Commissioner of Incometax Bihar2 also emphasises this and explains that the phrase carried on by him in section 101 of the Indian Income tax Act connotes the
fundamental idea of the continuous exercise of an activity as the essential constituent of that which is to produce the taxable income
 This phrase appears to me also clearly to connote the idea that the taxable income is that of the very assessee or the combination of assessee whose continuous activity produces the income
Where as in this case that continuity is kept up by two persons successively it appears to tile i ILR 2 Civil Appeal NO
33 Of 1953
374 that under this section the profits and gains are the assessable income of both together
This is in accord with the well accepted notion under the normal law that if two persons jointly carry out a work or conduct a business the total remuneration in fact earned for the work or the total gains made on that business belongs to both of them as their joint property and that such property has to be apportioned between them on some equitable basis
This is quite independent of any question as to whether the claim for remuneration for the work or for the emoluments of the business can be individually or jointly enforced as against the person who is liable to pay
It cannot be disputed that in the absence of any specific contract to the contrary between the persons who contribute to the work or business the fruit of such work or of such business is the joint property of both when the same has in fact been realised
Nor can it be said that this holds good only in cases where both the persons concurrently join together to earn the remuneration for the work or the profits of the business
There is no reason in law why the same principle should not be equally applicable where the two together contribute to the total work or to the total business in succession as in this case and not in concurrence
If what arises on such continuous and successive functioning of two persons is the joint remuneration 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 262 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 375 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 during the continuance of this Agreement  
It is urged that this term stamps the Managing Agency Agreement with the characteristic of an incomebearing asset which vests solely in the assignee the right to the entire income payable after the date of assignment
But it appears to me that a term of this kind has reference only to the payment aspect of the
money which constitutes remuneration and has no bearing on the question as to whose income it is for purposes of taxation
Taxable income must be derived from specified sources indicated in the Indian Incometax Act
Since the mere ownership of Managing Agency cannot as a matter of law be treated as the source of  income as explained above any term in the Managing Agency Agreement between the principal and the agent entitling only the assignee to receive the year s remuneration and negativing to the assignor any direct recourse to his quondam principal for his share of the income cannot have the effect of denying to the assignor a substantial right to a share in the remuneration if otherwise he has a vested right thereto
A distinction exists in law between the right to receive or get payment of a certain amount of money and the right to the money itself
The right to enforce payment of money may belong to one person
But the beneficial right in that money may belong wholly or partially to another
Benami contracts are familar examples of such a case
Instances of joint rights in money or money s worth enforceable only at the instance of one out of the persons entitled in special situations are easily conceivable
It may be true that there is no accrual of income unless there is a vested right to receive the money which constitutes income
But this 376 proposition has relevance only to the factum or date of accrual but not necessarily to the ownership of the income on such accrual
None of the cases that have been cited before us in support of the proposition that there is no accrual of income unless there is a right to receive it negative this view
In the course of the arguments repeated stress has been laid on the proposition that there is no accrual of income Unless there is a right to receive the income
This may be so
But it does not follow that the very person who has the right to receive the money which constitutes the income is the owner of that money or that the 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 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 the names of the partners in the said firm and as if such person firm or Company had entered into this Agreement with the said Company and the said Company shall forthwith upon demand by the said firm enter into an Agreement with the person firm or Company aforesaid appointing such person firm of Company the 377 Agents of the said Company for the then residue of the term outstanding under the Agreement and with the like powers and authorities remuneration and emoluments and subject to the like terms and conditions as are herein contained
 Stress has been laid on the underlined portion of the above clause
It is urged that this as well as clauses I and 3 of the Managing Agency Agreement show that the assignor and the assignee are to be treated as one entity and that on assignment the assignee becomes the Managing Agent as if his name had been inserted in the Managing Agency Agreement from the beginning and that the continuity of the Managing Agency was preserved thereby and that whoever satisfies the description of the Managing Agent at the time when the commission for the year becomes due is also the person entitled to the amount by way of remuneration not as per this argument by virtue of any mutual arrangement between the assignor and the assignee but by the very terms of the Managing Agency which is the source of income
It is urged
therefore that this feature stamps the Managing Agency as an income bearing asset
In substance therefore this argument amounts to saying that by virtue of this clause the service of the assignee subsequent to the date of assignment can be tacked on to the service of the assignor for the earlier portion of the year so as to constitute it service for the entire year which earns the remuneration as the sole property of the assignee ie that the assignment has to be given retrospective operation from the commencement of the year in respect of the work so far done
But if this clause is to be construed as having such retrospective operation it must on the very terms of the underlined portion become so operative from the original commencement 2of the Agreement itself and not from any particular date or event thereafter
There is no reason to confine such retrospective operation only to the inchoate advantage for remuneration arising from partly finished work of the year
The underlined portion of the clause if it is to  have retrospective effect at all is comprehensive enough to take within its ambit every othere claimwhich may have accrued but remained 49 378 unpaid commencing from the initial stage of the Agency
On this construction therefore the right to very 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 ie 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 assignee is entitled to demand a fresh Agreement on the same terms and that even without a fresh Agreement being formally executed as between the principal Mill Company and the assignee company their mutual rights and obligations will be governed by the old Agreement for the residue of the term with the assignee Company s name substituted for the assignor Company s name
Such effect can only be prospective and not retrospective
There can be no doubt however that though any mere clause in the Managing Agency Agreement that the employer is to be responsible only to the assignee for the payment of the entire year s remuneration is not by itself enough to vest in the assignee a beneficial right to the remuneration of the year such a right may arise by virtue of a specific or implied term as between the transferor and the transferee either as part of the deed of transfer or independent thereof
It may be mentioned that in the Agarwals  case there was such a specific term in the Agreement preliminary to the actual assignment
But learned counsel for the Sassoons expressly disclaimed it on the ground that it was not incorporated in the deed of transfer and was 379 in any case superfluous and did not rely on it
In his view the right of the assignee to receive the entire remuneration did not depend on any specific term between the assignor and the assignee but on the fact that what was transferred is an income bearing asset which carried with it a right to the entire income that falls due after the date of assignment
It is on account of the insistence on this view that as I apprehend learned counsel for the Sassoons disclaimed the above mentioned special term between the assignor and the assignee as being superfluous
He seems to have sought thereby to obviate the consequence of the contention that the assignor s share of remuneration became the assignee s by virtue of the specific assignment thereof operating thereon on its accrual and that hence it remained the taxable income of the assignor
It may be mentioned in this context that clause 10 of the Managing Agency Agreement in Agarwals  case has been relied on by learned counsel for Agarwals to show that while it may be that in the normal run of events the contract for remuneration under the Managing Agency Agreement is an indivisible contract for a whole year s remuneration 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 Bc of the Indian Companies Act
This argument was advanced to support the contention that the Sassoon s 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 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 380 of both the assignor and the assignee
The prior assignments in the course of the year operated as assign ments of this future right to a share of the income
It is only by virtue of inter se arrangement between the assignor and the assignee resulting from the transactions of assignment that the assignee had the right to collect the entire income
Nevertheless the share in this income which accrued to the Sassoons on the completion of the year remained the taxable income of the Sassoons and they were rightly taxed in respect thereof
The very strenuous arguments of learned counsel for Sassoons to counter the above view are based on the insistence that the Managing Agency is like property which per se produces income and on ignoring the distinction between right to receive the income and right to the ownership of the income and on treating the former as settling the question of the person to whom income accrues
In my opinion these arguments are unsustainable and the conclusion reached by the learned Judges of the Bombay High Court is correct
The appeals are therefore liable to be dismissed
I express no opinion on any of the other points raised
Appeals allowed


Summary:
The Sassoons had entered into three Managing Agency agree ments as the Managing Agents of three different companies
They transferred their Managing Agencies to three other companies by formal deeds of assignment and transfer on several dates during the accounting year
The question for determination was whether in the circum
stances of the case the Managing Agency commission was liable to be apportioned between the Sassoons and their respective transferees in the proportion of the services rendered as Managing Agents by each of them for the respective portions of the accounting year and the decision turned upon the question whether any income had accrued to the Sassoons for the purpose of income tax on the dates of the respective transfers of the Managing Agencies to the transferees
Under clause 2d of the Managing Agency agreements the commission to the Sassoons as Managing Agents was to be due to them yearly on the 31st of March in each and every year and was to be payable immediately after the annual accounts of the company had been passed by the shareholders
Held per SR DAS and BHAGWATI JJ
JAGANNADHADAS J dissentinganswering the question in the negative that on the 41 314 construction of the Managing Agency agreements the contract of service between the companies and the Managing Agents was entire and indivisible that the remuneration or commission became due by the companies to the Managing Agents only on the completion of a definite period of service and at stated intervals that it was a condition precedent to the recovery of any wages or salary in respect thereof that the service or duty should be completely performed that such debt constituted a debt only at the end of each period of service and that no remuneration or commission was payable to the Managing Agents for broken periods
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 during the chargeable accounting period and which the transferees by virtue of the assignment in their favour were in a position to collect
The true test under section 41a of the Indian Income tax Act for the purpose of ascertaining liability for income tax in the case of transfer of Managing Agency is not whether the transferore and the transferees had worked for any particular periods of the year but whether any income had accrued to the transferors and the transferees within the chargeable accounting period
The word profit in section 4 of the Indian Income tax Act has a well defined legal meaning
The term implies a comparison between the state of 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
Income connotes a periodical monetary return coming in with some sort of regularity or expected regularity from definite sources
The source is not necessarily expected to be continuously productive but its object is the production of a definite return excluding anything in the nature of windfall
The word income clearly implies the idea of receipt actual or constructive
The words accrues arises and is received are three distinct terms
The word accrues conveys the distinct sense of growing up by way of addition or increase or as an accession or advantage connoting the idea of a growth or accumulation
The word arises means comes into existence or notice or presents itself and conveys the idea of the growth or accumulation with a tangible shape so as to be receivable
Both the words accrues and  arises are used in contradistinction to the word receive and indicate a right to receive income
The accrual of income to an asseseee does not mean the actual receipt of the same by him and it may be received later on 
its being ascertained
The word earned does not appear in section 4 of the Income tax Act but it has been very often used in the course of judgments by learned Judges
It conveys the concept of income accruing to the assesses 315 Per JAGANNADHADAS J
In the present case the profits and gains of the whole year clearly related to the business carried oil both by the assignor and the assignee token together and were hence taxable as income accruing to both and apportionsble as such between them
The phrase carried on by him in section 101 of the Indian Income tax Act connotes the fundamental idea of the continuous exercise of an activity as an essential constituent of that which is to produce the taxable income and that the taxable income is that of the very assessee or the combination of assessees whose continuous activity produces the income
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 of this future right to a share of the income
It was only by virtue of inter se arrangement between the assignor and the assignee resulting from the transaction of assignment that the assignee had the right to collect the entire income
But the share in this income which accrued to the Sassoons on the completion of the year remained the taxable income of the Sassoons and they were rightly taxed in respect thereof
Case law discussed