Appeal No 100 of 1959
Appeal from the judgment and order dated February 11 1957 of the Bombay High Court in Income tax Reference No 53 of 1956
R J Kolah Dwarkadas section N Andley J B Dadachanji Rameshwar Nath and P L Vohra for the appellants
K N Rajagopal Sastri and D Gupta for the respondent
May 3
The Judgment of the Court was delivered by SK DAS J
This is an appeal on a certificate granted by the High Court of Bombay under section 66A 2 of the Indian Income tax Act 1922
The short facts are these
The Cotton Agents Limited Bombay are a limited liability company registered under the Indian Companies Act and will be called the assessee Company in this judgment
It held a substantial number of shares of the New Swadeshi Mills of Ahmedabad Ltd hereinafter called the Mills Company
Messrs Shivnarayan Surajmal Nemani called the Nemani group also held a block of shares of the Mills Company along with its managing agency
The assessment year was 1946 47 and the year ending with Diwali 1945 October 18 1944 to November 4 1945 was the accounting year
Sometime in 1944 some differences arose between the assessee Company and the Nemani group these differences were referred to one Govindram Seksaria who decided that the Nemani group should sell its block of shares to the assessee Company at an agreed price It was further decided 813 that a sum of Rs 500000 be paid by the assessee Company to the Nemani group as the price of the managing agency rights
This arrangement was approved by the share holders of the Mills Company by a resolution dated January 4 1945 and came into effect immediately
The agreement further was that the assessee Company would come in as managing agents of the Mills Company in place of the Nemani group and would be entitled to the emoluments of the managing agents as from April 1 1944
The managing agency commission from April 1 1944 to December 31 1944 amounted to Rs 220433 and from January 1 1945 to March 31 1945 to Rs 67959
The case of the assessee Company was that for the assessment year 1946 47 it was liable to pay tax only on the commission of Rs 67959 which it had earned by working as managing agent of the Mills Company and it was not liable to pay tax on the sum of Rs 220433
This contention of the assessee Company was not accepted by the departmental taxing authorities but the Tribunal decided in its favour
The assessee Company s case before the Tribunal was that as the managing agency commission was based on the sales the com mission accrued to the managing agents as and when the sales were made and furthermore the sum of Rs 500000 paid by the assessee Company to the retiring managing agents included the purchase price of the managing agency commission which had accrued in the hands of the retiring agents
The Tribunal expressed the view that on a true construction of the relevant managing agency agreement the 31 per cent
commission on sales made when the Nemani group was the managing agent accrued to that group and not to the assessee Company and thus a debt was created in favour of the Nemani group on every sale during its period of managing agency and only the payment of the debt was deferred till the accounts of the Mills Company were passed at a general meeting therefore the commission prior to the close of the year 1944 was assessable in the hands of the Nemani group and thereafter in the hands of the assessee Company
The Department however contended that the whole 106 814 of the managing agency commission accrued to the assessee
Thereupon at the instance of the Department the Tribunal referred the following question of law to the High Court for decision   Whether on the facts and circumstances of the case the managing agency commission at 3 12 on sales made by the New Swadeshi Mills of Ahmedabad Ltd between April 1 1944 and December 31 1944 accrued to Shivnarayan Surajmal Nemani or to the assessee  The High Court held that the matter was concluded by the decision of this Court in E DSassoon and Company Ltd vs Commissioner of Income tax Bombay City 1
With reference to the argument of learned counsel for the assessee Company that the commission was payable on the sale proceeds and not on the profits as in Sassoon s case 1 it said  We would have given serious thought to this aspect of the matter but for the view we take that the decision of the Supreme Court with regard to the question of creation of the debt and with regard to the serving by the managing agents for a term of one year being a condition precedent for their being entitled to receive payment is indistinguishable on the facts of this case
We may point out that here as in the Sassoon s case 1 the commission of 31 per cent
is to be earned in any year and also by clause 3 of the agreement the commission is to become due to the managing agents at the end of each financial year
Therefore till the end of the financial year there is no debt whatsoever created in favour of the managing agents and also their right to receive payment depends upon their having served for a whole year
Under the circumstances we must hold following the decision of the Supreme Court that the assessees are liable to pay tax on the whole of the commission as the commission accrued due on March 31 1945 and they became entitled to receive it at the end of the year
We do not agree with the view of the Tribunal that according to the agreement of the managing agents the debt was 1  815 created in favour of the agents when the goods were sold by the company and that the payment was deferred to a date after the accounts having been passed by the shareholders in the general meeting of the company
In no view of the case can it be said that the debt was created in favour of the agents when the goods were sold 
The answer to the question really depends on a construction of the relevant terms of the managing agency agreement dated March 15 1925 entered into between the Mills Company and the Nemani group
Before we proceed to a consideration of those terms it is necessary to state that the Department has assessed the Nemani group also to tax in respect of the commission for the period April 1 1944 to December 31 1944
That circumstance has however no bearing on the question of construction and learned counsel for the Department has stated before us that there is no intention to tax two parties for the same income and if the tax has been realised from both for the same income it will have to be refunded to one of the two parties after the decision of this Court
We are not considering in this case the validity or otherwise of what are known as protective or precautionary assessments and nothing said in this judgment has any bearing on that question
We go at once to the Managing Agency Agreement dated March 15 1925
Under that agreement the managing agents were appointed for a period of fifty
one years but with liberty to them to resign the appointment and retire from the agency at any time by twelve calendar months  notice in writing such notice to expire at the end of any financial year of the Mills Company
Then came cls
2 and 3 of the agreement which are material and must be quoted so far as they are necessary for our purpose  2 The remuneration of the Agents as such Agents of the Company as aforesaid shall be as follows A commission at the rate of three and a half per cent
on the gross proceeds of all sales of the yarn cloth waste and other articles manufactured 816 by the Company earned in any year or other period for which the accounts of the Company are made up and laid before the General Meeting Provided etc it is unnecessary to quote the proviso
 3 The said commission shall become due to the Managing Agents at the end of each financial year or other period for which the accounts of the Company are to be laid before the General Meeting and shall be payable and paid immediately after such accounts have been passed by the General Meeting
Clauses 6 to 11 recited the rights and duties of the managing agents one of such rights being to retain reimburse and pay themselves  all sums due to the agents for commission 
Clauses 13 and 14 dealt with the right to assign the remuneration and the managing agency and said inter alia that  it shall be lawful for the agents to assign this agreement and the benefit thereof and their rights and privileges etc to any person or firm or company having authority by its constitution to become bound by the obligations undertaken by the agents     and the Company shall be bound to recognise the person firm or company aforesaid as the agents of the Company
It is unnecessary to read the other clauses of the managing agency agreement The controversy before us hinges really on the scope and effect of clauses 2 and 3 read in the context of the agreement as a whole
On behalf of the assessee Company the argument is that under el
2 the managing agency remuneration accrued at the rate of 31 per cent
on the gross proceeds of all sales the word  all  is emphasised and it is argued that the remuneration accrued as each sale took place the totality of sales giving the gross sale proceeds
It is argued that embedded in each sale was the managing agency commission of the assessee Company
It is further suggested on behalf of the assessee Company that though cl
3 uses the word  due  it merely indicated the time of payment and not that of accrual
817 We do not think that this reading of the two clauses is correct
In our view cl
3 is the accrual clause it shows that the commission became due at the end of each financial year or other period for which the accounts of the Mills Company were to be laid before the General Meeting
Significantly enough the clause consists of two parts one part says when the commission becomes due and the other says when it is to be payable and paid
In very clear terms the clause says that the commission becomes due normally at the end of the financial year but is payable after the accounts have been passed by the General Meeting
Let us contrast el
3 with cl
Clause 2 states how the remuneration has to be calculated
It says in effect that the remuneration has to be calculated at the rate of 3 12 per cent
on the gross proceeds of all sales etc earned in any year or other period for which the accounts of the Mills Company are made up
Putting the two clauses side by side the conclusion at which we have arrived is that in their true scope and effect cl
3 determines the time of accrual of the managing agency remuneration and cl
2 determines the rate at which the remuneration is to be calculated and as to the time of payment that is determined by the second part of cl
This view of the managing agency agreement of March 15 1925 concludes the appeal
If the remuneration accrued at the end of the financial year then undoubtedly it accrued in the hands of the assessee Company
It remains now to refer briefly to some of the decisions cited at the Bar
As to the decision in Sassoon s case1 it is pointed out that the commission there payable by way of remuneration was a percentage on the net profits and this it is argued for the assessee Company distinguishes that decision from the present case
Indeed it is true that in Sassoon s case 1 the remuneration was fixed at a percentage on the net profits but the real point of the decision was as to when the remuneration accrued
On this point the majority of learned Judges said 1  818  It is clear therefore that income may accrue to an assessee 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 Johnson1 and Webb vs Stenton 2
Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he had acquired a right to receive the income or that income has accrued to him
It has been argued before us that the decision requires reconsideration because it failed to make a further distinction a distinction which it is stated arises in law between the right to receive payment and the creation of a debt
We consider it unnecessary to consider such a distinction if any such exists in the present case
On our view of the managing agency agreement the commission of the managing agents became due at the end of the financial year and that is when it accrued and there were neither any debt created nor any right to receive payment when each transaction of sale took place
We were also addressed at some length on the further question whether managing agency is service and if so whether it must be for one full year or whether apportionment is permissible
These questions do not fall for decision in the present case and we express no opinion thereon
We have proceeded in this case on the footing that the managing agency work of the assessee Company constituted business within the rule of the decision in Lakshminarayan Ram Gopal and Sons Ltd vs The Government of Hyderabad 3 and on that footing we have decided the question of accrual
In Commissioners of Inland Revenue vs Gardner Mountain  D Ambrumenil Ltd 4 on which learned counsel for the appellant placed reliance the facts were quite 1  539
2  522527
3  4 819 different and on a true construction of the agreements there it was held that the commission payable under certain under writers  agreements arose in the year in which the policies were underwritten
That decision proceeded on a construction of the agreements there considered and it is no authority for construing other agreements of a different character
Learned counsel for the appellant relied on Turner Morrison  Co Ltd vs Commissioner of Income tax West Bengal1 for his contention that in the sale proceeds of each transaction of sale were embedded the income profits or gains to be earned by the managing agents and therefore the accrual took place on each transaction of sale
The observations at page 160 of the report on which reliance was placed were made in a different context namely in the context of the place of receipt of income in relation to the provisions of section 41a of the Income tax Act
Learned counsel for the respondent has pointed out to us that the observations of Lord Justice Fry in Colquhoun vs Brooks 2 were not very accurately reproduced in Rogers Pyatt Shellac and Co vs Secretary of State for India 3
He submitted that Lord Justice Fry did not say that the words  accrual  or  arising  represented 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
He has argued that there is nothing inchoate about the income when it arises or accrues
We consider it unnecessary to embark on a discussion as to how far the aforesaid observations require consideration by us
It is enough to say that on the view which we have taken of the relevant clauses of the managing agency agreement no income arose or accrued on the sale proceeds at the time of each transaction of sale the income accrued at the end of the financial year at the rate of 31 per cent
on the gross proceeds of all sales of yarn cloth waste etc earned in any one year
In that view of the matter the High Court correctly answered the question
The appeal fails and is dismissed with costs
Appeal dismissed
1 2  59
3  372


Summary:
A house belonging to the petitioner in the Bangalore City fell vacant on the 1st September 1949 and on the 13th September 1949 an order was passed by the Rent Con troller 745 under the Mysore House Rent and Accommodation Control Order 1948 allotting the house to another person and directing the petitioner to deliver possession to the lat ter
The petitioner protested and took various steps to get the order vacated but he was unsuccessful and forcible possession was taken from him under an order made on the 11th April 1950
He applied to the Supreme Court under article 32 of the Constitution for quashing the order allotting the house and the subsequent orders made to enforce that order on the ground infer alia that these orders contravened the provisions of articles 31 2 and 19 1 f of the Consti tution Held i that as the order of allotment was made before the Constitution came into force and at a time when the Control Order provided validly that a house could be taken for the occupation of a private individual the order could not be impugned on the ground that it contravened article 31 2 or 19 1f of the Constitution ii the fact that possession was actually taken only in pursuance of an order made on the 11th April 1950 was immaterial as the peti tioner s right to possession was lost earlier iii article 31 2 was inapplicable for another reason also namely that there was no acquisition of the house by the State as taking of possession can only be from a person who is enti tled to possession and the landlord lost his right to pos session by reason of the Controller s order
Held also that the power conferred by cl
bb of sub cl
2 of Rule 81 of the Defence of India Rules under which the Control Order was made was not confined to cases where the house was available for letting or subletting in the sense that the landlord did not require the house for his own use or had not let it to another himself