Case: Morvi Industries Ltd Vs. Commissioner Of Income Tax (Central)Calcutta

we find that according to Cl. 2 (e) of the Managing Agency Agreement reproduced above, the commission for the two years in question became due to the appellant on the 31st day of December, 1954 and 31st day of December, 1955. The appellant also became entitled to receive fixed office allowance of Rs. 12,000,/- for each of the two years. It, therefore, can be said that the income of Rs. 50, 719/- had accrued to the appellant on 31st December, 1954 and of Rs. 13,973/- on 31st December, 1955. The fact that the payment of the managing agency commission was deferred till after the accounts had been passed in the meetings of the managed company did not affect the accrual of the income of those amounts on December 31, 1954 and December 31, 1955 respectively. According to Section 4 (1) (b) (i) of the Act, subject to the provisions of this Act, the total income of any previous year of any person includes all income profits and gains from whatever source derived which if such person is resident in the taxable territories during such year accrue or arise or are deemed to accrue or arise to him in the taxable territories during such year. The dictionary meaning of the word "accrue is "to come as an accession, increment, or produced to fall to one by way of advantage; to fall due." The income can thus be said to accrue when it becomes due. The postponement of the date of payment has a bearing only in so far as the time of payment is concerned, but it does not affect the accrual of income. The moment the income accrues, the assessee gets vested with the right to claim that amount even though it may not be immediately. There also arises a corresponding liability of the other party from whom the income becomes due to pay that amount. The further fact that the amount of income is not subsequently received by, the assessee would also not detract from or efface the accrual of the income, although that non-receipt may, in appropriate cases, be a valid ground for claiming deductions. The accrual of an income is not to be equated with the receipt of the income. That the two, accrual and receipt of income, have different connotations is also clear from the language of Section 4 of the Act. Clause (a) of sub-see. (1) of Section 4 of the Act deals with the receipt of income while the accrual of income is dealt with in Clause (b) of that sub-section.12. The appellant-company admittedly was maintaining its account according to the mereantile system. It is well known that the mercantile system of accounting differs substantially from the cash system of book keeping. Under the cash system, it is only actual cash receipts and actual cash payments that are recorded as credits and debits, whereas under the mercantile system, credit entries are made in respect of amounts due immediately they become legally due and before they are actually received similarly, the expenditure items for which legal liability has been incured are immediately debited even before the amounts in question are actually disbursed. Where accounts are kept on mercantile basis, the profits or gains are credited though they are not actually realised and the entries thus made really show nothing more than an accrual or arising of the said profits at the material time. The same is the position with regard to debits made.(See Indermani Jatia v. Commissioner of Income Tax U. P., 35 ITR 298 = (AIR 1959 SC 82 )13. In the case of Commissioner of Income Tax Bombay City 1 v. M/s. Shoorji Vallabhdas and Co., (1962) 46 ITR 44 (SC), Hidyantullah, J. (as he then was) speaking for the Court observed "Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz, the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in bookkeeping an entry is made about a "hypothetical income, which does not materialise.Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all there is obviously neither accrual nor receipt of income, even though an entry to that effort might in certain circumstances, have been made in the books of account."14. The assessee firm, who was the managing agent of two shipping companies in that case, gave up 75% of the managing agency commission with a view to get the managing agency transferred to two private companies. It was held that this was not a case of a gift by the assessee to the managed companies of a portion of income which had already accrued but an agreement to receive a lesser remuneration than what had been agreed upon.In the present case, the amounts of income for the two years in question were given up unilaterally after they had accrued to the appellant company. As such, the appellant could not escape the tax liability or those amounts.15. Coming to the second question, we find that the appellant could claim deduction of the amounts under Section 10 (2) (xv) of the Act if the amounts had represented an expenditure laid out or expended wholly and exclusively for the business of the appellant. There is, however, nothing to show that the amounts were relinquished for the purpose of the appellants business. The present is not a case wherein the amount due to the assessee were given up on grounds of commercial expediency or for advancing the business interest at the assessee. The conclusion of the learned Judges of the High Court in this respect, in our opinion, is well founded.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]11. So far as the first question is concerned, we find that according to Cl. 2 (e) of the Managing Agency Agreement reproduced above, the commission for the two years in question became due to the appellant on the 31st day of December, 1954 and 31st day of December, 1955. The appellant also became entitled to receive fixed office allowance of Rs. 12,000,/- for each of the two years. It, therefore, can be said that the income of Rs. 50, 719/- had accrued to the appellant on 31st December, 1954 and of Rs. 13,973/- on 31st December, 1955. The fact that the payment of the managing agency commission was deferred till after the accounts had been passed in the meetings of the managed company did not affect the accrual of the income of those amounts on December 31, 1954 and December 31, 1955 respectively. According to Section 4 (1) (b) (i) of the Act, subject to the provisions of this Act, the total income of any previous year of any person includes all income profits and gains from whatever source derived which if such person is resident in the taxable territories during such year accrue or arise or are deemed to accrue or arise to him in the taxable territories during such year. The dictionary meaning of the word "accrue is "to come as an accession, increment, or produced to fall to one by way of advantage; to fall due." The income can thus be said to accrue when it becomes due. The postponement of the date of payment has a bearing only in so far as the time of payment is concerned, but it does not affect the accrual of income. The moment the income accrues, the assessee gets vested with the right to claim that amount even though it may not be immediately. There also arises a corresponding liability of the other party from whom the income becomes due to pay that amount. The further fact that the amount of income is not subsequently received by, the assessee would also not detract from or efface the accrual of the income, although that non-receipt may, in appropriate cases, be a valid ground for claiming deductions. The accrual of an income is not to be equated with the receipt of the income. That the two, accrual and receipt of income, have different connotations is also clear from the language of Section 4 of the Act. Clause (a) of sub-see. (1) of Section 4 of the Act deals with the receipt of income while the accrual of income is dealt with in Clause (b) of that sub-section.12. The appellant-company admittedly was maintaining its account according to the mereantile system. It is well known that the mercantile system of accounting differs substantially from the cash system of book keeping. Under the cash system, it is only actual cash receipts and actual cash payments that are recorded as credits and debits, whereas under the mercantile system, credit entries are made in respect of amounts due immediately they become legally due and before they are actually received similarly, the expenditure items for which legal liability has been incured are immediately debited even before the amounts in question are actually disbursed. Where accounts are kept on mercantile basis, the profits or gains are credited though they are not actually realised and the entries thus made really show nothing more than an accrual or arising of the said profits at the material time. The same is the position with regard to debits made.(See Indermani Jatia v. Commissioner of Income Tax U. P., 35 ITR 298   = (AIR 1959 SC 82  )13. In the case of Commissioner of Income Tax Bombay City 1 v. M/s. Shoorji Vallabhdas and Co., (1962) 46 ITR 44 (SC), Hidyantullah, J. (as he then was) speaking for the Court observed "Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz, the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in bookkeeping an entry is made about a "hypothetical income, which does not materialise.Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all there is obviously neither accrual nor receipt of income, even though an entry to that effort might in certain circumstances, have been made in the books of account."14. The assessee firm, who was the managing agent of two shipping companies in that case, gave up 75% of the managing agency commission with a view to get the managing agency transferred to two private companies. It was held that this was not a case of a gift by the assessee to the managed companies of a portion of income which had already accrued but an agreement to receive a lesser remuneration than what had been agreed upon.In the present case, the amounts of income for the two years in question were given up unilaterally after they had accrued to the appellant company. As such, the appellant could not escape the tax liability or those amounts.15. Coming to the second question, we find that the appellant could claim deduction of the amounts under Section 10 (2) (xv) of the Act if the amounts had represented an expenditure laid out or expended wholly and exclusively for the business of the appellant. There is, however, nothing to show that the amounts were relinquished for the purpose of the appellants business. The present is not a case wherein the amount due to the assessee were given up on grounds of commercial expediency or for advancing the business interest at the assessee. The conclusion of the learned Judges of the High Court in this respect, in our opinion, is well founded.