Case: The Cotton Agents Ltd., Bombay Vs. Commissioner Of Income-Tax,Bombay

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. (3) 7. 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.8. As to the decision in Sassoons case (1955) 1 SCR 313 : (AIR 1954 SC 470 ) 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 Sassoons case (1955) 1 SCR 313 : (AIR 1954 SC 470 ) 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:"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. S. Try Ltd. v. Johnson, (1946) 1 All ER 532 at p. 539 and Webb v. Stenion, (1883) 11 QBD 518 at pp. 522 and 52 7. 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". 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 Son Ltd. v. Govt. of Hyderabad, (1955) 1 SCR 393 : (AIR 1954 SC 364 ) and on that footing we have decided the question of accrual.In Commissioners of Inland Revenue v. Gardner Mountain and D Ambrumenil Ltd., (1949) 29 Tax Cas 69 on which learned Counsel for the appellant placed reliance, the facts were quite different and on a true construction of the agreements there, it was held that the commission payable under certain underwriters 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 and Co. Ltd. v. Commissioner of Income-tax, West Bengal, (1953) 23 ITR 152 : (AIR 1953 SC 140 ) 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 p. 160 of the report (ITR): (at p. 143 of AIR) 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 S. 4 (1) (a) of the Income-tax Act. 9. Learned Counsel for the respondent has pointed out to us that the observations of Lord Justice Fry in Colquhoun v. Brooks, (1888) 21 QBD 52 at p. 59 were not very accurately reproduced in Rogers Pratt Shellac Co. v. Secretary of State for India 1 ITC 363 at p. 371: (AIR 1925 Cal 34 at p. 41). 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 required consideration by us. 10. 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 3 1/2 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.

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

Explanation:
0[ds]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 question6. We do not think that this reading of the two clauses is correct. In our view,) 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 Cl. (3) with Cl. (2). 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 1/2 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. (3)7. 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.Indeed, it is true that in Sassoons case (1955) 1 SCR 313  : (AIR 1954 SC 470  ) the remuneration was fixed at a percentage on the net profits, but the real point of the decision was as to when the remuneration accruedWe 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 Son Ltd. v. Govt. of Hyderabad, (1955) 1 SCR 393  : (AIR 1954 SC 364  ) and on that footing we have decided the question of accrual.In Commissioners of Inland Revenue v. Gardner Mountain and D Ambrumenil Ltd., (1949) 29 Tax Cas 69 on which learned Counsel for the appellant placed reliance, the facts were quite different and on a true construction of the agreements there, it was held that the commission payable under certain underwriters 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 characterWe consider it unnecessary to embark on a discussion as to how far the aforesaid observations required consideration by us10. 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 3 1/2 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.