Case: Commissioner of Income Tax, Bombay North Vs. Chamanlal Mangaldas &amp; Company

up out of the commission an amount upto 1/3 of the commission to enable the distribution of that amount of dividend to the shareholders. On December 28, 1950, a resolution was passed varying the agreement in regard to the payment of commission and adding a proviso to it applicable to years 1950 and 1951 that if the Directors having regard to the results of the working of the Managed Company were of the opinion that a lesser remuneration should be paid to the Managing Agent for any of the two years the Directors shall have the right to fix such lesser remuneration either by way of a lump sum or at a reduced percentage rate and the Managing Agent be bound to accept the same. On March 17, 1951 thee was a supplemental agreement embodying the terms of this resolution and on April 8, 1951, the Directors by a resolution fixed a sum of remuneration at Rs. 4,11,875 instead of the commission calculated at the old rates which worked out at Rs. 5,11,875. In this case also the question was whether that Rs. 1,00,000 was also subject to income-tax. The tribunal decided in favour of the Managing Agent and on a case being stated to the High Court the questions of liability to income-tax were decided in favour of the Managing Agent and the Commissioner of Income Tax has come in appeal to this Court by special leave.3. In both these appeals the question for decision is whether there was a voluntary relinquishment on the part of the Managing Agents of a part of the income, i.e. Rs. 1,00,000 which was the difference in both cases between the commission payable under the original agreements and the commission calculated on the modified agreements. In these appeals, as in C.A. 145 of 1958 (Since reported as Commr. of Income Tax Bombay North v. Harivallabhdas Kalidas and Co., AIR 1960 SC 703 ) which we have decided today, the question is one of construction of the terms of the contract and the question has to be determined on that basis.In both these appeals the clause in regard to commission has to be read as one integrated whole. In C. A. 162 of 1958 the commission was payable on the sale price of all cotton yearn and cloth sold and on the sale proceeds of all material yarn and fabrics manufactured from other fibres and sold by the Company and 10 per cent on the net profits from ginning or pressing operations.Read as an integrated whole it means that the right to receive the commission was at the end of the year because (1)the commission was payable on all cotton yarn and cloth manufactured and sold by the Managed Company so also the commission on yarn etc. manufactured by the Managed Company from other fibres and sold by the Managed Company and all sales could only be determined at the end of the year;(2) the percentage on total profits could only be determined at the end of the year; (3) the liability to contribute towards the dividends also could only be determined at the end of the year. This is supported by the entry in the books of the Managed Company which was made on December 31, 1950, which shows that the right of the Managing Agents to receive commission at the rate stipulated in the agreement calculated on all the sales of the year was Rs. 2,05,575 but the Directors decided that they should be paid Rs. 1,05,575 and that was the amount credited to their account. This supports the contention of the Managing Agents that their right to receive the commission or its accrual was at the end of the accounting year when all the sales were and could be added up and the accounts were made up. Thus the amount which accrued or which they were entitled to receive was the latter sum i.e. Rs. 1,05,575 and not what would have been payable and there been no variations in and modification of the agreement.4. In C. A. 210 of 1958 under Cl. 3 of the Managing Agency Agreement containing the terms as to commission was also to be determined at the end of the year.The agreement was one integrated and indivisible whole. In this appeal the commission was at 3 per cent on the sale of all yarn and cloth manufactured by the Managed Company and the total commission was only determinable and would accrue when the year was over. Further the right to receive the commission arose after the profits were determined because only then could it be decided as to what amount, if any, the Managing Agents would have to contribute under the proviso to Cl. 3.5. Counsel for the appellant relied on the entry in the books of account of the Company where the words used are "amount accrued Rs. 5,11,875", but this entry must be read as a whole and it shows that the amount which the Managing Agents were entitled to receive was Rs. 4,11,875.No doubt in this case the amounts of commission were credited every six months which only means that as an interim arrangement the accounts of all sales were made up at the end of six months also. But this would not affect the construction of the clause containing the terms for payment of commission nor the reduction made therein as a result of the modified arrangement.The amount which would arise or accrue and the Managing Agent would have the right to receive cannot be affected by the manner in which the entry was made.6. Therefore, in both these appeals the amount liable to income-tax would be the amount which the respective Managing Agents were entitled to receive as commission ; for, that would be the amount which would accrue or arise in each case and the amounts they were entitled to were Rs. 1,00,000 less than what they would have received had the terms of the Managing Agency Agreements not been varied.

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

Explanation:
0[ds]5. Counsel for the appellant relied on the entry in the books of account of the Company where the words used are "amount accrued Rs. 5,11,875", but this entry must be read as a whole and it shows that the amount which the Managing Agents were entitled to receive was Rs.doubt in this case the amounts of commission were credited every six months which only means that as an interim arrangement the accounts of all sales were made up at the end of six months also. But this would not affect the construction of the clause containing the terms for payment of commission nor the reduction made therein as a result of the modified arrangement.The amount which would arise or accrue and the Managing Agent would have the right to receive cannot be affected by the manner in which the entry was made.6. Therefore, in both these appeals the amount liable towould be the amount which the respective Managing Agents were entitled to receive as commission ; for, that would be the amount which would accrue or arise in each case and the amounts they were entitled to were Rs. 1,00,000 less than what they would have received had the terms of the Managing Agency Agreements not been varied.