Case: Commissioner of Income Tax, West Bengal II, Calcutta Vs. M/s. Birla Gwalior Private Limited

on the sale of cloth and yarn for the two years. The total amounts, including the office allowance which the assessee was entitled to receive were Rs. 50,719 and Rs. 13,963 for the two years. Under clause 2 (e) of the managing agency agreement the commission was due to the assessee on December 31, 1954 and December 31, 1955, respectively, and it was payable immediately after the annual accounts of the managed company was passed in general meetings, which were held on November 24, 1955, and July 21, 1956, respectively. By resolutions of its board of directors dated, respectively April 4, 1955, and June 19, 1956 (i.e., after the commission had become due but before it had become payable in terms of clause 2 (2) ), the assessee relinquished its commission on sales and office allowance because the managed company had been suffering heavy losses in the past years. The Tribunal held that the relinquishment by the assessee of its remuneration after it had become due was of no effect; and also rejected its claim that the amounts relinquished were allowable under Section 10 (2) (xv) of the Income-tax Act, 1922, because, as a result of the relinquishment, the financial position of the managed company did not become stronger while that of the assessee company became weaker and, therefore, the relinquishment was not for the benefit of the assessee. On a reference the High Court agreed with the view taken by the Tribunal. On appeal this court affirmed the decision of the High Court. 10. As seen from the facts of that case the commission given up had accrued on the 31st December, 1954 and 31st December, 1955, respectively, and the assessee purported to give up that commission several months thereafter. Further, the Tribunal in that case had come to the conclusion that the assessee did not give up the amounts in question for commercial expediency. This court came to the conclusion that the amounts in question were due on the 31st December, 1955 and 1956, though payable at a later date. Consequently those amounts had accrued long before they were given up and the giving up of the same did not come within the scope of Section 10 (1). It is true that in the course of the judgment emphasis was also placed on the fact that the assessee was maintaining its accounts on the basis of mercantile system, but it was not on that basis alone that this court came to the conclusion that the income in question accrued on 31st December, 1955 and 31st December, 1956. In arriving at the conclusion that the income in question accrued on the 31st December, 1955 and 31st December, 1956, this court primarily took into consideration the terms of the agreement. In the course of the judgment delivered by one of us, Khanna, J., a passage from the judgment of this court in Commr. of Income Tax Bombay City I v. Shoorji Vallabhdas and Co. (1962) 46 ITR 144 (SC) was quoted in support of the conclusion reached by this court. That passage reads thus:"Income-tax is a levy on income. Though 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, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping an entry is made about a hypothetical income, which does not materialist. 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 obvious1y neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account." (emphasis supplied).Hence it is clear that this court in Morvi Industries case, 82 ITR 835 = (AIR 1971 SC 2396 ) did emphasise the fact that the real question for decision was whether the income had really accrued or not.It is not a hypothetical accrual of income that has got to be taken into consideration but the real accrual of the income. 11. In addition to the contentions taken earlier, Mr. Desai also took objection to the way in which the High Court disposed of these cases. It may be noted that the High Court came to the conclusion that the findings reached by the Tribunal were findings of fact and, therefore, it would not be proper for the High Court to interfere with the same but strangely enough, at an earlier stage the High Court called for the questions referred to earlier, under Section 66 (2). If the questions raised are concluded by the facts found by the Tribunal the High Court was not justified in calling for these questions. Further when the High Court issued the rule on the applications made by the Revenue, the assessee not only objected to the prayer made by the Revenue, but also submitted that in case the court was pleased to direct the Tribunal to state a case, it may also be pleased to direct the Tribunal to submit the question "whether the commission given up can be considered as real income coming within the scope of Section 10 (1)?" But, the High Court rejected the prayer but merely called upon the Tribunal to submit the questions set out earlier. The High Court has now come to the conclusion that the commission given up by the assessee cannot be considered as its real income It is undoubtedly true that there are certain incongruities in the procedure adopted by the High Court but the final conclusion reached by the High Court is, in our opinion, correct in law. Therefore, the High Court was justified in refusing to answer the first question in all the three cases.

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

Explanation:
0[ds]According to the finding of the Tribunal the assessee company gave up the office allowance on the ground of commercial expediency. It opined that the managed companys financial position was not sound during the relevant accounting years and it was necessary for the assessee company to give up the office allowance in order to stabilise the finances of the managed company. The Tribunal further came to the conclusion that because of the sacrifices made by the assessee company, the finances of the managed company improved subsequently, as a result of which the assessee company was able to earn more profits in the late years. This is a finding of fact. That finding was binding on the High Court. On the basis of that finding the Tribunal was fully justified in coming to the conclusion that the expenditure incurred came within the scope of Section 10 (2) (xv). That conclusion is supported by the decision of this court in Chandulals case, 38 ITR 601  =(AIR 1960 SC 738  ) (supra)We do not know whether the office allowance was paid solely for that purpose or whether it was partly as remuneration and parly to meet the expenditure incurred. In either case it makes no difference in law. The ratio of the decision of this court in Chandulals case completely covers the point under considerationWe are unable to accept this contention as correct. As mentioned earlier no due date was fixed for the payment of the commission under the managing agency agreements. The commission receivable could have been ascertained only after the managed company made up its accounts. The assessee had given up the commission even before the managed company made up its accounts. Hence the mere fact that the assessee company was maintaining its accounts on the basis of mercantile system cannot lead to the conclusion that the commission had accrued to it by the end of the relevant accounting yearHence it is clear that this court in Morvi Industries case, 82 ITR 835   = (AIR 1971 SC 2396  ) did emphasise the fact that the real question for decision was whether the income had really accrued or not.It is not a hypothetical accrual of income that has got to be taken into consideration but the real accrual of the incomeIt may be noted that the High Court came to the conclusion that the findings reached by the Tribunal were findings of fact and, therefore, it would not be proper for the High Court to interfere with the same but strangely enough, at an earlier stage the High Court called for the questions referred to earlier, under Section 66 (2). If the questions raised are concluded by the facts found by the Tribunal the High Court was not justified in calling for these questions. Further when the High Court issued the rule on the applications made by the Revenue, the assessee not only objected to the prayer made by the Revenue, but also submitted that in case the court was pleased to direct the Tribunal to state a case, it may also be pleased to direct the Tribunal to submit the question "whether the commission given up can be considered as real income coming within the scope of Section 10 (1)?" But, the High Court rejected the prayer but merely called upon the Tribunal to submit the questions set out earlier. The High Court has now come to the conclusion that the commission given up by the assessee cannot be considered as its real income It is undoubtedly true that there are certain incongruities in the procedure adopted by the High Court but the final conclusion reached by the High Court is, in our opinion, correct in law. Therefore, the High Court was justified in refusing to answer the first question in all the three cases.