Case: Commissioner of Income Tax, Amritsar Vs. Shiv Prakash Janak Raj and Company Private Limited

the remaining twenty-five per cent amount as its income in its assessment proceedings. The Income Tax Officer and the Appellate Assistant Commissioner held that the commission amount @ ten per cent of the freight had already accrued to the assessee during the previous year ending on 31-3-1948 and since the assessee had given up seventy-five per cent of the said amount after such accrual, the whole of the commission amount, which was actually credited in the books of assessee, it includible in its income. On appeal, there was a difference of opinion between the two members of the Tribunal. On reference to the President, he held that even though the actual reduction took place after the year of account was over, there was in fact an agreement to reduce the commission even during the currency of the accounting year and hence, it cannot be said that the large income @ ten per cent) had accrued to the assessee-firm. Accordingly, the assessees appeal was allowed by the Tribunal. Thereupon, the following two questions were referred to the High Court under Section 66, viz. "(1) Whether the two sums of Rs 1, 36, 903 and Rs 2, 00, 625 are income of the previous year ended 31-3-1948 ?. (2) If the answer to the first question is in the affirmative, whether they represent an item of expenditure permissible under the provisions of Section 10(2)(xv) of the Indian Income Tax Act, 1922, in computing the assessees income of that previous year from its managing agency business ?" * 12. The High Court agreed with the view taken by the President of the Tribunal and answered the first question in the negative, i.e., in favour of the assessee and against the Revenue. It declined to express any opinion on the second question. This Court affirmed the approach adopted by the President of the Tribunal and the High Court. It pointed out. "Here too, the agreements within the previous year replaced the earlier agreements, and altered the rate in such a way as to make the income different from what had been entered in the books of account. A mere book-keeping entry cannot be income, unless income has actually resulted, and in the present case, by the change of the terms the income which accrued and was received consisted of the lesser amounts and not the larger. This was not a gift by the assessee firm to the managed companies. The reduction was a part of the agreement entered into by the assessee firm to secure a long-term managing agency arrangement for the two companies which it had floated." * 13. Hidayatullah, J., speaking for himself and J.C. Shah, J., observed that the facts of the case before them were identical to the facts of the case in CIT v. Chamanlal Mangaldas & Co. and that the principle of the said decision squarely applied to the facts of the case before them. In the course of the judgment, the learned Judge 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 book-keeping, 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 effect might, in certain circumstances, have been made in the books of account. This is exactly what has happened in this case, as it happened in the Bombay case CIT v. Chamanlal Mangaldas & Co. (Bom)] which was approved by this Court." 14. We may also mention that when this case was cited before this Court in State Bank of Travancore it has been distinguished on the basis of the above fact, viz., that the agreement to give up seventy-five per cent of the commission was arrived at during the relevant previous year itself, i.e., before the close of the previous year and, therefore, what accrued to the assessee at the end of the relevant previous year was the commission at 2 1/2 per cent of the freight alone and not @ ten per cent. It cannot, therefore, be said that this case lays down any principle contrary to the one enunciated in Morvi Industries Ltd., Since the facts of the case in Chamanlal Mangaldas & Co. are identical to the facts in Shoorji Vallabhdas & Co. we do not think it necessary to refer to the facts of that case separately. 15. Shri G.C. Sharma submitted that applying the real income theory, it must be held that no interest had really accrued to or received by the assessee for the said three assessment years (1969-70, 1970-71 and 1971-72) and that indeed, no such entries were made in the account books of the assessee. He submitted that, as a fact, no income was received and that the assessee cannot be asked to pay tax on income which it had not received. We answer this contention by repeating the words of Sabyasachi Mukharji, J. in State Bank of Travancore which we have extracted hereinabove. The concept of real income cannot be employed so as to defeat the provisions of the Act and the Rules. Where the provisions of the Act and the Rules apply, it is only those provisions which must be applied and followed. There is no room - nor would be permissible for the court - to import the concept of real income so as to whittle down, qualify or defeat the provisions of the Act and the Rules.

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

Explanation:
1[ds]We are, however, concerned only with the first answer given by the High Court. In our opinion, there is no contradiction or inconsistency between the holding in this case and the holding in Morvi Industries Ltd. In this case, the important fact found was that the money became due to the assessee not at the end of the accounting year, but on the date the managed company made up its accounts. Indeed, no date was fixed in the agreement for payment of the commission and the assessee gave up its commission even before it accrued to it, i.e., before the managed company made up its account. It is for this reason, this Court held that the commission had not accrued to the assessee by or before the date it gave it up. Indeed, Hegde, J., speaking for himself and Khanna, J., specifically referred to the decision in Morvi Industries Ltd. and distinguished it on the above basis. We are, therefore, unable to agree with the High Court that by the virtue of the decision of this Court in Birla Gwalior (P) Ltd. the principle of Morvi Industries Ltd. does not apply to the present case. The facts of the present case (with respect to three assessment years, viz., 1969-70, 1970-71 and 1971-72) so squarely fall within the principle of Morvi Industries Ltd10. We respectfully agree with the propositions as well as the observations of the learned Judge with respect to the plea of real income14. We may also mention that when this case was cited before this Court in State Bank of Travancore it has been distinguished on the basis of the above fact, viz., that the agreement to give up seventy-five per cent of the commission was arrived at during the relevant previous year itself, i.e., before the close of the previous year and, therefore, what accrued to the assessee at the end of the relevant previous year was the commission at 2 1/2 per cent of the freight alone and not @ ten per cent. It cannot, therefore, be said that this case lays down any principle contrary to the one enunciated in Morvi Industries Ltd., Since the facts of the case in Chamanlal Mangaldas & Co. are identical to the facts in Shoorji Vallabhdas & Co. we do not think it necessary to refer to the facts of that case separatelyWe answer this contention by repeating the words of Sabyasachi Mukharji, J. in State Bank of Travancore which we have extracted hereinabove. The concept of real income cannot be employed so as to defeat the provisions of the Act and the Rules. Where the provisions of the Act and the Rules apply, it is only those provisions which must be applied and followed. There is no room - nor would be permissible for the court - to import the concept of real income so as to whittle down, qualify or defeat the provisions of the Act and the Rules