Case: Commissioner Of Income-Tax, Madras Vs. K. R. M. T. T. Thiagaraja Chetty &amp; Co

connote the idea of something "coming in". Lord Wrenbury who delivered the judgment of the Privy Council construed the word "income and or accruing" as money arising or accruing by way of income and not "debts arising or accruing". The learned Law Lord observed A debt has accrued to him (tax-payer) but income has not. It is clear that the case related to the meaning of the word "Income" as used in the Ordinance and can be no authority on the question of the assessment of profits and gains under the Indian Income-tax Act.13. The next case relied upon is - Dewar v. Commr. of Inland Revenue, 1935-2 KB 351 (C). In that case one of the executors became entitled to a legacy which carried interest for such time as it remained unpaid. The testators estate, was sufficient at all material times to enable interest to be paid on the legacy but the legatee acting on the advice of his Accountant did not demand the legacy or interest thereon. It was held that as the legatee had not received interest, there was no income in respect of which he could be charged to sur-tax. The decision turned upon the language of Schedule D, cl. 1, sub-cl. (b), English Income-tax Act of 1918, as distinguished from cl 1 (a). Clause 1 (a) deals with annual profits or gains arising or accruing from any kind of property whatever . . . . . . . . but clause (b) imposes a tax in respect of "all interest of money, annuities and other annual profits."Lord Hanworth, M. R. drew the distinction between the two clauses and observed that the case was one of interest of money and fell under cl. (b) and not under cl. (a). Under that clause the tax was limited to any interest of money whether the same is received and payable half-yearly or any shorter or more distant period. The learned Master of the Rolls observed :"If the interest on the legacy in this case has not arisen to the respondent, it he had not become the dominus of this sum, if it does not lie to his order in the hands of his agent, can it be said that it has arisen to him? I think the answer definitely upon the facts must be; No, it has not."14. Lord Maugham, L. J. put the partition thus : " I think in the present case two circumstances may be accurately stated in regard to the sum of ?40,000 which it is said can be brought into charge. The first is that the sum of ?40,000 was not during the year of assessment a debt due by the executors to Mr. Dewar, and secondly, that the sum in question may never be paid or received at all".15. The case of - Commr. of Taxes v. Melbourne Trust Ltd., AIR 1914 PC 230 (D), turned on the construction of the charging section in the Income-tax Act, 1903 of Victoria, whereby a company was liable to pay tax upon the profits earned in or derived in or from Victoria ....In this case the surplus realised by the assesses over the purchase price for the assets sold after making all just deductions was taxed as profit but it was held that they were entitled to hold in suspense part of the surplus realised to meet possible losses on other assets and that under the circumstances the profit was earned for the purposes of the Act. only when distributed to the shareholders.16. Having considered all these cases, we are of opinion that neither of them has any bearing upon the facts and circumstances of the present case.17. Lastly it was urged that the commission could not be said to have accrued, as the profit of the business could be computed only after the 31st March, and therefore the commission could not be subjected to tax when it is no more than a mere right to receive. This argument involves the fallacy that profits do not accrue unless and until they are actually computed. The computation of the profits whenever it may take place cannot possibly be allowed to suspend their accrual. In the case of income where there is a condition that the commission will not be payable until the expiry of a definite period or the making up of the account, it might be said with some justification, though we do not decide it, that the income has not accrued, but there is no such condition in the present case.Clauses 7 and 8 of the agreement which relate to the payment of the commission and the calculation of the profits mean no more than this that the commission will be quantified only after certain deductions had been made and not that the commission will not accrue until the profits have been ascertained. The quantification of the commission is not a condition precedent to its accrual. If the profits of the company are said to have accrued on the 31st of March upon a parity of reasoning, it must be conceded that the commission also accrued on the same date. The date has as much to do with the accrual of the commission as it has to do with the accrual of the profits.18. It was faintly suggested that the managing agency was not a business but this is immaterial for Income-tax purposes because S. 13 will apply to cases both under S. 10 and 12, so we refrain from deciding the point. We may, however, point out in passing that in two cases -Tata Hydro Electric Agencies Ltd. Bombay v. Commr. of I. T. Bombay Presidency and Aden, AIR 1937 PC 139 (E) and - Commr. of Income Tax, Bombay v. Tata Sons, Ltd., AIR 1939 Bom 283 (P), it was assume that the managing agency is business but the point was directly decided in - Inderchand Hari Ram V. Commr. of Income Tax, AIR 1952 All 706 (G), that it is so.

Court's decision (1 = petition accepted / positive for appellant, 0 = rejected / negative): 1

Reasoning from the judgment:
1[ds]The sum of Rs. 2,26,850-5-0 was debited as a revenue expenditure of the company as having been paid to the firm in the books of accounts of the company kept by the firm and was also allowed as a deduction in computing the profits and gains of the company for the purposes of income-tax for 1941-1942.The fact that certain moneys were drawn in cash by the firm from time to time does not necessarily lead to the inference that the firm kept its accounts on a cash basis. Anyone familiar with commercial transactions knows that even in accounts kept on a mercantile basis there can be entries of cash credits and debits. We see no flaw in the conclusion reached by the High Court on the firstundisputed facts are that the amount in question was the commission earned by the firm as managing agents of the Company. In the books of the company maintained by the firm the aforesaid sum was debited as an item of revenue expenditure and the profits were computed after deducting that sum. The amount was simultaneously credited to the managing agents commission account. Under these circumstances, it is idle to contend that the aforesaid sum had not accrued. There can be no doubt under the circumstances that the aforesaid sum was income which had accrued to the firm.It is true that the sum was not drawn by the firm but that can hardly affect the question of its liability to tax, once it is established that the income had accrued or arisen to the firm. The mere fact that the company was withholding payment account of a pending dispute cannot be told to mean that the amount did not accrue to the firmThis argument involves the fallacy that profits do not accrue unless and until they are actually computed. The computation of the profits whenever it may take place cannot possibly be allowed to suspend their accrual. In the case of income where there is a condition that the commission will not be payable until the expiry of a definite period or the making up of the account, it might be said with some justification, though we do not decide it, that the income has not accrued, but there is no such condition in the present7 and 8 of the agreement which relate to the payment of the commission and the calculation of the profits mean no more than this that the commission will be quantified only after certain deductions had been made and not that the commission will not accrue until the profits have been ascertained. The quantification of the commission is not a condition precedent to its accrual. If the profits of the company are said to have accrued on the 31st of March upon a parity of reasoning, it must be conceded that the commission also accrued on the same date. The date has as much to do with the accrual of the commission as it has to do with the accrual of the profits.It was faintly suggested that the managing agency was not a business but this is immaterial for Income-tax purposes because S. 13 will apply to cases both under10 and 12, so we refrain from deciding the point. We may, however, point out in passing that in two cases -Tata Hydro Electric Agencies Ltd. Bombay v. Commr. of I. T. Bombay Presidency and Aden, AIR 1937 PC 139   (E) and - Commr. of Income Tax, Bombay v. Tata Sons, Ltd., AIR 1939 Bom 283   (P), it was assume that the managing agency is business but the point was directly decided in - Inderchand Hari Ram V. Commr. of Income Tax, AIR 1952 All 706   (G), that it is