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

5. The material facts of the case may now be stated. The assessee -respondent-is the managing agent of the National Bearing Co. Ltd. and Gwalior Rayon and Silk Manufacturing Co. As managing agent of the former company it was entitled to receive a commission of 12 1/2 per cent on the net profits of the managed company together with a sum of Rs. 18,000 as office allowance. In the case of Gwalior Rayon and Silk Manufacturing Co. the assessee was entitled to get an office allowance of Rs. 30000 per year in addition to the agreed managing agency commission. In the relevant accounting years the assessee gave up the managing agency commission due from both the managed companies. It also gave up the office allowance due from Gwalior Rayon and Silk Manufacturing company. The accounting years of both the assessee company as well as the managed companies were the financial years. In the agreement entered into between the assessee company and the managed companies no date for payment of the managing agency commission appears to have been stipulated. The commission was given up by the assessee company after the end of the financial year but before the accounts of the managed Co. were made up. The accounts of the managed companies appear to have been made up somewhere during the end of September of the year following the respective accounting years. But, in the case of office allowance the same was given up even before the end of the financial years. On the basis of these facts the Income-tax Officer as well as the Appellate Assistant Commissioner came to the conclusion that the deductions claimed were not allowable. As regards the commission, they came to the conclusion that the same having accrued at the end of each of the financial years the assessee giving up the same subsequent to those dates does not briny the case under Section 10 (1) of the Act and no case was made out under Section 10 (2) (xv). So far as the office allowance is concerned they came to the conclusion that there was no justification for giving up the same6. The Income-tax Appellate Tribunal differed from the view taken by the Income-tax Officer and the Appellate Assistant Commissioner. Dealing with the question of commission it came to the conclusion that to the extent the commission was given up the assessee company earned no income at all. In other words the commission that was given up cannot be considered as the real income of the assessee company. It further came to the conclusion that under any circumstance it is an allowable expenditure under Section 10 (2) (xv). As regards the office allowance, the Tribunal was of the opinion that the same was an allowable deduction under Section 10 (2) (xv). The Tribunal held that the commission as well as the office allowance were given up by the assessee on the ground of commercial expediency. The High Court agreed with the view taken by the Tribunal.

Reasoning:
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.