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

3. The assessee is a registered firm (hereinafter referred to as the firm) consisting of K. R. M. T. T. Thiagaraja Chetiy and his two sons. The firm is the managing agent of Shri Meenakshi Mills, Ltd. (hereafter referred to as the Company) owning a spinning mill at Madura. The firm also conducted insurance business and the business of ginning cotton in a ginning factory at another place. Under the terms of the agreement the managing agents word entitled to a remuneration of Rs. 1,000 per mensem and a commission of 1/2 per cent. on all purchases, 1 per cent. on all sales and 10 per cent, commission on the net profits of the mills before allowing for depreciation. The firm had plenary powers of management of the affairs of the company subject to general supervision of the Directors. It was to have charge and custody on behalf of the company of all the property books of accounts, papers and documents and effects belonging to the company.It was required to keep at the expense of the company proper and complete books of account of all purchases and sales and of all payments made and moneys received on behalf of the company. It had to defray all the expenses of maintaining a suitable office and a staff of assistants and clerks sufficient to transact the business of the firm as managing agents of the company. Clause 16 is most important and lays down that the firm shall be at liberty to retain, reimburse, and pay themselves out of the funds of the company, all charges and expenses, legal or otherwise and all the costs and expenses of providing and maintaining offices for the company and the salaries of clerks, servants, agents or workmen and all moneys expended by them on behalf of the company and all sums due to the firm for commission or otherwise.The Company made considerable profit in the assessment year 1942-1943 and the firm became entitled to commission to the tune of Rs. 2,26,850-5-0. The firm did not show this sum in the return on the ground that it was not actually received in the year of account, viz., byIt relied upon a resolution of the Board of Directors of the company, dated 30-3-1942, by which they had decided to keep the aforesaid amount in suspense without paying it on the ground that an amount of two lakhs odd was due to the company from the firm. It appears that the firm owed a debt to the company for a long time past which was outstanding.The firm wrote on 30-3-1942, to the company requesting that the debt be written off. The firm also wrote that on account of the extraordinary increase in the volume of business, it found it difficult to bestow adequate attention on all the aspects of the mill business and proposed that the direct responsibility for sale and purchases may be transferred to some other agency, leaving the general supervision over the entire management in the firms hands. The firm agreed to forego its commission on purchases and sales and agreed to take half of the commission on the net profits. The Directors by their resolution, passed on the same date, refused to write off the amount without consulting the general body of shareholders and pending the settlement of the dispute resolved to keep the amount in suspense.5. The Income-tax Officer held that the firm followed the mercantile method of accounting and not the cash basis and that the income having accrued became assessable whether received or not. The actual amount payable to the firm in accordance with the terms and conditions of the agreement for the year 1942-43 was not disputed. The Appellate Assistant Commissioner confirmed the assessment and dismissed the appeal of the assessee.The Commissioner upheld the view that the income was determined on the mercantile basis and that the income had accrued or arisen to the assessee within the meaning of Section 4 (1) (b) (i), Income-tax Act, and the mere fact that the amount was put in the suspense account did not alter the fact that the income had accrued to the firm. Upon the matter being carried further in appeal by the assessee, the Tribunal held that the income had not accrued to the firm and that the amount should be excluded from taxation as not having been received during the accounting year. The two questions aforementioned were then referred at the instance of the Commissioner by the Tribunal to the High Court.6. As already stated, the opinion on the first question was unanimous, both the learned Judges Satyanarayana Rao J. and Viswanatha Sastri J. holding against the assessee that there was no material for the Tribunals finding that the firm was being assessed on cash basis in previous years, the latter observing that findings in respect of 1942-l943 and 1943-1944 were mutually inconsistent, for in respect of the latter assessment year the Tribunal had held that the sum of Rs. 2,20,702/- was assessable to income-tax, though the amount merely stood as a credit to the firm in the books of the company and has not been drawn by the

Court's reasoning:
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