Sat Behwaric and Co., Jaipur Vs. Commissioner of Income-tax, Delhi - Court Judgment

Sharma, J.

1. This is a reference under Section 66 (2), Indian Income-tax Act (hereinafter to be referred to as the Act) and the question referred by the Income tax Appellate Tribunal (Delhi Branch) (hereinafter to be referred to as the Tribunal) is as follows:

'Whether upon a the interpretation of Clause 17 of the agreement dated 31-5-1934 the commission in respect of sales made in Part B States accrued and arose to the assessee at Dhariwal'.

2. The assessee is Sat Behwaric and Co. and is a selling representative of the New Egerton Wollen Mills Company, Branch of the British India Corporation Limited whose offices are situated at Dhariwal in the State of the Punjab. This latter company be hereinafter referred to as the Dhariwal Mills.

An agreement was entered into between the assessee and the Dhariwal Mills on 31-5-1934. This agreement will be referred to as the agreement. There are different clauses in that agreement dealing with different matters but only Clause 17 is relevant for the purposes of this case. It runs as follows:

'Agency Commission. The company shall pay to the Selling Representative a special commission on the gross annual value of goods invoiced and supplied by the Company and sold by the selling representatives on the following basis and terms:

(1) Where the gross value of goods supplied at standard list rates either to the Selling Representatives or against orders secured by them for which payment has been received by the Company amount to Rs. 50,000/- (Rupees fifty thousand only) and is under Rs. 1,00,000/- (Rupees one lac only) a commission of 2 1/2 per cent.

Where it amounts to over Rs. 1,00,000/- (Rupees one lac only) a commission of 4 per cent will be paid.

(2) This commission will not be credited or paid to the Selling Representatives until payments for all goods supplied during the year (Except Stocks on hand as at 31st December to the return of which the company has agreed) has been received and the account of the Selling Representatives closed.

3. The assessment in question is with respect to the year 1952-53 for which the account year was 1951-52, the assessee contended that he should be assessed at the rate prevailing in Part BStates on the gross value received of the goods sold in Part B States. But this contention was overruled and the assessment was made on the rate prevailing in Part A States because Dhariwal is situated in Punjab, a Part A State.

The contention of the assessee was repelled by the Tribunal on the ground that the assessee became entitled to his commission for the goods sold, in Part B States when the payment of such goods was made and as the payment was made at Dhariwal, the commission accrued at Dhariwal where he was given credit for it.

On this view, it was held that the entire commission accrued or arose to the assessee in respect of the goods of the Dhariwal Mills at Dhariwal and therefore the assessee had to suffer assessment on the basis of accrual and not on the basis of receipts. The assessee was, therefore, assessed at the rate applicable to Part A States.

4. The assessee applied to the Tribunal to State the case to this Court and thereupon the question mentioned above has been referred to this Court.

5. We have heard Shri C.L. Agarwal on be-half of the assessee and Shri K.N. Raja Gopal Shastri on behalf of the Income-tax Commissioner. Mr. Agarwal argued that the commission of the assessee accrued or arose at the place where thegoods were sold. It is true that the commission could not be paid to the assessee until the payment for those goods was received by Dhariwal Mills at Dhariwal, but for that it cannot be said that the income by commission accrued or arose at Dhariwal.

He argued that the assessee was entitled to his commission on account of his services as commission agent in Part B State specially so far as the goods sold through him in Part B States were concerned. It was argued than the commission was ascertained after the receipt of the value of goods at Dhariwal but the income by commission did not accrue there in respect of the sales in question. He relied upon the following rulings:

'Commissioner of Income-tax v. Sarupchand', AIR 1931 Bom 236 (A): -- 'Hiralal Kalyanmal v. Income-tax Commissioner', AIR 1943 Bom 98 (B);-- 'Commissioner of Income-tax v. Ahmedbhai Umarbhai and Company', AIR 1950 SC 134 (C);-- 'Gardner, Mountain and D. Ambrumenil Ltd. v. Inland Revenue Commissioner', 1947-1 All ER 650 (D).

On behalf of the Income-tax Commissioner, Sri Shastri relied upon the following rulings:

'Tora Gul Boi v Commissioner of Income-tax', AIR 1927 Lah 512 (E) ; -- 'Salt and Industries Agencies Ltd. v. I. T. Commissioner', AIR 1950 Bom 171 (F); -- 'Commr. of Income-tax, Bombay v. Agarwal and Company', AIR 1952 Bom 330 (G);-- 'E D. Sassoon and Co. Ltd. v. I. T. Commissioner of Bombay', AIR 1954 SC 470 (H); -- 'Commissioner of Income-tax. West Bengal v. Steel Brothers and Company Ltd.,' AIR 1951 Cal162 (I).

6. It was argued by Shri Shastri that normally the income by wav of commission should accrue at the place where the goods are sold through a commission agent but by virtue of the special provisions of Clause 17 of the agreement, the assessee was not entitled to his commission until the price of the goods sold was received by Dhariwal Mills and it was than that the commission became due. The commission, therefore, accrued at Dhariwal under the circumstances of this case and not within Part B State.

7. We have considered the arguments of both the learned counsel. In this case we areconcerned only with the question as to whetherthe commission in question accrued or arose to theassessee at Dhariwal. The assessee is a commission agent and we have got to see when the incomeby way of commission can be said to have accruedor arisen to a commission agent.

Such a question came up for consideration before their Lordships of the Supreme Court in the case of -- 'E. D. Sassoon and Company Limited v. I. T. Commissioner', (hereinafter to be referred to as 'The Sassoon's case (H)') referred to above. In that case the Sassoons were the managing agents of (1) E. D. Sassoon United Mills Ltd. (hereinafter to be referred to as the United Mills) under agreements dated 24-2-1920 and 2-10-1934, (2) Elphinstone Spinning and Weaving Mills Company Ltd. (hereinafter to be referred to as the Elphinstone Mills) under the agreement dated 23-5-1922 and (3) Appollo Mills Ltd. under the agreement dated 23-5-1922.

The Sassoons agreed to transfer their managing agencies of the said companies to Agarwal and Co., Chidambaram Mulraj and Company Ltd. and Rajputana Textile (Agencies) Ltd. respectively by letters dated 3-9-1943, 16th April 1943 and 27-4-1943.

The consent of the share-holders of the respective companies to the agreements for transfer was duly obtained and the Managing Agencies were ultimately transferred to the respective transferees with effect, from 1-12-1943, 2-6-1943 and 1-7-1943 respectively.

The Sassoons executed in favour of Messrs.. Agarwal and Company, Chidambaram Mulraj and Company Ltd. and Rajputana Textile (Agencies) Ltd. formal deeds of assignment and transfer and received from them Rs. 57,80,000/-, Rs. 12,50,000 and Rs. 6,00,000/- respectively on transfers of the Managing Agencies, and the net consideration, viz. Rs. 75,77,693 received by them on such transfers was taken by them to the 'Capital Reserve Account.'

The accounts of the Managing Agency Commission payable by the respective companies to the Managing Agents for the year 1943 were made up in the year 1944 and Messrs. Agarwal and Company received from the United Mills a sum of Rs. 27,94,504/- Chidambaram Mulraj and Company Ltd. received from the Elphinstone Mills, a sum of Rs. 2,37,602/- and the Rajputana Textile (Agencies) Ltd. received from the Apollo Mills Ltd. a sum of Rs. 3,82,608/- as and by way of such commission.

For the assessment year 1944-45 and the chargeable accounting period 1-1-1943 to 1-12-1943 the original income-tax and the excess profits tax assessments of the Saloons were made on 31-5-1945 at a total income of Rs. 46,48,483/-.

This income, however, did not include any part of the managing agency commission received by the transferees. The entire amounts of managing agency commission received by the transferees were assessed by the Income-tax Officer for the assessment year 1945-46 as the income of the transferees.

The Income-tax Officer and the Excess Profits Tax Officer appeared to have discovered that the amounts of the managing agency commission earned by the Sassoons prior to the dates of therespective transfers were not brought to tax and therefore issued on 29-6-1946 notices under Section 34, Indian Income-tax Act and Section 15, Excess Profits Tax Act upon the Sassoons on the ground that their income from the Managing Agency had escaped assessment.

The Income-tax Officer and the Excess Profits Tax Officer wanted to include in the assessable Income of the Sassoons Rs. 28,51,934/- made up of Rs. 25,61,629/- in respect of the Managing Agency of the United Mills for the period of 11 months from 1-1-1943 to 30-11-1943, Rs. 99,0017 in respect of the Managing Agency of the Elphinstone Mills for the period of five months from 1-1-1943 to 31-5-1943 and Rs. 1,91,304/- in respect of the Managing Agency of the Apollo Mills Ltd. for the period of six months from 1-1-1943 to 30-6-1943 contending that such managing agency commission had accrued to the Sassoons for services rendered so that en the dates on which the Agencies were transferred the Sassoons were entitled to such remuneration from the managed companies in the form of commission for service rendered up to the dates of the transfers.

In spite of the objection of the Sassoons the income-tax Officer and the Excess Profits Tax Officer determined the above sums as their escaped incomes and assessed them accordingly. The Sassoons appealed to the Appellate Assistant Commissioner, but their appeals were dismissed. A further appeal was taken to the Income-tax Appellate Tribunal which too in its turn dismissed the appeal relying upon its order dated 28-12-1949.

The Sassoons applied to the Tribunal to draw a statement of the case and refer the question of law arising out of the orders to the High Court for its decision and the following question of law was referred to the High Court of Bombay:

'Whether in the circumstances of the case was the Managing agency commission liable to be apportioned between the assessee company and the assignee'.

A similar reference was made on the application of the Commissioner of Income-tar. Excess Profits Tax Bombay City who was dissatisfied with the older of the Tribunal in the appeal of Messrs. Agarwal and Company in which the Tribunal had held that the Managing agency commission should be apportioned between the Sassoons and the transferees.

An application was also made by the Commr. of Income-tax/Excess Profits Tax, Bombay City for reference in the appeal of Chidembarani Mulraj and Company Ltd. and similar reference was made in that case also. The High Court agreed with the Tribunal and answered the question in the affirmative. An appeal was taken by the Sassoons to the Supreme Court after obtaining leave under Section 66(A)(1)(3) of the Act and Section 133(1) (c), Constitution of India and two appeals were filed by the Income-tax Commissioner.

All were heard together by the Supreme Court and disposed of by one judgment as the question raised was the same- Two separate judgments were given in those appeals one by the majority, namely, their Lordships S.R. Dass and Bhagwati, JJ., and the other, the minority Judgment by his Lordship Jagannadha Das. J. The view of the majority was

'In order that the income can be said to have accrued to or earned by the assessee it is not only necessary that the assessee must have contributed to its accruing or arising by rendering services or otherwise, but he must have created a debt in his favour. A debt must have come into existence and he must, have acquired a right to receive the payment.

Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or in other words a 'debitum in praesenti, solvendum in future' it, cannot be said that any income has accrued to him. The mere expression 'earned' in the sense of rendering the services etc. by itself is of no avail'.

Jagannadha Das, J. however, held:

'Accrual of income for purposes of taxation does not depend on the question as to when the income becomes payable. It depends only on when a vested right to receive the income arises. The accrual is accordingly complete when a right to the remuneration becomes vested by the occurrence of all the events on which the remuneration depends.

A mere clause that the remuneration shall be 'due' at a later date, notwithstanding that all the events on which the remuneration depends have occurred, can only have the effect of postponing liability for payment and not of postponing the vesting of the right to Income'.

8. The above case is a very important case as it is a decision of the highest Court of this land, namely, the Supreme Court and is the latest decision which has been referred to before us, The judgment of the majority is binding if the principle laid down therein is applicable to the facts of the present case, and we need not look to any ruling of any other Court.

The question which their Lordships had to consider in that case was whether the liability for the assessment of the tax in question was on the transferor, the Sassoons or their transferees, or was partly on one and partly on the other. It had, therefore, to be examined as to when the right to receive the managing agency commission arose in that case.

Because, if the right arose after the dates of transfer then the transferees alone were entitled to receive the commission from the particular company. If, however, the right arose before the transfer the Sassoons i.e., the transferors alone had the right to receive it. If the right arose partly before & partly after, then both the transferors & the transferees could be said to be entitled to the commission and they were both liable to tax according be the proportion of the commission which might be taken to have accrued or arisen to each.

That case had to be decided on the agreements between the Sassoons on one side and their principals on the other. The main feature of the agreements was that the managing agents were entitled to commission at a certain rate on the annual profits. It was held by the majority that although the services were rendered throughout by the transferor before the dates of transfer and by the transferees after the said date or dates, yet the annual profits could not be determined before the end of the year and it was then that it could be found out as to what commission the managing agents were entitled to.

In the view of the majority it was not enough that only services should have been rendered but it was necessary that a debt must have been created in favour of the assessee so that the income might be said to have accrued or arisen to him. It was held that no debt was created in favour ofthe transferor during the account year as they went out of the managing agency before the end of that year. It was held that the debt was created at the end of the year when it was possible to find out the annual profits and this debt was created not in favour of the transferor but in favour of the transferees who had by then acquired the managing agency. Hence their Lordships held that the Sassoons were not liable to be taxed, but it were only the transferees who were so liable.

9. There is no doubt that in that case the commission was to be paid on annual profits and annual profits could not be determined before the end of the year and in this case the commission was not to be paid on the annual profits but on the gross value received by Dhariwal Mills of the goods supplied. However, according to the majority judgment in -the Sassoon's case, the commission can be said to have accrued or arisen when the debt was created in favour of the assessee. The real question therefore, is when the debt was created in favour of the assessee in this case. Now there is no doubt that the services were rendered by the assessee within Part B States where the goods were sold but this alone would not suffice for the decision when the income from commission accrued or arose to the assessee. It could arise only when the debt was created in his favour. According to the agreement, the relevant extract of which has hereinbefore been given in the beginning, the assessee was entitled to commission only when the gross annual value of goods supplied at standard list rates either to the selling representatives or against orders secured by them for which payment had been received by the company amounted to Rs. 50,000/- and was under one lakh or more, at another rate. It is thus clear that the assessee could not become entitled to commission unless the gross value of goods supplied had been received by Dhariwal Mills and it was at least Rs. 50,000/-during the year. If suppose, not a single pie were received by the Mills out of the gross value of the goods supplied etc., within the account year, the assessee was not entitled to any commission at all. If the gross value of goods supplied were more than one lakh but the value received during the year were less than one lakh, the assessee could not be entitled to his commission for that year at the enhanced rate of 4 per cent. The debt could not be, therefore, created in favour of the assessee unless the gross value of goods supplied during the year were received by Dhariwal Mills and this was to be received at Dhariwal, which is in Part A States.

The assessee could not claim commission before the close of the year and the commission became due to him after the end of the year at Dhariwal where, according to the agreement, the gross value of goods supplied was to be received.

10. A number of rulings cited on behalf of each party have been referred to in the earlier part of this judgment, but all those cases were decided before the decision of the Sassoon's case (H)' and, therefore, whatever view to the contrary might have been taken in those cases, we are bound to follow the majority judgment in the 'Sassoon's case'.

11. One of those cases is the -- 'Commissioner of Income-tax v. Sarupchand', (A). Mr. Agarwal for the assessee argued on the strength of the Judgment in that case that commission upon sales accrues where and when the sales are made. Thatwas decided upon the particular facts thereof. There the agent was entitled to his commission as soon as the sales were made and could deduct it out of the sale proceeds.

He had not to wait till the end of the year or for the receipt of the entire sale proceeds of the year by the principal.

12. The other case cited was -- 'Hiralal Kalyanmal v. The Commissioner of income-tax,Bombay (B)'. That case too was decided before the decision of their Lordships of the Supreme Court in the 'Sassoon's case (H)'. Moreover in that case the sales were effected by the commission agent at Indore and sale proceeds were also received by the principals of Indore. The right to commission under the agreement accrued on the gross sale proceeds of all cloth and yarn sold during the year on 31st December in each and every year. It was held that the commission accrued to the assessees at Indore at the end of the year. The only thing that was done in Bombay in that case was that the sale proceeds were received by the commission agent at Bombay and it was rightly decided that this alone was not sufficient for the accrual or the arising of the commission to the commission agent. Certainly the receipt of the sale proceeds by the agent did not create any debt in his favour and income he had withheld the whole or part of the amount & not paid it to the principals he would not have been entitled to his commission on the amount withheld by him.

No doubt the only thing which was considered in that case was that the sales were effected at Indore and it was held that it were these sales which were the source of commission & therefore, the commission accrued or arose at Indore. But in that case no argument was raised that the commission could not be said to have accrued or arisen unless a debt was created in favour of the agent. The question raised by the assessee was that commission arose or accrued at Indore where goods were sold and on behalf of the Income-tax Commissioner, it was argued that the commission accrued or arose at the place the sale proceeds were received by the agent.

It was rightly held that the mere receipt of sale proceeds by the agent did not give him any right to commission. That case is an authority for the proposition that if sales are effected at one place but the debt by way of commission is created at another place, the income by commission will be said to have accrued or arisen at the place where the goods were sold and not at the place where the debt was created. Moreover, even if it be taken that any such inference can be drawn from the observations of the learned judges in that case, it loses all its force after the majority Judgment in the -- 'Sassoon's case (H)'.

There is also nothing in the report of that case to show that there was any clause in the agreement like the clause in the present agreement namely, that the agent will be entitled to commission when the payment for goods sold during the year has been received by the principals.

13. The third case viz.,--'Commr. of Income-tax Bombay v. Ahmedabhai Umarbhai & Company (C) turned on the wordings of Section 5 proviso (iii). Excess Profits Tax Act and it had to be decided as to what part of the profits could be said to have arisen from the manufacture of the oil at Raichur and what part by its sale at Bombay. That was not a case where their Lordships hadto consider when the income from commission accrued or arose to an agent.

14. Sri Agarwal also relied upon the case of -- 'Gardner, Mountain and D'Ambrumenil, Ltd. v.Inland Revenue Commissioners (D). That case was decided upon the particular terms of the agreement in that case and upon the particular drawing up of the under-writing accounts. The accounts were drawn up by reference to the year in which the risks were underwritten, but were kept open until the end of the second year after the year in which the risk; had been under-written, to allow for the adjustments required in order to ascertain the eventual profits.

Commission, therefore, was not calculated and paid until two years after a risk had been underwritten. It was provided, however, that the account for each year should be treated as a separate account for ascertaining the commission and that one year should not be effected by another.

It was contended by the Crown that, for the purpose of computing the company's liability for national defence contribution under the Finance Act, 1937, pt. III, Sections 19, 20, the profits of the company on transactions underwritten in the year ending 31-3-1939, arose in that year (1938-39), although they were not actually paid until March 1941.

It was held that on the true construction of the agreements, commission arising from under-writing in 1938-39, though calculated partly on future outcome and paid two years after (i.e., in March, 1941) was remuneration for work done, and, completely done, in the year ending 31-3-1939, and that the sum paid to the company in March, 1941 for underwriting in 1938-39 was rightly assessed, for the purpose of national defence contribution, as profits arising in the chargeable accounting period 1-4-1938 to 31-3-1939, the principle being to refer back to the year in which it was earned, so far as possible, remuneration subsequently received, even though it could only be precisely calculated afterwards.

15. It would thus appear that that case was decided on the particular facts and on the terms of the particular agreement. It was fully considered in the majority judgment of the Supreme Court in the Sassoon's case. Their Lordships observed:

'It may be noted that the charge was on profits arising in each chargeable accounting period and profits were to be taken to the actual profits arising in the chargeable accounting period. The ratio of the decision was that the commission paid was remuneration for services completely performed in the particular year that the assessee had at the end of the year done everything it had to do to earn it and that it was remuneration for work done and completely done in the particular year though it was ascertained and paid two years later'.

Further on their Lordships observed:

'The fact that the account of the commission could not be made up until later did not make any difference to the provision that the commission had been wholly earned during the chargeable accounting period and the income had accrued to the assessee during that period'.

16. It was argued by Mr. Agarwal that even if it be supposed that the debt was created at the close of the year in respect of the gross sale proceeds, received during that year, still the commission accrued at the places where the sales weremade. We find ourselves .unable to agree to thisargument. If commission cannot be said to have accrued unless gross annual sale proceeds were received at Dhariwal, it cannot be said that it accrued as soon as the sales were made.

According to the terms of the agreement, the assessee was entitled to his commission only after the gross annual sale proceeds had been received at Dhariwal and, therefore, the debt was created in his favour at Dhariwal to the extent, the annual gross sale proceeds were received there.

17. If according to the agreement the right to receive commission were not dependent upon the actual receipt of the gross annual sale proceeds at Dhariwal, it could be said that the commission accrued at the places where the goods were sold as soon as the sales were effected, but according to the present agreement the assessee was not entitled to commission until the gross annual sale proceeds were received at Dhariwal and it cannot be said that the question was one of ascertainment of commission only.

The question is when the debt was created in favour of the assessee and, as has been said above, the debt could be created only when the gross annual sale proceeds were received at Dhariwal. In our opinion the commission cannot be said to have accrued or arisen at any place other than Dhariwal.

18. In this view we are supported by the observations of their Lordships of the majority in the 'Sassoon's case (H)' referred to above. Before their Lordships a ruling of the Bombay High Court in the case of the -- 'Salt and Industries Agencies Ltd. v. Commrs. of Income-tax', (F) was cited and an argument was made that in that case the question was what was the place where the profits had accrued and net as to what was the time when the profits had accrued. In reply to this argument their Lordships observed as follows:

'In determining the place where profits had accrued, it was however necessary to find when the profits had accrued to the assessee and it was held that what was conclusive of the matter was the consideration as to when the right to managing agency commission arose and when the company became liable to pay managing agency commission to the managing agents and it was further held that it was only when all the accounts of the working of the company were submitted to the head office in Bombay and the profit was determined that it could be said that a right to receive a commission at the rate specified in the managing agency agreement had arisen and the managing agents became entitled to a certain specified commission'.

19. Our answer to the question referred to is, therefore, as follows:

'Upon a true interpretation of Clause 17 of the agreement dated 31-5-1934, the commission in respect of sales made in Part B States accrued and arose to the assessee at Dhariwal'

20. The reference is answered accordingly. Assessee to pay the costs of the reference.