Damodar Valley Corporation vs Girija Prosad Paul

Mitter, J.—This is an appeal from an order dated June 23, 1965, vacating an earlier order dated December 17, 1959, staying a suit u/s 34 of the Indian Arbitration Act.

The facts are as follows: The Plaintiff-Respondent filed a suit in this Court on July 30, 1959, for payment of moneys due in respect of certain excavation works done by him for the Defendant-Appellant under a written contract dated February 11, 1956. There was some dispute between the parties with regard to the quantity of the work stated before, that the subsequent agreement had altered the rate of commission in such a way as to make the income which really accrued to the Assessee different from what had been entered in the books of account. This was not a case of gift by the Assessee to the managed companies of a portion of income which had already accrued, but an agreement to receive a lesser remuneration than what had been agreed upon. The Assessee had, in fact, received only the lesser mount in spite of entries in the account books and this lesser amount in was taxable. According to their Lordships of the Supreme him income tax is a levy on income. Though the income tax. Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of income or its receipt, yet 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 ''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.

Mr. Meyer has relied upon the decision of the Supreme Court and has invited our attention to the observation by that Court, as follows:

If income does not result at all, there cannot be a tax, even though in book keeping, an entry is made on ''hypothetical income'' which does not materialise.

It has already been pointed out by us that the decision of the Bombay High Court was made on the particular facts involved in the case and their Lordships of the Supreme Court in deciding the legal principle in the appeal had in their mind the patent facts that the major portion of the commission was relinquished during the year of account on the basis of a bilateral contract entered into in that year. If such elements were present in the instant case, the principle decided by the Supreme Court would certainly have applied. In this connection the observations of the Supreme Court from the bottom of p. 147 may be quoted:

The Bombay High Court relied upon an earlier decision of the same Court reported in Commissioner of income tax v. Chamanlal Mangaldas and Company and held that the events during the accounting year were themselves sufficient to show that the income neither accrued to the Assessee firm nor was received by it so as to become assessable. The decision of the Bombay High Court was approved by this Court in Commissioner of Income Tax, Bombay North Vs. Chamanlal Mangaldas and Co., .

In Commissioner of income tax v. Chamanlal Mangaldas and Company the Assessee was also the Managing Agent of a Company and under the agreement was entitled to receive commission at a certain rate. By another agreement the commission earned by the Managing Agent for the Calendar year 1950 was reduced by Rupees one lakh. That agreement took place during the previous year and the resolution of the Board of Directors of the Managing Company was also in the previous year. It was, however, made final on April 8, 1951, at a meeting of the Board of Directors, but was beyond the previous year. The High Court of Bombay held that by reason of the resolution during the currency of the previous year, the right of the Assessee to commission ceased to be under the original agreement and depended upon and arose only after the decision of the Board of Directors to reduce the commission. The Assessee was, therefore, not held liable on the larger sum which, it was held, was only a hypothetical income which it might have earned if the old agreement had continued to subsist....

Mr. Meyer has advanced the argument as pointed out before, that their Lordships have decided in the aforesaid case a general principle of law that unless and until the income has resulted there cannot be any liability to tax. We are, however, of opinion that their Lordships of the Supreme Court do not appear to have enunciated a general principle regarding relinquishment of commission beyond the year of account as their Lordships have approved of the decision of the Commissioner of Income Tax, Bombay North, Kutch and Saurashtra, Ahmedabad Vs. Chimanlal Mangladas and Co., wherein the agreement to relinquish the commission was made during the accounting year and the decision was that if there is any relinquishment during the currency of the previous year the right of the Assessee to commission ceased to be under the original agreement and depended upon and arose only after the decision of Board of Directors to reduce the commission. In this Supreme Court decision it appears that the agreements between the shipping companies and the managing agents took place within the previous year and by virtue of this agreement their Lordships held that this relinquishment was not a gift by the Assessee firm to the managed company. The reduction was a part of the agreement entered into by the Assessee firm to secure a long managing agency arrangements for the two companies which it had floated. Thus it appears that their Lordships of the Supreme Court were not oblivious of the fact that if arrangements are made during the ''previous year'' and if as a sequel thereof the Assessee becomes disentitled to the previously agreed commission and the reduction thereof, the original entry into the account books of the accrued income will not be liable to tax. It has already been pointed out before that in the instant case the relinquishment was made beyond the year of account and as such, the principle decided by their Lordships of the Supreme Court cannot be invoked in aid of the Assessee.

A large number of cases has been cited before us by both the parties. We shall, however, refer to some of them for our conclusion whether the submission made by Mr. Meyer that there is no difference between cases where relinquishment takes place within or without the accounting period and that the criterion for assessability to tax is when the income is actually received in the year of account. Mr. S. Mukharji, the learned Counsel for the Respondent, contends that in this particular case the argument of Mr. Meyer is not sustainable in view of the fact that the question relating to accrual of income has been finally decided by the Supreme Court. He has referred us to the case of E.D. Sassoon and Company Ltd. Vs. The Commissioner of Income Tax, Bombay City, . It was decided in this case that income must be held to accrue at the date when it became due. Mr. Mukharji has next cited the decision of the Supreme Court in COMMISSIONER OF Income Tax, MADRAS Vs. K. R. M. T. T. THIAGARAJA CHETTY and COMPANY., . The decision in J this case is that the mere fact that, the amount due to the Assessee has been carried to ''suspense account'' in the debtors'' book or that the debtor withheld payment on account of pending dispute, cannot be held to mean that the income has not accrued to the Assessee. The facts are that the Assessee firm was the managing agent of a limited company. Under the managing agency agreement the Assessee was entitled to a certain monthly remuneration, a commission of 10 per cent on net profits of the company and a small percentage on sales and purchase. During the year of account ending March 31, 1942 the Assessee became entitled to a commission of Rs. 2,26,850. On March 30, 1942, the Assessee wrote to the managed company requesting that a certain debt which the Assessee owed the company for a long time past should be written off. The directors of the managed company, however, decided by a resolution that instead of making payment to the managing company the aforesaid sum should be kept in the ''suspense account''. On these facts the question arose whether in the assessment year 194243 the Assessee was liable to pay tax on the aforesaid sum. Here also it appears that the mercantile system of account was maintained by the Assessee. Their Lordships decided that the sum of Rs. 2,26,850 was income which had accrued to the Assessee, that it did not cease to be the income by reason of the fact that it was carried to the ''suspense account by a resolution of the directors and was, therefore, assessable to tax.

From the above decision it appears that although no payment was made to the Assessee and the amount was transferred to the ''suspense account'' of the managed company, yet the aforesaid amount was liable to assessment to income tax by virtue of the provisions of Section 4(1)(b) of the Act.

Having considered the above Supreme Court decision, we are of the view that the main contention of Mr. Meyer cannot be accepted. He has, however, referred us to certain English decisions in support of his contention that it is immaterial whether any arrangement was arrived at regarding the payment or non-payment of the remuneration etc. in the accounting year or beyond the same. The first case which is referred to us is Severne H.M. Inspector of Taxes v. Dadswell and Commissioners of Inland Revenue v. Dadswell 35 Tax Cases 649. The facts are as follows:

The Respondent was granted a licence to mill flour in October 1941 and carried on the trade of flour milling until September, 1945. As he had not been a miller at the outbreak of the war, he was not entitled to the benefit of a remuneration agreement, whereby Millers were compensated by the Ministry of Food for losses incurred under war-time arrangements for the purchase of wheat and sale of flour. Having, however, been informed by the Ministry in 1943 and twice later that the remuneration of Millers who had begun milling during the period of control was under consideration, he made a claim in 1949 on the same basis as that laid down in the remuneration agreement and received payment in settlement.

The Commissioners on these facts came to the conclusion that the Assessee was not liable for payment of income tax and excess profit tax as such an income was not received during the accounting period. Further, they came to the conclusion that the payment was in the nature of ex-gratia payment. On appeal to the High Court of Justice (Chancery Division) it was held that if on the discontinuance of a trade on payment for work already done has not been finally settled, accounts can be reopened so as to bring in a payment for such work, even though it is gratuitous, which is made thereafter. In deciding this matter Mr. Justice Roxburgh referred to several previous decisions. The first case which was referred to by his Lordship is Isaac Holden and Son Limited v. Commissioners of Inland Revenue 12 Tax Cases 768. This case is known as Woolcombers'' case. It was held that the total amount of commission received for the year ended June 30, 1918, under the terms of the final settlement which arose from the trade in that year, must be included in arriving at the profit of that period for the purpose of computing the company''s liability to excess profit duty. The next case which was referred to is Northern Aluminium Company Limited v. The Commissioner of Inland Revenue (1946) 1 A.E.R. 546 (549).

The last mentioned two decisions were also referred to us by Mr. S. Mukharji in order to show that they did not apply to the facts of the instant case, inasmuch as they refer to the Excess Profit Tax and the income tax Acts of England, the language whereof are not the same as that used in the income tax Act, 1922. Northern Aluminium Company Limited case (1946) 1 A.E.R. 546 (549) referred to above shows that the price for which the goods were sold in the accounting period was so much and that price later on was increased by virtue of some understanding or something which might fall short of a contractual obligation. There the increased price was held to be referable to the original transaction and therefore, the accounts must be reopened in order to bring the increase into the profits of the company in the accounting period.

The reason for referring these cases to us by Mr. Meyer was to strengthen his argument that if there was an accretion to the income during the accounting period by a subsequent contract resulting in assessability to tax, the same principle as to non-assessability to tax should be applied, if under an arrangement the income said to have accrued, is relinquished. The argument by Mr. Meyer has considerable force, but it seems to us that the principles decided in the English cases cannot be attracted to the present case, as it has not been pointed out to us that the provisions of the Excess Profit Duty Act as applicable in Britain are equivalent to the provisions which are contained in the Indian income tax Act as stated before. Furthermore, upon consideration of all the decided cases it appears that if the amount is to be taxable as income, the basic conception to be kept in view is that the right to receive must come into existence in the relevant previous year and that income can be held to arise of accrue to the Assessee, only when the Assessee obtains a right to receive the income. It seems to us, however, on a consideration of the Supreme Court decisions referred to before, which we are bound to follow, that the question of non-assessability could only arise if the relinquishment is made in the accounting year These decisions in our opinion are sufficient for negativing the contention raised by the Assessee.

It is, accordingly, not necessary to multiply a good lot of cases which have been referred to us for a decision in this reference. The instant case, however, may be considered from another point of view as urged by Mr. S. Mukharji. He has submitted that in all the English decisions referred to us, the root or germ as to accretion of income was in the accounting year and if such a root or germ fructifies in the subsequent years that could be taken into account and not otherwise. This argument which appears to be correct has in its support the principle discussed in Article 261 at p. 147 of Halsbury''s Laws of England (3rd ed., vol. 20). It runs as follows:

Where accounts may be re-opened: Closely allied to the question of the year in which receipts are to be brought in or expenses allowed is the question of reopening trade accounts. It is now established that trading accounts for a year or period may be reopened and amended. For example, where a transaction included in the accounts for any year or period whether as a receipt or an expense is not settled in amount during the said year or period and is subsequently settled at a figure different from that shown in the account, the account may be reopened and the figure subsequently ascertained, inserted in place of the original figure and the balance of profit as so revised will form the basis for assessment to income tax. In certain cases trade receipts have been related back to the period in which goods were delivered or service rendered as a result of which money became payable or deductions for trade expense have been subsequently disallowed or reduced in amount. In other instances accounts have not been reopened.

The principle as quoted above does not militate against the legal principles involved in the instant case, although it appears to us that the English cases laying down the general rule that receipt is the sole test of taxability and income which has accrued, but has not been received cannot be brought to charge and secondly that it is the income of the year of receipt and not of the year when it arises or accrues, would be misleading under the Income tax Act, which contains provisions which are not to be found in the English Statutes Vide observation in the case of COMMISSIONER OF Income Tax Vs. SHRIMATI SINGARI BAI., .

In the above premises we are of the view that the decision of the Tribunal was correct and our conclusion is summarised as follows:

(i) In the instant case, the unrealised income is liable to assessment of tax, not on the ground of constructive receipt but on the ground that it accrued during the relevant accounting year which ended on July 5, 1951.

(ii) The mere fact that the income was forgone by the asses-see beyond the accounting year by resolutions in meetings of the shareholders, cannot entitle the Assessee to an exemption from liability to tax. It was decided, inter alia, by the Supreme Court in the case of Commissioner of Income Tax, Bombay City I Vs. Shoorji Vallabhdas and Co., that 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 decision was made on the facts that there was a bilateral contract between the managing company and the managed company during the accounting year, whereby the Assessee disentitled itself from receiving the contractual commission, which obviously did not result in income during the accounting year. Such is not the case here, as no reliable evidence was placed before the Tribunal to show that the relinquishment was done on the basis of some direct negotiations between the Assessee and the managed company, with respect to the sum of Rs. 29,000, during the accounting year.

(iii) The real test is that if the amount is to be taxable as income the basic conception to be kept in view is that the right to receive the income must come into existence in the relevant previous year and that income can be held to arise or accrue to the Assessee only when the Assessee obtains a right to receive the income. In other words if the root or germ as to accretion of income was in the accounting year and if such a root or germ regarding accretion of income fructifies in the subsequent years, the account for the relevant previous year may be reopened and the figure subsequently ascertained may be inserted in place of the original figure for the purpose of assessability to tax. The same principle applies to taxability of a larger or lesser amount than the amount due under an agreement and the entire amount due thereunder, may also be subsequently given up under the said conditions, in order that the amount due under the agreement may not be taxable. Such is not the case here, as the resolutions of the Assessee quoted in the statement of the case do not show conclusively that the sum of Rs. 29,000 due under the agreement was forgone on account of some reasons rooted in the previous year.

Regard being had to the above decision, the last submission by Mr. Meyer that the case should be dealt with u/s 66(4) of the Act, as the Tribunal has failed to make any statement whether the relinquishment of commission was made on the ground of commercial expediency, need not be taken into consideration. It appears to us that the matter was considered by the Tribunal in its judgment and it found that such a plea was not sustainable on the evidence adduced. We are of opinion that no step u/s 66(4) is required to be taken, as this Court is satisfied that the statements in this case are sufficient to enable it to determine the question raised thereby. Apart from this consideration it appears that the Assessee never raised any question on this point in his application u/s 66(1) of the Act.

In the result the question is answered in the affirmative.

The Applicant will pay costs to the Respondent.

Sankar Prasad Mitra, J.

I agree.