# I960 Commissionsr of Income-Tax, Bombay v. Chandulal Keshavlal & Co. Kapuy ]. F 6bruary. il9

- **Citation:** [1960] 3 S.C.R. 50
- **Court:** Supreme Court of India
- **Decided:** 1960
- **Bench:** S. K. DAs, J. L. Kapur, M. HrnAYATULLAH
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/i960-commissionsr-of-income-tax-bombay-v-chandulal-keshavlal-co-kapuy-f-6bruary-1733
- **Pages:** 9

## Headnote

Income-tax-Managing Agent's Commission payable at the end
of the year-Rate of Cm1<missio1~ reduced before then by agreement-If voluntary reliiiquishment of a portion
of accrued
commission.
The respondent-firm Harivallabhdas Kalidas was appointed
,
the Managing Agent of Shri Ambika Mills Ltd., the appellant in
-"
the connected appeal by means of a Managing Agency Agreement
the relevant portion of which ran thus:-
" (2)(a) The Company shall pay each year to the said Firm
either the commission of 5 (five) per cent on the total sale
proceeds of yarn, and of all cloth, manufactnred tram cotton,
-
-
.....
--
3 S.C.R. · SUPREME COURT REPORTS
51
silk, jute, wool, waste and other fibres and sold by the
i96o
company, or 'a commission of three pies per pound avoirdupois Commissioner of
on the sale, whichever the said Firm choose to take, and also
Income-Tax,
a commission of IO (ten) per cent on the proceeds of sale of all
B
b
N
th
other materials sold by the Company and IO (ten) per cent on
om ay
or
the bills of any ginning and pressing factories and on any M/ H ".· 11 'hd
th
k d
·
ti C
"
s. ariva au
as
o er wor
one oy ie ompany.
Kalidas
And by clause (5) it was provided:
"(5) The remuneration payable to the said Firm under
clause z(a) shall be paid to the saii!l Firm forthwith after the
31st day of December or such otker date as the Directors
may fix for the closing of the accounts of the Company in each
year and after such accounts are passed by the company in
General Meeting."
Subsequently, at the request of the Managed Company the
Managing Agents agreed to charge commission at 3 per cent on
sales instead of 5 per cent for the year ending December 31", 1950
and a resolution to that effect was passed by the Managed
Company and a formal agreement to that effect was executed. The
Income-tax Authorities, however, taxed the Managing Agents
for two assessment years on the basis that by entering into an
agreement with the mills they had voluntarily relinquished
certain sums of money as their commission which had accrued to
them as income for the purpose of income-tax. An appeal was
taken to the Income-tax Tribunal which held that the agreement
between the Managing Agent and the Managed Company to
receive remuneration at 3 per cent on the total sale was valid
and took effect from January, r, :i:950, and the questions whether
the eommission accrued on the proceeds of every single sale or only
wken the assessee firm exercised its option to charge it on the
total sale proceeds or on the weight of the yarn sold and whether
the Managing Agents would get their commission after the whole
profit was determined at the end of the year, were decided in
favour of the Managing Agents. The High Court also on a
reference made to it at the instance of the Commissioner of
Income-fax,
answered the abovementioned question in favour
of the Managing Agents. On appeal by the Income-tax Commissioner by special leave,
Held, that on a proper construction of the agreement, it was
clear that there was no accrual of commission till the end of the
year and that it did not accrue as and when the sales took place.
The Managing Agents were to be.paid at the end of the year and
by agreeing to the modification of the agreement before then
they had not voluntarily relinquished any portion of the
commission.
·
Commissioner of Income-tax, Madras, v. K.R.M.T.T. Thia·
garaja Chetty and Co., [1954] S.C.R. 258, E.D. Sasoon and Co. Ltd.
v. The Commissioner of Income-tax Bombay City, [1955] r S.C.R.
313 and Commissioner of Inland Revenue v. Gardner Mountain
and D' Ambrumenil Ltd., 29 T.C. 69, not applicable.
52
SUPREME COURT REPORTS
[1960]
I960

## Text

I960
Commissionsr of
Income-Tax,
Bombay
v.
Chandulal
Keshavlal & Co.
Kapuy ].
F 6bruary. il9
50
SUPREME COURT REPORTS
[1960)
not in terms, negativing the Crown's contention. I
think that there was ample material to support the
findings of the Commissioners, and accordingly that
this prohibition does not apply."
Thus in cases like the present one in order to justify
deduction the sum must be given up 'for reasons of
commercial expediency ; it may be voluntary, but so
long as it is incurred for the assessee's benefit the
deduction would be claimable.
The Income-tax Appel.late Tribunal has found in
favour of the Managing Agent that the amount was
expended for reasons of commercial expediency, it
was not given as a bounty but to strengthen the
Managed Company and if the financial position of the
Managed Company became strong the Managing Agent
would benefit thereby. Th>l.t. finding is one of fact.
On that finding the Income-tax Appellate Tribunal
rightly came to the conclusion that it was a deductible
expense under s. 10(2)(xv).
In our OJ>inion the judgment of the High Court was
right and we would dismiss this appeal with costs .
•
Appeal dismissed.
1THE COMMISSIONER OF INCOME-TAX,
BOMBAY NORTH & OTHERS.
v.
M/S. HARIV ALLABHDAS KALIDAS AND CO.,
(S. K. DAs, J. L. KAPUR AND M. HrnAYATULLAH. JJ.)
Income-tax-Managing Agent's Commission payable at the end
of the year-Rate of Cm1<missio1~ reduced before then by agreement-If voluntary reliiiquishment of a portion
of accrued
commission.
The respondent-firm Harivallabhdas Kalidas was appointed
,
the Managing Agent of Shri Ambika Mills Ltd., the appellant in
-"
the connected appeal by means of a Managing Agency Agreement
the relevant portion of which ran thus:-
" (2)(a) The Company shall pay each year to the said Firm
either the commission of 5 (five) per cent on the total sale
proceeds of yarn, and of all cloth, manufactnred tram cotton,
-
-
.....
--
3 S.C.R. · SUPREME COURT REPORTS
51
silk, jute, wool, waste and other fibres and sold by the
i96o
company, or 'a commission of three pies per pound avoirdupois Commissioner of
on the sale, whichever the said Firm choose to take, and also
Income-Tax,
a commission of IO (ten) per cent on the proceeds of sale of all
B
b
N
th
other materials sold by the Company and IO (ten) per cent on
om ay
or
the bills of any ginning and pressing factories and on any M/ H ".· 11 'hd
th
k d
·
ti C
"
s. ariva au
as
o er wor
one oy ie ompany.
Kalidas
And by clause (5) it was provided:
"(5) The remuneration payable to the said Firm under
clause z(a) shall be paid to the saii!l Firm forthwith after the
31st day of December or such otker date as the Directors
may fix for the closing of the accounts of the Company in each
year and after such accounts are passed by the company in
General Meeting."
Subsequently, at the request of the Managed Company the
Managing Agents agreed to charge commission at 3 per cent on
sales instead of 5 per cent for the year ending December 31", 1950
and a resolution to that effect was passed by the Managed
Company and a formal agreement to that effect was executed. The
Income-tax Authorities, however, taxed the Managing Agents
for two assessment years on the basis that by entering into an
agreement with the mills they had voluntarily relinquished
certain sums of money as their commission which had accrued to
them as income for the purpose of income-tax. An appeal was
taken to the Income-tax Tribunal which held that the agreement
between the Managing Agent and the Managed Company to
receive remuneration at 3 per cent on the total sale was valid
and took effect from January, r, :i:950, and the questions whether
the eommission accrued on the proceeds of every single sale or only
wken the assessee firm exercised its option to charge it on the
total sale proceeds or on the weight of the yarn sold and whether
the Managing Agents would get their commission after the whole
profit was determined at the end of the year, were decided in
favour of the Managing Agents. The High Court also on a
reference made to it at the instance of the Commissioner of
Income-fax,
answered the abovementioned question in favour
of the Managing Agents. On appeal by the Income-tax Commissioner by special leave,
Held, that on a proper construction of the agreement, it was
clear that there was no accrual of commission till the end of the
year and that it did not accrue as and when the sales took place.
The Managing Agents were to be.paid at the end of the year and
by agreeing to the modification of the agreement before then
they had not voluntarily relinquished any portion of the
commission.
·
Commissioner of Income-tax, Madras, v. K.R.M.T.T. Thia·
garaja Chetty and Co., [1954] S.C.R. 258, E.D. Sasoon and Co. Ltd.
v. The Commissioner of Income-tax Bombay City, [1955] r S.C.R.
313 and Commissioner of Inland Revenue v. Gardner Mountain
and D' Ambrumenil Ltd., 29 T.C. 69, not applicable.
52
SUPREME COURT REPORTS
[1960]
I960
CIVIL APPELLATE JURISDICTION:
Civil Appeals
Nos. 145/58 and 323/57.
Commission" of
Appeals by special leave from ,the i'udgment and
Income-ta1:,
Bombay North order dated 8eptember 14, 1955, of the Bombay High
v.
Court in I.T. Iteferences, Nos. 8 and 21 of 1955
M /s.Harivallabhdas respectively,
Kalidas
· R. Ganapathi Iyer and D. Gupta, for the appellant
in C.A. No. 145 of 1958, and respondent in C. A.
No. 323 of 1957.
N. A. Palkhivala, S. N. Andley, J.B. Dadachanji
and Rameshwar Nath, for the respondent in C. A.
No. 145 of 1958 and appellant in 0. A. No. 323
of 1957.
+-
1960. February, 19. The Judgment of the Court was
delivered by
~
J(apur ].
KAPUR, J.-This judgment will dispose of two
appeals, C. A. No. 145/58 and C. A. 323/57.
They
arise out of the same transaction i.e. Managing Agency
Agreement and the result of C. A. No. 323/57 is dependent upon the judgment in C. A. 145/58 and we
propose to deal with the latter appeal which was
argued before us and £he former for reasons to be
stated later was not pressed. The appellant in C. A.
145/58 is the Commissioner of Income-tax, Bombay
and the respondent is the assessce, a registered firm,
which on March 8, 1941, was appointed the Managing
Agents of Shri Ambica Mills Limited (hereinafter
termed the Managed Company) the appellant in C. A.
323/57. The duration of the Managing Agency period
was 20 years. By clause (2) of the Managing Agency
Agreement it was provided:-
" (2)(a) The Company shall pay each year to the
said Firm either the commission of 5 (five) per cent.
on the total sale proceetls of yarn, and of all cloth,
manufactured from cotton, silk, jute, wool waste
and other fibres and sold by the company, or a
commission of three pies per pound avoirdupois on
the sale, whichever the said Firm choose to take,
and also a commission of 10 (ten) per cent. on the
proceeds of sale of all oUrnr materials sold by the
Company and 10 (ten) per cent. on the bills of any
ginning and pressing factories and on any other
work done by the Company.
-
-
' -
-
3 S.C.R.
SUPREME COURT REPORTS
53
(b) If in any year the net profits of the Company
r96o
shall not be sufficient to enable the Directors, if they Commissioner of
think fit, to recommend a dividend of eight per cent.
Income.tax,
per annum on the capital paid up on the ordinary Bombay N~rtk
shares for the time being, the same Firm shall be
v.
bound to give up from the total amount of commis- M/s.Harivallabhdas
sion payable under clause 2(a) hereof such portion
Kalidas
thereof as may be necessary to make up the deficit.
Kapur 1.
PROVIDED THAT in !'no event the amount so
given up by the said Firm shall exceed one-third of
such total amount of commission".
Arid by Clause (5) it was provided:
"(5) The remuneration payable to the said Firm
under Clause 2(a) shall be paid to the said Firm
forthwith after the 31st day of December or such
other date as the Directors may fix for the closing
of the accounts of the Company in each year and
after such accounti;i are passed by the Company in
General Meeting ".
On December 9, 1950, the Board of Directors of the
Managed Company pa.ssed a resolution to the effect
that the Directors had for some time past been discussing with the Managing Agents the advisability of
modifying the terms of the Managing Agency Agreement as to the commission payable under it and that
the Managing Agents had agreed to charge 3 per cent.
on sales instead of 5 per cent. for the year ending
December 31, 1950.
A resolution was passed at the
Annual General Meeting of the Managed Company on
April 22, 1951, which was to the same effect. The
resolution of the Board of Directors was ratified at an
Extraordinary General Meeting of the shareholders of
the Managed Company on October 7, 1951, and the
same day a formal agreement embodying the terms of
the resolution was executed between the Managing
Agents and the Managed Company. For the accounting years 1950 and 1951 i.e. assessment years 1951-52
and 1952-53 the Managing Agents were taxed by the
Income-tax Authorities on the basis that in those two
years they had voluntarily relinquished a sum of
Rs. 1,69,981 and Rs. 2,10, 530 for the respective assessment years. These sums were added to the income of
the Managing Agents for the purpose of income-tax.
54
SUPREME COURT REPORTS
[1960]
'960
An appeal was then taken to the Income-tax AppelCommissioner of late Tribunal and it was held by the Tribunal that the
Income-tax,
agreement between tho Managing Agents and the
Bombay North
Managed Company to receive remuneration at 3% on
v.
the total sales was a valid one and took effect as from
M/s.H;•i;_~
1ablidas January 1, 1950. The second question, whether the
~·s
commission accrued on the_ proceeds of every single
Kapur J.
sale or it accrued only when the a8sessee firm P.Xercised
its option to charge its commission on the total sale
proceeds or on the weight of tho yarn sold and
• whether the Managing Agents were to get the amount
of commission after the whole profit was determined
at theend of the year, was decided in favour of the
Managing Agents.
A Reference was made to the
High Court at the instance of the Commissioner of
Income-tax and the questions abovementioned were
answerecl. in favour of the Managing Agents. This
appeal by the appellant has been hr.ought against the
judgment of the High Court by special leave.
In the oonneoted appeal i.e. C. A. 323/57 by the
Managed Company the facts are the same except t.\;tat
the Appellate Tribunal allowed the Managed Company
the sum on which the Managing. Agents were to be
taxed as allowable deduction. When the Commissioner
got the case stabed to the High Court tho Managing
Company also had a case stated,. But as the High
Court upheld the contention of the Managing Agents
the Managed Company did not press its application
which was therefore dismissed. The appeal of the
Managed Company is brought against that order.
In the appeal by the Commissioner of Income-tax,
i.e. C. A. 145/58, it was argued that according to tho
terms of the Agency Agreement the Managing Agents
were to get the commission on the sales and as the
accounts were kept on a mercantile basis, the amount
of commission accrued as and when the sales took place
and paragraph 5 of agreement was only a machinery
for quantifying the amount. It was also argued that
the Managing Agents by entering into an agreement
with the Mills had voluntarily relinquished a portion
of the amount of commission which had accrued to
them and therefore the whole of the inoome from
commission which had already accrued was liable to
-
3 S.C.R. SUPREME COURT REPORTS
55
income-tax; and reference was made to the cases
I960
reported as Commissioner ol' Income-tax, Mailras v. ·c
. .
.i
1
•
•
'J
1
· ommissumer o
J(. R. M. 1. T. ThwgaraJa Chetty and Co. ( ), E. D. . Income-tax,
Sassoon &
Company Ltd. v. The Commissioner of Bo•~bay North
Income-tax, Bombay City (2) and to an English case
v.
, .
Commissioners of Inland Revenue v. Gardner Mountain M /s.H arivallabhdas
& D' Ambrumr.nil Ltd. (3).
But these ca.ses have no
Kalidus
application to the facts of the present case. In the
Commissioner of Income-tax, Mailras v. K. R. M. T. T.
Thiagaraja Chetty & Co. (1 ), the assesse@ firm was,
under the terms of the Managing Agency Agreement,
entitled to a certain percentage of profits and in the
books of the Company a certain sum was shown as commission due to the assessee firm and that sum was also
adopted as an item of business expenditure and credited to the Managing Agents' commission account but
subsequently it was carried to suspense account by a
resolution of the Company passed at the request of
the assessee firm in order that the debt due by the
Firm might be written off.
The accounts were kept
· on mercantile basis and it was held that 13n that basis
the commission accrued to the assessee when the
commission was creditsd to the assessee's account and
subi~equent dealing with it would mot affect the liability
of the assessee to income-tax. It was also held that
the quantification of the commission could not affect the
question as it was not a condition precedent to the
accrual of the commission. At page .267 Ghulam
Hassan J., observed:-
"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 subject
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
a.llowed 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
(I) [19.Hl s.c.R. 258 at 267.
(2) [1955] I S.C.R. 313, 344.
(3) 29 T;C. 6g, 96.
Kapur].
56
SUPREME COURT REPORTS
[1960)
'960
said with some justification, though we do not decide
it, that the income has not accrued but there is no
Comntissioner of
In"me-tax.
such condition in the present case ".
Bombay North
This passage does not help the appellant's case. The
~·
q ue8t.ion there decided was that the accrual of the
Mfs.Harw~Uabhd•scommission was not dependent upon the computation
Kahdas
of the profits although the question whether it would
Kapur J.
make any difference where the commission was so
payable or was payable after the expiry of a definite
period for the making of the account was left undecided. In the case before us the agreement is of a
different nature and the above observations are not
applicable to the facts of the present case.
The next case is E. D. Sassoon & Co., Lkl. v. The
Commissioner of Income-tax, Bombay City('). But it
is difficult to see how it helps the case of the appellant.
If anything it goes against his contention. In that
case the assessee Company was the Managing Agent
of several Companies and was entitled to receive
remuneration calculated on each year's profits. Before
the end of the year it assigned its rights to another
person and received from him a proportionate share
of the commission for the portion of the year during
which it worked as Managing Agent. On the construction of the Managing Agency Contract it was held that
unless and until the Managing Agent had carried out
one year's completed service, which was a condition
precedent to its being entitled to receive any remuneration or commission it was not entitled to receive any
comm1ss10n.
The facts in that case were different and
the question for decision was whether the contract of
service was such that the commission was only payable
if the service was for a completed year or the assessee
Company was entitled to receive even for a portion of
the year for which it had acted as a Managing Agent.
It was held that it was the former.
As was observed by Lord \Vright in Commissioners
of Inland Revenue v. Gardner, Mountain & D'Ambrumenil Ltd. ('), "It is on the provisions of the contract
that it must be decided, a~ a question of construction
and .therefore of law, when the commission was
earned". The contract in the present case in para-
(I) [1955] I S.C.R. 313, 344·
(2) 29 T.C. 69, 96.
-
3 S.C.R. SUPREME COURT REPORTS
57
graph 2 shows that (1) the company was to pay each
z960
year ; (2) that the Managing Agents were to be paid
f h
Commission~r of
5 per cent. commission on the proceeds o t e total
Income-tax
sales of yarn and of all cloth sold by the Company or Bombay Nortl•
three pies per pound avoirdupois on the sale, which- M
H Y·
11
k
th
M
.
A
t
h
th th
/s. arwa ab das
ever
e . anagmg
gen s c ose ;
us
ere was an
Kalidas
option to be exercised at the end of the year; (3) they
were also to be paid at 10 per cent. on the proceeds of
Kapur J.
sales of all other materials; and (4) the Mills were to
pay to the Managing Agents each year ·after December
31, or such other date which the Directors of the
Company may choose for the closing of the accounts.
There was a further clause that if the net profits of
the Managed Company, that is, the Mills were not
sufficient to enable the Directors to recommend a
dividend of 8 per cent. per annum on the paid up
capital, then the Managing Agents were bound to
forego a portion of their commission upto one-third.
All these provisions as to payment have to be read
together as an indivisible and an integral whole. On
·· ·
a proper construction of this contract, therefore, it is
obviot1s that the Managing Agents were to be paid at
the end of the year. They had the option of receiving
a percentage on total sales or three pies per pound and
this was exercisable at the end of the year. There was
also a liability to pay back a portion of the commission in certain contingencies which also could be
determined only when the accounts were made up for
the year. It is thus clear that there was no accrual
of any commission till the end of the year. On this
construction of the contract it cannot be held that the
commission had accrued as and when the sales took
place and that as a result of their agreeing to the
modification of the agreement the Managing Agents
had voluntarily relinquished a portion of their commission. On the other hand under the original agreement the Managing Agents were entitled to receive
commission only at the end of the year and before
then the agreement was varied modifying its terms as
from the beginning of the accounting year.·
w· e are of the opinion, therefore, that the High
Court correctly found against the appellant and we
therefore dismiss C. A. No.145 of 1958 with costs. In
8
58
SUPREME COURT REPORTS
[1960]
z960
view of this Mr. Palkiwala for the Managed Company
did not press C. A. No. 323 of 1957, which is therefore
Commissioner af
b
"11 b
h ·
·
Income-tax.
dismissed ut the parties w1
ear t. eir own costs m
Bombay North that case because the result of that appeal is rea.lly
v.
dependent upon the result in C. A. No. 145 of 1958.
~i1 /s H arivallabhdas
Kaliaas
Appeals dismissed
Kapur J.
Ig6o
February 32
THE BIHAR STATE CO-OPERATIVE
BANK LTD.
v.
THE COMMISSIONER OF INCOME-TAX
(J. L. KAPUR, A. K. SARKAR AND
M. HIDAYATULLAH, JJ.)
Income Tax-Co-operative Bank-Interest received on deposits
with other banks-Exemption from taxation under NotificationIndian Income-tax Act, r922 (XI of r922) ss. IO, I2.
The Appellant Bank which was registered under the Cooperative Societies 'Act, 1922, received, in the relevant account
years, by way of interest on deposits with the Imperial Bank
of India certain sums of money. The Income-tax Officer assessed the aforesaid sums under s. 12 of the Indian Income-tax Act
1922, as income from other sources, but the appellant claimed
that the deposits were made not with the idea of making
investments but for the purpose ·of carrying on its business as a
bank and that as the interest received on the deposits was profit
attributable to its business activities it was not subject to incometax because of the Notification issued by the Central Government
under s. 60 of the Act.
Under the Notification profits of any
Co-operative Society are exempt from the tax payable under the
Act but not income derived from "other sources" referred to in
s. 12 ofthe Act.
IIeld, that the interest from <leposits received by the Appellant Bank in the present case arose out of a transaction entered
into for the purpose of carrying on its banking business and fell
within the income exempted under the Notification.
The Punjab Co-operative Bank Ltd. v. The Commissioner of
Income-tax, Punjab, [1940] 8 I.T.R. 635, relied on.
CIVIL APPELLATE JURISDICTION: Civil
Appeals
Nos. 228 to 230 of 1958.
Appeals from the judgment and decree dated July 2,
1957, of the Patna High Court in Misc. Judicial
Case No. 640 of 1955.