Mysore, and the fourth v. The Stat• of Mysor1 & Ors.

Elphinstone Spinning and Weaving Mills Ltd., for th<~ t(} period of five months the 31st May, 1943, and Rs. 1,91,304 the Apollo Mills Ltd., for the Managing Agency of period of six months the 30th June, 1943, contending that such Managing Agency commission had accrued the Sassoons for that on the dates on which the services Agencies were transferred the Sassoons were entitled in the such remuneration from the managed Companies form of commission for services rendered up to the dates of the transfers. In spite of the objection of the Income-tax Officer and the Excess Profits Sassoons the Tax Officer determined these sums as their escaped in comes and assessed them accordingly. The Sassoons appealed to the Appellate Assistant Commissioner who dismissed to the Income-tax Appellate Tribunal. The Income tax Appellate Tribunal relied upon its order dated. the 28th December, 1949, in the case of the transferees ,and confirmed the orders of the Appellate Assistant Com that the missioner. The Tribunal was of the opinion Managing Agency commission was earned for services rendered and it was in the hands of the person who carried on the business of the Managing . Agency and not in the hands of the person to whom it was assigned, and that therefore so far as the Sassoons were concerned the Managing Agency commission · should be apportioned between them and their transferees. the appeals and further appeals were therefore The Sassoons applied under section 66(1) of the Indian Income-tax· Act and section 21 of the Excess Profits Tax Act requesting the Tribunal to draw a state ment of the case and refer the question of law arising to the High Court for its decision. On out of the orders the Tribunal by its statement the 12th January, 1951, of the case referred to the High Court one question of law as arising out of its orders, viz., "whether circumstances of the Managing Agency the case was commission liable to be apportioned between the asses see Company and the assignee" observing that the question was not when the Managing opinion real question was Agency commission accrued but to whom it accrued. This reference was made by - ... _-, ' 1 • -" - - ' .t 1954 E. D. Sassoon an Company Ltd. v. The Commissioner of Income-tax, Bombay City. BhagwatiJ, S.C.R. SUPREME COURT REPORTS 319 Tribunal in R. A. No. 474 of 1950-51, and R. A. No. 475 framed .-0f 1950-51 referring the question of law in regard to the Managing Agency commission of the Elphinstone E. D. Sassoon United Mills Ltd., and Spinning and Weaving Mills Ltd., Managing Agency commission having been paid respec to Messrs. Agarwal and Company and to Chidam tively baram Mulraj and Company Ltd., in the year 1944 . This was Income-tax Reference No. 27 of 1951. the whole of The Commissioner of Income-tax/Excess Profits Tax, Bombay City, also required the Tribunal to refer to the High Court the question of law arising out of its order in the appeal of Messrs. Agarwal and Company in which the Managing the Tribunal had held as above Agency commission should be apportioned between Sassoons and the transferees. The statement of submitted by the Tribunal on the ·case was accordingly 12th January, 1951, and the same question as above was referred to the High Court. This reference was Income-tax Reference No. 24 of 1951. A similar application was made by the Commissioner of Income-tax/Excess Profits Tax, Bombay City, reference in the appeal of Chidambaram Mulraj and Com pany Ltd. The Tribunal submitted its statement of case also on the same day and referred the very same ques ·tion to the High Court. This reference was Income-tax Reference No. 23 of 1951. answering the question All these references came for hearing and final dis posal before the High Court. Income-tax References Nos. 24 and 27 of 1951 were heard together and one judgment was delivered, to the High Court in both the references in the mitted this . judgment the High affirmative. Following upon the question ·Court also answered which had been the Tribunal in Income-tax Reference No. 23 of 1951. The decision the contentions ·of -which had been urged both by the Sassoons and the ·Commissioner of Income-tax and the Sassoons as well :as the Commissioner of Income-tax obtained leave un Income-tax Act and .der section 66A(3) of the Indian the High Court was thus against in the affirmative referred to it by 320 SUPREME COURT REPORTS (1955J 1954 E. D. Sassoon and Company Ltd. v. The CommissioMr of Income-tax, Bombay City. Bha.f!wati J. for filing appeals. section 133 ( 1) ( c) of the Constitution to this Court. The appeal of· the Sassoons was Civil· Appeal No. 3 of 1953, and filed against the Commissioner of Income-tax, Bombay City. The Income-tax against appeals of Messrs. Agarwal and Company and Chidambaram Mulraj and Company Ltd., respectively were Civil Appeal No. 3(} of 1953, and Civil Appeal No. 31 of 1953. These appeals. have come for hearing and final disposal before us. the Commissioner of it was law, All the appeals raise one common question of viz., whether ip the circumstances of the case the Man aging Agency commission was liable to be apportioned· between the Sassoons and their transferees in the proportion of the services rendered as Managing Agents by each one of them and the decision turns. upon the question whether any income had accrued to· the Sassoons on the dates of the respective transfers of the Managing Agencies transferees or at any time thereafter. This judgment will cover our decision· in all the appeals. respective in the style and relevant clauses of the Agreements and the deeds of assignment and It will be convenient at this stage to set out the respective Managing Agency transfer. The original agreement with the E. D. Sassoon United' Mills Ltd., was entered into on the 24th February, 1920,. by Sir Edward Sassoon and others carrying on business: in partnership form of Messrs. E.D .. Sassoon and Company. The Managing Agency was: transferred with the consent of the Company by E. D_ Sassoon and Company the Sassoons and another Managing Agency Agreement was executed between the Company and the Sassoons on the 2nd October, 1934,. appointing and recognising the latter as the Agents of the Company from the 1st January, 1921, for the residue of the period and upon the same terms and conditions set out in the original Agreement dated the 24th February- the Sassoons: 1920. Under clause 1 of the Agents of th<" Company for a period of 30 years from the date of the~ registration thereof and thereafter until resignect removed from office by a special resolution of or were their assigns were appointed that Agreement ,,_ ' - - E. D. Sassoon and Company Ud. v The Commissio•w of lncome-tsx, Bombay Ci!!' BhaJ:Wali 7. S.C.R. SUPREME COURT REPORTS 321 remuneration of the Company. Under clause 2 the the 'Sassoons and their assigns was fixed at a commis sion of 7-! per cent. per annum on the annual net profits of the Company after making all proper allowances and for working expenses charge deductions from revenue if in any able against profits, provided however year no such commission was earned or it fell short of Rs. 1,20,000 the Company was to pay to them a sum sufficient to make up the minimum remuneration of Rs. 1,20,000 per annum on account of such commission. The said commission was under clause 2(d) to be due them yearly on the 31st of March in each and every year during the continuance of the Agreement and was to be payable and to be paid immediately after the the Company had been passed by annual accounts of the Sassoons and the shareholders. Under clause 3 that they would their assigns agreed with the Company be and act as the Agents of the Company during said term for the said remuneration and uoon and sub therein contained. Clause 10 of the Agreement provided as under :- the terms and conditions "It shall be lawful for the said firm to assign Agreement and the rights of the said firm hereunder any person, firm or Company having authority by its constitution the obligations to become firm hereunder and upon such undertaken by the said the ·said Com assignment being made and notified pany the said Company shall be 'bound to recognise person or firm or Company aforesaid as the Agents of the the name of such said Company in like manner as this Agree person, firm or Company had entered into the said Company ment with the said Company and shall forthwith upon demand by firm enter the said into an Agreement with the person, firm or Company aforesaid appointing such person, firm or Company the Agents of the said Company for the then residue of the .term outstanding under the Agreement and with remuneration and emolu like powers and authorities ments and subject to the like terms and conditions as are herein contained." - - f {_ The the Agreement of letter dated the 3rd September, 1943, recording the Managing Agency transfer of 1954 E. D. Sassoon and Compnn'Y Ltd. 7 lit Commissioner oJ Income-tax1 B(lmbay City. Bha:;wati]. 322 SUPREME COURT REPORTS [1955] thereby transferred therein stated term created by January, 1945, stated provided that in the event of the transaction being com transferees pleted in its entirety as receive would be entitled to the commission payable by the Company under the Managing Agency Agreement for the calendar year 1943. The deed of on the profits assignment and transfer executed between the Sassoons in pursuance of this and Messrs. Agarwal and Company Agreement on the 26th that the to Messrs. Agarwal and Sassoons Company as from the 1st December, 1943, their office as Managing Agents of the Company for the unexpired the said Agreement residue of dated the 24th February, 1920, as also the said Agree ments dated the 24th February, 1920, and the 2nd October, 1934, and all rights and benefits as Managing Agents under the said Agreements and Messrs. Agarwal and Company agreed to be the Manag ing Agents of the Company from the 1st December, 1943, in place and stead of the Sassoons for the said unexpir like powers authorities remuneration and emoluments as were coJ1J.tained in the ·said Agreements. It may be noted though the letter recording the Agreement of transfer expressly provided receive the commission payable by the Company under the Managing Agency Agreement on the profits for the calendar year 1943 no such term was incorporated in the deed of assignment and transfer. transferees would be entitled residue of the term with that even The original Agreement entered into by the Elphin stone Spinning and Weaving Mills Company Ltd., was with Messrs. Hajee Mahomed Hajee Esmail and Com-· pany and was dated the 24th July, 1919. The Managing Agency was transferred with the consent of the Company by Messrs. Hajee Mahomed Hajee Esmail and Company to the Sassoons and on the 23rd May, 1922, another Managing Agency Agreement, was executed by Company their successors the Agents of the Com and assigns employing for the unexpired period of the term of 60 years commencing from 3rd July, 1919. Under clause 3 of the Agreement Company was during the continuance thereof to pay to favour of the Sassoons from the 1st February, 1922, , . ii<-- - - • E. D. Sassoon and Company Ltd. v. The Commissioner of lncome-taic, Bombay City. Bhagwati]. :S.C.R. SUPREME COURT REPORTS 323 to be at liberty to retain, the Sassoons, successors and assigns by way of remuneration a commission of ten per cent. on the net profits of the Company and a further sum of Rs. 1,500 their success per month. Under clause 6 the Sassoons, ors and assigns were imburse and pay themselves out of the moneys of the Company inter alia all sums due them for commis sion and otherwise. The deed of transfer executed by in favour of Chidambaram Mulraj and the Sassoons Company Ltd., on the 2nd June, 1943, stated Sassoons assigned and transferred the Agreement dated the 23rd May, 1922, between themselves and the Com pany for term of sixty therein and the full benefit and advan years specified the Agency thereunder and the right and the office of the Agents to receive to become pay the Company under or by virtue of the said able by Agreement and tqgether with the benefit of all rights, privileges, powers and authorities given and conferred on the Sassoons together with the benefit of the remuneration thereafter the ·unexpired thereunder. residue of thereof that before It is significant to observe the income the High Court no distinction ·tax authorities as also two Agency was drawn between the provisions of these the Managing the right of Agreements in regard to to remuneration thereunder and the facts in so Agents far as they related to all the Managing Agencies were treated as similar. The quantum also was not disput .ed the principle of apportionment ·was in dispute. in each case though they continued The Sassoons were assessed for this "escaped income" ·on the basis that they had earned the income by render to the Companies for ing services as Managing Agents the respective periods to be the transferees had rendered the Managing Agents and the services the balance of the periods completing the full year of accounting and had earned the propor tionate commission and the amount of com included mission which the Sassoons' share of commission in respect of which they were not liable to tax but the Sassoons. The High ·Court adopted this test of the services rendered by . the the whole of :Sassoons as well as the transferees during therefore latter actually received - t { 1954 E. D. Sassoon and Company Ltd. v. The Commissiontr of Income-tax, Bombay City. BhagwatiJ. 324 SUPREME COURT REPORTS [19551 transferees ·commission was the Sassoons and the Sassoons and transferees was considered the year and considered the proportions of the services. the transferees as the rendered by Managing Agents of the Companies as decisive of the portions of the Managing Agency commission earned respectively by each. The parenthood of income received by to be the real test of the apportionability of the amounts of Managing Agency commission and the total amount of the Managing Agency thus apportion ed between in the· proportion of 11 to I in the case of the E. D. Sassoon· United Mills Ltd., and 5 to 7 in the case of the Elphin stone Spinning and Weaving Mills Company Ltd., transfers of the Managing Agencies having been made the !st December, 1943, and the 1st with effect from June, 1943, respectively. The income was held assess- to tax not on the basis of receipt but on the basis. transferees was con of accrual. The receipt by sidered of no consequence. What wa.s received by the· transferees was treated as including the proportionate· the income which could be· shares of the Sassoons the Managing: attributed to their periods of service as though Agents of the respective Companies and even actually treated! they were as income which had accrued to the Sassoons by reason of their having acted as the Managing Agents of the respective Companies for respective periods. The Sassoons' shares of the income were thus considered as having been earned by them during the year 1943 and were held on the construction of the deeds of assign·· in £avow· ment and transfer executed by the Sassoons of the transferees as having been assigned by them the transferees and even though the transferees receiv-· ed the whole of the Managing Agency commission pay to the Managing Agents under able by the Companies the terms of the respective Managing Agency Agree·· the Sassoons, ments, trans·· the assignees, were assessed to tax in respect of ferees, the Sas the proportionate shares of income earned by soons in the year 1943. the assignors, and not the received by the transferees It was urged before us on behalf of the Sassoons that no part . of the managing agency commission for broken periods of 1943 was earned by them. It did not - _l , 1954 E. D. Sassoon and Compaf!Y Ltd •. v. The Commissioner of Income-tax, Bombay Ciry. BhagwatiJ. S.C.R. SUPREME COURT REPORTS 325 - "- it could not the Sassoons - earning to the Sassoons ""'1' _ become a debt due by ·the Companies to have accrued therefore be said them. The contract of employment was an entire and an indivisible contract and the remuneration pay thereunder was able by the Companies the Sassoons It was a condition prece payable at stated periods. remuneration that they fulfilled the terms of their employment, completed the period for which the remuneration was payable to the particular period was a them and the service for condition precedent to their earning the remuneration that period. The stated period was that of a year and no remuneration was payable to the Sassoons the end of the year and unless and until they completed the period of the year they would not be entitled to any commission or remuneration for the year, much less for the broken period. the Sassoons had not earned any commission for the the same broken periods and that not having earned they could not have assigned transferees with the result that when the transferees were paid the com the Managing Agency mission under received the same in their Agreements, own right even though they had not to the Company for the whole of the calendar services It was contended that in any event, what year 1943. ever be the position as between the Companies and the transferees, the Sassoons had not earned any part of the Managing Agency commission which had been paid transferees and were not liable to tax in respect of the same. therefore contended the Companies transferees terms of rendered it to the It was to the f...,· JI'. - - ' -t It was on the other hand urged on behalf of the the terms of the though under transferees that even they were paid by the deeds of assignment and transfer Companies the whole of the Managing Agency commis sion for the calendar year 1943 they had merely earned the period of actual the commission or remuneration for services the Company and the portions of the Managing Agency commission propor tionate to the Companies had accrued to the Sassoons Sassoons ~ though it had been ascertained and paid to the trans in the year 1944. Even though the ascertainment services actually rendered by rendered by ferees E. D. Sassoon tJnd Company Ltd. v. T ht Commissiontr of Income·lax, Bombay Cif}'. Bha.gwati ]. 326 SUPREME COURT REPORTS (1955] the payment came the respective periods it made no difference the accrual of the mcome which could be referred to the period during which the income was earn ed and accordingly whatever amount was earned by the Sassoons during the Managing Agents of the Companies had acted as those periods and was had accrued received by transferees only by virtue of the res pective deeds of assignment and transfer. Having been received by the transferees by virtue of the assignment the Managing Agency commission those portions of the · less constituted income received by to ta·~ which had accrued to the Sassoons and were liable against the Sassoons the assignors and not against the assignees. to them during them none The position of an employee under an entire con thus enunciated in Halsbury's tract of service has been Laws of England-Hailsham Edition-Vol. 22, page 133, paragraph 221 :- "\Vhen the contract of service is an entire contract, providing for payment on the completion of a definite period of service, or of a definite piece of work, it is a con to the recovery of any salary or wages dition precedent the service or duty shall be m thereof respect the employer so. alters completely performed, unless the servant to regard it at an the contract as to entitle end, in which case the whole sum payable under .contract becomes due, or unless there is a usage to wages in proportion to the servant though time actually m to be construed as providing that remuneration shall accrue due and become . vested at stated periods, such the end remuneration constitutes a debt .of each such period of service." served. But when the contract, terminating at a particular respect of work recoverable at rs entitled time, Section 219 of the Indian Contract Act also provides that in the absence of any special contract, payment to the agent ·until the completion of such act. the performance of any act is not due - - .}, "' Our attention was drawn .case of Boston Deep Sea Fishing and Ice Co. v. Ansell( 1 in this connection to the ) • . (1) 39 Ch. D. 339. S.C.R. SUPREME COURT REPORTS 327 In that case the defendant was employed as the manag the company for 5 years at a yearly ing director of salary. He was dismissed for misconduct befor' expiration of the current year and claimed against company damages for wrongful dismissal and salary for the quarter which had expired before his dis missal. His .claim for salary was disallowed and it was held that having been dismissed for misconduct he was not entitled to any part of the unpaid salary for the current year of his service. Lord Justice Cotton at page 360 posed the question as under :- 1 954 E. D. Sassoon and Company Ltd. v. The Commission"" of Income-tax, Bomba;• City. Bhagwati]. "Can he sue for a proportionate part of the salary for the current year ? ................ What he would have been entitled to if he continued in their service until the end of the year would have been £800, but in my opinion that would · give him no right of action until the year was completed." · Lord Justice Bowen observed at page 364 :- salary "As regards his current it is clear and established beyond all doubt by authorities ........... . that the servant who is dismissed for wrongful behavi· our cannot recover his current salary, to say, he cannot recover salary which is not due . and payable at the time of his dismissal but which is only to accrue later date, and on due and become payable at some the condition that he had fulfilled his duty as a faithful servant down to that later date." that is remuneration was The case of Moriarty v. Regents Garage & Engineering ) was particularly relied upon by the Company Limited(1 learned counsel for the Sassoons. No question of dismis sal or removal for misconduct arose in that case, but the director whose the rate of £150 per annum" ceased to be a director on settle ment of disputes between himself· and the company, the director agreeing to accept payment of all money to him upon his debentures and the debentures being paid off in the middle of the year. The director sued the company to recover a proportionate part of the £150 as his fees for the broken period. The Deputy County Court Judge gave judgment for the company, "at (r) [r92r] 2 K.B. 766. - { .• 1954 E. D. Sassoon rand Compa'!Y Ltd. v. The Commissioner of Income-tax, Bombay City. .Bhagwati J. 328 SUPREME COURT REPORTS [1955] there was a further appeal. holding that the director was not entitled to remuner ation for a broken part of a year. The Divisional Court reversed the decision of the Deputy County Court It was held by Judge and the Court of Appeal that neither under the Agreement the articles was the director entitled to the nor under sum he claimed. The question of the applicability of the Apportionment Act was sought to be raised before the Appeal· Court but was not allowed raised in the County Court. appeal as In arriving at this decision Lord Sterndale M. R. stated the position as follows at page 774 :- it had not been done to be "It seems to me that upon the construction of It is a payment per annum, a agreement it must fail. payment for a year, and unless he serves for the year he cannot get the payment." The decision in Swabey v. Port Darwin Gold Mining Co.('), had been cited before the proposition the director was in support of such cases entitled to his proportionate_ remuneration for the broken period. The Learned Master of the Rolls however observed at page 777 :- the Court of Appeal is power, mutual or one-sided, "There is nothing in Swabey v. Port Darwin Gold Mining Co.( 1 ) in my opinion to oblige us to hold that wherever to ter minate an agreement in the middle of the year, must, as a matter of necessity, be inferred a right to receive payment from day to day, and receive payment in this case there for the broken period. I do not think <lraw that inference." .circumstances which oblige me or induce me These authorities as well as the cases of M apleson v. Sears('), and Sanders v. Whittle( 3 the well ), enunciate ·established principle that wages and salaries are not apportioriable upon the sudden cessation of a contract of service, which is stated to be still in Batt the Law of Master and Servant, 4th Edn., at page in a 209 until a hardy higher Court a confirmation of the view of McCardie J. injustice expressed in Moriarty's case(') as regards litigant successfully the law (t) I Meg. 385. (2) 28 T. L. R. 30. (3) 33 L.T. 816. (4) [1921] 2 K.B. 766. - I 1954 E. D. Sassoon and Company lid. v. The Commissioner of Income-tax, Bombay City. BhagwatiJ. I .. "" • • I.. 'S.C.R. SUPREME COURT REPORTS 329 In former event the master or the benefit ·of the Apportionment Act such cessation by mutual consent of -0£ denying .a man who may have been guilty of mis.conduct. is a sudden This rule applies not only when there -cessation of a contract of service by the unilateral the servant but also when .act of parties. the servant would be .deprived of his proportionate wages by his own act or default or he would be able to sue his master for dam for wrongful dismissal, but no claim for propor .ages tionate salary or wages would survive under the con In tract of service. latter event the consensus of ·opinion between the master and the servant would be the contract of service and no sufficient ·daim for proportionate wages or salary would survive unless it was made an express term of the Agreement In either event thus arrived at between there would be no question of the servant claiming the broken period. from his master wages or salary for transferees attempted to throw doubt on the correctness of the rule as enuncia ted above by citing a passage from Palmer's Company Precedents-16th Edition-Vol. 1, page 583, where the learned author discusses the question of apportionment -in the case of director's remuneration payable at so much per annum:- Learned counsel the parties. terminate "Where the words that year has given rise the clause provides that a director paid so much per annum, being omitted, and he vacates office before :a current year, :a claim for an apportioned part of the -opinion. pany(1 ), in follows, and not as shall each the funds of £200, and 'The words 'at the the articles .director is to be 'at the rate of' the end of the question whether he can maintain remuneration to some difference of In Swabey v. Port Darwin Gold Mining Com the article was as stated in the report : 'The directors remuneration out of the sum of the chairman in addition £100 per annum.' rate of' were not present (as appears registered at Somerset House). A the course of a current year, the Company in each year the Court of Appeal, receive by way of resigned in (r) (1889 )1 Meg. 385. 1954 E D. Sassoon and C.mpariJ [Jd. v. The-Commissioner of Income-tax, Bombay Ci!J. Bha, gwati J. 330 SUPREME COURT REPORTS [1955} and was held entitled to an apportioned part of remuneration for that year. But m Salton v. New Beeston Cycle Co.(1}, where the article provided 'the directors shall be enti tled to receive by way of remuneration m each year £5,000,' Cozens-Hardy J. held that a director who· vacated office before the end of a current year was not entitled to any apportionment. This case was followed by Wright J. in McConnell's Claim('), the words being 'each director shall be paid the sum of £300 per annum' ; J. in Inman '" Acroyd and Bert('). See and by Bruce also Central de Kapp Gold Mines('). In these four cases the Court no doubt proceeded on the assumption that report of Swabey's case(') was correct, and that the article m the words 'at the of.' Certainly Lord Alverstone C. J. acted on assumption in Harrison v. British Mutoscope, etc., Co.( 6 ) •. There the words were 'the sum of £ 1,500 per annum' •. In the meantime Inman v. Acroyd(') had been the Court of Appeal, and affirmed, but on the ground that it was by the articles to· apportion the remuneration at the end of each year. that case contained the directors This case, turned on therefore, really the cons truction of the particular article, and as it was carefully distinguished from Swabey's case (' ), the authority of that case, on an article omitting the words 'at the of, referred remams unshaken." Swabey' s case(') was to by Lord Stern dale M. R. at page 777 in Moriarty's the Rolls stated learned Master of case(') and in that case which would' oblige the Court that wherever there was to hold to terminate an Agreement power, mutual or one-sided, in the middle of the year, there must, as· a matter of to receive payment from necessity, be inferred a right the broken period- day to day, and receive payment for there was nothing (•) (i898] I Ch. 775. !2) fI901J I Ch. 728. (3) 1900J B2 L. T. 621, on appeal [1901] r Q.B .613, (4J (!899 W.N. 216, 235, 69 L,J. Ch. •8 (Wright].). (5) (•889) I Meg. 385. (6) Times, Nov .10, 1903, p.3. (7) [tgot] i QB. 613. (8) [!921] 2 K.B.D. 766, ... - , 1954 E. D. Sassoon and Company Lid. v. The Commissioner of lncom1-llJJr, Bombay Ci!J. Bhagwali J. S.C.R. SUPREME COURT REPORTS 331 the four cases inference or not. the remuneration or commission It really depended on the cir.cumstances of each case whether to draw In any event the terms of the Managing we have not before us under for payment of re Agency Agreements any provision rate of" any particular sum a muneration "at referred to by ratio of year and Palmer in the passage quoted above as also the obser vations of Lord Sterndale M. R. at page 777 in Mori arty's case ( 1 ) set out above are sufficient to enable us to hold that when is ex pressed at so much per annum without anything more the pay it would amount in law to a stipulation ment of remuneration per year and the servant would not be entitled remuneration unless and until he has completely perforll).ed his contract and such performance would be a condition precedent the recovery of any wages or salary for that definite pe:riod of service. That would be the position even if the remuneration was to accrue due and becomes vested at stated periods and unless the servant performed condition and fulfilled his duty as a faithful servant that stipulated date or the stated period no salary would accrue due and become payable to him until at the end of such period of service. to get any the E. D. Sassoon United Mills Ltd. and We shall now examine the terms of the Managing to see whether the Agency Agreements with a view to remuneration or Sassoons were entitled thereunder the broken periods. · the Agreement commission for between Managing Agents was for a fixed period of 30 years from the date of the registration of the Company and thereafter until they resigned or were removed from their office by a special resolution of the Company and the firm of E. D. Sassoon and the appointment of Company and their assigns was for the whole period. E. D. Sassoon and Company and their assigns cove the Company to be and act as nanted and agreed with such Agents for the remuneration and upon and subject therein contained. It was to the terms and conditions lawful to assign the agreement and their firm or Company to any person, rights thereunder (1) (1921] 2 K. B. D. 766. 3-87 S. C. India/59 - - 1954 E •. n. Sas.soon· and Co"mpany Ltd. v. T ht COmmi.s.sfoner of Income·lax, Bambay City. .Bhagwati ]: • #'- .. 332 SUPREME COURT REPORTS [1955) having authority by its constitution to become bound by these obligations and upon such assignment being to the Company, the Company was made and notified bound to recognise such person, firm or Company as like manner as if the the Agents of the Company name of such person, firm or Company had appeared in these presents the partners of in lieu of the names of E. D. Sassoon and Company and as if such person, firm or Company had entered into the Agreement. with the Company and the Company agreed upon demand to enter into an Agreement appointing such person, firm or · Company the Agents of the Company for the then residue of the term outstanding under the Agreement and with the like powers and authorities remuneration and emoluments and subject terms and conditions as therein contained. These provisions ·of the continuity of the Managing the Agreement showed the Agents of the Com Agents who were employed as pany for this specified period and under the terms and the substi conditions therein recorded. The new or if. they had tuted Managing Agents were treated as the Company and entered into' their name had appeared in the original Agreement in the lieu of E. D. Sassoon and Company who were the· Agents ·of the Company. f.irst These ·Managing Agents · described as such were to be paid the remuneration specified· in clause 2(a) of the Agreement which . was a commission of 7! per cent. per annum on the annual net profits of the Company· with a stipulation to the minimum remunera tion of Rs. 1,20,000 per annum. Clause 2(d) specified when the said commission was to become due to the Managing Agents and it provided that the commission was to be due to them yearly on the 31st March in each and every year during the continuance of Agreement. The commission was thus an annual pay ment calculated upon ·the annual net profits of Company and was to be due to the Managing Agents ye.aFly on .the '31st March in each and every year. Un less ··and ·Until the annual net profits of the Company were determined the 7! per cent. commission could not be ascertained but the sum none the less becami: due ·on the Agreement with instance appointed in regard 1954 E. D. Sassoon ana Company lid. v. The Commissioner of Income-tax, Bombay Civ. Bhagwati]. • ~.C.R. SUPREME COURT REPORTS 333 immediately after the annual accounts of the 31st March in each- and every year following dose of the accounting year of the Company. The <amount of such commission did not become a debt the Managing Agents until <>wing by the Company to be the 31st March in each and every year and was Company had been passed by the shareholders. The this manner postponement of the date of payment however did not prevent the amount of the commission thus ascertained becoming due to the Managing Agents and it was on the 31st March in each and every year that the amount of commission thus calculated at 7t per cent. per annum on the annual net profits of the ·Company became due by the Company to the Managing Agents. Until and unless the accounting year of 'Company had gone by and the Managing Agents had served the Company as their Agents for the full period no part of the Managing Agency commission which was payable per year in the manner aforesaid could become -Oue to them and the performance of the service for the year was a condition precedent to the Managing Agents being entitled to any part of the remuneration or com mission for the accounting year of the Company. The Managing Agency Agreement therefore was an entire -and indivisible contract stipulating a payment of re muneration or commission per year and enjoined upon the Managing Agents the duty and obligation of render the services to the Company for the whole year by ·way of condition precedent muneration or commission for the particular -accounting -year. to their earning any · - therein from assigning there · was nothing It was however urged that clause 10 of the Managing ·Agency Agreement itself contemplated a broken period, to prevent because Managing Agents the Agreement and thereunder at any time in a particular year their rights If the the Agreement. dMring Managing Agents therefore could assign the Agreement and their rights thereunder it could not be suggested that neither the transferors who could not complete the year of service nor the transferees who had also not ·Tendered the services as the Managing Agents for the continuance of _1 - - _I - 1954 E. D. Sassoon and Company Ltd. v. Thi Commissioner of Income-tax, Bombay City. Bhagwati]. • 334 SUPREME COURT REPORTS [1955] i1tnores transferee whole of the accounting year could earn any remunera tion or commission which would be payable Managing Agents only if they rendered the services to• It therefore followed the Company for the whole year. as a necessary corollary that both the transferors and' their remuneration or· transferees would be paid the propor commission and both would be entitled to tionate commission for the respective periods during which they rendered services as Managing Agents to the· Company. This argument however the fact that whatever be the position as between the transferor and inter se,. the transferee, whatever be their arrangements whatever be the periods of the year during which the Company in their capacity as the might have served Managing Agents, the Managing Agents as described in the recitals and clauses I and 3 of the Managing Agency Agreement were one entity and no severance of such periods of service during the course of a particular· year was ever contemplated under the Agreement. On the Managing· assignment, Agent as if its name had been inserted in the Managing the beginning. For the future Agency Agreement from period transferee· the place of the transferor and preserved the con- that whoever tinuity of happened to satisfy the Managing Agents at the commission for the accounting year became due to the Managing Agents thus described, which was expressly stated to be due yearly on the 31st March in each and every year,. became entitled to receive the debt which thus became the annual due and accounts of the Company had been passed by shareholders. The stipulation for the Company execut- ing in favour of the new or the substituted Managing them the Agents of Agents an Agreement appointing the Company for standing under tial upon the earlier provision stated in so many then residue of the term out the Agreement was merely consequen- therein contained which terms that the Company was bouncf recognise such new or substituted Managing Agents. like manner as if the Managing Agency so the description of the transferor effaced itself and their names had appeared in thereof after the payment time when became _;/ .. - - ~--" - ..;. :s.C.R . ... r. SUPREME COURT REPORTS 335 substituted Agents were created by the very said Agreement in lieu of the partners of E. D. Sassoon and Company and as if they had entered into the Agreement with the Company. The rights of such new -or of clause 10 of the Agreement and the formal embodi ment thereof in to be entered the Company with them merely confirmed the into by in them under rights which had already been created that clause. fresh Agreement 1954 E. D. Sassoon and Company Ltd. v. The Commissioner of Income-tax, Bombay City. B/iagwatiJ. .... "'." >- ~- ~ cannot affect the date ot It was further pointed out the construction of the relevant that at the end of the Managing Agency Agreement if not earlier, during there would certainly be a broken .continuance thereof the period of 30 years stipulated period because dause 1 of the Agreement would certainly expire on some date in February, 1950. The calendar year would ,expire on the 31st December, 1949, and there would of necessity be between the date of the expiration of the calendar year and the expiration of the term of the agreement a period of about 2 months which would certainly be a broken period and not a full year. What would happen however on the expira tion of the period of the Managing Agency Agreement terms of to a year or the Agreement which have reference It is years during the continuance of the Agreement. reason of unnecessary to speculate as that E. D. Sassoon and Company must have the fact received the full year's remuneration or commission at the end of the first accounting year of the Company they might ending with the 31st December, 1920, just as well give up, if need be, remuneration or commission for the last two months on the expiration <Jf the term of the Managing Agency Agreement. We the Managing Agency -see nothing Agreement which would compel or induce us to hold that there must as a matter of necessity be inferred to receive remuneration or commis therefrom a right sion for a broken period. to whether by terms of ..._ Learned counsel for Chidambaram Mulraj and Com pany Ltd. however sought to distinguish the terms of the Managing Agency Agreement of the :F.lphinstone Stiinning and Weaving Company Ltd. from those of the __. A 1954 E. D. Sassoon and , Company Ltd. v. The Commissioner of Income-tax, !Jombay City. Bhagwati]. 336 SUPREME COURT REPORTS [1955J there was nothing the Managing Agents the Company was during the E. D. Sassoon Managing Agency Agreement United Mills Company Ltd. even though as stated before no such distinction was made either before the income-tax anthorities or the High Court. He contend the Agency Agreement with the Elphinstone Spinning and Weaving 'Company Ltd. which corresponded with clauses 2(a), 2(d) and clause 10 of the Agreement between the E. D. Sassoon United Mills and their Managing Agents. The only term which was to be found in the Agency Agreement of the Elphinstone Spinning and Weaving Company Ltd. was the continuance of the Agreement to pay to the Managing Agents who were there described as E. D. Sassoon and Company Ltd. their successors and their assigns by way of remune ten per cent. on the net ration a commission of profits of the Company and a further sum of Rs. 1.,500 per month. There was besides clause 6 of the Agreement which conferred upon the right of retainer, and reimbursement in connection inter alia with all sums due to them for commission or otherwise. These payment of remuneration or commission a payment per annum and it was not possible to argue the Sas- to any remuneration or com soons were not entitled mission for a broken period thereunder. It may however be observed terms it was submitted did not constitute that the Managing Agency Agreement with which we are here concerned was the Agreement dated the 23rd May, 1922, between the Company and the Managing there described were E. D.' Sassoon and Com Agents their successors and pany Ltd. on behalf of themselves, the Sas assigns. Clause soons, the Agents of the Company from the 1st February, 1922, for the unexpired portion of the term of 60 years commencing from 3rd July, 1919, and it was these Managing Agents thus described, viz., the Sassoons, their successors and as signs, who were during the continuance of the Agree remunerated by a commission of 10 per cent. on the. net profi~s of the Company and the Com to pay such commission to them. The ·pany agreed l of the Agreement employed their successors and assigns the Sassoons and to be ~ ' 1954 E. D. SaJSoon anti. Company Ltd. v~- T he Commissioner of Incorne·tax, Eombay!City. ·-!""" Bhagwati] .. . S.C.R. SUPREME COURT REPORTS 337 retainer and reimbursement comm1ss1on became due reserved under right of clause 6 of the Agreement would not carry the trans ferees any further because it was in respect of all sums due to them for commission or otherwise. Unless- and It would still have to be had no such right of retainer. determined whether any sum became due to them by way of such commission. Whe~her any commission be came due to them would depend upon the construction of clause 3 of the Agreement an<\ under that clause the commission calculated at 10 per fent. of the net profits of the Company was to become due to them and was to be paid by the Company to diem during the contin uance of the Agreement. We have got . to determine what is the full implication of this clause of the Agree rnent,-"the commission of 10 per cent. on the net profits of the Company." The word "profits" has a well defined legal meaning as was observed by Lord Justice Fletcher Moulton at page 98 in The Spanish Prospect ing Company Limited (1) : "The word 'profits' has in mercantile phraseology in my opinion a well defined legal meaning, and this meaning coincides with in general par the fundamental conception of profits the word lance, although indicated by the 'Special may at times bear meanings context which deviate in some respects this fun damental signification. implies a comparison 'Profits' between the state of a business at two specific dates· usually separated by an interval of a year. The funda mental meaning is -the amount of gain made by the business during the year. This can only be ascer tained by a comparison of the assets of the business at the two dates." This concept of the term was also adopted by Mr. in . Commissioner of Justice Mahajan, . as he then was, Income-tax, Bombay v. Ahmedbhai Umarbhai and Com pany, Bombay(') : "Profits of a trade or business are what is gained implies a comparison bet the business. The term ween the state of business at two specific dates separa ted by an the fundamental (1)[1911] 1 Ch. D.. 901. (11)[1950) 18 I. T. R. 472 at page502. interval of a year and - - - 195+ E. D. Sassoon and Company Ltd. Yo Tiu Commissiantr -0f Income-tax, Bombay CitJ. BJiagwatiJ. 338 SUPREME COURT REPORTS [1955] is the amount of gain made by meaning the business during the year and can on! y be ascertained by a com the business at the two dates, parison of the assets of the increase shown at a later date compared to earlier date represents the profits of the business." to prevent to construe the Company It was urged before us that there was nothing in the terms of the Agreement which provided that the profits were to be ascertained at the end of every year, and there was nothing if it so from casting its ,accounts and ascertaining the net profits half yearly or quarterly or even every month by in that manner. Theoreti preparing trial balance sheets cally speaking all this may be possible but we have the Agreements arrived at between in a business sense. Ordinarily in the business people case of business or trading concerns accounts of profits intervals usually separa are not made except at stated in the case of limited Com ted by a year. Particularly panies the Indian Companies Act incorporated under the accounts are cast every year and the net profits earn ed by the Company are ascertained every year both for the declaration of dividends and for submitting the retu rns to the income-tax authorities. Under section 131(1) of Indian Companies Act of 1913 every Company was required once at least in every year and at intervals of the accounts to be not more to be prepared which was balanced and a balance sheet called the annual balance sheet. The first schedule to the Companies Act which contained the regulations by which unless excluded the affairs of the Company were to be governed provided under Regulation 106 the pre paration once at least every year of the profit and loss the Regulation 108 account for the period and under to be made out in every year and laid before the~ Company in general meeting. Having regard to the course of business which prevailed in this Company also so far as it is evidenced by the fact that the account of the Managing Agency commission was made up for the calendar year 1943 and was paid to Chidambaram Mulraj and Company Ltd., who became the Managing· Agents in place and stead of the Sassoons in the year 1944, the balance sheet than 15 months it is reasonable to assume that to cause - --~· • E. D. Sassoon and Company Ltd. v. Th• Commissioner of lncome·ltl!C, Bombay City. Bhagwati]. S.C.R. SUPREME COURT REPORTS 339 the • justified from month In any event it would be absurd this purpose. If the profit or there may be a theoretical possibility of throughout made up accounts of this Company were the end of every calendar year. The profit and loss of the Company was then ascertained and a commission of 10 per cent. on the net profits of the Company was pai<l to the Managing Agents of the Company for the In the case of limited Companies time being. like those before us we would be that nor in presuming the accounts are made up every year and even though . accounts being cast half yearly or quarterly .or even every month no such procedure woul<l be adopted by the Company. the profits of the Company could accrue suggest from day to day or even to month. The working of the Company from day to day could certainly not indicate any profit or loss. Even the working of the Company from month to month could not be taken as a reliable guide for has got to be ascertained by a comparison of the assets the most businesslike way of at two stated periods, it would be to do so at stated intervals of one year and that would be a reasonable period to be adopt . ed for the purpose. In the case of large business con- cerns like these the working of the Company during a the working particular month may show profits and in a particular month may show loss. The working during the earlier part of the year may show profit or loss and working in the later part of the year may show to counter-balance the loss or profit which would go profit or loss as the case may be in the earlier part of the profits which ·the year. the Company may appear to have earned during earlier months of the year or even during the 11 months · or the year may be considerably reduced or even wiped out during the later months or the last months · of the year by reason of some catastrophe or unforeseen to assume · events. that the profit or loss as the case may be should be determined at the end of every year so that on such ·calculation of net profits the Managing Agents may be the percen . paid their remuneration or commission at :tage stipulated in the Managing Agency Agreement and It may as well happen therefore · reasonable It would be 1954 E. D. Sassoon and Company Ltd. . v. The Commissiorier of lncom~~taxJ Bombay City. Bhagwati]. 340 SUPREME COURT REPORTS [19S5J in not the shareholders also be paid dividends out of the net profits of the Company. We are sure that these were the considerations which weighed with the Managing taking up any such, Agents of this Company contention before the Income-tax authorities and th~ High Court that the remuneration or commission pay able to them under the Managing Agency Agreement was· not payable per year and the contention put for- ward before us in this behalf was a clear after-thought .. We would be therefore justified terms. and conditions in regard to the payment of Managing these Managing Agency Agency Commission· in both Agreements as on a par with each other stipulating for such payment per year on the net annual profits of the Companies. in treating If this be the true construction of the Managing~ indivisible, the Companies Agency Agreements it follows that the contract of ser- vice between the Companies and the Managing Agents. was entire and the remuneration or commission became due by Managing Agents only on completion of a definite period' of service and at stated periods, that it was a condi tion precedent to the recovery of any wages or salary fo respect thereof that the service or duty should be completely performed, remuneration consti that such tuted a debt only at the end of each such period oF service and that no remuneration or commission wa"' payable to the Managing Agents for broken periods. transferees was that The question still remains whether the remuneration the broken periods accrued to the Sassoons and the. - contention which was strenuoUllly urged before us on behalf of the rendered the services Agreements income could be attributed whatever was earned by the Sassoons and accrued to them chargeable accounting period and paid in the year 1944 to the transferees. the ser-. the source of income and' to those services .. in the - though it was ascertained,' in terms of the Managing Agency to the respective Companies, thus rendered were the Sassoons · had' · The word "earned" has not been used in section 4 of: talks of "income,. : the Income-tax Act. The section _;. 1 954 E. D. Sassoon ani Company Ltd. v. The Commissioner· of Income-tax, Bombdy City. Bhagwati J._ ' .... < - - S.C.R. SUPREME COURT REPORTS 341 to the asses see profits and gains" from whatever source derived which (a) are received by or on behalf of the assessee, or (b) accrue or arise in the taxable territories during the chargeable accounting period. Neither word "income" nor the words "is received," "accrues" and "arises" have been defined in the Act. The Privy Council in Commissioner of Income-tax, Bengal v. Shaw Wallace & Ca.(1 ) "income" attempted a definition of in the words following :- think, "Income, their Lordships Indian lncome-tax Act, connotes a periodical monetary return in' with some sort of regularity, or expected 'coming is not regularity necessarily one which is expected to be continuously productive, but it must be one whose object is the pro duction of a definite return, excluding anything in the nature of a mere windfall." from definite sources. The sour.ce Mukherji J. has defined these terms in Rogers Pyatt ) lands or investments Shellac & Co. v. Secretary of State for India( 2 "Now what is income ? The : is nowhere defined in the Act ...... In the absence of a statutory definition we must take its ordinary dictionary mean the periodical produce in as ing-'that which comes of one's work, business, (consi dered in reference to its amount and commonly expres sed in terms of money) ; annual or periC>dical receipts accruing (Oxford Diction to a person or corporation" idea of receipt, ary). The word clearly the Act is to actual or constructive. The Policy of taxable when it is paid or received · make 'arises' either actually far as and 'is received' are receiving of income is concerned there can be no diffi culty ; it conveys a clear and definite meaning, and I can think of no expression which makes its meaning itself. The words plainer 'arise' also are not defined in the Act. 'accrue' and The ordinary dictionary meanings of these words have got to be them .. in the sense 'Accruing' taken as the meanings attaching to is synonymous with or constructively. three distinct 'Accrues,' terms. So than the word the amount 'receiving' implies 'arising' (2) 1 J.T.C. 363 at p. 371. (1) I. L.R. 59 Cal. 1343 at p. 1352. t954 .E. D. Sassoon and Company Ltd. v. ·The Commbsioner of lnropie-tax, BombayCi(l', Bhagwati]. 342 SUPREME COURT REPORTS [1955] It 'is 'accrues/ 'arises' and strictly synonymous with of springing as a natural growth or result. The l1av expressions received' speaking 'accrues' ing been used in the section, should not be taken as 'arises' but in the distinct sense of growing up by way of addition or increase or as an accession or advantage ; while the word 'arises' means comes into existence or notice or itself. The former connotes the idea of a growth presents or accumulation and latter of the growth or accumulation with a tangible shape so as to be receiv to say that this distinction has able. is difficult the Act and perhaps been throughout maintained in the two words seem idea or ideas the same very similar, and the difference only one is more appropriate than the other when applied to particular cases. clear, however, as pointed It is out by Fry L.J. in Colquhoun v. Brooks('), [this part of reversal the decision not having been affected by the of the decision by that both the House of Lords(')] the words are used to the word in contradistinction to receive. They repre "receive" and indicate a right sent a stage anterior income becomes receivable and connote a character of the income which is more or less inchoate. the point of time when to denote in this One other matter need be referred to in connection with the section. What to be taxed must be is sought income and it cannot be taxed unless it has arrived at a stage when it can be called 'income'." The observations of Lord Justice Fry quoted above in Colquhoun v. Brooks( 1 ) the provisions of 16 and 17 Victoria 'D'. The words to be 'profits or gains, arising or accru .and it was observed by Lord Justice Fry at page by Mukerji J. were made while construing Chapter 34 construed there were ing' 59: section 2 schedule "In the first place, that the tax in respect of 'profits or gains arising or accruing.' cannot read those words as meaning 'received by.' the enactment were I If limited to profits and gains 'received I would observe (1) (1888) 21 Q.B.D. 52 at p. 59. (•) (1889) 14 App. Cas. 493· 1954· E. D. Sassoott amt· Company Ltd. v. The Commissionn. of Jru; ome-tax, Bombay City. Bhagwatij. S.C.R. SUPREME COURT REPORTS 343 residing that no foreigners as much this country. The to all Her Majesty's the person to be charged, by' limitation would subjects as result income-tax would be payable would be upon profits which accrued but which were not actually received, although profits might have been earned in the kingdom and might have accrued in the 'arising kingdom. or accruing' are gentral words descriptive of a right to receive profits." that the words therefore, I think, is clear therefore To the same effect are judgment of Mukerji J. the observations of Satya narayana Rao J. in Commissioner of Income-tax, Madras v. Anamallais Timber Trust Ltd. (1) and Mukherjea J. in Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay (2) where this passage from in Rogers Pyatt Shellac & Co. v. Secretary of State for lndia( 8 ), is approved and income may accrue adopted. It to an assessee without the actual receipt of the same. If the assessee acquires a right income, the income can be said to have accrued to him though it may be later on its being ascertained. The that he must have acquired a right basic conception to receive him by somebody. There must be as is otherwise expressed debitum in presenti, solvendum in futuro; See W. S. Try Ltd. v. Johnson (Inspector of Taxes)(4 )> and Webb v. Stenton and Others, Garnishees( 5 ). Unless the assessee a and until there is created in favour of that he has debt due by somebody income acquired a right has accrued to him. it cannot be said to receive the income or that the income. There must be a debt owed received to receive the The word "earned" even though it does not appear in section 4 of the Act has been very often used in the course of the judgments by learned Judges both in the High Courts as well as the Supreme Court. (Vide Com missioner of Income-tax, Bombay v. Ahmedbhai Umarb hai & Co., Bombay( 6 ), and Commissioner of Income-tax, Madras v. K. R. M. T. T. Thiagaraja Chetty & Co.(7). (5) II Q.B.D. 518 at pp. 522 and 527 •. (6) (1950] S.C.R. 335 at p.364. (7) 24 I.T.R. 525 at p. 533. (1) 18 I.T.R. 333 at p. 342. (2) ('!950] S.C.R. 335 at p. 389. 13) I I.T.C. 363 at p. 372. (4) (1946] 1 A.E.R. 532 at p. 539. -'954 £. -D. Sassoon and • Company Ltd. v. ·The Commissioner · of Income-tax, Bombay City. ._.Bhagwati]. 344 SUPREME COURT REPORTS [1955] is effective to receive that any income has accrued It has also been used by the Judicial Committee of the Privy Council in Commissioners of Taxation v. Kirk ('). The concept however cannot be divorced from that of income accruing to the assessee. If income has accru ed to the assessee it is certainly earned by him in that he has contributed to its production or income can be traced to him. But parenthood of the income can be said to have accrued in order that the 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 in his favour. A debt must must have created a debt have come into existence and he must have acquired -a the payment. Unless and until his to receive . contribution or parenthood in bringing into the payment or . existence a debt or a right in other words a debitum in presenti, solvendum in futuro . it cannot be said to him. :·The mere expression "earned" in the sense of rendering . the services etc., by itself is ·of no avail. . . If ther~foie · on . the construction of the Managing Agency Agreements we cannot come to the conclusion · that the Sassoons had created any debt in their favour the payments from . or had acquired a right the Companies as at the date of the transfers of the ·Managing Agencies· in favour of the transferees no in ' come can be said to have accrued to them. They had no doubt rendered services as Managir:g Agents of the , Companies the broken periods. But unless aqd . until they completed their performance, viz., the com pletion of the definite period of service of a year which was , a condition precedent to receive stipulated ·-thereunder, no debt payable by the Companies was .· created in their favour and they had no right to receive the Companies. No remuneration any payment from · or commission could therefore be said to have accrued ~ to them at the dates of the respective transfers. · · · . can be said to ·have ' accrued to , date of _tile the Sassoons at transfers which could be though no mcome It was · however urged that even remuneration or commission their being entitled to receive respective (•) (igooJ:A.C. 5ss at p. 592. - .. ' • S.C.R. SUPREME COURT REPORTS 345 . . . d r9s1 - d f h subject-matter of any assignment by them in favour of the transferees,· the moment the remuneration or d •I d E.D.Sassoonan h comm1ss10n was ascertame at t e en . o t .e ca en ar Company Ltd. year and became a debt due to the l\Ianagmg Agents under the terms of the l\Ianaging Agency Agreements The Commission" it could be referred back to the period in which it . was of Income-t~x. ·earned arid the portions of the remuneration or com- Bombay City. mission which were,' earned by the Sassoons during the Bhagwati J. broken period could certainly then be said to be the income which had accrued to them during the charge- able accounting period. v. Reliance was placed is support of this position· on Commissioners of lnland'Revenue v. Gardner.ftiountain dJ D' Ambrumenil, Ltd.('). The assessee in that case carried on inter alia the business of underwriting Agents, and entered into Agreements with certain underwriters at Lloyds under which it was entitled to receive as remuneration for.its services in conducting the Agency, commissions on the net profits of each year's under writing. · The Agreements provided that "accounts should be kept for the period ending 31st December in each year and that each such account shall be made up and balanced at the end of the second clear year from the expiration of the period or year to which it relates and the amount then remaining to the credit of the account shall be taken to represent the amount of. the net profit of the period or year to which it relates and the commission payable to the Company shall be calculated and paid thereon." The accounts for the underwriting done in the calendar year 1936 were made up at the end of 1938 and the question that arose was whether the assessee was liable to additional assessment in respect of the commission on underwriter's profits from the policies underwritten in the calendar year 1936 in the year in which the policies were underwrit ten or in the year when the accounts were thus made up. The assessee contended that the contracts into which it entered were executorycontracts, under which its services were not completed or paid for, as regards commission, until the conclusion of the relevant account; that the profit in the form of commission was (1) 29 T.c. 69. 45 • , ' ' 346 [1955] 1954 - E.~. 8 ""0 omp:? . . SUPREME COURT REPORTS . . not ascertairn1ble orearned, and ·did not arise,. until that time and that the additional assessment which ";_ ~ndwas made in the year in which the policies were under 1 ·-written should accordingly be discharged. The Special The Commission.• Commissioner allowed the assessee's contention and of Income-tax, discharged the ·additional assessment. The decision of the Special Commissioners was confirmed on appeal by· Bombay City. Macnaghten J. in the King's Bench Division of the Bkagwati f. High Court_ The Cou.rt of Appeal however reversed this decision and a further appeal was taken by the assessee to the House of Lords- The House of Lords heid that on the true construction of the Agreements, the commissions in question were earned by the asses see in the year in which the policies were underwritten, and must be brought into .account accordingly and confirmed the decision of the Court of AppeaL It may be noted that the charge was on profits arising in each chargeable accom;1ting period and the profits were to be taken to be the actual profits arising in the charge able 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. Vis· count Simon in his speech at page 93 stated. that the assessee had acquired a legal right to be paid in futuro and that the principle was 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- \Vright in his speech at page 94 said that it was necessary to determine in what year the eommission was earned, or in the language of the Act, in what year the assessee's profits arose and observed at page 96 : - Lord "l agree with the Court of Appeal in thinking - that the necessary conclusion from that must be that the right to the commission is treated as a vested right which has accrued at the time when the risk was underwritten. It has then been earned, though the profits resulting from the insurance cannot be then 1954 E. D. Sassoon and Company Ltd. 1 v. The Comrizissioner i of Income-tax, Bomb.ay City. Bhagwati]. S.C.R. SUPREME COURT REPORTS 347 is vested, though ascertained, but in practice are not ascertained until the end of two years beyond the date of underwriting. The right its valuation is postponed, is not merely postponed but depends on all the contingencies which are insurance inevitable risk, losses which may or may not happen, returns of to be arranged for additional risks, premium, premiums the whole catalogue of uncertain reinsurance, and future into ac count according to ordinary commercial practice and the delays and difficulties which understanding. But there may be in any particular case, however they may affect the profit, do not affect the right for what it eventually proves factors. All these have to be brought to be worth." in any to me Lord Simonds in his speech at page 110 stated :- "It is clear the commission is wholly in year 1 in respect of the profits of that year's I should have thought that it was that that commiss!on did not accrue for it was in that same year though earned underwriting. If so, not arguable income-tax purposes not ascertainable until later." - decisions The fact that the account of the commission could not be made up until later did not make any difference to the position that the commission had been wholly earned during the chargeable accounting period and the income had accrued to the assessee during that period. Learned counsel for the transferees also relied upon in Bangalore Woollen, Cotton and Silk Mills Co., Ltd. v. Commissioner of Income-tax, Madras( 1 ), and Turner Morrison and Co., Ltd. v. Com missioner of that as and when the sale proceeds were received by the profits made by the Company were the Company embedded in those sale proceeds and if that was so the percentage of the net profits which was payable by the Companies to the Managing Agents as and by way of those sale similarly' embedded .commission was proceeds. If the profits to the Company thus accrued during the chargeable accounting period the commis sion payable to the Managing Agents also could be said to have accrued to them during that period. Income-tax, West Bengal( 2 ), (1) [1950] 18 I.T.R. 423. (2) [1953] 23 I.T.R. 152. -17 S C I ndia/59 195 ... E. D. Sassoon and Company l.Jd. v, Thi Commissioner of Income.tax, Bombay City. Bhagwati]. 348 SUPREME COURT REPORTS [1955) -,.au .- ,• )- . f. it may later on its accrual." in Commissioner of the assessee and also upon It is no doubt true that the accrual of income does not depend upon the accounts its ascertainment or cast by assessee. The accounts may be made up at a much later date. That depends upon the convenience the exigencies of the the income, profits or gains situation. The amount of may thus be ascertained the accounts being the accounts are thus made up made up. But when the income, profits or gains ascertained as the r~sult of the account are referred back to the chargeable account they have accrued or arisen ing period during which in respect of the same and the assessee is liable "The com during that chargeable acco11nting period. putation of the profits whenever take place cannot possibly .be allowed to suspend their accrual. ..... the commission . . . . . . . . . . ". "The quantification of is not a condition precedent (Per Ghulam Hassan Income-tax, Madras v. K. R. M. T. T. Thiagaraja Chetty and Isaac Holden and Sons, Ltd. v. ) . See also Co.X 1 Inland Revenue('), and Commis Commissioners of sioners of Inland Revenue v. Newcastle Breweries Ltd.(' ) . What has however got to be determined is whether to the assessee and income, profits or gains accrued to him it is neces in order that the same may accrue sary that he must have acquired a right to receive same or that a right to the income, profits or gains has its valuation may be become vested its materialisation may depen<l postponed or the contingency that the making up of the accounts income, profits or gains. The argument that the income, profits or gains are embedded in sale proceeds as and when received by the Company also does not help the transferees, because the Managing in the sale proceeds Agents have no share or interest such. They are not co-sharers with the received as Company and no part of the sale proceeds belongs to them. Nor is there any ground for Company are trustees for the business or any of for the Managing Agents. The Managing the assets to _have acquired a Agents cannot . therefore be in him though though saying (1) 24 I.T.R. 525, at p. 534. (2) 12 Tax Cases 768. (3j 12 Tax Cases 927. 1 954 E. D. Sassoon and Company Ltd. v. Thi Commissioner of Income-tax, Bomba> City. Bhagwati]. • - -',- ., I • - ) S.C.R. SUPREME COURT REPORTS 349 receive any commission unless and until the .accounts are made up at the end of the year, the net profits ascertained and the amount of commission due by the Company .to the Managing Agents thus determi ned. (See Commissioners of Inland Revenue v. Lebus( 1 ) ). It is clear therefore that no part of the Managing the Sassoons at transfers of the Agencies Agency commission had accrued the dates of to the transferees. the respective support this conclusion. The two decisions which were sought to be distingui shed by the High Court in the judgments under appeal In the unreported deci sion of the High Court of Bombay in Commissioner Qf Excess Profits Tax, Bombay City v. Messrs. P. N. the Managing Agency Agreement Mehta and Sons(2), terms as that of the the very same .couched E. D. Sassoon United Mills Company Ltd. The Manag ing Agents were to be paid 10,per cent. of the net annual profits made by the Company with a guaranteed mini mum commission of Rs. 15,000 per annum. The accounting year of the Company was the calendar year. The Tribunal had held the annual profits could only be ascertained when the accounts of the Company it was then that the 10 per cent. were made up and commission would accrue to the Managing Agents. The contention of the Department was that as the Managing Agents worked as such from day to day and helped the Company to earn profits, profits accrued to them from day to day and not at the end of the year. This con tention was negatived by the High Court :- "It is only on net annual profits that the Managing to any commission. A Company Agents are entitled may have worked remaining six months it may make a large profit so as. to wipe off the loss, and have a net profit to show. It is only as a rnsult of the working of the Mills for the whole year that it will be possible to ascertain whether the Mills have worked at a loss or at a profit, and what the Managing Agents are the profit was. Therefore, result of the only entitled to a commission on the six months at a loss, (1) [1946] 1 A. E. R. 476; s.c. 27 Tax Cases 136. (2) [1950] I. T. Ref. No. 19 of 1950. ' • . \ '954 1£. D. Sassoon and Company Ud. v. The Commissioner of Income~tax, Bombay City. Bhagwati J.

#350. SUPREME COURT REPORTS [1955] that amount. working of the Mills for a whole year. If the working shows a net annual profit which gives them a commis the basis of 10 per sion of more than Rs. 15,000 on If, on the· cent., they are entitled other hrnd, the working does not show a profit which them to a commission of Rs. 15,000 they are entitles in our in any case entitled to that amount. Therefore the accrual of opinion, the commission was at the calendar the year maintained by the Mills and year, which was time as contended by the Depart- 1nent." the end of the Tribunal rightly held from time to to when the right In determining the place where to pay Managing Agency commission the consideration of the place where In the case of Salt and Industries Agencies Ltd., Bombay v. Commissioner of Income-tax, Bombay City(1 )", the Court no the question the profits had doubt was what was accrued. the profits had accrued it was however necessary to find when the profits had accrued to the assessee and it was held that the matter was the consider what was conclusive of to Managing Agency com ation as mission arose and when did the Company become to the liable that it was Managing Agents and it was further held only when all the accounts of the working of the com pany were submitted to the head office in Bombay and it could be said that a the profit was determined that 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. These considerations are germane to decide in these appeals and question which we have support the conclusion which we have already arrived the commission would arise the right to receive at, to the and the income, profits or gains would accrue Managing Agents only at the end of the calendar year terminus a quo for the making up of the which was the accounts and ascertaining the net profits earned by the Company. We fail to see how tl1ese cases which were relied upon by the Revenue before the High Court could be distinguished in the manner in which it was done. (r) r8 I.T.R. 58. 1954 E. D. Sassoon and C,ompany Ltd. v. The Commissiorur of Income-tax, Bombay Ci!Y. Bhagwali]. - t ,.t S.C.R. SUPREME COURT REPORTS 351 term. We were invited by the Sassoons learned counsel for the to approach the question from another point Sassoons transferred <Jf view and that was that what had been transferees was a source of income, viz., the Managing Agency which was to run for the unexpired residue of the It was urged that where a source of income was transferred any income which accrued from income and not of the transfer was transferors, and that it was immaterial (a) that at the there was an expectation that at a date of the transfer (b) that the transferor future date income would accrue, transfer had contributed to c;eate any in.come which might eventually accrue and ( c) income a higher price had been paid for the transfer. that because of the expectation of that source after the date of the work before transferees' Reliance was placed in this connection on the case <Jf Commissioners of Inland Revenue v. Forrest (1 ). In that case the assessee purchased certain shares on the 25th November, 1919, and paid an excess price "to cover the portion of the dividend accrued to date." A dividend of 10 per cent. for the period ending on 28th February, 1920, was declared on the 13th May, 1920. the dividend The contention of the assessee was that should be treated as capital in view of the terms of the contract of purchase and not included in the computa tion of his income. Under the provisions of the Income receivable by him tax Act were required included in the computation of his income. The the. legal effect of such a transaction of the purchase of shares. Lord Ormidale observed at page 709 :- Judges however discussed the dividends which were to be learned "The value of the shares had to be determined as a matter of bargain between the parties, and the pur chaser thought that it was not unreasonable that he should pay something over par for them because of the possibility, not the certainty but the possibility, of a dividend six months afterwards being paid upon shares so purchased by him." Lord Anderson observed at page 710 : ( 1) 8 Tax Cases 704. 1954 E. D. Sassoon and Company Ltd. v. The Commisiontr of Income-lax, Bombay City. BhagwatiJ. • 352 SUPREME COURT REPORTS [1955} "He buys two things with his money. He buys, the first place, a share of the assets of the industrial the number of shares which concern proportionate he has purchased ; and he also buys the right to partici in any profits which the Company may make . in J:'low, when a transaction of this nature is the future. financial year entered into during the currency of that what is obvious industrial concern that not only is a part of the assets is this, happens is bought as purchased outright but that a chance well-a chance of sharing in any profits which may be made during the currency of that financial year." the stock, Wigmore (H. M. Inspector of Taxes) v. Thomas Sum merson and Sons, Limited ( 1 ) was the case of a vendor loan stock bearing interest payable , without of war the 10th deduction of tax. The sale was effected on rights. The vendor was April, 1923, with interest in respect of the amount assessed for the year 1923-24 the stock of interest said to have accrued on period between the last payment of interest and that the price sale of it being contended received by the vendor on sale of stock included interest. The purchasers said that they were not liable in respect of the income which had been accru- to tax in a period ing on It was •anterior to the date on which they purchased. observed that- the interest and interest was the vendor did not receive subject-matter of the the price of an expectancy of interest which was not the subject of taxation. It was not argued that the interest accrued de die in diem and the vendor. was held not assessable in respect of the interest accrued at the date of the sale of the stock. tax. But he received they had purchased that the truth of the matter was the security the sale of an orchard inclusive of Commissionas of Inland Revenue v. Pilcher( 2 ) was the case of the cherries year's fruit crop. The assessee had valued which were on the trees at £ 2,500 and had put ·a man in the orchard after he had purchased it immediately at the auction. He commenced to pick the fruit on 25th May, 1942, and completed the operations on (1) 9 Tax Cases 577. (2) 31 T.-x Cases 314. - • ,l. •• - - S.C.R. SUPREME COURT REPORTS 353 12th June, 1942. He realised £ 2,903 as the price of cherries. This sum was brought into the profit and account as a trading receipt and the contention of the assessee ·was that in computing his profits he was en to charge the sum of £ 2,500 being the purchase titled price of the cherries sold for £ 2,903 which sum had been brought into credit as a trading receipt. This con tention was negatived and it was observed by Lord Justice Jenkins at page 332 :- E. D. Sassoon and Company Ltd. V• The Commissioner of Income-tax, Bombay City. Bhagwati ]. "It is a well settled principle purchase of an income-bearing asset in the nature of capital outlay, and no part of the capital so laid out income-tax purposes, be set off as expenditure can, for against income accruing from that outlay on the asset in question." There is a further passage in the judgment of Jenkins L. J. at page 335 which is very instructive. It had been the revenue should look at the transac contended tion from the assessee's point of view and should cpn sider it in a manner favourable to him. This contention was dealt with in the manner following :- to buy the cherries the cherries from to his own calculation, "One has to remember that transaction con cerned not merely Mr. Pilcher but also the vendor of the orchard. Mr. Pilcher was able to buy the orchard the vendor and by complete with that means, according cherries stood him in £ 2,500. It by no means follows that if he had been minded from the land, as a separate transac the vendor apart tion, the vendor would have been willing to sell them to him for £ 2,500, or at any price. The difference ii obviously a material one from the vendor's point of view because, dealing with the matter as he did, he was receipt, selling a capital asset, and the resulting capital If he sold prima facie, would attract no trade he would at cherries separately once have created an income receipt on which, prima f acie, tax would have in the form of the bargain required to make alteration it more favourable to Mr. Pilcher from the tax point of vie'-": would have involved an alteration not merely of form but of substance owing to its adverse effect on been exigible. Therefore in the way of tax. '954 E. D. Sassoon and Company Ltd. v. The Commissioner iof Income-tax, Bombay City. Bhagwa#J. 354 SUPREME COURT REPORTS (1955J situation of the vendor, and assumed been one to which Mr. Pilcher could have secured vendor's agreement." it cannot be thus altered would have the bargain though These observations throw considerable light on in the cases before us. It will be situation obtaining total amount of Rs. 75,77,693 remembered received by the Sassoons on the transfers of the Manag to the "Capital Reserve ing Agencies was taken by them Account." No part of that amount was treated by them as a receipt of income and it is debatable whether any part of the same could have been allocated as a the transferees had income even receipt of transferees obtai1ml so. All desired to do under the deeds of assignment and transfer executed in their favour was an income bearing by the Sassoons asset consisting of the office of Managing Agents, Managing Agency Agreement and all rights and beriefi ts as such Managing Agents under the Agreements transferees and no part of the consideration paid by the the Sassoons could be allocated as a receipt of their contribution towards the mcome by the shape of services earning of the commission rendered by them as Managing Agents of the Com transferees panies for transfer obtained under in the event of the condition precedent by way of complete performance of the obligation of the Managing Agents the Managing Agency Agreements being fulfilled and a debt arising in favour of the Managing Agents at the end of the stated periods of service contingent on the ascertainment of net profits as a result of the working of the Company during the calendar year. the expectancy of earning a commission the deeds of assignment and the broken periods. What reason of The last case to which we were referred by learned counsel for the Sassoons was The City of London Contract Corporation, Limited v. Styles (Surveyor of Taxes)('). The part of the business taken over by the assessee in that case consisted of unexecuted and partly executed contracts. The contracts were executed after the date of the purchase by the assessee aad [r) 2 Tax Cases .239· • > .. - .... ' ... A E. D. Sassoon and Company Ltd. v. The CommiJSioner of Income-I ax, Bombay City. Bhagwati]. • - .l 355 to deduct the price paid SUPREME COURT REPORTS S.C.R . the con .assessee sought tracts from the profits arising from their performance. This deduction was not allowed, because whatever price the assessee paid for the purchase of the business was treated as the capital which had been invested for the purpose of acquiring that business and the assessee could not deduct from the net profits of the working of the business after the date of the purchase any part of the capital which had been thus invested by it. This in the purchase of result was achieved even unexecuted contracts the part of the work done the performance of the con tracts by the vendors. The assessee derived the benefit from such partial execution of the value of such work was not vendors ; nevertheless treated as any vendors and which the assessee was entitled to deduct from its profits arising from the performance by it of those unexecuted contracts. income which had accrued the contracts by there was included towards though the question these cases were concerned with Learned counsel on behalf of the transferees conten <led that all income derived by the assessee <JUestion whether -out of the income bearing asset after the date of purc}iase could be treated as a capital expenditure so far as it formed part of the consideration paid by the :assessee to the vendors and in none of these cases were the Courts concerned with that arises before us, viz., whether any part of the income which was actually received by the assessees could be said to have accrued to the vendor. Even though the question involved <lid not arise in terms it is nonetheless consideration of the question whether the assessee was liable the whole of the in come thus derived by him. As was pointed out by Jenkins L. J. in Commissioner of Inland Revenue and v. Pilcher(1), quoted above, the vendor's point of view cannot be neglected and once you come to the conclu follows sion that the assesse alone is liable it necessarily that the vendor certainly has nothing to do with the same. If it were otherwise the vendor would certainly be liable tax and no purchaser would miss the ()pportunity of avoiding his liability for that portion of income-tax on to pay (r) 31 Tax Cases 314 at p. 335. 1 954 E. D. Sassoon and Company Ltd. v. Tht Commissioner of lncoma-tax, Bombay City. Bhagwati J· [1955} the purchasers SUPREME COURT REPORTS 356 the income which can be said to have accrued to vendor. As a matter of fact such a contention was taken in Wigmore (H. M. Inspector of Taxes) v. Thomas Summerson and Sons Limited('), respect they declined to be assessed for tax in of income which had been accruing on the securities they had purchased the date at which they did purchase. This contention however did not prevail and the vendors were held not assess able in respect of the interest accrued on the date of the sale of the stock. in a period anterior It therefore clear they transferred that the Sassoons had not ear ned any income for the broken periods nor had any in respect of the same, and income accrued to them transferees under respective deeds of assignment and transfer did not they had earned or had include any income which accrued them and which the transferees by virtue of the assignment in their favour were in a position 'to If any debt had accrued due to the Sassoons collect. by the respective Companies at the dates of respective transfers of Managing Agencies such debt would cer tainly have been the subject-matter of assignment. But if what was transferred' by' the Sassoons pective transferees were merely expectations of earning commission and not any part of the commission actu ally earned by to them under the terms of the Managing Agency Agreements, the Companies received terms of the Managing Agency Agreements under the which were income and no part of such income could ever be said to have accrued to the Sassoons, during the chargeable accounting period. them or which had accrued to them would be transferred transferees it is unnecessary In view of the above the contention which was urged by for the Sassoons income liable to pay Commissioner of Tata Sons Ltd. ( 2 and he also referred us to deal with the learned counsel that even if there be an assignment of the assignor would be the tax. He referred us to the case of the Income-tax, Bombay Presidency v. in support of this contention of his 'G' at page 209 in the assignee and not to note ) , (1) 9 Ta.< Cases 577. (2) [1939] 7 I. T. R. 195. • .. • - S.C.R. SUPREME COURT REPORTS 357 Simon's Income-tax, 2nd Edn., Vol. II, where the ratio of Parkins v. Warwick (H.M. Inspector of Taxes)(1 ), relied upon by the High Court in the judgments under appeal has been criticised. We do not however think it necessary to go into this question as in our opinion there were no debts due by the Companies to the Sas soons which were assigned under the respective deeds of transfer and assignment. 1954 E. D. Sassoon anrl Company Ltd. v. The Commissioner of Income-tax, Bombay City. Bhagwati]. transferee, local usage to the The only question which remains to consider is whe ther section 36 of the Transfer of Property Act imports the principle of apportionment in regard to the commission received by the transferees herein. Section 36 of the Transfer of Property Act provides-"ln absence of a contract or .contrary, rents, annuities, pensions, dividends and other shall, periodical payments the nature of income upon the transfer of the interest of the person entitled to receive such payments, be deemed, as between the transferor and the to accrue due from day to day, and to be apportionable accordingly, but to be payable on the days appointed for the payment there that the section applies in the of." It may be noted absence of a contract or to the contrary and also applies as between transferor and the transferee. There the application of these provisions. as between the subject and the Crown. (Vide The Commissioners of Inland Revenue v. Hender ). The contract to the contrary must son's Executors ( 2 the trans of necessity be as between the transferor and feree and it is only when there is no such contract the contrary the rents, annuities, pensions, divi dends and other periodical payments in the nature of income become apportionable as between the transferor and transferee, deemed to accrue due from day to day and be apportionable accordingly. The deeds of assign ment and transfer executed by the Sassoons in favour transferred an· the rights and benefits of the transferees under the Agency Agreement to the transferees and there was no question of apportionment of any com mission between the Sassoons and the In retain fact the transferees claimed (1) [1943] 25 Tax Cases 419. to retain and did 12) 16 Tax Cases 2B2 at p. 291. local usage is no room transferees. £. D. Sassoon and Compan_i• Ltd. v. The Commissioner of Income-tax, Bombay City. Bhagwati]. 358 SUPREME COURT REPORTS [1955] them. Whatever was the whole of the commission which had been paid by the Companies to them in the year 1944 and the Sas it as having been soons never claimed any part of earned by their contribution towards the subject whole of transferees matter of to the and that was sufficient to spell out a contract contrary as provided in section 36 of the Transfer of Property Act. the calendar year 1943 was the assignment that commission during in favour of the the earning of transferees because 'Of the previous year that he Section 26(2) of the Indian Income-tax Act also does it is only when the not help person succeeded has acquired an actual share of the income profits or gains in respect of it and as set out herein above liable to tax to or be no part of the commission actually accrued came a debt due by the Company to the Sassoons on transfers of the Managing the dates of the respective Agencies to operation of section 26(2) the person succeeded must have had an actual share in the income, profits or gains the construction of the to have Agreements acquired any the broken periods. the previous year and on in commission the Sassoons cannot be transferees. In order to attract The whole difficulty has arisen because reconcile the High itself to the situation that Court could not transferees had not worked for the whole calendar year and yet they would be held entitled to the whole income of the year of account ; whereas the transferors had worked for the broken periods and yet they would be held disentitled in the income for the to any share year. If the work done by the transferors as well as the transferees during the the year the criterion the result would certainly were taken to be true test under section 4(1)(a) be anomalous. But transferors of the Income-tax Act is not whether for any particular periods of the year but whether any income had accru transferees within the transferors and the work done chargeable accounting period. income or the services rendered by the person but the transferees had worked It is not respective periods of , ' • - - ' r - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - SUP.REME COURT .REP.ORTS 359 ,the 'f.hat income which •. h~s ;iccrued charge; ible accounting period recei,v~d. oy peqpp withii+ tli.e is the proper is ~h~ .subject-l)'latter- qf·, taxation. method of approacp- while ·considering the, taxability or otherwis~ pf, .income_ and no considerations of the work done foi; brokq1 periods oi; towards the .source of .inctJll; ie th<; u\tima~e lnco111e . di:tixed from no.r ,apy equitabl<; ,qonsi\terations can mak~ any <liffer~ the pasitiol): ;.vhkh r.ests el),tirely oli 1. a $trict ,enc;<; , tq iptrrpi:~il!ti_op qf tl,,e provisions ot section 4(1) (a) .. pf .. the Incoz;n<;-t'll:' Act., .C!mtribut\ou. made 1

#1. 'theref9re ·is tliat r/egadve. ~Il the appeals "will . '.'Th~ fes\111 the q~estion referred ~y tb/ Tribunal td tbe High Court 'must' be answered 'in .accordingly b~ 'But as r'egar'ds the costs, under the peculiar alfowej:l: circumstances of tltese appeals where the Commissioner o~ Income-tax, Bo{Ilbay, has supported C~vil Appeal No. 3 1of 1953· and the brunt of the attack in Civil l}ppeals Nos. 30 of 1953 and 31 of 1953 has been borne not by the Commissioner of the Income-tax in both, but by the Sassoons, th~ wh.o is the appellant proper order should be that each party should bear and pay his own costs here as well as in the Court below. t)ie Sassoons ]AGANNADHADAS J.-I am unable to agree with just delivered~on behalf of both my It is with considerable reasons to write a separate for my not being able in spite of my profound respect' for regret jiidgmen'.t learned that I feel express- to agree judgment brothers. constrained ":'.ith Vil.CWS. These three are appeals against a judgment of Bombay High Court by leave granted under tion 66A (2) of the Indian Income-tax Act. They adse out of a set of facts mostly common. E. D. Sassoon and Company, Ltd. now in voluntary liq, nidation (hete inafter referred' fo as the Sassoons) had the Managing Agency of threB Mills (1) E. D. Sassoon United Mills Ltd. ·(2) Elphinstone Spinning and Weaving Mills Company, Ltd., and (3) The Apollo Mills l;ttl, With 1 954 - J E. D ... Sassoon anti Company Ltd. .v. Thi Commissiotli1' of /ncome·tax, Bombay Cit?. \ Bhagwati J ~ Jagannadhadas ]. • • • l ' I f .. I L 1 954 E. D. Sassoon and Company LtJ. v. The Commissiontt .of Jncomt-lax, .Bombay Ciry. Jagannadhadas J. 360 SUPREME COURT REPORTS [1955 J relate the Sassoons (Agencies) Ltd., on (hereinafter referred consent of the Mill Companies and by virtue of clauses in the Managing Agency Agreements enabling transferred the Managing Agency of unto, the three Mills to three other· Companies during the calendar year 1943 as follows : ( 1) to course of Agarwal and Company, Ltd. as Agarwals) on the 1st December, 1943, (2) to Chidam referred baram Mulraj an<l Company, Ltd. (hereinafter to as Chidambarams) on the 1st June, 1943, and (3) to Rajputana Textile the 1st July, 1943. The assessments with which we are . concerned are those of (1) Sassoons, (2) Agarwals, and (3) Chidam income by way of Managing barams and Agency remuneration paid in the year 1944 by the Mill Companies to the respective assignee-Companies for the calendar year 1943. For Sassoons and Agarwals assessment year was 1944-45 and the accounting year was the calendar year 1943. For Chidambarams assessment year was 1945-46 and chargeable accounting period was from 1st to 30th June, 1944. The tax was assessed on the basis not of receipts but of accrual. The authorities the total remuneration for the entire year 1943 treated the assignee in each case as income which accrued to Companies in the respective accounting periods. The assignee-Companies objected on the ground that part of respective the assignor-Company, viz., assignments, Sassoons and to be assessed only in respect of the balance of the remunera tion referable to the portion of the calendar year 1943 subsequent to the respective dates of the assignments. The objection was· overruled and the assessments were made. On appeals the Income-tax Appellate Tri the assess bunal, It may be mentioned that ments were modified. (Agencies) Ltd. does not appear Rajputana Textiles to the Tribunal. Meanwhile to have filed any appeal (presumably by way of caution) the income-tax autho the assignor-Company, viz., rities Income-tax Indian Sassoons, under section 34 of the Act and assessed it in respect of the proportionate pan their contention was accepted July, 1943, accrued to remuneration, up the date of the issued notices they were, income-tax therefore, liable , • ) • -fl" S.C.R. SUPREME COURT REPORTS 361 ' - - 1954 E. D. Sassoon and Company Ltd. v. The Commissioner of Income·tax, Bombay Ciry. Jagannadhadas J. respective It has been stated into their accounts as capital -0f the year's Managing Agency commission up to assignments. The Sassoons date of objected to this before the income-tax authorities, . but the objection was overruled. to us in this Court that the in the case filed by the Sassoons three assignments was entire net consideration for the taken by them reserve. in the Tribunal's statement But this finds no mention of the case to the High Court. How the Sassoons made in their own accounts is not decisive and has entries not been relied on before us. On their objection being filed an appeal to the Income the Sassoons overruled, tax Appellate Tribunal. The Tribunal they had already given appeal in the appeals two assignee-Companies, three Companies Agarwals and Chidambarams. The concerned obtained references to the High Court under section 66 of the Indian Income-tax Act. The question referred by the Tribunal in each of the three cases was the same and is as follows : "Whether in the circumst'ances of the case, was ~ the Managing Agency commission liable to be appor tioned between the assessee Company and the assignee (or assignor, as the case may be)." in view of the decision filed by rejected the year remuneration in substance that ( 1) The High Court· answered the question against the Sassoons and in favour of the other two. What th~ the Manag High Court held was in question ing Agency the assignor and accrued as· the joint income of both the assignee and was apportionable between them, and (2) the assignee-Companies received the assignor's share of the joint income by virtue of the assignments of the assignor's share and hence to that extent it was not their taxable income but continued to be taxable income of the assignor. There are three appeals, the Income-tax Commis one by the Sassoons against two by the Income-tax Commis sioner and the other against Agarwals and Chidambarams s10ner respec tively. Income-tax first of the appeals, In Commissioner supports the position taken up by the Sassoons, while in the other two the Commissioner taken by the the appellant and contests the position 362 SUPREME COURT REPORTS (1955] ....... , 1 954 E. D. Sassoon and Company Ltd. v. The Commissioner of /ncome~tax, Bombay City. Jagannadhadas J. Agarwals and the Chidambarams. Thus it will be seen three appeals are each bet that though in form the ween the Income-tax Commissioner and one of the three they raise a controversy between Companies, the assignor-Company, the one side the Agarwals and the and the two assignee-Companies, the Commissioner sup Chidambarams on porting the Sassoons and opposing the other two. the Sassoons, on the other, in fact though income, the year's the decision remuneration that accordingly The arguments before us covered a wide range and were advanced on the assumption that what the High the Sassoons became entitled on Court held was that to a pro the very date of the respective assignments for the portionate share of that share Managing Agency, and accrued to the Sassoons as their taxable and there, and did not cease to be such notwithstand- ing the assignment thereof. The case was accordingly turned upon debated before us as the question whether any income could accrue Sassoons on the dates of the respective transfers of the Managing Agency to the therefore, to clarify, at the outset, what the question was which was directly raised on the reference made in the view of the High to the High Court and what, Court, was the date when a share of the year's remunera- tion accrued to the Sassoons as It appears to me that the judgment of the High Court taken as a whole is based only on the view that the entire Manag- ing Agency remuneration for the year accrued on the completion of the year, i.e., on the 31st December, 1943, assignor and together. This appears from the following passage of the judgment of the High Court. that when it so accrued it accrued both the assignee transferees. income. It is necessary,~ "In order to levy, income-tax it is not enough income accrues. What enquire when a particular e_n more ·important and what is more pertinent taxed. quire whose Assuming that this particular 31st December and till 31st December there was nothing income does accrue the earned, even so, when to whose question still income it is which is sought to be answered as income accrued on to be remains . , - .\. .. 1954 E. D. Sassoon and Company Ltd. v. !;The Commissiomr of Income-tax, Bombay Ci(r . Jagannadhadas J. S.C.R. SUPREME COURT REPORTS 363 rncome it 1s which has accrued on the 31st December, 1943." It appears to me also accrual on the completion of the year Cou;t dealt with income as appears from the following passage : that it is on the footing of the the High the question of assignment of the From these passages .......... They transferred it appears to me clear that "And clearly one of the rights which E. D. Sassoon and Company, Ltd. had, was to receive the Managing Agency commission (share therein?) when it accrued on that right." 31st December. High Court proceeded on the view that income accrued at the end of the year to. both together and that what passed to the assignee under included the assignment a future right of the assignor to a share in the remune ration, when it accrued on the completion of the year, that the assignment operated as and not on the view to such a share on the tlie transfer of a present right in view of very date of It is the assignment. assumption that the for the year accrued Income-tax only on Appellate Tribunal also took care to in making say, their reference to the High Court, as follows : the 31st December, remuneration "The question is not when the Managing Agency is to whom it commission accrued. The real question acc:_rued." It appears to me, therefore, approach the consideration of this case as decision therein turns directly upon the question whe to the Sassoons on the ther any income had accrued dates of the Managing respective Agency to the transferees. that it is not correct though transfers of In the arguments before us considerable stress was laid by learned counsel appearing for the Sassoons on the fact that the Managing Agency Agreements with which we are concerned provide for annual an year's work. remune ration payable was as commission at a certain specified percentage of the net profits of the respective Mill Companies. So the Sassoons United Mills Ltd., are concerned, whose Managing Agency had been It was pointed out that the remuneration far as 5-87 S. C. India/59 E. D. Sassoon and Company Ltd. v. Th• Commissioner of Income-tax, Bombay City. Jagannadhadas J. • • ' l , ~ I 364 SUPREME COURT REPORTS [ 1955] in the the comm1ss1on was in terms assigned to Agarwals, in the Agency Agreement to be per annum and stated the annual net profits of the Company. So far as Elphinstone Spinning and Weaving Mills Company, Ltd., are concerned, whose Managing Agency was a~sign- the remuneration is merely stat- ed to Chidambarams, ed in the corresponding Agreement to be a percentage of the net profits of the company, but is not in terms stated to be per annum or on the annual net profits. But there can be no reasonable doubt that as a matter of construction, latter case remuneration also must be taken to be per annum and on the annual net profits, notwithstanding some argument before us to this basic fact, the to the contrary. Having regard the arguments put forward following are, in substance, before us by learned counsel for the assignor-Sassoons. (1) The Managing Agency commission was payable m for an entire calendar year and not respect of services therefore no comm1ss10n be for a portion thereof and rendered by came due to the Sassoons for the services for broken respective Mill Companies the dates of the respective periods of the year up (2) Since no remuneration became a debt assignments. due to the Sassoons from any of the Mill Companies on the dates of the respective assignments, no taxable in come accrued to them for the broken periods. (3) By the Sassoons the dates of the respective assignments, had only a bare expectancy, if any, to receive remune ration for the broken period and this expectancy could not be the subject-matter or any assignment, and (4) that what was therefore, 1s The true assigned was an income bearing asset, viz., the Managing Agency which was the source of income and which entitled remuneration for the year payable under the Managing Agency Agreement subsequent respective dates of assignment. Accordingly the same became in its in the hands of the respective entirety taxable income time as assignees and no portion of it accrued at any respective assignees legal position, receive all to the to the the ,i taxable income of the assignor-Sassoons. In the view that I take of the High Court's judg ment as to the date of accrual of the income and as to ,_ ' s.c . .R.. SUPREME COURT REPORTS 365 "'" ':'.'.Y z954 -·- the scope of the question presented on the_ reference, the first three of the above arguments· do not appear to me to call for any examination. In the presentE·g·s;sso~~·& · case no question arises as to the enforceability of the claim for a proportionate share of the remuneration by TheCommissianer the assignor from the very date of assignment. Nor of Income-tax, does any question arise as to the non-payability of Bombay City, ~. aa remuneration on account of non-completion of the ·work. The year's work has been completed by the agann assignee-Company. in continuation of that of the . assignor-Company. The total remuneration for the year has in fact been paid into the hands of ·the assignee-Company. The only questions, therefore, are . (1) whether the money so received accrued by way of . remuneration for the year's work and became taxable income on the 31st December, 1943, (2) if so, whether it was the joint income of the assignor and the assignee or the sole income of the assignee, and (3) whether the assignment operated to transfer the assignor's share of.· the income on its accrual. a sf. 1 The answer to the first of the above questions seems to me to admit of no doubt. The remuneration was for the year's work. The year's work.was completed on the expiry of ~he- year. The right to receive the remunera· tion became;· therefore, vested on the 31st December, 1943. It is true that in Agarwal' a case there is a clause in the original Managing Agency Agreement that . · "the Managing Agency commission shall be due yearly on the 31st day of 1\Iarch in each and every year and shall be payable and be paid immediately after the annual accounts of the Mill Company have been passed by the shareholders." . ; It has been urged, in reliance on this clause that the accrual of the income, in so far as the case of Agarwals is concerned, is not on the 31st December, but on the 31st 1\Iarch next. In the first place such a contention, in so far as it relates to the date of accrual, is not per missible in view . of the clarification in the order of reference made by the Tribunal to the High Court and in view of the specific and ca tegor'ical language of some of the grounds in the statements of the case filed I 1954 E. D. Sassoon and Company Ltd. v. The Commissioner of Income-tax, Bombay City. Jagannadhadas J. 366 SUPREME COURT REPORTS [1955} the date of -,_ (2) and I do not to receive to receive it, remuneration. strenuomly urged on behalf of that there is no accrual of before us both by Sassoons and the Income-tax Com m1ss1oner showing 31st December, 1943, as ( Vide paragraphs. accrual of the entire the Sassoons' statement, and 19(1), 26(a) and (g) of (5) of the Income-tax paragraphs 12, 15(1), Commissioner's statement, in Civil Appeal No. 3 of 1953). But even if the contention be permissible and granting the view income appellant-Sassoons until there exists a right that the clause in question has any relevancy so far as the date of accrual of income is concerned. Accrual of income for purposes of taxation, does not depend on the income becomes payable. the question as to when It depends only on when a vested th<O" (See Commissioners of Inland Revenue income arises. v. Gardner Mountain and D' Ambrnmenil Ltd., ( 1 ). The accrual is accordingly complete when right to the remuneration becomes vested by the occurrence of all the remuneration depends. A the events on which remuneration shall be due at a mere clause that the events on later date, notwithstanding the remune'ration depends have occurred, can only have liability for payment and not of postponing the vesting of the right to income. The. requirement of lapse of further is not after the occurrence of all the qualifying events imports any ele It appears to me, ment of contingency that the above clause which has been relied therefore, upon-whatever the reason may be for the distinction which the language seeks to suggest between due and , payable-can have no bearing on the date of the accrual the accrual and cannot have the effect of postponing the 31st December · to 31st March. But even otherwise, final conclu the High Court of Bom- sion. in this case bay. income accrued both the year's work it assignee after seems to matter little whether 31st December or on the 31st March next. If the view of the High Court is correct that this does not at all affect reached by the completion of itself an additional event which the effect of postponing the assignor and in the right. that accrual is on time ' •. ·• ,J (I) 29 Tax Cas. 69. E. D. Sassoon and Company Ltd. v. The Commissioner of Income-tax, Bombay Cify. Jagannadlzadas J. - - .S.C.R. SUPREME COURT REPORTS 367 to the assignee The further question as remuneration accrued both is ample authority for the position the remuneration on to whether the view taken by the High Court that the assignments operated transfer the assignor's share of year's remuneration after it accrued to him as his ,come and whether it continues to remain the assignor's taxable income in spite of the assignment, may also be shortly dealt with. If the High Court be right in its the assignee together, whenever it may .assignor and to be, that on the respective dates of the is clear the assignor had a future right to a share assignment, the completion of the year. If · so, assignment of such a future is valid and becomes operative by ·way of attaching to the right when ), Misri Lal v. Mozhar Hossain(2) Palaniappa v. Lakshma nan (3) and Baldeo v. Miller (4 ). ) The validity of such an assignment as between the assignor and the assignee may also be supported with reference to the principle of recognition in section cstoppel feeding title which finds further 43 of the Transfer of Property Act. For position, viz., that a person continues liable for to be respect of accrued income notwithstanding assignment This in the Privy Council case in Pondicherry Railivay Co. Ltd. v. Commissioner of Income-tax, Madras (6 thereof operating on or after such accrual, . in Parkins v. Warwick("). following passages itself (See Ba1isidhar v. Sant Lal(1 is authority is confirmed by thereof on the assignor's future springs up. the effect ) "Profits 011 their coming that point and the revenue the subsequent application of the profits." into existence attract tax is not concerned with "The destination of the profits or the charge which has been made on those profits by previous agreement or otherwise is perfectly immaterial." (Quoted out of an extract from the case in Gresham Life Assurance Society v. Styles (1) .) .. (1) I.L.R. IO All 133. (2) I.L.R. 13 Cal. 262. (3) I.L.R. 16 Mad. 429. (4) I.LR. 31 Cal. 667. (5) 25 Tax Cases 919. (6) A.LR. 1931 P.C. 165 at 170. (7) [1892] A. C. 309 . 1 954 E. D. Sasso on and Company Ltd. v. The Commissioner of lncom e-tax, Bombay Ci~)'. Jaganna dhadas J. 368 SUPREME COURT REPORTS [1955] to me It appears these passages constitute a clear recongnition of the principle that when once in come accrues to a person, an assignment operative for that respect thereof, does not affect his taxability is not seriously It may be mentioned that income. disputed the consideration for each assignment included the value of the prospective advantage of col lecting the remuneration for the entire year, i.e., in the actual consideration paid was higher the assignment had it might have been if than what taken place at the very commencement of the year. accrued as is entirely taxable income. the date of assignment The only substantial question, requires examination. The cases is correct. forward therefore, which this case raises is whether the view taken by the High Court, income that the remuneration for the year It is both to the assignor and the assignee, learned apparently as an answer to this question counsel appearing for the Sassoons put argument No. 4 above enumerated, viz., is the transfer of an assignment of Managing Agency received sub income-bearing asset and that all income sequent It is the validity of this argu assignee's ment that now have been relied on in support of this argument are the following: The Commissioners of Inland Revenue v. Forrest (') ; Wigmore v. Thomas Summerson(') ; and Commissioners of Inland Revenue v. Pilcher('). Com missioners of Inland Revenue v. Forrest(') is a case of income derived purchase of certain shares and the second head of therefrom and income chargeable to income-tax under section 6 of the income Indian Income-tax Act, referable only to the ownership of therefrom lapse of time makes taxation depends on the receipt income payable and the of the in.come. Wigmore v. Thomas Summerson(') to the above. Commissioners of In also a case land Revenue v. Pilcher(') the case of a sale of an inclusive of the year's fruit crop, which by the orchard date of the sale does not appear to have become shares or secunt1es. Mere viz., Securities. The is directly analogous similar (I) 8 Tax Cases 704. (2) g Tax Cases 577. (3) 3r Tax Cases 314. - ·- - Q 1954 E. D. Sassoon and Company Ltd. v. The Commissioner of Income-tax, Bombay Cifv. -~ Jagannadhadas J. S.C.R. SUPREME COURT REPORTS 369 It is interesting to be treated as a severable is analogous Income-tax Act. fruits derived fructus naturales and not item of property. enough This was a case of property whose ownership itself, rise to the ordinary course and by lapse of time, gives to head No. 3 of section 6 of income and Indian to note, that in this case, the learned Judges make a distinction fructus naturales and between fructus industriales and the orchard point out that being cherries are fructus in dustriales. That the result might have been different if it was frnctus industriales appears clearly, at least so far as Lord Justice Singleton and Lord Justice Tucker are concerned. income does not arise by niere ownership but as a result labour which may be the of further investment and refer only effective source of income. These decisions to cases where the sole or effective source of income receipt of mere ownership and taxability depends on the income. the case of industriales fructus In right, Another case It was claimed that that has been relied on before us is the City of London Contract Corporation v. Styles (1). That was a case where one Company purchased as a going concern the business carried on by another Company, as contractors for public works. assignee-Company was entitled to deduction from taxable income for a portion of the purchase price which the purchase of the may be attributed to the benefit of, certain building interest to, and contracts of the Company, from the execution of which, a portion of the net profits of the Company arose. This the entire purchase was negatived on the ground price was capital that what all was received later on was income derived by the execution the contracts so purchased. This, so far as it goes, that there may be may seem to be executed and that the a purchase of contracts yet treated therefrom benefit of the entire profits the purchaser. The report as income in the hands of of this case, however, does not indicate clearly whether the contracts, whose benefit was purchased were parti ally executed and if so, whether the partial execution investment and to suggest by implication is to be (•) 2 Tax Cases 239. - - • E. D. Sassoon and Company 11..Jd. Yo The Commissioner of Income-tax, Bombay City. Jap, annadhadas J. 370 SUPREME COURT REPORTS (1955] thereunder and is nothing to show was substantial or negligible. The statement of facts of the case at page 241 of the report shows the business which was purchased consisted entirely "of partially executed or wholly unexecuted contracts, the benefits to accrue and ·of the rights If the business consisted of only unexe therefrom." cuted contracts, this case is not an authority for position contended for on behalf of the Sassoons. But in any case, even if some of the contracts were partially executed the execution was of any such extent as to have become a substan It may also be noted tial source of income. decision is a direct authority only on what is capital expenditure and what is revenue expenditure for pur poses of deduction. The point relevant there and cannot (1949 Edn.), notice the following passage appears. page 188, paragraph 222, "In City of London Contract Corporation Ltd. v. Styles (•) where the Company acquired a business includ ing a number of unexecuted contracts, the sum paid for the contracts could not be deducted the ground in computing the whole of the purchase price of the business to be employed as was a sum 'employed or intended capi1al in such trade'." the present case was not raised in Simon's Income-tax, Vol. 2, the Company's profits, on to have been decided. It is interesting it was held in the Similarly in Spicer (20th Edn.), and Pegler's at page 116 Income-tax and stated as Profits-tax follows : taken over with a the perfor- ,; "Cost of unexecuted contracts the profits from business (in arriving at mance of the contracts)" and the case of City of London Contract Corporation v. Styles (') is quoted as authority. These books elso show that this case has been treated as hay (and not to parti ing reference to u11executed contracts ally executed contracts) and as being authority for the question as taxable income of business concerns. to what are permissible deductions standard (1) 2 Tax Cases 239 . • ~·· - '.-'- ' :S.C.R. SUPREME COURT REPORTS 371 The above cases, treated as in therefore, cannot be forward by . any way ,supporting the contention put that .in the learned counsel for the appellant-Sassoons the entire · case of an assignment of Managing Agency the year's work accrues as a matter remuneration for . of law to the assignee and is his sole that the Agency is the source of income and . ground it is treated as an income · that in this respect specific authority has been cited . bearing asset. No ·· before us covering the case of a Managing Agency nor can the case in City of London Contract Corporation v. Styles( 1 be treated as an authority showing that in the case of an assignment of partially executed contracts relatable remuneration or profits · suc.h partial execution the income of the assignee. is necessarily income, on to be ) 1954 E. D. Sassoon am! Company Lta. v. The Commissioner of Income-tax, Bombay City • Jagannaa/zadas J . It income therefore, raised has, that produces The question Managing Agent the argument advanced is not the ownership of fundamental misconception. to be . examined on principle. On such examination it appears this behalf is to me that · based on a Income of · the kind with which we are concerned in this case does not arise by virtue of any mere ownership of an asset. Vlhat produces Managing Agency but the actual work turned out for is not the fact of a the benefit of the principal. as a to work · Company having obtained the income but it is the · continuous functioning of the Company, as the Manag ing Agent, it is the rendering of the produces service of the Managing Agency or the carrying out of the Managing Agency business, which is the effective and direct source of income. This is not to say that It taxation. work or service remuneration the subject of tax and work is the source of the remuneration. Hence in such a case is the source of income and not the service or work legal posi tion has been very succinctly brought out by Lord in another context, in John Smith & Finlay, in the following passage: · ownership of the right to work. The above in terms of the contract of Agency, the income. Hence, is the subject of though ) . Son v. Moore( 2 (1) 2 Tax Cases 239. (2) (1921] 2 A.C. 13 at 25, 1 954 E. D. Sassoon and Compartv Ltd. v. The Commissioner of Income-tax, Bombay Gi{v. Jagannadhadas J. 372 SUPREME COURT REPORTS [1955] "The business makes no profits. The profits are · fruits yielded by a tree spontaneously. They are the owner of · the result of the operations carried on by the business for the time being." Therefore, on principle, apart from authority, to me appears to be erroneous Agency Agreement as by itself income and to treat it as an income-producing asset. to treat the Managing the direct source of - the provisions of · Interest on governe<l by (1) Salaries, (2) the provisions of An examination of the assessee within resident assessee. As receipt. Computation of the Act. Section 6 thereof enumerates following heads of income as being chargeable to securities, (4) Profits and gains of the Indian Income-tax Act clearly bears out this view. Sections the charging sec 3 and 4 of the Income-tax Act are tions. The charge relevant it is is (in so far as purposes of this case) on the income of the previous year (a) which is received by territory, or (b) which accrued or arose within taxable the taxable territory to a stated the assessment in the present case is based at the outset on accrual and not on taxable income Chapter III of income-tax. (3) Income from property, business, profession or vocation, sources. The purposes be left out. Of the other four heads, 2 and 3 are the only related is directly the present income has no items but may conceivably fall under head No. 1 or head No. 4. At this that, though, so far, in stage, the Managing Agency has been the above discussion, therefor as referred to as service and the commission remuneration, nature of the functioning of a Managing Agent, where it is a firm or a Company, which so functions, has been recently held by this Court in Lakshminarayan Ram Gopal and Son, Ltd. v. The Government of Hyderabad(') to be a business and the remuneration income by way of profits or gains from ·the business. The to the ownership of an asset. the computation of the present the taxable income In for purposes of convenience, it is necessary to observe residual item (5) may in which relation to be (5) Income from other · taxable · (1) Civil Appeals Nos. 292 and 312of1950 of the Supreme Court of India. S.C.R. SUPREME COURT REPORTS 373 falls under head No. 4 and the com income, therefore, to be made under section 10 of putation thereof has the Income-tax Act. Sub-section ( 1) of that section runs as follows: "The tax shall be payable by an assessee under the head profits and gains of business, profession or vocation in respect of the profits or gains of any busi ness, profession or vocation carried on by him." 1954 E. D. Sassoon and Company Ltd. v. The Commissioner of Income-tax, Bombay City. Jagannadhadas J. - - In- Now, taxable It appears income of that before to an assessee, ·the present case, together and are hence is the income of the profits and gains of in computing the remunera assignee, can it reasonably be said the assignee tion for the entire year the business carried on by the assignee, when as a fact he stepped into the position of the Managing Agent only on some the assign date in the course of the year by virtue of income can be ment. to me attributed under this head it must the business carried on by the assessee him relate self. the profits and therefore, to relate to gains ofltne whole year seem to me clearly the business carried on both by the assignor and ~ss1gnee taken taxable as to both and apportionable as such mcome accruing between them. The importance of not overlooking the phrase "carried on by him" in sub significance of section ( 1) of section 10, though in a different context, has been emphasised by in Com missioner of Income-tax, Bengal v. Shaw Wallace and Co. (1). A recent decision of this Court in the Liquida of Pursa Limited v. Commissioner of Income tax, Bihar (2) also emphasises this and explains that the phrase "carried on by him" m section 10(1) of the Indian fundamental idea of the continuous exercise of an activity as essential constituent of that which is to produce taxable to me also taxable income clearly the combination of that of assessee whose produces mcome. Where, it appears to me kept up by income." This phrase appears to connote the idea that Income-tax Act "connotes two persons successively, continuous the Privy Council that continuity in this case, assessee or the very activity (•) I.L.R. 59 Cal. 1343. (2) Civil Appeal No. 33 of 1953. E. D. Sassoon and Company Ltd. v. The Commissioner of Income-tax, Bombay City. Jagannadiwdas J. 374 SUPREME COURT REPORTS [1955] that under assessable income of both together. this section, the profits and gains are This is quite if two persons in accord with independent of any joint property and that such property has the well-accepted notion, jointly under the normal law, carry out a work or conduct a business, remuneration in fact earned for the work or the total gains made on that business belongs to both of them them on some equitable basis. be apportioned between question as This whether the claim for remuneration for the work or for the emoluments of the business can be individually or the person who is liable to jointly enforced as against the absence of It cannot be disputed pay. the contrary between specific contract the work or business, the persons who contribute fruit of such work or of such business in fact been property of both, when the same has realised. Nor can it be said that this holds good only in cases where both to earn the remuneration for the work or the together is no reason in law why profits of the business. There the same principle should not be equally applicable where the two together contribute to total work in succession as in this case total business If, what arises on and not concurrence. continuous and successive functioning of two persons is there can be no doubt the joint remuneration of both, that such apportionable between them on some equitable basis on the principle that joint property is normally severable. To such a Income-tax Act would situation also clearly apply. That section no doubt indicates nothing as the principle of apportionment. But it is agreed that wise. This also prima facie is the only equitable way of apportionment on the facts of this case. is no difficulty the persons concurrently the present case since remuneration would the apportionment, section 26(2) of is to be if any, - • • - At this stage it becomes necessary to notice certain provisions of the relevant Managing Agency Agreements which have been strongly view contrary to 'what I have indicated above. Reliance relied on as supporting .. S.C.R. SUPREME COURT REPORTS 375 the Sassoons which are relevant only the ·Managing J1::is been placed on · two provisions of the Sassoon United Mills Agency Agreement between Ltd. ::ind in the appeal provisions is the one already noticed · in another con text, vi.z., clause 2(d) of the Agency Agreement which rum ::is follows : the Agarwals. The fii"~t of relating 1 954 E. D. Sassoon ant! Company Ltd. v. The Commissioner of Income-tax, Bombay Ciry. Jagannadhadas J. - • it appears the entire It is urged the assignee term stamps income payable after "The said commission shall be due to the said firm yearly on the 31st day of March in each and every year during the continuance of this Agreement ........ ". the Managing Agency Agreement with the characteristic of an income bearing asset which vests solely the date of to me that a term of this assignment. But kind has reference only to the payment aspect of .has no money which constitutes remuneration and it is for be::iring on the question as income to whose income must be derived purposes of taxation. Taxable from specified sources in the Indian Income indicated tax Act. Since the mere ownership of Managing Agency cannot ::is a m::itter of bw be treated as the source of income, as explained above, any term in the Managing the principal and the agent Agency Agreement between receive the year's entitling assi~1;ee remuner:ition and negat1v111g the assignor any to his quondam principal for his share direct recourse of the income, cannot have the effect of denying to the to a share in the remunera assignor a substantial right thereto. A tion, if otherwise he has a vested receive distinction exists or get payment of a certain amount of money and the right to the money itself. The right to enforce payment of money may belong to one person. But the beneficial that money may belong wholly or partially familar examples to another. Benami contracts of such a case. in money or money's worth enforceable only at the instance of one in special situations, are out of the persons entitled, easily conceivable. there is no accrual of to· this; receive the money which constitutes income. But It may be j:rue income unless there is a vested in law between the right Instances of rights '954 E. D. Sassoon and Company Ltd. v. The Commissioner of Income·tax, Bomba;i Ciry. Jagannadhadas J. 376 SUPREME COURT REPORTS [1955] In is a right is no accrual of income unless there it negative repeated proposition has relevance only to the factum or date to the ownership of the of accrual but not necessarily income on such accrual. None of the cases that have 'before us in support of the proposition that been cited the course of the this view. receive stress has been laid on the pro arguments is no accrual of position that income unless income. This may be receive there is a right the very person who so. But it does not follow that the money which constitutes receive the owner of that money or that the to him alone. That must depend on mcome accrues to a parti rights, the substantive cular situation. A term in a Managing Agency Agree the agent as to the ment between the principal and is to is payable or person to whom the remuneration become due can only have been meant as a protection respect of multiplicity of claims substantive against rights between persons who may have contributed earn the remuneration. himself and cannot settle the right to income if any, applicable the principal The second provision relied on Managing Agency Agreement with which Agarwals runs as follows : is concerned. Clause 10 of is clause 10 of the the case of the agreement the said firm hereunder and upon "It shall be lawful for the said firm to assign agreement and the rights of the said firm hereunder to any person, firm or Company having authority by its constitution to become bound by the obligations under .such taken by to the said Com assignment being made and notified pany shall be bound to recognise the person or firm or Company aforesaid as the Agents of the said Company firm or in like manner as if the name ofi such person, Company had appeared in these presents in iieu of the names of the partners in the said firm and as if such person, firm or Company had entered into this Agreement said Company shall with the said Company and forthwith upon demand by the said firm enter into an the person firm or Company afore Agreement with said appointing such person firm of Company - ... E. D. Sassoon and Company Ltd. v. The Commissioner of Income-tax, Bombay City. Jagannadhadas J. .r - - S.C.R. SUPREME COURT REPORTS 377 Agents of the said Company for the then residue of the term outstanding under the Agreement and with remuneration and emo like powers and authorities luments and subject terms and conditions as are herein contained." to the income. the very terms of It is urged the source of feature stamps Stress has been laid on the underlined portion of the above clause. that this as well as clauses 1 and 3 of the Managing Agency Agreement show that the assignor and the assignee are to be treated as one the assignee becomes entity and that on assignment the Managing Agent as if his name had been inserted in the Managing Agency Agreement from the begin ning, and that the continuity of the Managing Agency that whoever satisfies the thereby and was preserved time when description of the Managing Agent at the the commission the year becomes due, is also the person entitled to the amount by way of remunera this argument by virtue of any tion-not, as per mutual arrangement between the assignor assignee, but-by the Managing It is urged, Agency which the Managing therefore, substance, as an Agency therefore, that by virtue of this clause the service of the assignee sub sequent to the date of assignment can be tacked on to the service of the assignor for the earlier portion of the year, so as to constitute it service for the entire year which earns the remuneration, as the sole property of the assignee, i.e., that the assignment has to be given retrospective operation from the commencement of the the work so far done. But if this clause is to be construed as having such retrospective operation, it must, on the very terms of the underlined the original com portion, become so operative from mencement of the Agreement itself and not from any thereafter. There is no reason particular date or event to confine such inchoate party finished work of the year. The underlined por ticn of the clause, retrospective effect if it is to have at all, is comprehensive enough to take within its ambit every other claim which may have accrued but remained retrospective operation only remuneration income-bearing asset. this argument amounts In saying respect of advantage arising E. D. Sassoon and Company Lid. v. The Commissioner of Income-tax, Bombay Ci!)•. Jagannadhadas J. 378 SUPREME COURT REPORTS [1955 J result specifically It appears to me, ,;hould be confined i.e. that on assignment, the argui_:nent put forward in stage of the initial unpaid, commencing therefore, the right to· Agency. On this construction, every such claim would pass to the assignee. Such a result would obviously be untenable and no reason exists why the retrospective operation, to be imputed to this clause, to the limited extent this behalf which serves by the appellant-Sassoons. therefore, quite clear on a fair reading of the entire clanse 10 of that the only effect the Managing Agency Agreement thereof is to bring about the stated that clause (which has been the second portion of side lined) shall be entitled principal Company a fresh Managing Agency Agreement in its own favour for the residue of the term outstand remuneration and ing and with like powers authorities terms and condi emoluments and subject tions. taken as that the assignee is a whole means entitled the same to demand a fresh Agreement on terms and that even without a fresh Agreement being formally executed as between the principal Mill Com pany and rights and obligations will be governed by the old Agreement for the residue of the term with the assignee-Company's. the assignor-Company's name. substituted Such effect retrospective. In my opinion all that the clause 10 the assignee to demand and obtain the assignee-company prospective and their mutual is no more to the is to be remuneration of responsible only There can he no doubt, however, the entire year's remuneration to vest .that though any mere clause in the Managing Agency Agreement that to the assignee the employer is. the payment of in the assignee a beneficial not by itself enough such a right to the implied term as. may arise by virtue of a specific or transferee, either as between the part of the deed of transfer or thereof. independent It may be mentioned was such a specific term in the Agreement preliminary to the actual assignment. But learned counsel for Sassoons expressly disclaimed it on the ground that in the deed of transfer and was, was not that in the Agarwals' case transferor and incorporated the year, . .. • 1954 E. D. Sassoon and Company Lid. v. The Commissioner of Income-tax, Bombay City. Jagannadhadas J. • S.C.R. SUPREME COURT REPORTS 379 right of that hence the assignor and remuneration became It may be mentioned the elate of assignment. insistence on this view, in any case, superfluous and did not rely on it. In his to receive the entire the assignee remuneration did not depend on any specific term the assignor and the assignee, but on the fact between that what was transferred is an income-bearing asset which carried with it a right to the entire income falls due after It is on account that, as I apprehend, learned counsel for the Sassoons disclaimed the above mentioned special term between assignee as being superfluous. He seems to have sought the contention the consequence of thereby to obviate that the assignor's share of assignee's by virtue of the specific assignment thereof -operating thereon on its accrual and remained the taxable income of the assignor. in this context that clause 10 of the Managing Agency Agreement in Agarwals' case has been relied on by learned counsel for Agarwals show that while, that in the normal run of the Manag events the contract for remuneration under ing Agency Agreement is an indivisible contract for a the completion of a whole year's whole year's work, implied divisibility of contract and of the remuneration in the year of assignment since the consent of the principal Mill Company. place with (Vide section 87-B(c) of Indian Companies Act). to support the contention This argument was advanced that the Sassoon's share of the year's income accrued on the very date of assignment. Since, however, in my the basis of the judgment of the High Court as explained above and since such an argument is not, in my opinion, open, having regard to Income-tax Appellate the statement of the case by the Tribunal as well as of the statements of appellants and respondents herein, I do not consider it necessary to deal with that argument. the assignment necessarily this clause necessarily remuneration on that was not it may be, In my view, therefore, the continuous and successive functioning by both the assignee under the Managing Agency Agreement was the effective source of income accrued on the completion of the year and was the joint income 6-87 S. C. India/59 the assignor and income. That the year's ' - ' - • :71 _, - 1954 E. D. Sassoon arul Companj Ltd. '" The Commissioner of Income-tax, 'Bomb£!_'1! Cilj!. Jagannadhadas J. 380 SUPREME COURT REPORTS [1955j the year the assignee, the assignor and income which accrued income. Nevertheless, resulting from the that the assignee had the the assignee. The prior of both assignments in the course of the year operated as assign to a share of the income. It ments of this future is only by virtue of inter se arrangement between assignor and actions of assignment, to collect the entire the share in the Sassoons on the income completion of respect of the Sassoons and they were rightly taxed thereof. The very learned the above view are counsel for Sassoons the Managing Agency is based on like property which per se produces income and, on receive the ignoring income and right to the ownership of the income and the question of the person to whom income accrues. arguments are unsustainable conclusion reached by learned Judges of the Bombay High Court is correct. remained the taxable strenuous arguments of to counter In my opinion the distinction between right the former as settling insistence that treating - 1 954 May 14. The appeals are, therefore, liable to be dismissed. l express no opinion on any of the other points raised. Appeals allowed. HARISHANKAR BAGLA AND ANOTHER f!. THE STATE OF MADHYA PRADESH. [MEHR CHAND MAHAJAN C.J., MUKHER)EA, VIVIAN BosE, BHAGWATI and VENKATARAMA AYYAR JT.J Constitution of India-Art. 19(1)(1) and (g)-Cotton Textile (Control of Movement) Order, 1948, cl. 3-Promu/gated under s. 3 (Temporary Powers) Act, 1946-Permit of Essential Supplies Requirement of-to dispose of or transport cotton textiles-Whether violation of Art. 19(1)(1) and (g)-Essential Supplies (Temporary Powers) Act, 1946 (XXIV of 1946) ss. 3, 4, 6-Whether ultra vires the Legislature on ground of delegation of legislative pou,1ers-s. 6- Wh"ether repeals or abrogates-pre-existing laws-Effect of.the section legislation-Whetl1er can be de -Delegation-Essential power of legated-Principles underlying it-Requirements of permit by clauses 3 and 4 of the Control Order-Whether in conflict with ss. 27, 28, 41 of the Railway Act. .f ,.::::;:-