E. D. Sassoon And Company Ltd vs The Commissioner Of … on 14 May, 1954

           PETITIONER:
E.   D. SASSOON AND COMPANY LTD.

	Vs.

RESPONDENT:
THE COMMISSIONER OF INCOME-TAX,BOMBAY CITY.(With connected A

DATE OF JUDGMENT:
14/05/1954

BENCH:
BHAGWATI, NATWARLAL H.
BENCH:
BHAGWATI, NATWARLAL H.
DAS, SUDHI RANJAN
JAGANNADHADAS, B.

CITATION:
 1954 AIR  470		  1955 SCR  599
 CITATOR INFO :
 D	    1960 SC 703	 (3,5)
 R	    1960 SC1279	 (2,8)
 D	    1961 SC1007	 (12)
 R	    1964 SC1653	 (7)
 F	    1965 SC1343	 (6,8,9,11,12)
 R	    1967 SC1626	 (5)
 F	    1977 SC 560	 (7)
 R	    1986 SC1805	 (5)
 RF	    1991 SC 513	 (7)
 RF	    1992 SC1495	 (17)


ACT:
Indian	Income-tax Act (XI of 1922) s.	4(1)(a)(b)-"Income,"
accrues arises' is received"-Meaning of-"Earned"-Meaning of-
s.  10(1)-"Carried on by him"-Connotation of-Managing Agency
Agreement-Transfer   of	  rights    thereunder-Apportionment
between assignors and assignees.



HEADNOTE:
The  Sassoons had entered into three Managing Agency  agree-
ments  as the Managing Agents of three different  companies.
They  transferred  their Managing Agencies  to	three  other
companies  by  formal deeds of assignment  and	transfer  on
several dates during the accounting year.
The  question for determination was whether in	the  circum.
stances	 of  the  case the Managing  Agency  commission	 was
liable	to  be apportioned between the	Sassoons  and  their
respective  transferees	 in the proportion of  the  services
rendered  as  Managing	Agents	by  each  of  them  for	 the
respective portions of the accounting year and the  decision
turned	upon the question whether any income had accrued  to
the  Sassoons for the purpose of income-tax on the dates  of
the  respective	 transfers of the Managing Agencies  to	 the
transferees.   Under  clause  2(d) of  the  Managing  Agency
agreements,  the  commission  to the  Sassoons	as  Managing
Agents was to be due to them yearly on the 31st of March  in
each and every year and was to be payable immediately  after
the  annual accounts of the company had been passed  by	 the
shareholders.
Held  per  S.R.	 DAS  and  BHAGWATI  JJ.  (JAGANNADHADAS  J.
dissenting).answering the question in the negative, that  on
the
41
314
construction of the Managing Agency agreements, the contract
of service between the companies and the Managing Agents was
entire and indivisible, that the remuneration or  commission
became	due by the companies to the Managing Agents only  on
the completion of a definite period of service and at stated
intervals, that it was a condition precedent to the recovery
of  any wages or salary in respect thereof that the  service
or  duty  should  be completely performed,  that  such	debt
constituted a debt only at the end of each period of service
and  that no remuneration or commission was payable  to	 the
Managing Agents for broken periods.
The  Sassoons  had  not earned any  income  for	 the  broken
periods nor had any income accrued to them in respect of the
same and what they transferred to the transferees under	 the
respective deeds of assignment and transfer did not  include
any  income  which they had earned or had  accrued  to	them
during	the  chargeable	 accounting  period  and  which	 the
transferees by virtue of the assignment in their favour were
in a position to collect.
The true test under section 4(1)(a) of the Indian Income-tax
Act,  for the purpose of ascertaining liability for  income-
tax  in	 the  case of transfer of  Managing  Agency  is	 not
whether	 the transferore and the transferees had worked	 for
any  particular periods of the year but whether	 any  income
had  accrued to the transferors and the	 transferees  within
the chargeable accounting period.
The word "profit" in section 4 of the Indian Income-tax	 Act
has  a	well-defined  legal meaning.   The  term  implies  a
comparison  between  the state of business at  two  specific
dates  usually	separated  by an interval of  a	 year.	 The
fundamental  meaning  is  the amount of	 gain  made  by	 the
business during the year.
"Income"  connotes a periodical monetary return "coming	 in"
with  some sort of regularity, or expected  regularity	from
definite sources.  The source is not necessarily expected to
be continuously productive but its object is the  production
of  a  definite return excluding anything in the  nature  of
windfall.   The	 word "income" clearly implies the  idea  of
receipt, actual or constructive.
The  words "accrues", "arises" and "is received"  are  three
distinct  terms.   The word "accrues" conveys  the  distinct
sense of growing up by way of addition or increase or as  an
accession  or  advantage connoting the idea of a  growth  or
accumulation.  The word "arises" means comes into  existence
or  notice  or presents itself and conveys the idea  of	 the
growth	or  accumulation with a tangible shape so as  to  be
receivable.  Both the words "accrues" and " arises" are used
in  contradistinction to the word "receive" and	 indicate  a
right to receive income.
The  accrual  of  income to an asseseee does  not  mean	 the
actual	receipt	 of the same by him and it may	be  received
later  on . its being ascertained.  The word  "earned"	does
not  appear  in section 4 of the Income-tax Act but  it	 has
been  very often used in the course of judgments by  learned
Judges.	  It conveys the concept of income accruing  to	 the
assesses,
315
Per  JAGANNADHADAS  J.-In the present case the	profits	 and
gains  of  the whole year clearly related  to  the  business
carried	 oil  both by the assignor and	the  assignee  token
together  and were hence taxable as income accruing to	both
and apportionsble as such between them.	 The phrase "carried
on  by	him" in section 10(1) of the Indian  Income-tax	 Act
connotes the fundamental idea of the continuous exercise  of
an activity as an essential constituent of that which is  to
produce	 the taxable income and that the taxable  income  is
that  of the 'very assessee or the combination of  assessees
whose  continuous activity produces the	 income.   Therefore
the  continuous	 and  successive  functioning  by  both	 the
assignor   and	the  assignee  under  the  Managing   Agency
agreement  was	the effective source of the  year's  income.
That  income accrued on the completion of the year  and	 was
the joint income of both the assignor and the assignee.	 The
prior  assignments  in the course of the  year	operated  as
assignments  of this future right to a share of the  income.
It  was only by virtue of inter se arrangement	between	 the
assignor and the assignee resulting from the transaction  of
assignment,  that the assignee had the right to collect	 the
entire	income.	 But the share in this income which  accrued
to  the Sassoons on the completion of the year remained	 the
taxable	 income of the Sassoons and they were rightly  taxed
in respect thereof.
Case-law discussed.



JUDGMENT:

CIVIL APPFLLATE JURISDICTION: Civil Appeals Nos. 3, 30 and
31 of 1953.

Appeal from the Judgment and Order dated the 12th day of
September, 1951, of the High Court of Judicature at Bombay
in Income-tax Reference No. 27 of 1951 arising out of the
order dated the 23rd day of November, 1949, of the Income-
tax Appellate Tribunal in Income-tax Appeal No. 122 of 1947-

48.
B.J. M. Mackenna (D. H. Dwarka Das and Rajinder Narain,
with him) for the appellant in C. A. No. 3 of 1953.
M.C. Setalvad, Attorney-General for India, (G. N. Joshi and
P. A. Mehta, with him) for the respondent in C. A. No. 3 and
for the appellant in C. A. Nos. 30 and 31.

C.K. Daphtary, Solicitor-General for India, (R. J. Kolah,
N. A. Palkhiwala and 1. N. Shroff, with him) for
therespondent in C. A. No. 30, R. J. Kolah, N. A. Palkhiwala
and I. N. Shroff for the respondent in C. A. No. 3 1.

316

1954. May 14. The judgment of Das and Bhagwati JJ. was
delivered by Bhagwati J. Jagannadhadas J. delivered a
separate judgment.

BHAGWATI J.-These appeals arise out of two judgments and
orders of the. High Court of Judicature at Bombay in
Income-tax References Nos. 23, 24 and 27 of 1951 made by the
Income-tax Appellate Tribunal under section 66(1) of the
Indian Income-tax Act and section 21 of the Excess Profits
Tax Act.

E. D. Sassoon and Company Ltd., (hereinafter refered to
as the Sassoons) were the Managing Agents of (1) E. D.
Sassoon United Mills Ltd., under Agreements dated the 24th
February, 1920, and the 2nd October, 1934, (2) Elphinstone
Spinning and Weaving Mills Company Ltd. under the Agreement
dated 23rd May, 1922, and (3) Apollo Mills Ltd., under the
Agreement dated the 23rd May, 1922. The Sassoons agreed to
transfer their Managing Agencies of the said Companies to
Messrs. Agarwal and Company, Chidambaram Mulraj and Company
Ltd., and Rajputana Textile (Agencies) Ltd. respectively by
letters dated the 3rd September, 1943, 16th April, 1943, and
the 27th April, 1943. The consent of the shareholders of
the respective companies to the Agreements for transfer was
duly obtained and the Managing Agencies were ultimately
transferred to the respective transferees with effect from
the 1st December, 1943, 1st June, 1943, and 1st July, 1943,
respectively. The Sassoons executed in favour of Messrs.
Agarwal and Company, Chidambarain Mulraj and Company Ltd.,
and Rajputana Textile (Agencies) Ltd., formal deeds of
assignment and transfer and received from them Rs.
57,80,000, Rs. 12,50,000 and Rs. 6,00,000 respectively on
transfers of the Manaoing Agencies, and the net
consideration, viz., Rs. 75,77,693, received by them on such
transfers was taken by them to the “Capital Reserve
Account”. The accounts of the Managing Agency commission
payable by the respective Companies to the Managing Agents
for the year 1943 were made up in the year 1944 and Messrs.
Agarwal and Company received from the E. D. Sassoon United
Mills Ltd., a sum of Rs. 27,94,504, Chidambaram Mulraj and
Company Ltd., received from the Elphiiistone Weaving and
317
Spinning Mills Company Ltd., a sum of Rs. 2,37,602 and the
Rajputana Textile (Agencies) Ltd., received from the Apollo
Mills Ltd., a sum of Rs. 3,82,608 as and by way of such
commission.

For the assessment year 1944-45 and the chargeable
accounting period 1st January, 1943, to the 31st December,
1943, the original income-tax and excese profits tax
assessments of the Sassoons were made or the 31st May, 1945,
at a total income of Rs. 46,48,483. This income however did
not include any part of the Managing Agency commission
received by the transferees. The entire amounts of the
Managing Agency commission received by the transferees were
assessed by the Income-tax Officer for the assessment year
194546 as the income of the transferees. The transferees
appealed to the Appellate Assistant Commissioner who
confirmed the orders of the Income-tax Officer. Wher the
matter was taken in further appeal to the Income. tax
Appellate Tribunal, the Tribunal by its order dated the 28th
December, 1949, accepted the trans. ferees’ contention that
the Managing Agency commission received by them should be
apportioned on a proportionate basis and the transferees
should be made liable to pay tax only on the commission
earned by them during the period that they had worked as the
Managing Agents of the respective Companies.
The Income-tax Officer and the Excess Profits Tax. Officer
appear to have discovered that the amounts of the Managing
Agency commission earned by the Sassoons prior to the dates
of the respective transfers were not brought to tax and
therefore issued on the 29th June, 1946, notices under
section 34 of the Indian Income -tax Act and section 15 of
the Excess Profits Tax Act upon the Sassoons on the ground
that their income from the Managing Agency had escaped
assessment. The Income-tax Officer and the Excess Profits
Tax Officer wanted to include in the assessable income of
the Sassoons Rs. 28,51,934 made up of Rs. 25,61,629 in
respect of the Managing Agency of the E. D. Sassoon United
Mills Ltd., for the period of 11 months from the 1st
January, 1943, to the 30th November, 1943, Rs. 99,001 in
respect of the Managing Agency of the
318
Elphinstone spinning and Weaving Mills Ltd for the period
of five months from the 1st January, 1943, to the 31st May,
1943, and ]Rs. 1,91,304 in respect of the Managing Agency of
the Apollo Mills Ltd., for the period of six months from the
1st January, 1943, to the 30th June, 1943, contending that
such Managing Agency commission had accrued to the Sassoons
for services rendered so that on the dates on which the
Agencies were transferred the Sassoons were entitled to such
remuneration from the managed Companies in the form of
commission for services rendered up to the dates of the
transfers. In spite of the objection of the Sassoons the
Income-tax Officer and the Excess Profits Tax Officer
determined these sums as their escaped incomes and assessed
them accordingly. The Sassoons appealed to the Appellate
Assistant Commissioner who dismissed the appeals and further
appeals were taken to the Income-tax Appellate Tribunal.
The Incometax 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-
missioner. The Tribunal was of the opinon that the Managing
Agency commission was earned for services rendered and
therefore it was taxed 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 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 statement of the case and
refer the question of law arising out of the orders to the
High Court for its decision. On the 12th January, 1951, the
Tribunal by its statement of the case referred to the High
Court one question of law as arising out of its orders,
viz., ” whether in the circumstances of the case was the
Managing Agency commission liable to be apportioned between
the assessee Company and the assignee ” observing that in
its opinion the question was not when the Managing Agency
commission accrued but the real question was to whom it
accrued. This reference was made by the
319
Tribunal in R.A. No. 474 of 1950-51, and R.A. No. 475 of
1950-51 referring the question of law thus framed in regard
to the Managing Agency commission of the D. Sassoon United
Mills Ltd., and the Elphinstone Spinning and Weaving Mills
Ltd., the whole of the Managing Agency commission having
been paid respectively to Messrs. Agarwal and Company and
to Chidambaram Mulraj and Company Ltd., in the year 1944.
This was Income-tax Reference No. 27 of 1951.
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 Tribunal had
held as above that the Managing Agency comniission should be
apportioned between the Sassoons and the transferees. The
statement of the case was accordingly submitted by the
Tribunal on the 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, for reference in
the appeal of Chidambaram Mulraj and Company Ltd. The
Tribunal submitted its statement of case also on the same
day and referred the very same question to the High Court.
This reference was Income-tax Reference No. 23 of 1951.
All these references came for hearing and final disposal
before the High Court. Income-tax References Nos. 24 and 27
of 1951 were heard together and one judgment was delivered,
answering the question submitted to the High Court in both
the references in the affirmative. Following upon this
judgment the High Court also answered in the affirmative the
question which had been referred to it by the Tribunal in
Income-tax Reference No. 23 of 1951. The decision of the
High Court was thus against the contentions 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 under section 66A(3) of the Indian
Income-tax Act and
320
section 133(1)((c) of the Constitution for filing appeals to
this Court. The appeal of the Sassoons was Civil Appeal No.
3 of 1953, and it was filed against the Commissioner of
Income-tax, Bombay City. The appeals of the Commissioner of
Income-tax against Messrs. Agarwal and Company and
Chidambaram Mulraj and Company Ltd., respectively were Civil
Appeal No. 30 of 1953, and Civil Appeal No. 31 of 1953.
These appeals have come for hearing and final disposal
before us.

All the appeals raise one common question of law, viz.,
whether in the circumstances of the case the Managing Agency
commission was liable to be apportioned between the Sassoons
and their respective 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 to the transferees or at
any time thereafter. This judgment will (,-over our
decision in all the appeals.

It will be convenient at this stage to set out the relevant
clauses of the respective Managing Agency Agreements and the
deeds of assignment and 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 in the style and 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 to 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 lst 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, 1920. Under
clause 1 of that Agreement the Sassoons and their assigns
were appointed the Agents of the Company for a period of 30
years from the date of the registration thereof and
thereafter until they resigned or were removed from office
by a special resolution of
321
the Company. Udder clause. 2 the remuneration of the
Sassoons and their assigns was fixed at a commission of 71/2
per cent. per annum on the annual net profit of the Company
after making all proper allowances and deductions from
revenue for working expenses charge- the able against
profits, provided however that if in any 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 to 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 annual
accounts of the Company had been passed by the shareholders.
Under clause 3 the Sassoons and their assigns agreed with
the Company that they. would be and act as the Agents of the
Company during the said term for the said remuneration and
upon and subject to the terms and conditions therein
contained. Clause 10 of the Agreement provided as under:-
” It shall be lawful for the said firm to assign this
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 undertaken by the said
firm hereunder and upon such assignment being made and
notified to the said Company the said Company shall be bound
to recognise the person or firm or Company aforesaid as the
Agents of the said Company in like manner as if the name of
such person, firm or Company had entered into this Agreement
with the said Company and the said Company shall forthwith
upon demand by the said firm enter 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 the like powers and authorities remuneration and
emoluments and subject to the like terms and conditions as
are herein contained.”

The letter dated the 3rd September, 1943, recording the
Agreement of transfer of the Managing Agency
322
322
provided that in the event of the transaction being com-
pleted in its entirety as therein stated the transferees
would be entitled to receive the commission payable by the
Company under the Managing Agency Agreement in the profits
for the calendar year 1943. The deed of assignment and
transfer executed between the Sassoons and Messrs. Agarwal
and Company in pursuance of this Agreement on the 26th
January, 1945, stated that the Sassoons thereby transferred
to Messrs. Agarwal and Company as from the lst December,
1943, their office as Managing Agents of the Company for the
unexpired residue of the term created by the said Agreement
dated the 24th February, 1920, as also the said Agreements
dated the 24th February, 1920, and the 2nd October, 1934,
and all their rights and benefits as Managing Agents ‘under
the said Agreements and Messrs. Agarwal and Company agreed
to be the Managing Agents of the Company from the 1 st
December, J 943, in place, and stead of the Sassoons for the
said unexpired residue of the term with like powers
authorities remuneration and emoluments as were contained in
the said Agreements. It may be noted that even though the
letter recording the Agreement of transfer expressly
provided that the transferees would be entitled to 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.

The original Agreement entered into by the Elphin-
stone Spinning and Weaving Mills Company Ltd., was with
Messrs. Hajee Mahomed Hajee Esmail and Company 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 the Company in favour of the Sassoons their
successors and assigns employing them the Agents of the Com-
pany from the 1st February, 1922, for the unexpired ‘Period
of the term of 60 years commencing from the 3rd July, 1919.
Under clause 3 of the Agreement the Company was during the
continuance thereof to pay to
323
the Sassoons, their 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 per
month. Under clause 6 the Sassooris, their successors and
assigns were to be at liberty to retain, reimburse and pay
themselves out of the moneys of the’ Company inter alia all
sums due to them for commission and otherwise.- The deed of
transfer executed by the Sassoons in favour of Chidambaram
Mulraj and Company Ltd., on the 2nd June, 1943, stated that
the Sassooins assigned and transferred the Agreement dated
the 23rd May, 1922, between themselves and the company for
the unexpired residue of the term of sixty years specified
therein and the full benefit and advantage thereof together
with the benefit of the Agency and the office of the Agents
thereunder and the right to receive the remuneration
thereafter to become payable by the Company under or by
virtue of the said Agreement and together with the benefit
of all rights, privileges, powers and authorities given and
conferred on the Sassoons there under.

It is significant to observe that before the incometax
authorities as also the High Court no distinction was drawn
between the provisions of these two Agency Agreements in
regard to the right of the Managing Agent to remuneration
thereunder and the facts in so far as they related to all
the Managing Agencies were treated as similar. The quantum
also was not disputed in each case though the principle of
apportionment was in dispute.

The Sassoons were assesse for this “escaped income” on the
basis that they had earned the income by rendering services
as Managing Agents to the Companies for the respective
periods that they continued to be the Managing Agents and
the transferees had rendered the services for the balance of
the periods completing the full year of accounting and had
earned the proportionate commission and therefore the amount
of commission which the latter actually received included
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 Sassoons
as well as the transferees during the whole of
325
become a debt due by the Companies to the Sassoons and it
could not therefore be said to have accrued to them. The
contract of employment was an entire’ and an indivisible
contract and the remuneration payable by the Companies to
the Sassoons thereunder was payable at stated periods. It
was a condition precedent to the Sassoons earning the
remuneration that they fulfilled the terms of their
employment, completed the period for which the remuneration
was payable to them and the service for the particular
period was a condition precedent to their earning the
remuneration for that period. The stated period was that of
a year and no remuneration was payable to the Sassoons till
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. It was therefore contended that the Sassoons
had not earned any commission for the broken periods and
that not having earned the same they could not have assigned
it to the transferees with the result that when the
transferees were paid the commission under the terms of the
Managing Agency Agreements, the transferees received the
same in their own right even though they had not rendered
the services to the Company for the whole of the calendar
year 1943. It was contended that in any event, what. 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 by the
Companies to the transferees and were not liable to tax in
respect of the same.

It was on the other hand urged on behalf of the transferees
that even though under the terms of the deeds of assignment
and transfer they were paid by the Companies the whole of
the Managing Agency commission for the calendar year 1943
they had merely earned the commission or remuneration for
the period of actual services rendered by them to the
Company and the portions of the Managing Agency commission
proportionate to the services actually rendered by the
Sassoons to the Companies had accrued to the Sassoons though
it had been ascertained and paid to the transferees in the
year 1944. Even though the asceertainment
326
and the payment came later it made no difference which could
be referred to the accrual of the income back to the period
during which the income was earn Ltded and accordingly
whatever amount was earned by me the Sassoons durin’g the
respective periods that they had acted as the Managing
Agents of the Companies had accrued to them during those
periods and was received by the transferees only by virtue
of the respective deeds of assignment and transfer. Having
been received by the transferees by virtue of the assignment
those portions of the Managing Agency commission received by
them none the less constituted income which had accrued to
the Sassoons and were liable to tax against the Sassoons the
assignors and not against them the assignees.
The position of an employee under an entire contract of
service has been thus enunciated in Halsbury’s Laws of
England-Hailsham Edition-Vol. 22, page 133, paragraph 221:-
“When 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-
dition precedent to the recovery of any salary or wages in
respect thereof that the service or duty shall be completely
performed, unless the employer so alters the contract as to
entitle the servant to regard it at an end, in which case
the whole sum payable under the contract becomes due, or
unless there is a usage that the servant is entitled to
wages in proportion to the time actually served. But when
the contract,, though in respect of work terminating at a
particular time, is to be construed as providing that
remuneration shall accrue due and become vested at stated
periods, such remuneration constitutes a, debt recoverable
at the end of each such period of service.”

Section 219 of the Indian Contract Act also provides that in
the absence of any special contract, payment for the
performance of any act is not due to the agent until the
completion of such act.

Our attention was drawn in this connection to the case of
Boston Deep Sea Fishing and Ice Co. v. Ansell(1).
39 Ch. D. 339.

327

In that case the defendant was employed as the managing
director of the company for 5 years, at a yearly salary. He
was dismissed for misconduct before the expiration of the
current year and claimed against the company damages for
wrongful dismissal and the salary for the quarter which had
expired before his dismissal. 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:-
“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 pound 8OO, but in my; opinion
that would give him no right of action until the year was
completed.”

Lord Justice Bowen observed at page 364:-

“As regards his, current salary it is clear and established
beyond all doubt by authorities…………… that the
servant who is dismissed for wrongful behaviour cannot
recover his current salary, that is to say, he cannot
recover salary which is not due and payable at the time of
his dismissal but which is only to accrue due and become
payable at some later date, and on the condition that he had
fulfilled his duty as a faithful servant down to that later
date.”

The case of Moriarty v. Regents Garage & Engineering Company
Limited(1) was particularly relied upon by the learned
counsel for the Sassoona. No question of dismissal or
removal for misconduct arose in that case, but the director
whose remuneration was fixed “at the rate of pound150 per
annum” ceased to be a director on settlement of disputes
between himself and the company the director agreeing to
accept payment of all money due 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 pound 150 as his fees for the broken period.
The Deputy County Court Judge gave judgment for the company,
(1) (1921] 2 K.B. 766,
328
holding that the director was not entitled to remuneraion
for a broken part of a year. The Divisional Court versed
the decision of the Deputy County Court judge and there was
a further appeal. It was held by the Court of Appeal that
neither under the Agreement or under the articles was the
director entitled to the he claimed. The question of the
applicability of the Apportionment Act was sought to be
raised before the appeal Court but was not allowed to be
raised in appeal as it had not been done in the County
Court. arriving at this decision Lord Sterndale M.R. stated
the position as follows at page 774:–

“it seems to me that upon the construction of the agreement
it must fail. It is a payment per annum, a payment for a
year, And unless he serves for the year the cannot get the
payment.”

The decision in Swabey v. Port Darwin Gold Mining to.(1),
had been cited before the Court of Appeal in support of the
proposition that the director was in such cases entitled to
his proportionate remuneration for the broken period. The
Learned Master of the Rolls however observed at page 777:-
“There is nothing is Swabey v. Port Darwin Gold Mining
Co.(1) in my opinion to oblige us to hold that wherever
there is power, mutual or one sided, to terminate an
agreement in the middle of the year, there must, as a matter
of necessity, be inferred a right to rceive payment from day
to day, and receive payment for the broken period. I do not
think in this case there re circumstances which oblige me or
induce me to raw that inference.”

These authorities as well as the cases of Mapleson v.
years(2), and Sanders v. Whittle(3), enunciate the well-
stablished principle that wages and salaries are not
apportionable upon the sudden cessation of a contract of
service, which is stated to be still the law in Batt on the
Law of Master and Servant, 4th Edn., at page 209 until a
hardy litigant successfully seeks in a higher Court a
confirmation of the view of McCardie J. expressed in
Moriarty’s case(4) as regards the injustice
(I) I Meg. 385. (3) 33 L.T. 816.

(2) 28 T,L.R. 30. (4) [1921] 2 K.B. 766,
329
of denying the benefit of the Apportionment Act to a man who
may have been guilty of misconduct. This rule applies not
only when there is a sudden’ cessation of a contract of
service by the unilateral act of the master or the servant
but also when,, there is such cessation by mutual consent of
the parties. In the former event the servant would be Part
deprived of his proportionate wages by his own act or
default or he would be able to sue his master for damages
for wrongful dismissal, but no claim for proportionate
salary or wages would survive under the contract of service.
In the latter event the consensus of opinion between the
master and the servant would be sufficient to terminate the
contract of service and no claim for proportionate wages or
salary would survive unless it was made an express term of
the Agreement thus arrived at between the parties. In
either event there would be no question of the servant
claiming from his master wages or salary for the broken
period.

Learned counsel for the transferees attempted to throw doubt
on the correctness of the rule as enunciated 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:-

“Where the clause provides that a director is to be paid so
much per annum, the words ‘at the rate of’ being omitted,
and he vacates office before the end of a current year, the
question whether he can maintain a claim for an apportioned
part of the remuneration for that year has given rise to
some difference of opinion. In Swabey v. Port Darwin Gold
Mining Company(1), in the Court of Appeal, the article was
as follows, and not as stated in the report: ‘The directors
shall each receive by way of remuneration out of the funds
of the Company in each year the sum of pound 2OO, and the
chairman in addition pound 100 per annum.’ The words at the
rate of’ were not present (as appears from the articles
registered ‘at Somerset House). A director resigned in the
course of a current year,

(i) (1889) I Meg. 385.

43
330

and was held entitled to an apportioned part of the
remuneration for that year.

But in Salton v. New Beeston Cycle Co.(1), where the article
provided that ‘the directors shall ‘ be entittled to receive
by way of remuneration in each year pound 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(2),
the words being ,each director shall be paid the sum of
pound 300 per annum’ and by Bruce J. in Inman v. Acroyd and
Bert(1). See also Central de Kapp Gold Mines(4). In these
four cases the Court no doubt proceeded on the assumption
that the report of Swabey’s case(5) was correct,, and that
the article in that case contained the words ‘at the rate
of.’ Certainly Lord Alverstone C. J. acted on this
assumption in Harrison v. British Mutoscope, etc., Co.(,).
There the words were ‘the sum of E 1,500 per annum. In ‘the
meantime Inman v. Acroyd(7) had been taken to the Court of
Appeal, and affirmed, but on the ground that it was by the
articles left to the directors, to apportion the
remuneration at the end of each year.

This case, therefore, really turned on the construction of
the particular article, and as it was carefully
distinguished from Swabey’s case(5), the authority of that
case, on an article omitting the Words ‘at the rate of,’
remains unshaken.” Swabey’s case(5) was referred to by Lord
Sterndale M. R. at page 777 in Moriarty case(3) and the
learned Master of the Rolls stated that there was nothing in
that case which would oblige the Court to hold that wherever
there was power, mutual or one-sided, to terminate an
Agreement in the middle of the year, there must, as a matter
of necessity, be inferred a right to receive payment from.
day to day, and receive payment for the broken period.

(i) [1898] I Ch. 775-

(2) [1901] I Ch. 728.

(3) [1900] 82 L.T.. 621; on appeal [1901] I Q.B., 613.
(4) (1899) W.N. 216, 235; 69,L.J. Ch. 18 (Wright J.).
(5) (1889) I Meg. 385.

(6) Times, Nov. 10, 1903. P. 3.

(7) [1901] I Q.B. 613.

(8) [1921] 2 H.B,D. 766.

331

It really depended on the circumstances of each case whether
to draw that inference or not. In any event we have not
before us under the terms of the Managing Agency Agreements
any provision for payment of remuneration ” at the rate of ”
any particular sum a, year and the ratio of the four cases
referred to by Palmer in the passage quoted above as also
the observations of Lord Sterndale M. R. at page 777 in
Moriarty’s case (1) set out above are sufficient to enable
us to hold that when the remuneration or commission is ex-
pressed at so much per annum without anything more it would
amount in law to a stipulation for the payment of
remuneration per year and the servant would not be entitled
to get any remuneration unless and until he has completely
performed his contract and such performance would be a
condition precedent to the recovery of any wages or salary
for that definite period 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 the condition and fulfilled his duty as a faithful
servant down to 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.

We shall now examine the terms of the Managing Agency
Agreements with a view to see whether the Sassoons were
entitled thereunder to remuneration or commission for the
broken periods. The Agreement between the E. D. Sassoon
United Mills Ltd. and the 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 appointment of the firm of E. D . Sassoon and Company
and their assigns was for the whole period. E. D. Sassoon
and Company and their assigns covenanted and agreed with the
Company to be and act as such Agents for the remuneration
and upon and subject to the terms and conditions therein
contained. It was lawful for them to assign the agreement
and their rights thereunder to any person, firm or ‘Company
(1) [1921) 2 K.B.D. 766.

332

having authority by its constitution to become bound by
these obligations and upon such assignment being made and
notified to the Company, the Company was bound to recognise
such person, firm or Company as the Agents of the Company in
like manner as if the name of such person, firm or Company
had appeared in these presents in lieu of the names of the
partners 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 to the like terms
and. conditions as therein contained. These provisions of
the Agreement showed the continuity of the Managing Agents
who were employed as the Agents of the Company for this
specified period and under the terms and conditions therein
recorded. The new or the substituted Managing Agents were
treated as if they had entered into the Agreement with the
Company and their name had appeared in the original
Agreement in lieu of E. D. Sassoon and Company who were in
the first instance appointed the Agents of the company 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 71 per cent per annum on the annual net
profits of the Company with a stipulation in regard to the
minimum remuneration 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 the Agreement. The
commission was thus an annual payment calculated upon the
annual net profits of the Company and was to be due to the
Managing Agents yearly on the 31st March in each and every
year. Unless and until the annual net profits of the
Company were determined the 71/2 per cent. commission could
not be ascertained but the sum none the less became due on
333
the 31st March in each and every year following the close of
the accounting year of the Company. The’ amount of such
commission did not become a debt’ owing by the Company to
the Managing Agents until the 31st March in each and every
year and was to be paid immediately after the annual
accounts of the Company had been passed by the shareholders.
The postponement of the date of payment, in this manner
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 71 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 the 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 due 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 commission for the accounting year
of the- Company. The Managing Agency Agreement therefore
was an entire and indivisible contract stipulating a payment
of remuneration or commission per year and enjoined upon the
Managing Agents the duty and obligation of rendering the
services to the Company for the whole year by way of
condition precedent to their earning any remuneration or
commission for the particular accounting year.
It was however urged that clause 10 of the Managing Agency
Agreement itself contemplated a broken period, because there
was nothing therein to prevent the Managing Agents from
assigning the Agreement and their rights thereunder at any
time in a particular year during the continuance of the
Agreement. If the 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 rendered the services as the Managing Agents for
the
334
whole of the accounting year could earn any remuneration or
commission which would be payable to the managing Agents
only if they rendered the services to the Company for the
whole year. It therefore followed as a necessary corollary
that both the transferors and the transferees would be paid
their remuneration or commission and both would be entitled
to the proportionate commission for the respective periods
during which they rendered services as Managing Agents to
the Company. This argument however ignores the fact that
whatever be the position as between the transferor and the
transferee, whatever be their arrangements inter, se,
whatever be the periods of the year during which they might
have served the Company in their capacity as the 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 I such periods of service during
the course of a particular year was ever contemplated under
the Agreement. On assignment, the transferee became the
Managing Agent as if its name had been inserted in the
Managing Agency Agreement from the beginning. For the
future period the transferor effaced itself and the
transferee took the place of the transferor and preserved
the continuity of the Managing Agency so that whoever
happened to satisfy the description of the Managing Agents
at the time when 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 due and to the payment thereof after the annual
accounts of the Company had been passed by the shareholders.
The stipulation for the Company executing in favour of the
new or the substituted Managing Agents an Agreement
appointing them the Agents of the Company for the then
residue of the term outstanding under the Agreement was
merely consequential upon the earlier provision therein
contained which stated in so many terms that the Company was
bound to recognise such new or substituted Managing Agents
in like manner as if their names had appeared in the
335
mid 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 substituted. Agents
were created by the very terms of clause 10 of the Agreement
and the formal embodiment thereof in the fresh Agreement to
be entered into by the Company with them merely confirmed
the rights which had already been created in them under that
clause.

It was further pointed out that at the end of the Managing
Agency Agreement if not earlier, during the continuance
thereof there would certainly be a broken period because the
period of 30 years stipulated in clause I 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 date of 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 expiration of
the period of the Managing Agency Agreement cannot affect
the construction of the relevant terms of the Agreement
which have reference to a year or years during the
continuance of the Agreement. It is unnecessary to
speculate as to whether by reason of the fact that E. D.
Sassoon and Company must have received the full year’s
remuneration or commission at the end of the first
accounting year of the Company ending with the 31st
December, 1920, they might just as well give up, if need be,
their remuneration or commission for the last two months on
the expiration of the term of the Managing Agency Agreement.
We see nothing in the terms of the Managing Agency Agreement
which would compel or induce us to hold that there must as a
matter of necessity be inferred therefrom a right to receive
remuneration or commission for a broken period.
Learned counsel for Chidambaram Mulraj and Company Ltd.
however sought to distinguish the terms of the Managing
Agency Agreement of the Elphinstone Spinning and Weaving
Company Ltd. from those of the
336
Managing Agency Agreement of the E. D. Sassoon United Mills
Company Ltd. even though as stated ‘before no such
distinction was made either before the income-tax
authorities or the High Court. He contended that there was
nothing in 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
that the Company was during 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 remuneration a commission of ten per cent.
on the net 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 Managing Agents the right
of retainer, and reimbursement in connection inter alia with
all sums due to them for commission or otherwise. These
terms it was submitted did not constitute the payment of
remuneration or commission a payment per annum and it was
not possible to argue that the Sassoons were not entitled to
any remuneration or commission for a broken period
thereunder.

It may however be observed that the Managing Agency
Agreement with which we are here concerned was the Agreement
dated the 23rd May, 1922, between the Company and the
Sassoons and the Managing Agents there described were E. D.
Sassoon and Company Ltd on behalf of themselves, their
successors and assigns. Clause 1 of the Agreement employed
the Sassoons, their successors and assigns the Agents of the
Company from the 1 st February, 1,922, for the unexpired
portion of the term of 60 years commencing from the 3rd
July, 1919, and it was these Managing Agents thus described,
viz., the Sassoons, their successors and assigns, who were
during the continuance of the Agreement to be remunerated by
a commission of 10 per cent. on the net profits of the
Company and the Company agreed to pay such commission to
them. The
337
right of retainer and reimbursement reserved under clause 6
of the Agreement would not carry the transferees any further
because it -was in respect of all sums due to them for
commission or otherwise. Unless and until the commission
became due to them they had no such right of retainer. It
would still have to be determined whether any sum became due
to them by way of such commission. Whether any commission
became due to them would depend upon the construction of
clause 3 of the Agreement and under that clause the
commission calculated at 10 per cent. of the net profits of
the Company was to become due to them and was to be paid by
the Company to them during the continuance of the Agreement.
We have got to determine what is the full implication of
this clause of the Agreement,-“the commission of 10 per
cent. on the net profits of the Company.” The word “profits”
has a welldefined 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 my opinion a welldefined legal
meaning, and this meaning coincides with the fundamental
conception of profits in general parlance, although in
mercantile phraseology the word may at times bear meanings
indicated by the special context which deviate in some
respects from this fundamental signification. ‘Profits’
implies a comparison between the state of a business at two
specific dates usually separated by an interval of a year.
The fundamental meaning is the amount of gain made by the
the business during the year. This can only be ascertained
by a comparison of the assets of the business at the two
dates.”

This concept of the term was also adopted by Mr. Justice
Mahajan, as he then was, in Commissioner of Income-tax,
Bombay v. Ahmedbhai Umarbhai and Company, Bombay(2):
“Profits of a trade or business are what is gained by the
business. The term implies a comparison between the state
of business at two specific dates separated by, an interval
of a year and the fundamental

(i) [1911] i Ch. D. 92.

44

(2) [1950] i8 I.T.R. 472 at page 5o2.

338

meaning is the amount of gain made by the business during
the year and can only be ascertained by a comparison of the
assets of the business at the two dates, the increase shown
at a later date compared to the ,earlier date represents the
profits of the business.”

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
to prevent the Company if it so chose from casting its
accounts and ascertaining the net profits half yearly or
quarterly or even every month by preparing trial balance
sheets in that manner. Theoretically speaking all this may
be possible but we have got to construe the Agreements
arrived at between business people in a, business sense.
Ordinarily in the case of business or trading concerns
accounts of profits are not made except at stated intervals
usually separated by a year. Particularly in the case of
limited Companies incorporated under the Indian Companies
Act the accounts are cast every year and the net profits
earned by the Company are ascertained every year both for
the declaration of dividends and for submitting the returns
to the income-tax authorities. Under section 131 (I)of the
Indian Companies Act of 1913 every Company was required once
at least in every year and at intervals of not more than 15
months to cause the accounts to be balanced and a balance
sheet to be prepared which was 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 preparation once at least every year of
the profit and loss account for the period and under the
Regulation 108 for the balance sheet 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 Sasssoons in the year 1944, it is
reasonable to assume that the
339
accounts of this Company were throughout made up at 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 paid to the Managing Agents
of the Company for the, time being. In the case of limited
Companies like those before us we would be justified in
presuming that normally the accounts are made up every year
and even though there may be a theoretical possibility of
the accounts being cast half yearly or quarterly or even
every month no such procedure would be adopted by the
Company. In any event it would be absurd to suggest that
the profits of the Company could accrue from day to day or
even from month 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 this purpose. If the
profit or loss has got to be ascertained by a comparison of
the assets at two stated periods, the most businesslike way
of doing it would be to do so at stated intervals of one
year and that would be a reasonable period to be adopted for
the purpose. In the case of large business concerns like
these the working of the Company during a particular month
may show profits and the working 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 loss or profit which would go to
counterbalance the profit or loss as the case-may be in the
earlier part of the year. It may as well happen that the
profits which the Company may appear to have earned during
the earlier months of the year or even during the II months
of 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 events. It would
be therefore reasonable to assume 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 paid their remuneration or commission at the
percentage stipulated in the Managing Agency Agreement and
340
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 Agents of
this Company in not taking up any such contention before the
Income-tax authorities and the High Court that the
remuneration or commission payable to them under the
Managing Agency Agreement was not payable per year and the
contention put forward before us in this behalf was a clear
after-thought. We would be therefore justified in treating
the terms and conditions in regard to the payment of
Managing Agency Commission in both these Managing Agency
Agreements as on a par with each other stipulating for such
payment per year on the net annual profits of the Companies.
If this be the true construction of the Managing Agency
Agreements it follows that the contract of service between
the Companies and the Managing Agents was entire and
indivisible, that the remuneration or commission became due
by the Companies to the Managing Agents only on completion
of a definite period of service and at stated periods, that
it was a condition precedent to the recovery of any wages or
salary in respect thereof that the service or duty should be
completely performed, that such remuneration constituted a
debt only at the end of each such period of service and that
no remuneration or commission was payable to the Managing
Agents for broken periods.

The question still remains whether the remuneration for the
broken periods accrued to the Sassoons and the contention
which was strenuously urged before us on behalf of the
transferees was that the Sassoons had rendered the services
in terms of the Managing Agency Agreements to the respective
Companies, that the services thus rendered were the source
of income and whatever income could be attributed to those
services was earned by the Sassoons and accrued to them in
the chargeable accounting period though it was ascertained
and paid in the year 1944 to the transferees.
The word “earned” has not been used in section 4 of the
Income-tax Act. The section talks of ” income,
341
profits and gains ” from whatever source derived which (a)
are received by or on behalf of the assessee, or (b) accrue
or arise to the assessee in the taxable territories during
the chargeable accounting period. Neither the 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. Shau Wallace & Co.(1) attempted a
definition of the term income ” in the words following :-
” Income, their Lordships think, in the Indian Income-tax
Act, connotes a periodical monetary return ‘ coming in’ with
some sort of regularity, or expected regularity from
definite sources. The source is not necessarily one which
is expected to be continuously productive, but it must be
one whose object is the production of a definite return
excluding anything in the nature of a mere windfall.”
Mukerji- J. has defined these terms in Rogers Pyatt Shellac
& Co. v. Secretary of State for India(2):

” Now what is income? The -term is nowhere defined in the
Act…… In the absence of a statutory definition we must
take its ordinary dictionary meaning that which comes in as
the periodical produce of one’s work, business, lands or
investments (considered in reference to its amount and
commonly expressed in terms of money) ; annual or periodical
receipts accruing to a person or corporation ” (Oxford
Dictionary). The word clearly implies the idea of receipt,
actual or constructive. The policy of the\ Act is to make
the amount taxable when it is paid or received either
actually or constructively. i Accrues,’ arises’ and I is
received’ are three distinct terms. So far as receiving of
income is concerned there can be no difficulty; it conveys a
clear and definite meaning, and I can think of no expression
which makes its meaning plainer than the word ‘ receiving’
itself The words I accrue and arise also are not defined in
the Act. The ordinary dictionary meanings of these words
have got to be taken as the meanings attaching to them.
Accruing’ is synonymous with ‘arising’ in the sense

(i) I.L.R. 59 Cal. I343 at p. 1352.

(2) 1 I.T.C. 363 at P. 371
342
of springing as a natural growth or result. The three
Expressions accrues, I arises ‘ and I is received ‘ having
been used in the section, strictly speaking ‘accrues’ should
hot be taken as synonymous with I arises’ but on the
distinct sense of growing up by way of addition for increase
or as an accession or advantage; while the word I arises’
means comes into existence or notice or presents itself.
The former connotes the idea of a growth or accumulation and
the latter of the growth or accumulation with a tangible
shape so as to be receivable. It is difficult to say that
this distinction has been throughout maintained in the Act
and perhaps the two words seem to denote the same idea or
ideas very similar, and the difference only lies in this
that one is more appropriate than the other when applied to
particular cases. It is clear, however, as pointed out by
Fry L.J. in Colquhoun v. Brooks(1), [this part of the
decision not having been affected by the reversal of the
decision by the House of Lords(2)] that both the words are
used in contradistinction to the word ” receive ” and
indicate a right to receive. They represent a stage
anterior to the point of time when the income becomes
receivable and connote a character of the income which is
more or less inchoate.

One other matter need be referred to in connection with the
section. What is sought to be taxed must be 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 by Mukerji
J. were made in Colquhoun v. Brooks(1) while construing the
provisions of 16 and 17 Victoria Chapter 34 section 2
schedule ‘D’. The words to be construed there were’ profits
or gains, arising or accruing’ and it was observed by Lord
Justice Fry at page 59:

” In the first place, I would observe that the tax is in
respect of ‘profits or gains arising or accruing.’ I cannot
read those words as meaning I received by.’ If the enactment
were limited to profits and gains ‘received

(i) (1888) 21 Q.B.D. 52 at P. 59.

(2) (I889) 14 APP. Cas. 493.

343

by’ the person to be charged, that limitation would apply as
much to all Her Majesty’s subjects as to foreigners residing
in this country. The result’ would be that no income-tax
would be payable 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 kingdom.
I think, therefore, that the words I arising or accruing are
general words descriptive of a right to receive profits.”
To the same effect are the observations of Satyanarayana 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 the judgment of Mukerji J. in Roqers
Pyatt Shellac & Co. v. Secretary of State for India(3), is
approved and adopted. It is clear therefore that income may
accrue to an assesee without the actual receipt of the same.
If the assessee acquires a right to receive the income, the
income can be said to have accrued to him though it may be
received later on its being ascertained. The basic
conception is that he must have acquired a right to receive
the income. There must be a debt owed to 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 and until there is created in favour
of the assessee a debt due by somebody it cannot be said
that he has acquired a right to receive the income or that
income has accrued to him.

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 Commissioner of Income-tax,
Bombay v. Ahmedbhai Umarbhai & Co., Bombay(6), and
Commissioner of Income-tax, Madras v. K. R. M. T. T.
Thiagaraja Chetty & Co.(7).

(i) 18 I.T.R.1 333 at P. 342. (5) II Q.B.D. 5i8 at pp.
522 and 527′
(2) [19501] S.C. R. 335 at P. 389. (6) [1950] S.C.R.
335 at P. 364.

(3) I I.T.C. 363 at P. 372. (7) 24 I.T.R. 525 at P.

533.
(4) [1946] I A.E.R. 532 at P. 539.

344

It has also been used by the Judicial Committee of the Privy
Council in Commissioners of Taxation v. Kirk(1). The
concept however cannot be divorced from that of income
accruing to the assessee. If income has accrured to the
assessee it is certainly earned by him in the sense that he
has contributed to its production or the parenthood of the
income can be traced to him. But in order that the income
can be said to have accrued to or earned by the assessee it
is not only necessary that the assessee must have
contributed to its accruing or arising by rendering services
or otherwise but he must have created a debt in his favour.
A debt must have come into existence and he must have
acquired a right to receive the payment. Unless and until
his contribution or parenthood is effective in bringing into
existence a debt or a right to receive the payment or in
other words a debitum in presenti, solvendum in futuro it
cannot be said that any income has accrued to him. The mere
expression “earned” in the sense of rendering the services
etc., by itself is of no avail.

If therefore on the construction of the Managing Agency
Agreements we cannot come to the conclusion that the
Sassoons had created any debt in their favour or had
acquired a right to receive the payments from the Companies
as at the date of the transfers of the Managing Agencies -in
favour of the transferees no income can be said to have
accrued to them. They had no doubt rendered services as
Managing Agents of the Companies for the broken periods.
But unless and until they completed their performance, viz.,
the completion of the definite period of service of a year
which was a condition precedent to their being entitled to
receive the remuneration or commission stipulated
thereunder, no debt payable by the Companies was created in
their favour and they had no right to receive any payment
from the Companies. No remuneration or commission could
therefore be said to have accrued to them at the dates of
the respective transfers.

It was however urged that even though no income can be said
to have accrued to the Sassoons at the date of the
respective transfers which could be the
(1) [1900] A. C. 588 at p. 592,
345
subject-matter of any assignment by them in favour of the
transferees, the moment the remuneration or commission was
ascertained at the end of the calendar year and became a
debt due to the Managing Agents under the terms of the
Managing Agency Agreements it could be referred back to the
period in which it was earned and the portions of the
remuneration or commission which were earned by the Sassoons
during the broken period could certainly then be said to be
the income which had accrued to them during the chargeable
accounting period.

Reliance was placed is support of this position on
Commissioners of Inland Revenue v. Gardner Mountain & D’
Ambrumenil, Ltd.(1). 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 underwriting. 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 under
writer’s profits from the policies underwritten in the
calendar year 1936 in the year in which the policies were
underwritten or in the year when the accounts were thus made
up. The assessee contended that the contracts into which it
entered were executory contracts, 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
(I) 29 T.C. 69.

45

346.
not ascertainable or earned, and did not arise, until that
time and that the additional assessment which was made in
the year in which the policies were underwritten should
accordingly be discharged. The Special ,Commissioner
allowed the assessee’s contention and, discharged the
additional assessment. The decision of the Special
Commissioners was confirmed on appeal by Macnaghten J. in
the King’s Bench Division of the High Court. The Court of
Appeal however reversed this decision and a further appeal
was taken by the assessee to the House of Lords. The House
of Lords held that on the true construction of the
Agreements, the commissions in question were earned by the
assessee 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 accounting period and the profits were to be
taken to be the actual profits arising in the chargeable
accounting period. The ratio of the decision was that the
commission paid was remuneration for services completely
performed in the particular year, that, the assessee had at
the end of the year done everything it had to do to earn it
and that it was remuneration for work done and completely
done in the particular year though it was ascertained and
paid two years later. Viscount 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. Lord Wright in his
speech at page 94 said that it was necessary to determine in
what year the Commission was earned, or in the language of
the Act, in what year the assessee’s profits arose and
observed at page 96 : –

“I 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
347
ascertained, but in practice are not ascertained until the
end of two years beyond the date of underwriting. The right
is vested, though its valuation is postponed,’ and is not
merely postponed but depends on all the contingencies which,
are inevitable in any insurance risk, losses which may or
may not happen, returns of premium, premiums to be arranged
for additional risks, reinsurance, and the whole catalogue
of uncertain future factors. All these have to be brought
into account according to ordinary commercial practice and
understanding. But the delays and difficulties which there
may be in any particular case, however they may affect the
profit, do not affect the right for what it eventually
proves to be worth.”

Lord Simonds in his speech at page 110 stated:”
It is clear to me that the commission is wholly earned in
year 1 in respect of the profits of that year’s
underwriting. If so, I should have thought that it was not
arguable that that commission did not accrue for income-tax-
purposes in that same year though it was not ascertainable
until later.”

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 the
decisions in Bangalore Woollen, Cotton and Silk Mills Co.,
Ltd. v. Commissioner of Income tax, Madras(1), and Turner
Morrison and Co., Ltd. v. Commissioner of Income-tax, West
Bengal(2), to show that as and when the sale proceeds were
received by the Company the profits made by the Company were
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 commission
was similarly embedded in those sale proceeds. If the
profits thus accrued to the Company. during the chargeable
accounting period the commission payable to the Managing
Agents also could be said to have accrued to them during
that period.

(I) [1950] is I.T.R 423.

(2) 11953) 23 I.T.R. 152.

348

It is no doubt true that the accrual of income does not
depend upon its ascertainment or the accounts cast by
assessee. The accounts may be made up at a much later date.
That depends upon the convenience -of the assessee and also
upon the exigencies of the situation. The amount of the
income, profits or gains may thus be ascertained later on
the accounts being made up. But when the accounts are thus
made up the income, profits or gains ascertained as the
result of the account are referred back to the chargeable
accounting period during which they have accrued or arisen
and the assessee is liable to tax in respect of the same
during that chargeable accounting period. “The computation
of the profits whenever it may take place cannot possibly be
allowed to suspend their accrual..:… …………….. “.
“The quantification of the commission is not a condition
precedent to’ its accrual.” (Per Ghulam Hassan J., in
Commissioner of Income-tax, Madras v. K. B. M. T. T.
Thiagaraja Chetty and Co.(1). See also Isaac Holden and
Sons, Ltd. v. Commissioners of Inland Revenue(2), and
Commissioners of Inland Revenue, v. Newcastle Breweries
Ltd.(3). What has however got to be determined is whether
the income, profits or gains accrued to the assessee and in
order that the same may accrue to him it is necessary that
he must have acquired a right to receive the same or that a
right to the income, profits or gains has become vested in
him though its valuation may be postponed or though its
materialisation. may depend on the contingency that the
making up of the accounts would show income, profits or
gains. The argument that the income, profits or gains are
embedded in the sale proceeds as and when received by the
Company also does not help the transferees, because the
Managing Agents have no share or interest in the sale
proceeds received as such. They are not co-sharers with the
Company and no part of the sale proceeds belongs to them.
Nor is there any ground for saying that the Company are the
trustees for the business or any of the assets for the
Managing Agents. The Managing Agents cannot therefore be
said to have acquired a
(1) 24 I.T.R. 525. at P. 534.

(2) 12 Tax Cases 768.

(3) 12 Tax Cases 927.

349

right to 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 determined. (See Commissioners
of Inland Revenue v. Lebus(1) ).

It is cleat therefore that no part of the Managing Agency
commission had accrued to the Sassoons at the dates of the
respective transfers of the Agencies to the transferees.
The two decisions which were sought to be distinguished by
the High Court in the judgments under appeal also support
this conclusion. In the unreported decision of the High
Court of Bombay in Commissioner of Excess Profits Tax,
Bombay City v. Messrs. P. N. Mehta and Sons(1), the
Managing Agency Agreement was couched in the very same terms
as that of the E. D. Sassoon United Mills Company Ltd. The
Managing Agents were to be paid 10 per cent. of the net
annual profits made by the Company with a guaranteed minimum
commission of Rs. 15,000 per annum. The accounting year of
the Company was the calendar year. The Tribunal had held
that the annual profits could only be ascertained when the
accounts of the Company were made up and it was then that
the 10 per cent. 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 contention
was negatived by the High Court :-

“It is only on net annual profits that the Managing Agents
are entitled to any commission. A Company may have worked
‘for six months at a loss, for the 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 result 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 profit was. Therefore, the Managing
Agents are only entitled to a commission on the result of
the
(1) [ 1946] i A.E.R. 476 ; S.C. 27 Tax Cases 136.
(2) [1950] I.T.Ref. No. 19 Of 1950.

350

working of the Mills for a whole year. If the working shows
a net annual profit which gives them a commission of more
than Rs. 15,000 on the basis of 10 per cent., they are
entitled to that amount. If, on the ,other hand, the
working does not show a profit, which entitles them to a
comnission of Rs. 15,000 they are in any case entitled to
that amount. Therefore in our opinion, the Tribunal rightly
held that the accrual of the commission was at the end of
the calendar year, which was the year maintained by the
Mills and not from time to time as contended by the Depart-
ment.”

In the case of Salt and Industries Agencies Ltd., Bombay v.
Commissioner of Income-tax, Bombay City(1),, the question
for the consideration of the Court no doubt was what was the
place where the profits had accrued. In determining the
place where the profits had accrued it was however necessary
to find when the profits had accrued to the assessee and it
was held that, what was conclusive of the matter was the
consideration as to when the right to Managing Agency com-
mission arose and when did the Company become liable to pay
Managing Agency commission to the Managing Agents and it was
further held that it was only when all the accounts of the
working of the Company were submitted to the head office in
Bombay and the profit was determined that it could be said
that a right to receive a commission at the rate specified
in the Managing Agency Agreement had arisen and the Managing
Agents became entitled to a certain specified commission.
These considerations are germane to the question which we
have to decide in these appeals and support the conclusion
which we have already arrived at, that the right to receive
the commission would arise and the income, profits or gains
would accrue to the Managing Agents only at the end of the
calendar year which was the terminus a quo for the making up
of the accounts and ascertaining the net profits earned by
the Company. We fail to see how these cases which were
relied upon by the Revenue before the High Court could, be
distinguished in the manner in which it was done.

(i) iS I.T.R. 58.

351

We were invited by the learned counsel for the Sassoons to
approach the question from another point of view and that
was that what had been transferred by the Sassoons to the
transferees was a source of income, viz., the Managing
Agency which was to run for the unexpired residue of the
term. It was urged that where a source of income was
transferred any income which accrued from that source after
the date of the transfer was the transferees’ income and not
of the transferors, and that it was immaterial (a) that at
the date of the transfer there was an expectation that at a
future date income would accrue, (b) that the transferor by
the work before the transfer had contributed to -create any
income which might eventually accrue and (c) that because of
the expectation of income a higher price had been paid for
the transfer.

Reliance was placed in this connection on the case Of
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 contention of the
assessee was that the dividend should be treated as capital
in view of the terms of the contract of purchase and not
included in the computation of his income. Under the
provisions of the Incometax Act the dividends which were
receivable by him ‘were required to be included in the
computation of his income. The learned Judges however
discussed the legal effect of such a transaction of the
purchase of shares. Lord Ormidale observed at page 709:-
” The value of the shares had to be determined as a matter
of bargain between the parties, and the purchaser 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 the shares so purchased by him.”
Lord Anderson observed at page 710:-

(i) 8 Tax Cases 704.

352

He buys two things with his money. He buys, in the first
place, a share of the assets of the industrial concern
proportionate to the number of shares which he hat;
purchased; and he also buys the right to participate in any
profits which the Company may make in the future. Now, when
a transaction of this nature is entered into during the
currency of the financial year of the industrial concern it
is obvious that what happens is this, that not only is a
part of the assets purchased outright but that a chance is
bought as well-a chance of sharing in any profits which may
be made during the currency of that financial year.”
Wigmore (H. M. Inspector of Taxes) v., Thomas Summerson and
Sons, Limited (1) was the case of a vendor of war loan stock
bearing interest payable without deduction of tax. The sale
was effected on the 10th April, 1923, with interest rights.
The vendor was assessed for the year 1923-24 in respect of
the amount of interest said to have accrued on the stock in
the period between the last payment of interest. and the
sale of the stock, it being contended that the price
received by the vendor on sale of stock included this
interest. The purchasers said that they were not liable to
tax in respect of the income which had been accruing on the
security they had purchased in a period anterior to the date
on which they purchased. It was observed that the truth of
the matter was that the vendor did not receive interest and
interest was the subject-matter of the tax. But he received
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 them and the vendor was held not
assessable in respect of the interest accrued at the date of
the sale of the stock.

Commissioners of Ihland Revenue v. Pilcher (2) was the case
of the gale of an orchard inclusive of the year’s fruit
crop. The assessee had valued the cherries which were on
the trees at pound 2,500 and had pat a man immediately in
the orchard after he had purchased it at the. auction. He
commenced to pick the fruit on the 25th May, 1942, and
completed the operations on the

(i) 9 Tax Cases 577.

(2) 3 i Tax Cases 314.

353

12th June, 1942. He realised pound, 2,903 as the price of
the cherries. This sum was brought into the profit and loss
account as a trading receipt and the contention of the
assessee was that in computing his profits he was entitled
to charge the sum of i 2,500 being the purchase price of the
cherries sold for pound 2,903 which sum had been brought
into credit as a trading receipt. This contention was
negatived and it was observed by Lord Justice Jenkins at
page 332 —

” It is a well settled principle that outlay on the purchase
of an income- bearing asset is in the nature of capital
outlay, and no part of the capital so laid out can, for
income-tax purposes, be set off as expenditure against
income accruing from 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
contended that the revenue should look at the transaction
from the assessee’s point of view and should consider it in
a manner favourable to him. This contention was dealt with
in the manner following:-

One has to remember that this transaction concerned not
merely Mr. Pilcher but also the vendor of the orchard. Mr.
Pilcher was able to buy the orchard complete with the
cherries from the vendor and by that means, according to his
own calculation, the cherries stood him in pound 2,500. It
by no means follows that if he had been minded to buy the
cherries from the vendor apart from the land, as a separate
transaction, the vendor would have been willing to sell them
to him for pound 2,500, or at any price. The difference is
obviously a material one from the vendor’s point of view
because, dealing with the matter as he did, he was selling a
capital asset, and the resulting capital receipt, prima
facie, would attract no tax. If he sold the cherries
separately in the way of trade he would at once have created
an income receipt on which, prima facie, tax would have been
exigible. Therefore the alteration in the form of the
bargain required to make it more favourable to Mr. Pilcheer
from the tax point of view would have involved an alteration
not merely of form but of substance owing to its adverse
effect on 46
354
the tax situation of the vendor, and it cannot be assumed
that the bargain thus altered would have been one to which
Mr. Pilcher could have secured the vendor’s agreement.”
These observations throw considerable light on the situation
obtaining,in the cases before us. It will be remembered
that the total amount of Rs. 75,77,693 received by the
Sassoons on the transfers of the Managing Agencies was taken
by them to the ” Capital Reserve 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 receipt of income even though the transferees
had desired to do so. All that the transferees obtained
under the deeds of assignment and transfer executed by the
Sassoons in their favour was an income bearing asset
consisting of the office of Managing Agents, the Managing
Agency Agreement and all the rights and benefits as such
Managing Agents under the Agreements and no part of the
consideration paid by the transferees to the Sassoons could
be allocated as a receipt of income by reason of their

-contribution towards the earning of the commission in the
shape of services rendered by them as Managing Agents of the
Companies for the broken periods. What the transferees
obtained under the deeds of assignment and transfer was the
expectancy of earning a commission in the event of the
condition precedent by way of complete performance of the
obligation of the Managing Agents under 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 last case to which we were referred by the learned
counsel for the Sassoons was The City of London Contract
Corporation, Limited v. Styles (Surveyor of Paxes) (1). 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 and the
(1) 2 Tax cases. 239,
355
assessee sought to deduct the price paid for the contracts
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 result was achieved even
though in the purchase of unexecuted contracts there was
included the part of the work done towards the performance
of the contracts by the vendors. The assessee derived the
benefit from such partial execution of the contracts by the
vendors; nevertheless the value of such work was not treated
as any income which had accrued to the vendors and which
the assessee was entitled to deduct from its profits arising
from the performance by it of those unexecuted contracts.
Learned counsel on behalf of the transferees contended that
all these cases were concerned with the question whether the
income derived by the assessee out of the income bearing
asset after the date of the purchase 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 the
question 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 did not arise in terms it is nonetheless
involved in the consideration of the question whether the
assessee was liable to pay the income-tax on the whole of
the income 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 conclusion that the
assesse alone is liable it necessarily follows that the
vendor certainly has nothing to do with the same. If it
were otherwise the vendor would certainly be liable to tax
and no purchaser would miss the opportunity of avoiding his
liability for that portion of

(i) 31 Tax Cases 314 at P. 335.

356

the income which can be said to have accrued to the vendor.
As a matter of fact such a contention was taken by the
purchasers in Wigmore (H.M. Inspector of Taxes) v. Thomas
Summerson and Sons Limited(1), where they declined to be
assessed for tax in respect of income which had been
accruing on the securities they had purchased in a period
anterior to the date at which they did purchase. This
contention however did not prevail and the vendors were held
not assessable in respect of the interest accrued on the
date of the sale of the stock.

It is therefore clear that the Sassoons had not earned any
income for the broken periods nor had any income accrued to
them in respect of the same, and what they transferred to
the transferees under the respective deeds of assignment and
transfer did not include any income, which they had earned
or had accrued to them and which the transferees by virtue
of the assignment in their favour were in a position to
collect. If any debt had accrued due to the Sassoons by the
respective Companies at the dates of respective transfers of
Managing Agencies such debt would certainly have been the
subject-matter of assignment. But it what was transferred
by the Sassoons, to the respective transferees were merely
expectations of earning commission and not any part of the
commission actually earned by them or which had accrued to
them under the terms of the Managing Agency Agreements, what
the transferees received from the Companies under the terms
of the Managing Agency Agreements which were thus
transferred to them would be their income and no part of
such income could ever be said to have accrued to the
Sassoons, during the chargeable accounting period.
In view of the above it is unnecessary to deal with the
contention which was urged by the learned counsel for the
Sassoons that ever be an assignment of income the assignee
and not the assignor would be liable to pay the tax. He
referred us to the case of the Commissioner of Income-tax,
Bombay Presidency v. Tata Sons Ltd.(2), in support of this
contention of his and he also referred us to note ‘G’ at
page 209 in

(i) 9 Tax Cases 577.

(2) [1939] 7 I.T.R. 195.

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 Sassoons which were assigned under the
respective deeds of transfer and assignment.
The only question which remains to consider is whether
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-“In the Absence of a
contract or local usage to the contrary, all rents,
annuities, pensions, dividends and other periodical payments
in the nature of income shall, upon the transfer of the
interest of the person entitled to receive such payments, be

-deemed, as between the transferor and the transferee, to
accrue due from day to day, and to be apportionable
accordingly, but to be payable on the days appointed for the
payment thereof.” It may be noted that the section applies
in the absence of a contract or local usage to the contrary
and also applies as between the transferor and the
transferee. There is no room for the application of these
provisions as between the subject and the Crown. (Vide The
Commissioners of Inland Revenue v. Henderson’s
Executors(2)). The contract to the contrary must of
necessity be as between the transferor and the transferee
and it is only when there is no such contract to the
contrary that the rents, annuities, pensions, dividends 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 assignment and transfer executed
by the Sassoons in favour of the transferees transferred all
the rights and benefits under the Agency Agreement to the
transferees and there was no question of apportionment of
any commission between the Sassoons and the transferees. In
fact the transfer claimed to retain and did retain
(1) [I943] 25 Tax, 419.

(2) i6 Tax CaseS 282 at P. 291,
358
the whole of the commission, which had been paid by the
Companies to them in the year 1944 and the Sassoons never
claimed any part of it as having been earned by them.
Whatever was their contribution .towards the earning of that
commission during the whole of the calendar year 1943 was
the subjectmatter of the assignment in favour of the
transferees and that was sufficient to spell out a contract
to the contrary as provided in section 36 of the Transfer of
Property Act.

Section 26(2) of the Indian Income-tax Act also does not
help the transferees because it is only when the person
succeeded has acquired an actual share of the income profits
or gains of the previous year that he is liable to tax in
respect of it and as set out herein above no part of the
commission actually accrued to or became a debt due by the
Company to the Sassoons on the dates of the respective
transfers of the Managing Agencies to the transferees. In
order to attract the operation of section 26(2) the person
succeeded must have had an actual share in the income,
profits or gains of the previous year and on the
construction of the Agreements the Sassoons cannot be said
to have acquired any share in commission for the broken
periods.

The whole difficulty has arisen because the High Court could
could not reconcile itself to the situation that the
transferee 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 transfers had worked for the
broken periods and yet they would be held disentitled to any
share in the income for the year. If the work done by the
transferors as well as the transferees during the respective
periods of the, year were taken to be the criterion the
result would certainly be anomalous. But the true test
under section 4(1)(a) of the Income-tax Act is not whether
the transferors and the transferees had worked for any
particular periods of the year but whether any income had
accrued to the transferors and the transferees within the
chargeable accounting period. It is not the work done or
the services rendered by the person but the income
359
received or the income which has accrued to the person
within the chargeable accounting period that is the subject-
matter of taxation. That is the proper method of approach
while considering the taxability or otherwise of income and
no considerations of the work done for broken periods or
contribution made towards the ultimate income derived from
the source of income nor any equitable considerations can
make any difference to the position which rests entirely on
a strict interpretation of the provisions of section 4(1)(a)
of the Income-tax Act.

The result therefore is that the question referred by the
Tribunal to the High Court must be answered in the negative.
All the appeals will accordingly be allowed. But as regards
the costs, under the peculiar circumstances of these appeals
where the Commissioner of Income-tax, Bombay, has supported
the Sassoons in Civil Appeal No. 3 of 1953 and the brunt of
the attack in Civil Appeals Nos. 30 of 1953 and 31 of 1953
has been borne not by the Commissioner of the Income-tax who
is the appellant in both, but by the Sassoons, the proper
order should be that each party should bear pay his own
costs here as well as in the Court below
JAGANNADHADAS J.-I am unable to agree with the judgment
just delivered on behalf of both my learned brothers. It is
with considerable regret that I feel constrained to write a
separate judgment expressing the reasons for my -not being
able to agree with them in spite of my profound respect for
their views.

These three are appeals against a judgment of the Bombay
High Court by leave granted under section 66A(2) of the
Indian Income-tax Act. They arise out of a set of facts
mostly common. E. D. Sassoon and Company, Ltd. now in
voluntary liquidation (hereinafter referred to as the
Sassoonal had the Managing Agency of three Mills (1) F.D.
Sassoon United Mills Ltd. (2) Elphinstone Spinning and We
having Mills Company, Ltd., and (3) The Apollo Mills Ltd.
With the
360
consent of the Mill Companies and by virtue of clauses in
the Managing Agency Agreements enabling thereunto, the
Sassoons transferred the Managing Agency of the three Mills
to three other Companies during the course of the calendar
year 1943 as follows: (1) to Agarwal and Company, Ltd.
(hereinafter referred to as Agarwals) on the 1st December,
1943, (2) to Chidambaram Mulraj and Company, Ltd.
(hereinafter referred to as Chidambarams) on the 1st June
1943, and (3) to Rajputana Textile (Agencies) Ltd., on the
1st july, 1943. The assessments with which we are concerned
are those of (1) Sassoons, (2) Agarwals, and (3) Chidam-
barams and relate to income by way of Managing 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 the assessment year was
1944-45 and the accounting year was the calendar year 1943.
For Chidambarams the assessment year was 1945-46 and the
chargeable accounting period was from 1st July, 1943, to
30th June, 1944. The tax was assessed on the basis not of
receipts but of accrual. The income-tax authorities treated
the total remuneration for the entire year 1943 in each case
as income which accrued to the assigneeCompanies in the
respective accounting periods. The assignee-Companies
objected on the ground that part of the remuneration, up to
the date of the respective assignments, accrued to the
assignor-Company, viz., Sassoons and that they were,
therefore, liable to be assessed only in respect of the
balance of the remuneration 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 to the Income-tax
Appellate Tribunal, their contention was accepted and the
assessments were modified. It may be mentioned that the
Rajputans Textiles (Agencies) Ltd. does not appear to have
filed any appeal to the Tribunal. Meanwhile (presumably by
way of caution) the income-tax authorities issued notices to
the assignor-Company, viz., Sassoons, under section 34 of
the Indian Income-tax Act and assessed it in respect of the
proportionate part
361
of the year’s Managing Agency commission up to the date of
the respective assignments. The Sassoons objected to this
before the income-tax.authorities, but the objection was
overruled. It has been stated to us in the case filed by
the Sassoons in this Court that the entire net consideration
for the three assignments was taken by them into their
accounts as capital reserve. But this finds no mention in
the Tribunal’s statement of the case to the High Court. How
the Sassoons made entries in their own accounts is not
decisive and has not been relied on before us. On their
objection being overruled, the Sassoons filed an appeal to
the Income. tax Appellate Tribunal. The Tribunal rejected
the appeal in view of the decision they had already given in
the appeals filed by the two assignee-Companies, Agarwals
and Chidambarams. The three Companies 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 circumstances of the case; was the Managing
Agency commission liable to be apportioned between the
assessee Company and the assignee (or assignor, as the case
may be).”

The High Court answered the question against the Sassoons
and in favour of the other two. What the High Court held
was in substance that (1) the Managing Agency remuneration
for the year in question accrued as the joint income of both
the assignor and 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 the taxable income
of the assignor’ There are thus three appeals, one by the
Sassoons against the Income-tax Commissioner and the other
two by the Income-tax Commissioner against Agarwals and
Chidambarams respectively. In the first of the appeals, the
Income-tax Commissioner supports the position taken up by-
the Sassoons, while in the other two the Commissioner is the
appellant and contests the position taken by the
47
362
Agarwals and the Chidambarams. Thus it will be seen that
though in form the three appeals are each between the
Income-tax Commissioner and one of the three Companies, in
fact they raise a controversy between the assignor-Company,
the Sassoons, on the one side and the two assignee-
Companies, the Agarwals and the Chidambarams on the other,
the Commissioner supporting the Sassoons and opposing the
other two.

The arguments before us covered a wide range and were
advanced on the assumption that what the High Court held was
that the Sassoons became entitled on the. very date of the
respective assignments to a proportionate share of the
year’s remuneration for the Managing Agency, and that
accordingly that share accrued to the Sassoons as their
taxable income, then and there, and did not cease to be such
notwithstanding the assignment thereof The case was
accordingly debated before us as though the decision turned
upon the question whether any income could accrue to the
Sassoons on the dates of the respective transfers of the
Managing Agency to the transferees. It is necessary,
therefore, to clarify, at the outset, what the question was
which was directly raised on the reference made to the High
Court and what, in the view of the High Court, was the date
When a share of the year’s remuneration accrued to the
Sassoons as its income. It appears to me that the judgment
of the High Court taken as a whole is based only on the view
that the entire Managing Agency remuneration for the year
accrued on the completion of ‘the year, i.e., on the 31st
December, 1943, and that when it so accrued it accrued both
to the assignor and to the assignee together. This appears
from the following passage of the judgment of the High.
Court.

” In order to levy income-tax it is not enough to enquire
when a particular income accrues. What is more important
and what is more pertinent is to enquire whose income it is
which is sought to be taxed. Assuming that this particular
income accrued on the 31st December and till 31st December
there was nothing earned, even so, when. the income does
accrue the question still remains to be answered as to whose
363
income it is which has accrued on the 31st December, 1943.”
It appears to me also that it is on the footing of the
accrual on the completion of the year that the High Court
dealt with the question of assignment of the, income as
appears from the following passage:

” 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 31st
December………….. They transferred that right.”
From these passages it appears to me clear that the 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 the assignment included a future right of the
assignor to a share in the remuneration, when it accrued on
the completion of the year, and not on the view that the
assignment operated as the transfer of a present right to
such a share on the very date of the assignment. It is in
view of the assumption that the remuneration for the year
accrued only on the 31st December that the Income-tax
Appellate Tribunal also took care to say, in making their
reference to the High Court, as follows:

” The question is not when the Managing Agency commission
accrued. The real question is to whom it accrued.”
It appears to me, therefore, that it is not correct to
approach the consideration of this case as though, the
decision therein turns directly upon the question whether
any income had accrued to the Sassoons on the dates of the
respective transfers of the Managing Agency to the
transferees.

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 remuneration for an year’s work. It was
pointed out that the remuneration payable was fixed as
commission at a certain specified percentage of the net
profits of the respective Mill Companies. So far as the
Sassoons United Mills Ltd., are concerned, whose Managing
Agency had been
364
assigned to Agarwals, the commission was in terms stated in
the Agency Agreement to be per annum and on the annual net
profits of the Company. So far as Elphinstone Spinning and
Weaving Mills Company,Ltd., are concerned, whose Managing
Agency was assigned to Chidambarams., the remuneration, is
merely stated 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, the remuneration in the latter case also must
be taken to be per annum and on the annual net profits,
notwithstanding some argument before us to the contrary.
Having regard to this basic fact, the following are, in
substance, the arguments put forward before us by learned
counsel for the assignor-Sassoons. (1) The Managing Agency
commission was payable in respect of services for an entire
calendar year and not for a portion thereof and therefore no
commission became due to the Sassoons for the services
rendered by them to the respective Mill Companies for broken
periods of the year up to the dates of the respective
assignments. (2) Since no remuneration became a debt due to
the Sassoons from any of the Mill Companies on the dates of
the respective assignments, no taxable income accrued to
them for the broken periods. (3) By the dates of the
respective assignments, the Sassoons had only a bare
expectancy, if any, to receive remuneration for the broken
period and this expectancy could not be the subject-matter
of any assignment, and (4) The true legal position,
therefore, is that what was assigned was an income bearing
asset, viz., the Managing Agency which was the source of
income and which entitled the respective assignees to
receive all the remuneration for the year payable under the
Managing Agency Agreement subsequent to the respective dates
of assignment. Accordingly the same became in its entirety
taxable income in the hands of the respective assignees and
no portion of it accrued at any time as taxable income of
the assignor-Sassoons.

In the view that I take of the High Court’s judgment as to
the date of accrual of the income and as to
365
the scope of the question presented on the references the
first three of the above arguments do not appear, to me to
call for any examination. In the present case no question
arises as to the enforceability of the claim for a
proportionate share of the remuneration by, the assignor
from the very date of assignment. Nor does any question
arise as to the non-payability of remuneration on account of
non-completion of the work. The year’s work has been
completed by the
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.

The answer to the first of the above questions seem$ 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 the
year. The right to receive the remuneration became,
therefore, vested on the 31st December, 1943. It is true
that in Agarwal’s case there is a clause’ in the original
Managing Agency Agreement that
“the Managing Agency commission shall be due yearly on the
31 st day of March 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
March next. In the first place such a contention in so far
as it relates to the date of accrual, is not permissible 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 categorical language of some’ of the grounds in the
statements of the case filed.

366

before us both by Sassoons and the Income-tax Commissioner
showing 31st December, 1943, as the date of accrual of the
entire remuneration. (Vide paragraphs 19(1), 26(a) and (g)
of the Sassoons’ statement, and paragraphs 12, 15(1), (2)
and (5) of the Income-tax Commissioner s statement, in Civil
Appeal No. 3 of 1953). But even if the contention be
permissible and granting the view strenuously urged on
behalf of the appellant-Sassoons that there is no accrual of
income until there exists a right to receive it, I do not
think 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
question’ -as to when the income becomes payable. It
depends only on when a vested right to receive the income
arises. (See Commissioners of Inland Revenue v. Gardner-
Mountain and D’ Ambrumenil Ltd., (1)). The accrual is
accordingly complete when the right to the remuneration
becomes vested by the occurrence of all the events on which
the remuneration depends. A mere clause that the
remuneration shall be due at a later date, notwithstanding’
that all the events on which the remuneration depends have
occurred, can only have the effect of postponing the
liability for payment and not of postponing the vesting of
the right to income. The requirement of lapse of further
time after the occurrence of all the qualifying events is
not itself an additional -event which imports any element of
contingency in the right. It appears to me, therefore, that
the above clause which has been relied 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 and cannot have the affect of
postponing the accrual from the 31st December to 31st March.
But even otherwise, this does not at all affect. the final
conclusion in this case reached by the High Court of Bombay.
If the view of the High Court is correct that the ncome
accrued both to the assignor and to the assignee after the
completion of the year’s work it seems to matter little
whether that accrual is on the 31st December or on the 31st
March next.

(1) 29 Tax Cas. 69.

367

by the High Court that the assignments operated to transfer
to the assignee the assignor’s share of the year’s
remuneration after it accrued to him as his income 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 view that the remuneration
accrued both to the assignor and to the assignee together,
whenever it may’ be, then it is clear that on the respective
dates of the assignment,, the assignor bad a future right to
a share of the remuneration on the completion of the year.
If so, there is ample authority for the position that the
assignment of such a future right is valid and becomes
operative by way of attaching itself to the right when it
springs up. (See Bansidhar v. Sant Lal (1), Misri Lal v.
Mozhar Hossain (2), Palaniappa v. Lakshmanan (3) and Baldeo
v. Miller (4).) The validity of such an assignment as
between the assignor and the assignee and the effect thereof
on the assignor’s future right may also be supported with
reference to the principle of estoppel feeding title which
finds recognition in section 43 of the Transfer of Property
Act. For the further position, ViZ., that a person
continues to be liable for tax in respect of accrued income
notwithstanding assignment thereof operating on or after
such accrual, there is authority in Parkins v. Warwick (5).
This -view is confirmed by the following passages in the
Privy Council case in Pondicherry Railway Co. Ltd. v.
commissioner of Income-tax, Madras (6).

” Profits on their coming into existence attract tax at that
point and the revenue is not concerned with the subsequent
application of the profits.”

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(7)).

(1) I.L.R.1o All I33.

(2) I.L.R. 13 Cal. 262.

(3) I L.R. 16 Mad. 429.

(4) I.L R. 31 Cal. 667.

(5) 25 Tax Cases gig.

(6) A.I.R. 1931 P.C. i65 at 170.

(7) [I892] A.C. 309.

368

clear recongnition of the principle that when once income
accrues to a person, an assignment operative in respect
thereof, does not affect his taxability for that income. It
may be mentioned that it is not seriously disputed that the
consideration for each assignment included the value of the
prospective advantage of collecting the remuneration for the
entire year, i.e., in the sense that the actual
consideration paid was higher than what it might have been
if the assignment had taken place at the very commencement
of the year.

The only substantial question, therefore, which this case
raises is whether the view taken by the High Court, that the
remuneration for the year accrued as income both to the
assignor and the assignee, is correct. It is apparently as
an answer to this question that learned counsel appearing
for the Sassoons put forward the argument No. 4 above
enumerated, viz., that the assignment of Managing Agency is
the transfer of an income-bearing asset and that all income
received subsequent to the date of assignment is entirely
the assignee’s taxable income. It is the validity of this
argument that now requires examination. The cases that have
been relied on in support of this argument are the following
: The Commissioners of Inland Revenue v. Forrest(1); Wigmore
v. Thomas Summerson(2); and Commissioners of Inland Revenue
v. Pilcher(3). Commissioners of Inland Revenue v.
Forrest(1) is a case of purchase of certain shares and the
income derived therefrom and is analogous to the second head
of income chargeable to income-tax under section 6, of the
Indian Income-tax Act, viz., Securities. The income
therefrom is directly referable only to the ownership of the
shares or securities. Mere lapse of time makes income
payable and the taxation depends on the receipt of the
income. Wigmore v. Thomas Summerson(2) is also a case
similar to the above. Commissioners of In. land Revenue v.
Pilcher(3) is the case of a sale of an orchard inclusive of
the year’s fruit crop, which by the date of the sale does
not appear to have become ripe.

(i) 8 Tax Cases 704.

(2) 9 Tax Cases 577
(3) 3T Tax Cases 314.

369

enough to be treated as a severable item of property. This
was a case of property whose. ownership itself, in the
ordinary course and by lapse of time, gives rise to income
and is analogous to head No. 3 of section 6 of’ the Indian
Income-tax Act. It is interesting to note, that in this
case, the learned Judges make a distinction between fructus
industriales and fructus naturales and point out that the
fruits derived from the orchard being cherries are fructus
naturales and not fructus industrials. That the result
might have been different if it was fructus industriales
appears clearly, at least so far as Lord Justice Singleton
and Lord Justice Tucker are concerned. In the case of
fructus industriales the income does not arise by mere
ownership but as a result of further investment and
labour which may be the effective source of income. These
decisions refer only to cases where the sole or effective
source of income is mere ownership and taxability depends on
receipt of the income.

Another case 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. It was claimed that the assignee-Company was
entitled to deduction from their taxable income for a
portion of the purchase price which may be attributed to the
purchase of the right, title and interest to, and the
benefit of, certain building contracts of the Company, from
the execution of which, a portion of the net profits of the
Company arose. This was negatived on the ground that the
entire purchase price was capital investment and that what
all was received later on was income derived by the
execution of the contracts so purchased. This, so far as it
goes, may seem to suggest by implication that there may be a
purchase of contracts yet to be executed and that the
benefit of the entire profits therefrom is to be treated as
income in the hands of the purchaser. The report of this
case, however, does not indicate clearly whether the
contracts, whose benefit was purchased were partially
executed and if so, whether the partial execution
(1) 2 Tax Cases 239,
370
was substantial or negligible. The statement of the facts
of the case at page 241 of the report shows that the
business which was purchased consisted entirely ” of
partially executed or wholly unexecuted contracts, and of
the rights thereunder and the benefits to accrue therefrom.”
If the business consisted of only unexecuted contracts, this
case is not an authority for the position contended for on
behalf of the Sassoons. But in any case, even if some of
the contracts were partially executed there is nothing to
show that the execution was of any such extent as to have
become a substantial source of income. It may also be noted
that this decision is a direct authority only on what is
capital expenditure and what is revenue expenditure for pur-
poses of deduction. The point in the form relevant for the
present case was not raised there and cannot be taken to
have been decided. It is interesting to notice that in
Simon’s Income-tax, Vol. 2, (1949 Edn.), page 188, paragraph
222, the following passage appears.

” In City of London Contract Corporation Ltd. v. Styles(1)
where the Company acquired a business including a number of
unexecuted contracts, it was held that the sum paid for the
contracts could not be deducted in computing the Company’s
profits, on the ground that the whole of the purchase price
of the business was a sum ‘ employed or intended to be
employed as capital in such trade’.”

Similarly in Spicer and Pegler’s Income-tax and Profits-tax
(20th Edn.), at page 116 it is stated as follows :
” Cost of unexecuted contracts taken over with a business
(in arriving at the profits from the performance of the
contracts)”

and the case of City of London Contract Corporation v.
Styles(1) is quoted as authority. These standard textbooks
also show that this case has been treated as having
reference to unexecuted contracts (and not to partially
executed contracts) and as being authority for the question
as to what are Permissible deductions from taxable income of
business concerns,
(I) 2 Tax CaseS 239.

371

The above cases, therefore, cannot be treated as in any way
supporting the contention put forward by learned counsel for
the appellant-Sassoons that in the case of an assignment of
Managing Agency the entire remuneration for the year’s work
accrues as a matter of law to the assignee and is his sole
income, on the ground that the Agency is the source of
income and that in this respect it is to be treated as an
income bearing asset. No specific authority has been cited’
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 the remuneration
or profits relatable to such partial execution is necesarily
the income of the assignee.

The question thus raised has, therefore, to be examined on
principle. On such examination it appears to me that the
argument advanced in this behalf is based on a fundamental
misconception. Income of the kind with which we are
concerned in this case does not arise by virtue of any mere
ownership of an asset. What produces income is not the
ownership of the Managing Agency but the actual work turned
out for the benefit of the principal. It is not the fact of
a Company having obtained the right to work as a Managing
Agent that produces the income but it is the continuous
functioning of the Company, as the Managing Agent, in terms
of the contract of Agency, that produces the income. Hence,
it is the rendering of the 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 work or service is the subject of taxation. It is
the remuneration that is the subject of tax and work is the
source of the remuneration. Hence in such a case service or
work is the source of income and not. the ownership of the
right to work. The above legal position has been very
succinctly brought out by Lord Finlay, though in another
context, in John Smith & Son v. Moore(2) in the following
passage:

(1) 2 Tax Cases -239.

(2) (1921] 2 A.C. I3 at 25.

372

“The business makes no profits. The profits are not fruits
yielded by a tree spontaneously. They are the result of the
operations carried on by the owner of ‘the business for the
time being.”

Therefore, on principle, apart from authority, it appears to
me to be erroneous to treat the Managing Agency. Agreement
as by itself the direct source of income and to treat it as
an income-producing asset.

An examination of the provisions of the Indian Income-tax
Act clearly bears out this view. Sections 3 and 4 of the
Income-tax Act are the charging sections. The charge is (in
so far, as it is relevant for purposes of this case) on the
income of the previous year (a) which is received by the
assessee within the taxable territory, or (b) which accrued
or arose within the taxable territory to a resident
assessee. As stated at the outset the assessment in the
present case is based on accrual and not on receipt.
Computation of the taxable income is governed by the
provisions of Chapter III of the Act. Section 6 thereof
enumerates the following heads of income as being chargeable
to income-tax. (1) Salaries, (2) Interest on securities, (3)
Income from property, (4) Profits and gains of business,
profession or vocation, (5) Income from other sources. The
residual item (5) may for the present purposes be left out.
Of the other four heads, items 2 and 3 are the only items in
which the taxable income is directly related to the
ownership of an asset. In the present case the computation
of the taxable income ‘has no relation to those items but
may conceivably fall under head No. 1 or head No. 4. At this
stage, it is necessary to observe that, though, so far, in
the above discussion, the Managing Agency has been referred
to as service and the commission therefor as remuneration,
for purposes of convenience, the true 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(1) to be a business and the
remuneration to be income by way of profits or gains from
the business. The

i) Civil Appeals Nos. 292 and 312 Of 1050 of the Suprem
Court of India.

373

income, therefore; falls under head No. 4 and the com-
petation thereof has to be made under section 10 of 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 business, profession
or vocation carried on by him.”

Now, in computing the taxable income of the assignee, can it
reasonably be said that the remuneration for the entire year
is the income of the assignee and that it is the profits and
gains of the business carried on by the assignee, when as a
fact he stepped into the position of the Managing Agent only
on some date in the course of the year by virtue of the
assignment. It appears to me that before income can be
attributed under this head to an assessee, it must relate to
the business carried on by the assessee himself In the
present case, therefore, the profits and gains of the whole
year seem to me clearly to relate to the business carried on
both by the assignor and the assignee taken together and are
hence taxable as income accruing to both and apportionable
as such between them. The importance of not overlooking the
significance of the phrase “carried on by him” in subsection
(1) of section 10, though in a different context, has been
emphasised by the Privy Council in Commissioner of Income-
tax, Bengal v. Shaw Wallace and Co.(1). A recent decision of
this Court in the Liquidators of Pursa Limited v.
Commissioner of Incometax, Bihar(2) also emphasises this and
explains that the phrase “carried on by him” in section
10(1) of the Indian Income-tax Act “connotes the.
fundamental idea of the continuous exercise of an activity
as the essential constituent of that which is to produce the
taxable income.” This phrase appears to me also clearly to
connote the idea that the taxable income is that of the very
assessee or the combination of assessee whose continuous
activity produces the income. Where, as in this case, that
continuity is kept up by two persons successively, it
appears to tile

(i) I.L.R. 9 Cal. 1343.

(2) Civil Appeal NO. 33 Of 1953.

374

that under this section, the profits and gains are the
assessable income of both together.

This is in accord with the well-accepted notion, under the
normal law, that if two persons jointly carry out a work or
conduct a business, the total remuneration in fact earned
for the work or the total gains made on that business
belongs to both of them as their joint property and that
such property has to be apportioned between them on some
equitable basis. This is quite independent of any question
as to whether the claim for remuneration for the work or for
the emoluments of the business can be individually or
jointly enforced as against the person who is liable to pay.
It cannot be disputed that in the absence of any specific
contract to the contrary between the persons who contribute
to the work or business, the fruit of such work or of such
business is the joint property of both, when the same has in
fact been realised. Nor can it be said that this holds good
only in cases where both the persons concurrently join
together to earn the remuneration for the work or the
profits of the business. There is no reason in law why the
same principle should not be equally applicable where the
two together contribute to the total work or to the total
business in succession as in this case and not in
concurrence. If, what arises on such continuous and
successive functioning of two persons is the joint
remuneration of both, there can be no doubt that such
remuneration would be apportionable between them on some
equitable basis on the principle that joint property is
normally severable. To such a situation section 26(2) of
the Income-tax Act would also clearly apply. That section
no doubt indicates nothing as to the principle of
apportionment. But there is no difficulty in the present
case since it is agreed that the apportionment, if any, is
to be timewise. This also prima facie is the only equitable
way of apportionment on the facts of this case.
At this stage it becomes necessary to notice certain
provisions of the relevant Managing Agency Agreements which
have been strongly relied on as supporting the view contrary
to what I have indicated above. Reliance
375
has been placed on two provisions of the Managing Agency
Agreement between the Sassoon United Mills Ltd. and the
Sassoons which are relevant only in the appeal relating to
the Agarwals. The first of these provisions is the one
already noticed in another context, viz., clause 2 (d) of
the Agency Agreement which, runs as follows:
“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………….
It is urged that this term stamps the Managing Agency
Agreement with the characteristic of an incomebearing asset
which vests solely in, the assignee the right to the entire
income payable after the date of assignment. But it appears
to me that a term of this kind has reference only to the
payment aspect of the. money which constitutes remuneration
and has no, bearing on the question as to whose income it is
for purposes of taxation. Taxable income must be derived
from specified sources indicated in the Indian Incometax
Act. Since the mere ownership of Managing Agency cannot as
a matter of law be treated as the source of’ income, as
explained above, any term in the Managing Agency Agreement
between the principal and the agent entitling only the
assignee to receive the year’s remuneration and negativing
to the assignor any direct recourse to his quondam principal
for his share of the income, cannot have the effect of
denying to the assignor a substantial right to a share in
the remuneration, if otherwise he has a vested right
thereto. A distinction exists in law between the right to
receive 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 right in
that money may belong wholly or partially to another.
Benami contracts are familar examples of such a case.
Instances of joint rights in money or money’s worth
enforceable only at the instance of one out of the persons
entitled, in special situations, are easily conceivable. It
may be true that there is no accrual of income unless there
is a vested right to receive the money which constitutes
income. But this
376
proposition has relevance only to the factum or date of
accrual but not necessarily to the ownership of the income
on such accrual. None of the cases that have been cited
before us in support of the proposition that there is no
accrual of income unless there is a right to receive it
negative this view. In the course of the arguments repeated
stress has been laid on the proposition that there is no
accrual of income ‘Unless there is a right to receive the
income. This may be so. But it does not follow that the
very person who has the right to receive the money which
constitutes the income is the owner of that money or that
the income accrues to him alone. That must depend on the
substantive rights, if any, applicable to a particular
situation. A term in a Managing Agency Agreement between
the principal and the agent as to the person to whom the
remuneration is payable or is to become due can only have
been meant as a protection of the principal in respect of
multiplicity of claims against himself and cannot settle the
substantive rights between persons who may have contributed
to earn the remuneration.

The second provision relied on is clause 10 of the Managing
Agency Agreement with which the case of Agarwals is
concerned. Clause 10 of the agreement runs as follows:
“It shall be lawful for the said firm to assign this
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 undertaken by the said
firm hereunder and upon such assignment being made and
notified to the said Company shall be bound to recognise the
person or firm or Company aforesaid as the Agents of the
said Company in like manner as if the name of such person,
firm or Company had appeared in these presents in lieu of
the names of the partners in the said firm and as if such
person, firm or Company, had entered into this Agreement
with the said Company and the said Company shall forthwith
upon demand by the said firm enter into an Agreement with
the person firm or Company aforesaid appointing such person
firm of Company the
377
Agents of the said Company for the then residue of the term
outstanding under the Agreement and with the like powers and
authorities remuneration and emoluments and subject to the
like terms and conditions as are herein contained.”
Stress has been laid on the underlined portion of the above
clause. It is urged that this as well as clauses I and 3 of
the Managing Agency Agreement show that the assignor and the
assignee are to be treated as one entity and that on
assignment the assignee becomes the Managing Agent as if his
name had been inserted in the Managing Agency Agreement from
the beginning, and that the continuity of the Managing
Agency was preserved thereby and that whoever satisfies the
description of the Managing Agent at the time when the
commission for the year becomes due, is also the person
entitled to the amount by way of remuneration-not, as per
this argument by virtue of any mutual arrangement between
the assignor and the assignee, but-by the very terms of the
Managing Agency which is the source of income. It is urged.
therefore, that this feature stamps the Managing Agency as
an income-bearing asset. In substance, therefore, this
argument amounts to saying that by virtue of this clause the
service of the assignee subsequent 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 year in respect of 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
portion, become so operative from the original commencement
2of the Agreement itself and not from any particular date or
event thereafter. There is no reason to confine such
retrospective operation only to the inchoate advantage for
remuneration arising from partly finished work of the year.
The underlined portion of the clause, if it is to’ have
retrospective effect at all, is comprehensive enough to take
within its ambit every othere claim,which may have accrued
but remained 49
378
unpaid, commencing from the initial stage of the Agency. On
this construction, therefore, the right to. ,very 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, should be confined
to the limited extent which serves the argument put forward
in this behalf by the appellant-Sassoons. It appears to me,
therefore, quite clear on a fair reading of the entire
clause 10 of the Managing Agency Agreement that the only
effect thereof is to bring about the result specifically
stated in the second portion of that clause (which has been
side lined) i.e. that on assignment, the assignee firm shall
be entitled to demand and obtain from the principal Company
a fresh Managing Agency Agreement in its own favour for the
residue of the term outstanding and with like powers
authorities remuneration and emoluments and subject to the
like terms and conditions. In my opinion all that the
clause 10 taken as a whole means is no more than that the
assignee is entitled to demand a fresh Agreement on the same
terms and that even without a fresh Agreement being formally
executed as between the principal Mill Company and the
assignee-company their mutual rights and obligations will be
governed by the old Agreement for the residue of the term
with the assignee-Company’s name substituted for the
assignor-Company’s name. Such effect can only be
prospective and not retrospective.

There can be no doubt, however, that though any mere clause
in the Managing Agency Agreement that the employer is to be
responsible only to the assignee for the payment of the
entire year’s remuneration is not by itself enough to vest
in the assignee a beneficial right to the remuneration of
the year, such a right may arise by virtue of a specific or
implied term as between the transferor and the transferee,
either as part of the deed of transfer or independent
thereof. It may be mentioned that in the Agarwals’ case
there was such a specific term in the Agreement preliminary
to the actual assignment. But learned counsel for the
Sassoons expressly disclaimed it on the ground that it was
not incorporated in the deed of transfer and was,
379
in any case, superfluous and did not rely on it. In his
view the right of the assignee to receive the entire
remuneration did not depend on any specific term between the
assignor and the assignee, but on the fact that what was
transferred is an income-bearing asset which carried with it
a right to the entire income that falls due after the date
of assignment. It is on account of the insistence on this
view, that, as I apprehend, learned counsel for the Sassoons
disclaimed the above mentioned special term between the
assignor and the assignee as being superfluous. He seems to
have sought thereby to obviate the consequence of the
contention that the assignor’s share of remuneration became
the assignee’s by virtue of the specific assignment thereof
operating thereon ‘on its accrual and that hence it remained
the taxable income of the assignor.

It may be mentioned in this context that clause 10 of the
Managing Agency Agreement in Agarwals’ case has been relied
on by learned counsel for Agarwals to show that while, it
may be, that in the normal run of events the contract for
remuneration under the Managing Agency Agreement is an
indivisible contract for a whole year’s remuneration on the
completion of a whole year’s work, this clause necessarily
implied divisibility of contract and of the remuneration in
the year of assignment since the assignment necessarily took
place with the consent of the principal Mill Company. (Vide
section 87-B(c) of the Indian Companies Act). This argument
was advanced to support the contention that the Sassoon’s
share of the year’s income accrued on the very date of
assignment. Since, however, in my view that was not 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 the statement of the case by the Income-tax
Appellate Tribunal as well as of the statements of
appellants and respondents herein, I do not consider it
necessary to deal with that argument.

In my view, therefore, the continuous and successive
functioning by both the assignor and the assignee under the
Managing Agency Agreement was the effective source of the
year’s income. That income accrued on the completion of the
year and was the joint income
380
of both the assignor and the assignee. The prior
assignments in the course of the year operated as assign-
ments of this future right to a share of the income. It is
only by virtue of inter se arrangement between the assignor
and the assignee, resulting from the transactions of
assignment, that the assignee had the right to collect the
entire income. Nevertheless, the share in this income which
accrued to the Sassoons on the completion of the year
remained the taxable income of the Sassoons and they were
rightly taxed in respect thereof. The very strenuous
arguments of learned counsel for Sassoons to counter the
above view are based on the insistence that the Managing
Agency is like property which per se produces income and, on
ignoring the distinction between right to receive the income
and right to the ownership of the income and on treating the
former as settling the question of the person to whom income
accrues. In my opinion these arguments are unsustainable
and the conclusion reached by the learned Judges of the
Bombay High Court is correct.

The appeals are, therefore, liable to be dismissed.I express
no opinion on any of the other points raised.
Appeals allowed.