{"id":207943,"date":"1996-09-30T00:00:00","date_gmt":"1996-09-29T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/comissioner-of-income-tax-vs-ms-shiv-prakash-janak-raj-on-30-september-1996"},"modified":"2016-06-29T01:25:31","modified_gmt":"2016-06-28T19:55:31","slug":"comissioner-of-income-tax-vs-ms-shiv-prakash-janak-raj-on-30-september-1996","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/comissioner-of-income-tax-vs-ms-shiv-prakash-janak-raj-on-30-september-1996","title":{"rendered":"Comissioner Of Income Tax, … vs M\/S.Shiv Prakash Janak Raj & … on 30 September, 1996"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Comissioner Of Income Tax, … vs M\/S.Shiv Prakash Janak Raj & … on 30 September, 1996<\/div>\n
Author: B Reddy<\/div>\n
Bench: B.P. Jeevan Reddy, Suhas C. Sen<\/div>\n
           PETITIONER:\nCOMISSIONER OF INCOME TAX, AMRITSAR\n\n\tVs.\n\nRESPONDENT:\nM\/S.SHIV PRAKASH JANAK RAJ & CO.PVT. LTD. ETC.\n\nDATE OF JUDGMENT:\t30\/09\/1996\n\nBENCH:\nB.P. JEEVAN REDDY, SUHAS C. SEN\n\n\n\n\nACT:\n\n\n\nHEADNOTE:\n\n\n\nJUDGMENT:\n<\/pre>\n
\t\t      J U D G M E N T
\n     B.P.JEEVAN REDDY, J.\n<\/p>\n
     These appeals  are preferred by the Revenue against the
\njudgment of  the Punjab and Haryana High Court answering the
\nquestions, referred  at the  instance of  the  assessee,  in
\nfavour of the assessee and against the Revenue. The question
\ninvolved in  all these\tappeals\t are  common.  It  would  be
\nsufficient if  we take\tthe case  of one  of the  assessees,
\nM\/s.Shiv Prakash  Janak Raj  & Co.(P)  Ltd. Four  assessment
\nyears are  relevant in\tthis case,  viz.,  Assessment  Years
\n1968-69, 69-70,\t 1970-71  and  1971-72.\t The  two  questions
\nreferred under\tSection 256(1)\tof the\tIncome Tax Act, 1961
\nare:\n<\/p>\n
     “(i) Whether, on  the facts  and in
\n     the circumstances\tof the case, the
\n     Tribunal was  right in holding that
\n     the  interest  for\t the  assessment
\n     year 1971-72,  had already\t accrued
\n     to\t the  assessee\ton  October  31,
\n     1970, under  the mercantile  system
\n     of accountancy?\n<\/p><\/blockquote>\n
     (ii) Whether, on  the facts  and in
\n     the circumstances\tof the case, the
\n     Tribunal was  right in holding that
\n     the subsequent   relinquishment  of
\n     interest  by   a  resolution  dated
\n     November 24,  1970, did  not affect
\n     the tax  liability of  the assessee
\n     on accrual basis?”<\/p><\/blockquote>\n
     The partners  of a\t firm, M\/s.Shiv\t Prakash Janak Raj &
\nCo. [the  Firm], are  also the shareholders\/directors of the
\nassessee-company. The  assessee-company had  advanced a loan
\nto the\tfirm. During  the accounting  year relevant  to\t the
\nAssessment Year\t 1966-67, it  charged interest\tin a  sum of
\nRs.25,048\/- on\tthe loan  so advanced.\tSimilarly,  for\t the
\nAssessment Year\t 1967-68, it  charged interest\tin a  sum of
\nRs.25,843\/-.  For   the\t four  assessment  years  concerning
\nherein, however,  the assessee\tadopted a  different course.
\n[The accounting\t year adopted  by the  assessee was the year
\nending on 31st October 31] In respect of the Assessment Year
\n1968-69 [year ending October 31, 1967], the assessee-company
\npassed a resolution on October 9, 1967 [i.e., before the end
\nof the accounting Year] deciding not to charge interest from
\nthe firm  in view of the difficult financial position of the
\nfirm. For  the next three assessment years, i.e., Assessment
\nYears 1969-70, 1970-71 and 1971-72, similar resolutions were
\npassed on February 26, 1969, March 16, 1970 and November 24,
\n1970 respectively. In other words, in the case of last three
\nassessment years,  the resolution  deciding  not  to  charge
\ninterest on  the loan  advanced to the firm was passed after
\nthe expiry  of the  relevant accounting\t year.\tIndeed,\t the
\nresolution says\t that the  firm had approached the assessee-
\ncompany to  waive the  interest on  the loan for each of the
\nsaid  years   and  that\t on  such  representation  that\t the
\ndirectors of the assessee-company [who were also partners in
\nthe said firm] decided that no interest shall be charged for
\neach of the said three assessment years.\n<\/p>\n
     In the assessment proceedings relating to the said four
\nassessment years,  the Income Tax Officer took the view that
\ninasmuch as  the loans\tin  question  were  interest-bearing
\nloans and  because the assessee-company had relinquished the
\ninterest without  any commercial  considerations and further
\nbecause the  directors\/ shareholders of the assessee-company
\nwere interested\t in the\t firm, it  was a  case of  collusion
\nbetween them  to evade\tthe tax\t liability. Accordingly,  he
\nadded an  amount towards interest calculating it at the rate
\nof fifteen  percent per\t annum.\t On  appeal,  the  Appellate
\nAssistant Commissioner found that inasmuch as the resolution
\nto waive  the interest\twas passed  after the  expiry of the
\naccounting year and further because the assessee-company was
\nfollowing the  mercantile system of accounting, the interest
\nmust be\t held to have already accrued to the assessee before
\nit was\twaived. He, however, reduced the rate of interest to
\nnine percent.  With  that  modification,  he  dismissed\t the
\nappeals. The  assessee thereupon  filed a  further appeal to
\nthe Tribunal  but without  success.  The  Tribunal  observed
\nthat even  though no  entries were  made in the books of the
\nassessee-company or  of the  firm with respect to receipt or
\npayment of interest, that circumstance is of no relevance in
\nview of the facts that the resolutions were passed after the
\nexpiry\tof   the  accounting  year  that  the  assessee\t was
\nmaintaining its\t accounts on mercantile business and further
\nthat  the   relinquishment  of\tinterest  was  not  for\t any
\ncommercial reasons.  On reference,  however, the  High Court
\ntook a\tcontrary view  purporting to  follow the decision of
\nthis Court  in Commissioner  of Income Tax West Bengal-II v.
\nBirla Gwalior  (P) Limited<\/a>  [(1973) 89\tI.T.R.266]. The High
\nCourt held  that in view of the said decision, the principle
\nof earlier  decision  of  this\tCourt  in  Morvi  Industries
\nLimited v.  Commissioner of  Income Tax\t (Central), Calcutta<\/a>
\n[(1971) 82 I.T.R.835] cannot be applied to this case.\n<\/p>\n
     In these  appeals, it is contended by Sri J.Ramamurthy,
\nlearned senior\tadvocate for  the appellant-Revenue, that in
\nthe facts  and circumstances  of the case, the view taken by
\nthe Tribunal  was the  correct one being consistent with the
\ndecisions of this Court and that the High Court was in error
\nin holding  to the contrary. Sri G.C.Sharma, learned counsel
\nfor the\t assessee, however,  sought to support the reasoning
\nand conclusion of the High Court.\n<\/p>\n
     Before we\trefer to  the decisions of this Court, it is
\nnecessary to  reiterate the basic facts of the case. For the
\nprevious two  assessment years,\t viz., 1966-67\tand 1967-68,
\nthe  assessee-company\tdid  charge  interest  on  the\tloan
\nadvanced by  it to the firm which shows that the loan was an
\ninterest-bearing loan. The second circumstance to be noticed
\nis that the resolution waiving interest was passed after the
\nexpiry of  the relevant accounting year in the case of three
\nsubsequent assessment years, viz., Assessment Years 1969-70,
\n1970-71 and  1971-72. Only  in the  case of  Assessment Year
\n1968-69, was  the resolution passed before the expiry of the
\naccounting   year.   Thirdly,\tthe   assessee-company\t was
\nmaintaining its\t accounts on  mercantile basis.\t Yet another
\ncircumstance to be noticed is that the Tribunal has found it
\nas a  fact that the waiver was not based upon any commercial
\nconsiderations. Of  course, no\tentries\t were  made  in\t the
\naccounts of  the assessee-company, or for that matter in the
\naccounts of  the firm,\tin respect  of four assessment years
\nconcerned herein, that any interest was received or paid. On
\nthese facts,  it has  to be  held that\tin the case of three
\nsubsequent assessment years, the interest had accrued to the
\nassessee notwithstanding  the fact  that no entries may have
\nbeen made  in the  accounts of\tthe assessee to that effect.
\nThe waiver  of interest\t after the  expiry of  the  relevant
\naccounting year\t only meant  that the assessee was giving up
\nthe money which had accrued to it; It cannot be said, in the
\ncircumstances, that  the interest  amount had not accrued to
\nthe ascessee.  Therefore, the  Tribunal was  right in taking
\nthe view  it did  in respect  of Assessment  Years 1969- 70,
\n1970-71 and 1971-72. In the case of Assessment Year 1968-69,
\nhowever, the  resolution was passed before the expiry of the
\naccounting year\t and though  the finding  of the Tribunal is
\nthat the  said waiver  was not\tactuated by  any  commercial
\nconsiderations, yet  the learned counsel for the Revenue did
\nnot press  the Revenue’s case so far as this assessment year
\nis concerned.\n<\/p>\n
     In Morvi Industries Limited, the relevant facts are the
\nfollowing: the\tassessee which was the managing agent of its
\nsursidiary  company,   maintained  its\t accounts   on\t the
\nmercantile system.  It was  entitled to\t receive  an  office
\nallowance of  Rupees one thousand per month, a commission at
\n12 1\/2\tper cent  of the  net profits of the managed company
\nand an\tadditional commission  of 1  1\/2  per  cert  on\t all
\npurchases of  cotton and  sales of  cloth and  yarn. In\t the
\naccounting year\t ended on December 31,1954, and December 31,
\n1955, the  managed-company suffered  losses and the assessee
\nearned only commission on the sale of cloth and yarn for the
\ntwo years.  The total amounts including the office allowance
\nwhich the  assessee was entitled to receive were Rs.50.719\/-
\nand Rs.13,963\/-\t for the two years. Under clause 2(e) of the
\ncommission was\tdue to the assessee on December 31, 1954 and
\nDecember  31,\t1955  respectively   and  it   was   payable
\nimmediately after the annual accounts of the managed company
\nhad been  passed in  general meetings,\twhich were  held  on
\nNovember  24,  1955  and  July\t21,  1956  respectively.  By
\nresolutions of\tits board  of directors\t dated April 4, 1955
\nand June  19, 1956  respectively [i.e., after the commission
\nhad become  due but before it had become payable in terms of
\nclause 2(e)],  the assessee  relinquished its  commission on
\nsales and  office because  the managed\thad  been  suffering
\nheavy losses  in the  past years. The Tribunal held that the
\nrelinquishment by  the assessee of its remuneration after it
\nhad become  due was  of no  effect.  It\t also  rejected\t the
\nassessee’s claim  that amounts\trelinquished were  allowable
\nunder section  10(2)(xv) of  the Income\t Tax Act,  1922. The
\nHigh Court  agreed with\t the view  taken by the Tribunal. On
\nappeal, this  Court agreed  with the  view taken by the High
\nCourt and  the Tribunal.  It held  that the  commission\t had
\naccrued to  the assessee  on December  31, 1954 and December
\n31, 1955  and the  fact that  the payment  was deferred till
\nafter the  accounts had\t been passed  in the meetings of the
\nmanaged company did not affect the accrual of the income. It
\nwas held  that since  the assessee  had chosen\tto  give  up
\nunilaterally the  amounts accrued to it, it could not escape
\nthe liability  to tax  on those grounds. Khanna,J., speaking
\nfor the\t three-Judge Bench  made the  following observations
\nwhich are apposite to the issue concerned herein:\n<\/p>\n
     “The  appellant-company  admittedly
\n     was   maintaining\t  its\taccounts
\n     according to the mercantile system.
\n     lt\t  is   well   known   that   the
\n     mercantile\t system\t  of  accounting
\n     differs substantially from the cash
\n     system of\tbook-keeping. Under  the
\n     cash systems  it  is  only-  actual
\n     cash  receipts   and  actual   cash
\n     payments  that   are  recorded   as
\n     credits and  debits; whereas  under
\n     the   mercantile\tsystem,\t  credit
\n     entries  are  made\t in  respect  of
\n     amounts due immediately they become
\n     legally due  and  before  they  are
\n     actually received;\t similarly,  the
\n     expenditure items\tfor which  legal
\n     liability has been incurred amounts
\n     in question are actually disbursed.
\n     Where   accounts\t are   kept   on
\n     mercantile basis,\tthe  profits  or
\n     gains are\tcredited though trey are
\n     not  actually   realised,\tand  the
\n     entries  thus   made  really   show
\n     nothing more  than\t an  accrual  or
\n     arising of\t the said profits at the
\n     material  time.  The  same\t is  the
\n     position  with   regard  to  debits
\n     made.  (See   Indermani  Jatia   y.
\n     Commissioner of  Income-tax  [1959]
\n     35\t  I.T.R.298;\t[1959]\t Suppl.1
\n     S.C.R.45 (S.C.)…..In  the present
\n     case, the amounts of income for the
\n     two years in question were given up
\n     unilaterally after they had accrued
\n     to the  appellant-company. As such,
\n     the appellant  could not escape the
\n     tax liability for those amounts.”<\/p><\/blockquote>\n
     The learned Judge also quoted with approval certain
\nobservations made  by Hidayatullah,J.  [as he  then was]  in
\nCommissioner of\t Income Tax  v.\t Shoorji  Vallabhdas  &\t Co.<\/a>
\n[(1962) 46  I.T.R 144],\t which we  shall refer to presently.
\nThe ratio  of this  decision clearly  support the  Revenue’s
\ncase.\n<\/p>\n
     In Birla Gwalior (P) Ltd., the facts are the following:
\nthe  respondent,   which  was  the  managing  agent  of\t two
\ncompanies, maintained its accounts on the mercantile system.
\nIt was\tentitled to an agreed managing agency commission and
\nan office  allowance from  each of the managed companies. No
\ndate for  payment of  the commission  was stipulated  in the
\nmanaging agency\t agreements.  The  accounting  year  of\t the
\nrespondent  as\t well  as  the\tmanaged\t companies  was\t the
\nfinancial year.\t The respondent\t gave up the managing agency
\ncommission  from   both\t the   managed\tcompanies   for\t the
\nAssessment Years  1954-55 to  1956-57, after  the end of the
\nrelevant financial Years but before accounts were made up by
\nthe managed companies. It also gave up before the end of the
\nrelevant financial  Years its  office allowance\t from one of
\nthe managed  companies for  the Assessment Years 1955-56 and
\n1956-57. The  Appellate Tribunal  held that  the  commission
\ngiven up was not the respondent’s real income and that since
\nit was\tgiven up op grounds of commercial expediency, it was
\nan allowable deduction under Section 10(2)(xv) of the Indian
\nIncome Tax  Act, 1922.\tIn relation to office allowance, the
\nTribunal found\tthat the  financial position  of the managed
\ncompany was  not sound\tduring the relevant accounting years
\nthat it\t was necessary\tfor the\t respondent to\tgive up\t the
\noffice allowance  in order  to stabilise the finances of the
\nmanaged company\t and because  of the  sacrifice made  by the
\nrespondent the\tfinances of the managed company improved and
\nas a  result the respondent was able to earn more profits in
\nlater years. On reference made under Section 66(2), the High
\nCourt  opined  that  (1)  the  commission  foregone  by\t the
\nrespondent-assessee was not its real income. [On that basis,
\nit declined  to answer\tthe question  whether the amounts of
\nthe  commission\t  foregone   were   allowable\tas   revenue
\nexpenditure under Section 10{2)(xv) of the 1922 Act] and (2)
\nthat  the   office  allowance  foregone\t was  deductible  as
\nbusiness expenditure  under Section  10(2)(xv).\t On  appeal,
\nthis Court  affirmed the  view taken  by the  High Court. We
\nare, however,  concerned only with the first answer given by
\nthe High Court. In our opinion, there is no contradiction or
\ninconsistency between  the holding  in\tthis  case  and\t the
\nholding in  Morvi Industries  Limited.\tIn  this  case,\t the
\nimportant fact\tfound was  that the  money became due to the
\nassessee not  at the  end of the accounting year, but on the
\ndate the  managed company  made up  its accounts. Indeed, no
\ndate  was   fixed  in  the  agreement  for  payment  of\t the
\ncommission and\tthe assessee  gave up  its  commission\teven
\nbefore it  accrued to  it, i .e., before the managed company
\nmade up\t its account. It is for this reason, this Court held
\nthat the  commission had  not accrued  to the assessee by or
\nbefore the  date it  gave it  up. Indeed, Hegde,J., speaking
\nfor himself  and Khanna,J.,  specifically  referred  to\t the
\ndecision in Morvi Industries Limited and distinguished it on
\nthe above basis. We are, therefore, unable to agree with the
\nHigh Court  that by  virtue of the decision of this Court in
\nBirla Gwalior  (P) Ltd.,  the principle\t of Morvi Industries
\nLimited does not apply to the present case. The facts of the
\npresent case  [with respect to three assessment years, viz.,
\n1969-70, 1970-71  and 1971-72]\tdo squarely  fall within the
\nprinciple of Morvi Industries Limited.\n<\/p>\n
     In State  Bank of\tTravancore v. Commissioner of Income
\nTax, Kerala  [(1986) 158  I.T.R.102],  the  facts  were\t the
\nfollowing: the appellant-Bank maintained its accounts on the
\nbasis of  mercantile system. It was charging interest on the
\nloans advanced by it. Some of the loans had become “sticky”,
\ni.e., their  recovery had  become  extremely  doubtful.\t The
\nBank,  however,\t  charged  interest  on\t these\tloans  also,
\ndebiting the  account of  the concerned parties. But instead
\nof carrying  the interest  amount to  the  profit  and\tloss
\naccount, the  appellant remitted the said interest amount to
\na separate  account called  “the Interest Suspense Account”.
\nIn the\tcourse of  its assessment,  the\t Bank  claimed\tthat
\nhaving regard  to the  poor financial  condition of the said
\ndebtors and  the poor  chances of  recovery of interest from
\nthem, the  interest amount  due from  them was\ttaken to the
\n“Interest  Suspense   Account”\tto  avoid  showing  inflated
\nprofits by  including hypothetical  and\t unreal\t income\t and
\nfurther that  the interest  on such  sticky advances was not
\nits real  Income and,  hence, not taxable. Both the Tribunal
\nand the High Court rejected the plea. On appeal, this Court,
\nby majority,  Sabyasachi Mukharji  and Ranganath  Misra,JJ.,
\n[Tulzapurkar,J. dissenting]  affirmed the  decision  of\t the
\nHigh Court.  This Court\t held that  the interest  on  sticky
\nadvances did  accrue to\t the appellant-Bank according to the
\nmercantile  system  of\taccounting  and\t that,\tindeed,\t the
\nappellant had  debited the respective parties with interest.
\nThe appellant,\thowever, did  not chose to treat the debt as
\nbad debts  but carried\tthe interest amount to the ‘Interest
\nSuspense Account”.  Mere  crediting  of\t the  said  interest
\namount to,  what it  called the “Interest Suspense Account”,
\nwithout treating it as a bad debt or irrecoverable interests
\nwas repugnant  to Section  36 (1)(vii)\tand Section 32(3) of
\nthe Act\t and that  the concept\taf real income does not help
\nthe appellant-Bank. It was observed that the concept of real
\nincome cannot  he so  read as  to defeat  the object and the
\nprovisions  of\tthe  Act.  Sabyasachi  Mukharji,J.,  in\t his
\nopinion, discussed  all the  relevant cases  on the  subject
\nincluding Morvi\t Industries Limited  and Birla\tGwalior\t (P)
\nLtd. as\t well as  the derision\tof  this  Court\t in  Shoorji
\nVallabhdas  &\tCo.  and  stated  the  proposition  emerging
\ntherefrom in the following words:\n<\/p>\n
     “(1) It is\t the  income  which  has
\n     really accrued  or\t arisen\t to  the
\n     assessee that  is taxable.\t Whether
\n     the income\t has really  accrued  or
\n     arisen  to\t the  assessee\tmust  be
\n     Judged in\tthe light of the reality
\n     of the  situation. 12)  The concept
\n     of real  income would  apply  where
\n     there  has\t  been\ta  surrender  of
\n     income which  in  theory  may  have
\n     accrued but  in the  reality of the
\n     situation, no  income had\tresulted
\n     because the  income did  not really
\n     accrue. (3) Where a debt has become
\n     bad, deduction  in compliance  with
\n     the provisions  of the  Act  should
\n     be claimed\t and allowed.  (4) Where
\n     the Act  applies,\tthe  concept  of
\n     real income  should not  be so read
\n     as to  defeat the provisions of the
\n     Act. (5)  If there is any diversion
\n     of\t income\t  at  source  under  any
\n     statute  or  by  overriding  title,
\n     then there\t is  no\t income\t to  the
\n     assessee.\n<\/p><\/blockquote>\n
     (6) The  conduct of  the parties in
\n     treating the income in a particular
\n     manner is\tmaterial evidence of the
\n     fact whether  income has accrued or
\n     not.  (7)\t Mere  improbability  of
\n     recovery, where  the conduct of the
\n     assessee is  unequivocal, cannot be
\n     treated as\t evidence  of  the  fact
\n     that income  has  not  resulted  or
\n     accrued  to   the\tassessee.  After
\n     debiting the  debtor’s account  and
\n     not  reversing  that  entry  –  but
\n     taking  the   interest  merely   in
\n     suspense  account\tcannot\tbe  such
\n     evidence  to   show  that\tno  real
\n     income has\t accrued to the assessee
\n     or been  treated  as  such\t by  the
\n     assessee. (8)  The concept\t of real
\n     income is\tcertainly applicable  in
\n     judging   whether\tthere  has  been
\n     income or\tnot but,  in every case,
\n     it must  be applied  with care  and
\n     within well-recognised limits.”<\/p><\/blockquote>\n
     To the argument of real income pressed with great
\n persistence in that case, the learned Judge responded in
\n the following words:\n<\/p>\n
     “We were  invited to  abandon legal
\n     fundamentalism. With a problem like
\n     the present  one, it  is better  to
\n     adhere to the basic fundamentals of
\n     the   law\t  with\t  clarity    and
\n     consistency than to be carried away
\n     by common\tcliches. The  concept of
\n     real income  certainly is\ta  well-<\/p><\/blockquote>\n
     accepted one and must be applied in
\n     appropriate    cases    but    with
\n     circumspection  and   must\t not  Be
\n     called  in\t  aid  to   defeat   the
\n     fundamental principles  of the  law
\n     of income-tax as developed.”<\/p><\/blockquote>\n
     We respectfully  agree with the propositions as well as
\nthe observations  of the  learned Judge\t with respect to the
\nplea of real income.\n<\/p>\n
     We may now deal with the decision in Shoorji Vallabhdas
\n& Co.,\trelied upon  strongly by Sri Sharma, learned counsel
\nfor  the  respondent-assessee.\tThe  assessee-firm  was\t the
\nmanaging agent of two shipping companies. Under the managing
\nagency agreement,  the assessee\t was entitled  to receive as
\ncommission ten percent of the freight charged. Between April
\n1, 1947\t and December  31, 1947, a sum of Rs.1,71,885\/- from
\none company  and Rs.2,56,815\/- from the other company became
\ndue to\tthe assessee  as commission at the aforesaid rate of
\nten percent.  In the books of account of the assessee, these
\namounts were  credited to itself and debited to the managing
\ncompanies. But\twhat happened  even before December 31, 1947
\nis of  relevance. In  November 1947, the assessee desired to
\nhave the  managing agency transferred to two private limited
\ncompanies,  Shoorji   Vallabhdas  Limited   and\t  Pratapsinh
\nLimited, floated  by the assessee-firm. Certain shareholders
\nof the\tmanaged companies objected to the rate of commission
\nand suggested  that the\t commission  should  be\t either\t ten
\npercent of  the profits\t of the\t managed companies  or 2 1\/2
\npercent of  the freight\t receipt. The  board of directors of
\nthe  Malabar   Steamship  Company   agreed  with   the\tsaid
\nsuggestion and\tinvited\t the  assessee-firm  to\t reduce\t its
\nmanaging commission to 2 1\/2 percent of the freight for that
\nyear as\t well as for the future years. The assessee accepted
\nthe said offer and agreed to voluntarily reduce its managing
\nagency commission  both in  respect of\tthat year as well as
\nfor the\t future years to 2 1\/2 percent of the total freight.
\nA similar  procedure was  followed in  the case of the other
\nmanaged company\t [New Dholera  Steamships Limited].  On this
\nbasis, both  the managed companies appointed the two private
\nlimited companies  aforesaid as\t their\tmanaging  agents  at
\ntheir extraordinary  meeting held on December 30, 1947 – the
\nappointment  was  to  take  effect  from  January  1,  1948.
\nSubsequently, at  the annual general meetings cf the two man
\nmanaged companies held in December, 1948, the commission was
\nreduced from  ten percent of the freight to 2 1\/2 percent as
\nalready agreed.\t The assessee  accordingly gave\t up  seventy
\nfive percent  of its  earnings during  the aforesaid year of
\naccount [April\t1, 1947\t to December  1, 1947] and disclosed
\nonly the  remaining twenty five percent amount as its income
\nin its\tassessment proceedings.\t The Income  Tax Officer and
\nthe  Appellate\t Assistant  Commissioner   held\t  that\t the
\ncommission amount @ ten percent of the freight had already
\naccrued to  the assessee  during the previous year ending on
\nMarch 31,  1948 and  since the assessee had given up seventy
\nfive percent  of the  said amount  after such  accrual,\t the
\nwhole of  the commission amount, which was actually credited
\nin the\tbooks of  the assessee, is includible in its income.
\nOn appeal, there was a difference of opinion between the two
\nmembers of  the Tribunal.  On reference to the President, he
\nheld that  even though the actual reduction took place after
\nthe year of account was over, there was in fact an agreement
\nto reduce  the commission  even during\tthe currency  of the
\naccounting year and hence, it cannot be said that the larger
\nincome [@  ten percent]\t had accrued  to the  assessee-firm.
\nAccordingly,  the  assessee’s  appeal  was  allowed  by\t the
\nTribunal.  Thereupon,\tthe  following\ttwo  questions\twere
\nreferred to the High Court under Section 66, viz.:\n<\/p>\n
     “(1) Whether  the\t two   sums   of
\n     Rs.1,36,903  and\tRs.2,00,625  are
\n     income of the ‘previous year’ ended
\n     March 31,1948?\n<\/p><\/blockquote>\n
     (2)  If the  answer  to  the  first
\n     question  is  in  the  affirmative,
\n     whether they  represent an\t item of
\n     expenditure permissible  under  the
\n     provisions of  section 10(2)(xv) of
\n     the Indian Income-tax Act, 1922, in
\n     computing the  assessee’s income of
\n     that  ‘previous   year’  from   its
\n     managing agency business?”<\/p><\/blockquote>\n
     The High  Court agreed  with  the\tview  taken  by\t the
\nPresident of the Tribunal and answered the first question in
\nthe negative,  i.e., in\t favour of  the assessee and against
\nthe Revenue.  It declined  to express  any  opinion  on\t the
\nsecond question. This Court affirmed the approach adopted by
\nthe President of the Tribunal and the High Court. It pointed
\nout:\n<\/p>\n
     “Here too,\t the  agreements  within
\n     the  previous   year  replaced  the
\n     earlier agreements, and altered the
\n     rate in  such a  way as to make the
\n     income different from what had been
\n     entered in\t the books of account. A
\n     mere book-keeping\tentry cannot  be
\n     income, unless  income has actually
\n     resultad, and  in the present case,
\n     by the  change  of\t the  terms  the
\n     income  which   accrued   and   was
\n     received consisted\t of  the  lesser
\n     amounts and  not the  larger.  This
\n     was not a gift by the assessee firm
\n     to\t the   managed\tcompanies.   The
\n     reduction\twas   a\t part\tof   the
\n     agreement\tentered\t  into\tby   the
\n     assessee firm to secure a long-term
\n     managing agency arrangement for the
\n     two   companies\twhich\tit   had
\n     floated.”<\/p><\/blockquote>\n
     Hidayatullah,J., speaking\tfor himself and J.C.Shah,J.,
\nobserved  that\tthe  facts  of\tthe  case  before  them\t was
\nidentical to the facts of the case in Commissioner of Income
\nTax v.\tChamanlal Mangaldas  & Co.<\/a>  [(1960) 39\tI.T.R.8] and
\nthat the  principle of the said decision squarely applied to
\nthe facts  of the  case before\tthem. In  the course  of the
\njudgment, thy learned Judge observed:\n<\/p>\n
     “Income-tax is a levy on income. No
\n     doubt,  the  Income-tax  Act  takes
\n     into account  two points of time at
\n     which  the\t  liability  to\t tax  is
\n     attracted, viz., the accrual of the
\n     income  or\t its  receipt;\tbut  the
\n     substance\tof  the\t matter\t is  the
\n     income. If\t income does  not result
\n     at all, there cannot be a tax, even
\n     though in book-keeping, an entry is
\n     made about a ‘hypothetical income’,
\n     which does\t not materialise.  Where
\n     income has,  in fact, been received
\n     and is  subsequently  given  up  in
\n     such circumstances\t that it remains
\n     the income\t of the\t recipient, even
\n     though given  up, the  tax\t may  be
\n     payable. Where, however, the income
\n     can be said not to have resulted at
\n     all,  there  is  obviously\t neither
\n     accrual nor receipt of income, even
\n     though  an\t entry\tto  that  effect
\n     might,  in\t certain  circumstances,
\n     have been\tmade  in  the  books  of
\n     account. This  is exactly\twhat has
\n     happened  in   this  case,\t  as  it
\n     happened\tin   the   Bombay   case
\n     [Commissioner  of\t Income-tax   v.
\n     Chamanlal Mangaldas & Co.<\/a> (1956) 29
\n     I.T.R.987),   which was approved by
\n     this court.”<\/p><\/blockquote>\n
     We may  also mention  that when  this  case  was  cited
\nbefore this Court in State Bank of Travancore, it has
\nbeen distinguished  on the  basis of  the above\t fact, viz.,
\nthat the  agreement to\tgive up\t seventy five percent of the
\ncommission was\tarrived at during the relevant previous year
\nitself, i.e.,  before the  close of  the  previous year and,
\ntherefore, what\t accrued to  the assessee  at the end of the
\nrelevant previous  year was  the commission at 2 1\/2 percent
\nof the\tfreight alone  and not\t@ ten  percent.\t It  cannot,
\ntherefore, be  said that  this case  lays down any principle
\ncontrary to  the one enunciated in Morvi Industries Limited.
\nSince the facts of the case in Chamanlal Mangaldas & Co. are
\nidentical to  the facts\t in Shoorji  Vallabhdas & Co., we do
\nnot think  it necessary\t to refer  to the facts of that case
\nseparately.\n<\/p>\n
     Sri G.C.Sharma  submitted that applying the real income
\ntheory, it  must be held that no interest had really accrued
\nto or received by the assessee for the said three assessment
\nyears [1969-70,\t 1970-71 and  1971-72] and  that indeed,  no
\nsuch entries were made in the account books of the assessee.
\nHe submitted  that, as\ta fact,\t no income  was received and
\nthat the assessee cannot be asked to pay tax on income which
\nit had\tnot received. We answer this contention by repeating
\nthe words  of Sabyasachi  Mukharji,  J.\t in  State  Bank  of
\nTravancore, which we have extracted hereinabove. The concept
\nof real\t income cannot\tbe employed  so\t as  to\t defeat\t the
\nprovisions of the Act and the Rules. Where the provisions of
\nthe Act\t and the Rules apply and followed. There is no room-
\nnor would  be permissible  for the  court –  to\t import\t the
\nconcept of  real income\t so as\tto whittle  down, qualify or
\ndefeat the provisions of the Act and the Rules.\n<\/p>\n
     For  the\tabove  reasons,\t  the  appeals\trelating  to
\nAssessment Years  1969-70, 1970-71  and 1971-72 [in the case
\nof Shiv\t Prakash Janak Raj & Co.] are allowed and the appeal
\nrelating to  Assessment Year  1968-69 [in  the case  of Shiv
\nPrakash Janak  Raj &  Co.] is  dismissed as not pressed. For
\nthe  same  reasons,  the  other\t appeals  are  allowed.\t The
\njudgment of the High Court in all these matters [except with
\nrespect to  the Assessment  Year 1968-69 in the case of Shiv
\nPrakash Janak  Raj  &  Co.]  is\t set  aside.  The  questions
\nreferred to  are answered  in  favour  of  the\tRevenue\t and
\nagainst the  assessee [except  in  the\tappeal\trelating  to
\nAssessment Year\t 1968-69 in  the case  of Shiv Prakash Janak
\nRaj & Co.].\n<\/p>\n
     There shall be no order as to costs.<\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Comissioner Of Income Tax, … vs M\/S.Shiv Prakash Janak Raj & … on 30 September, 1996 Author: B Reddy Bench: B.P. Jeevan Reddy, Suhas C. Sen PETITIONER: COMISSIONER OF INCOME TAX, AMRITSAR Vs. RESPONDENT: M\/S.SHIV PRAKASH JANAK RAJ & CO.PVT. LTD. ETC. DATE OF JUDGMENT: 30\/09\/1996 BENCH: B.P. JEEVAN REDDY, SUHAS […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-207943","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nComissioner Of Income Tax, ... vs M\/S.Shiv Prakash Janak Raj & ... on 30 September, 1996 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/comissioner-of-income-tax-vs-ms-shiv-prakash-janak-raj-on-30-september-1996\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Comissioner Of Income Tax, ... vs M\/S.Shiv Prakash Janak Raj & ... on 30 September, 1996 - 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