MUHAMMAD AFZAL LONE, ACTG. C.J.---This judgment shall dispose of Tax References Nos.39 and 40, both of 1.972 relating to the assessment years 1964-65 and 1965-66 respectively. These have been filed by the Commissioner of Income-tax, Lahore Zone, Lahore; arise out of Tribunal's same order dated 16-6-1971 and common questions of law and facts have been urged therein.
2. During these two assessm ent years, the respondent assesses; acted as Managing Agent of Punjab Vegetable Ghee and General Mills Ltd. According to the Managing Agency agreement, the petitioner was entitled to Rs. 36,000 per annum as office allowance, 15 percent. Commission on the profits earned and further percent. Commission on the total sales and purchases made by the Managing Company. It may be added that as the Managed Company had suffered losses, there was no question of payment of commission or profits. The Return filed by the respondent for the assessm ent year 1964-65 disclosed only receipt of office allowance of Rs.36,000 and did not declare receipt of any commission regarding sales and purchases. In the return for the succeeding year, apart from office allowance, as against a sum of Rs. 1,20,049 payable is commission on the sales and purchases of the Managing Company, only onamount of Rs. 22,368 was disclosed as commission. The Income-tax Officer issued notices to the respondent to explain as to why for the assessm ent year, 1963-64 receipt of commission was not declared and for the succeeding year full amount of commission was not shown. In reply the respondent stated that it had voluntarily surrendered the commission payable to it to minimise the deficit of the Managed Company, which suffered losses. The Resolution dated 19-10-1962 passed by the Managed Company in this behalf was pressed into service, which is reproduced below:-- "While discussing the audited Balance-Sheet, Profit and Loss statement etc. For the year 1961-62 together with Directors' report, an offer was received from the Managing Agents foregoing the amount of Rs.1,74,926 on account of Managing Agent's Sale and Purchase Commission with a view to minimise the deficit of the company. The Directors expressed their gratitude for this generous offer on the part of the Company's Managing Agents and directed the office to convey their appreciation and gratitude to the Managing Agents. And further directed that the Balance Sheet and P & L statement etc. Be returned to Auditors for reincorporating the amount of Rs.1,74,926 and return the amended account statements as soon as possible. The matter was therefore postponed to Wednesday the 24th October, 1962 for reconsideration."
3. The Income-tax Officer did not accept the plea of voluntary surrender. The operative parts, of his orders dated 23-12-1965 and 6-12-1966 for the assessment years 1964-1965 and 1965-1966 respectively are reproduced below:-- (1964-1965)...."From the assessee's contention and the resolution of the managed company dated 19-10-1962, it appears that the assessee voluntarily surrendered commission receivable. Such an act is not contemplated in the managing agency agreement. The fact of the matter is that the assessee firm have substantial interest in the company. The firm is being taxed at maximum rate whereas the managed company is in losses or at best could be taxed a 50% odd. It would thus best suit the managing agents to divert the income towards the managed company and thus save taxes. Moreover, the commission accrued to the assessee on 31-3-1962 and according to the system of accounts was to be credited to the books on 1-8-1962. The assessee vide a resolution on 19-10-1962 i.e. Subsequent to the accrual of the commission has tried to divert the profits. It is settled law that disposal of profits or commission on a date after the accrual is nothing but diversion of profits. This is supported by High Court ruling in case of Messrs Morvi Industries Ltd.; Morvi v. C.I.T. Central Calcutta Taxation (India) Sept., 1964 page-37."
(1965-1966) "For foregoing this commission of 97,680 the assessee has verbally asserted that the managed company incurred losses, therefore, the commission was foregone. The explanation of the assessee has been considered. The facts are that the accounts of the managed company were closed on 31-3-1963 on which a commission of Rs.1,20,048 accrued to the assessee.
Assessee's accounting year begins on 1st of Aug. 1963 and ended on 31-8-1964. The total commission therefore became due to the assessee on 1st of Aug 1963. The assessee requested the managed company on 6-8-1963 that it has foregone a commission of Rs.97,680. The assessee voluntarily surrendered the commission which was accrued to it as income on earlier date. The commission foregone is a clear diversion of profit to evade the proper levy of taxes because the managed company has shown losses therefore it will not pay any tax on the surrendered commission of Rs.97,680 while the assessee firm is liable to maximum rate of tax. Furthermore, as stated above, once the commission accrued to the assessee as an income, all subsequent proceedings are simply diversion of this income. Support to this view can be had from a High Court ruling in the case of Messrs Morvi Industries Ltd.; Morvi v. C.I.T Central, Culcutta Taxation (India)
Sept., 1964 page 37. Accordingly the Commission of Rs.97,680 is added back as taxable income of the assessee Rs.97,680.
4. The Department filed a direct appeal before the Income Tax Appellate Tribunal against the order dated 23-12-1965. The second order was however challenged before the Appellate Assistant Commissioner but this appeal failed. The matter was then lifted before the Tribunal. Both the appeals were accepted by the Tribunal through a consolidated order dated 16-6-1971. Before the Tribunal, on behalf of the respondent it was argued that the resolution foregoing the commission was passed long before the end of its accounting period and the Managing Agent surrendered the commission because of the 'financial considerations of the managed company; it was business expediency which motivated the respondent to relinquish the right to receive the commission. On the rectitude of some case-law from the Indian jurisdiction, the Tribunal maintained that if surrender is made with a view to stabilise the Managing Company it would be a surrender for commercial expediency and thus, an admissible deduction. After quoting an extract from one of its earlier decisions the Tribunal went on to hold:-- "This decision has been followed in several other cases by Bench and Full Benches of the Tribunal and we would in accordance with the view expressed therein hold that the commission which has been foregone by the appellant in the instant case in both the years would not attract the levy of income-tax inasmuch as the points raised by the Income-tax Officer have been effectively made in that decision of the Tribunal."
5. Aggrieved by the orders of the Tribunal the department has come to this Court under Section 66(1) of the Income Tax Act, 1922 praying that the following question of law relating to assessment year 1964-65 arising out of the Tribunal's order be answered by this Court.
Question:- Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the Managing Agent's commission amounting to Rs. 1,74,926 already accrued, was not taxable in the hands of the assessee respondent?
The question of law formulated for the assessment year 1965-66 is similar to the question aforesaid except that the figure mentioned therein is Rs.97,680.
6. We have heard the learned counsel for the parties. On behalf of the department the main thrust of the argument was that commission was payable to the respondent under the managing agency agreement for the assessm ent years 1964-65 and 1965-66 respectively on 31-3-1962 and 31-3-1963 and was to be credited in its books of accounts of the respondent on 1-8-1962 and 1-8- 1963 as per its accounting period; the resolution was passed on 19-10-1962 when -the income had already accrued to the respondent; the surrender amounts to an attempt to divert the income after its accrual to the assessee. It, therefore, had to be assessed in the hands of the latter.
7. In reply to these arguments, the learned counsel for the respondent repeated the contentions raised by him before the tribunals below. It was argued that right to receive commission was given up before the conclusion of the accounting period and the income was never received by the respondent, and that surrender of the commission was actuated by commercial consideration, and therefore, the tax-liabilities did not arise.
8. It is on the record that for the two assessment years the managed', company's accounting period closed on 31-3-1962 and 31-3-1963 and that of the Managing Agent on 31-7-1962 and 31-7- 1963 respectively. The commission became payable to the petitioner on 1-8-1962 and 1-8-1963. It is noteworthy that the managed company in its books of accounts had actually credited the amount of the commission to the petitioner. The income thus, had accrued to it and was surrended after its accrual. The resolution is also post accrual. Had the surrender taken place, before the income accrued, it could not be taxed because in such an eventuality the accrual was prevented by act of surrender. The argument that because of non-receipt of income the chargeability averted, has no merit. The principle that without receipt, the income cannot be brought under charge, as applied to some of the English cases such as Leigh v. I. R (II Tax Cases 590) and I.R. v. White Worth Park Coal Company Ltd. (38 Tax Cases 531) cannot be extended to the cases under the Income-tax Act, 1922, because the language of English Statute is worded differently. The scheme of the Income-tax Act is different from that of the English Statute. Under Section 4(1)(a) and (b)(i) of the Act the income of an assessee includes the income received or deemed to have been received and also the income accrued or arisen or deemed to have accrued or arisen. Again under Section 7 tax is payable on salary as soon as it falls doe irrespective of the fact whether or not it is paid. Tax on interest on securities is leviable under section 8, on interest receivable. Section 9 makes assessable the bona fide annual value of the property. It is thus, obvious that mere accrual and receivability, without actual receipt, can be brought under charge under the provisions of the Income-tax Act, 1922. In the instant case, the income, had already become the property of the assessee. Its actual receipt was not sine qua non for its chargeability. The view taken by the Income-tax Office is well--- grounded and the Tribunal fell in error, in invoking the principle of surrender for the purposes of commercial expediency. Indeed the opinion expressed by us is fully supported by a judgment of the Supreme Court of India in the case of Messrs Morvi Industries Ltd. v. The Commissioner of Income Tax (Central) (AIR 1971 Supreme Court 2396), wherein surrender after the accrual of income was not accepted and the income was subjected to charge in the hands of the managing agent, with which we entirely agree. In this view of the matter these reference applications are accepted and the questions referred to this Court are answered in favour of the department. The parties are left to bear their own costs.