COMMISSIONER OF INCOME TAX TAMIL NADU II Vs. SOUTH MADRAS INDUSTRIAL DEVELOPMENT COMPANY PRIVATE LIMITED

JUDGEMENT

(1.) IN T.C. No. 432 of 1975, the following is the question that has been referred to this court under s. 256(1) of the I.T. Act, 1961 "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in reducing the quantum of penalty levied under section 273(c) of the INcome-tax Act of 1961 ?" *IN T.C. No. 433 of 1975, the following question has been referred"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that to the extent of Rs. 76, 429 the managing agency commission accrued to the assessee only after March 31, 1970, and hence was not assessable in the assessment year 1970-71 ?" *The assessee is a private limited company. Whether the amount of Rs. 76, 429 is assessable in 1970-71 or 1971-72, is not likely to be of any consequence, because ordinarily the tax rates leviable on companies are more or less uniform, whatever be the total income of the company. However, in the present case, the question assumes some significance because of the penalty proceedings. We shall first set out the facts relating to the assessment proceedings before going into the penalty proceedingsThe assessee entered into an agreement with M/s. Simco Meters Ltd. on 12th April, 1962, under which it was appointed as the managing agent for a period of 10 years from 27th September, 1961, that being the date of the incorporation of the managed company. Clause 3 of the agreement provided that the assessee should be paid for its work as managing agent remuneration as detailed therein. It was to be at the rate of 10 per cent. on the first Rs. 10 lakhs of net profit or fraction thereof of the managed company, and thereafter, the percentage of net profit payable as remuneration went on going down on a progressively reduced scale. IN the absence of or inadequacy of profits, the agent was to be paid such minimum remuneration per year as may be fixed by the Government, and the managing agent could draw the same in twelve equal instalments on the last working day of the month for which the remuneration was due. Any amount due over and above the minimum remuneration was to be drawn by the managing agent after the audited balance-sheet and profit and loss account of the company for the relative year had been laid before the company in general meetingThe minimum remuneration was fixed at Rs. 24, 000 per year with the approval of the Government of INdia. The assessee received this sum of Rs. 24, 000 from M/s. Simco Meters Ltd. during the relevant previous year ending March 31, 1970.

(2.) THE total remuneration calculated at 10 per cent. of the net profits, under the terms of the agreement, came to Rs.1, 00, 429. THE balance of Rs. 76, 429, after giving credit to the sum of Rs. 24, 000, was paid to the assessee-company by M/s. Simco Meters Ltd., subsequent to September 7, 1970, on which date the general body meeting of the managed company approved the statement of accounts and affairsTHE assessee filed a return disclosing its income on the basis that the managing agency remuneration assessable on it, was only Rs. 24, 000 and after claiming the deduction due with respect to the income, the balance of the income disclosed in the return was Rs. 22, 279. THE ITO determined the total income as Rs. 98, 726. In doing so, he made an addition of Rs. 76, 429 on the ground that the remuneration to that extent was due to the assessee for the period ending on 31st March, 1970, and was, therefore, assessable for the assessment year 1970-71THE assessee appealed to the AAC and contended before him that this sum of Rs. 76, 429 became due only after the managed company had approved the audited statement of accounts in the meeting held on September 7, 1970, and, therefore, was not assessable as its income for the assessment year under consideration.THE AAC rejected this contention and confirmed the order of assessmentTHE assessee appealed to the Appellate Tribunal. THE Tribunal after referring to certain decisions cited before it and having regard to the fact that the managing agency agreement entered into between the assessee and the managed company had not fixed the date of accrual, held that the remuneration of Rs. 76, 429 accrued only after 31st March, 1970, and hence was not liable to be taxed in its hands for the assessment year under consideration. It is this order of the Tribunal that has given rise to the question whether the sum of Rs. 76, 429 accrued to the assessee as managing agency remuneration only after 31st March, 1970, so as not to be assessed in the assessment year 1970-71THE question as to when the managing agency remuneration is liable to be assessed, has been considered by the Supreme Court in some cases. Before referring to the decisions, it may be useful to refer to the relevant provisions of the Companies Act. Prior to the Companies Act of 1956, the managing agency remuneration fell under two parts one was the monthly remuneration called office allowance, and the other was based on net profits and sometimes on the turnover either by way of sale or by way of purchase or both. Section 354 of the Companies Act, 1956, provided that the managing agent shall not be paid any office allowance and, therefore, what was previously paid as monthly remuneration was no longer available.

(3.) THE further finding of the Tribunal was that the amount forgone by the assessee could not be said to be expenditure incurred wholly and exclusively for the purpose of the managing agent's business. THE High Court agreed with these findings. THE Supreme Court held that the commission had under the agreement accrued to the assessee on December 31, 1954, and December 31, 1955, and the fact that the payment was deferred till after the accounts were passed by the managed company in its annual general meetings did not affect the accrual of the income. As the income was given up unilaterally by the assessee after accrual, it was held that it could not escape liability to tax. At page 838, it is stated that cl. 2(e) of the managing agency agreement in that case provided that the commission due to the agent yearly on the 31st day of December or any other date on which the company's yearly accounts were closed in each and every year. Having regard to this specific provision in the managing agency agreement, the Supreme Court pointed out that the commission was due on 31st December of every year, though it was payable only after the annual general meeting of the company. THE distinction between the amount accruing to an assessee and the assessee's right to receive it, was pointed outThis problem came to be considered, again in CIT v. Birla Gwalior (P.) Ltd.