E. D. Sassoon and Company Ltd. Vs. The Commissioner of Income-Tax, Bombay City [1954] INSC 65 (14 May 1954)
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 ofs. 10(1)-"Carried on by him"-Connotation of-Managing Agency Agreement-Transfer of rights there under-Apportionment between assignors and assignees.
HEADNOTE:
The Sassoons had entered into three Managing Agency agreements 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 transferor 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 apportion able 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.
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 Incometax Appellate Tribunal in Income-tax Appeal No. 122 of 194748.
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 Commissioner. 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 Incometax and the Sassoons as well as the Commissioner of Incometax 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 chargethe 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 completed 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 Elphinstone 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 Company 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 during 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 condition 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 wellstablished 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, CozensHardy 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 expressed 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 there under 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 there under 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 there under 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 there under 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 Prospecting 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 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." MukerjiJ. 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'
