COMMISSIONER OF INCOME-TAX WEST BENGAL-II, CALCUTTA vs. M/S BIRLA GWALIOR (PVT.) LTD.

CIVIL APPEAL No. 242/1970Supreme Court[1973] 3 S.C.R. 90204 April 1973Bench: 2 JudgesAuthor: K.S. HEGDE, HANS RAJ KHANNA9 pages
AI SummaryDismissed

What were the facts?

The assessee, M/s. Birla Gwalior (Pvt.) Ltd., acted as the managing agent for two companies, N. & G. As managing agent for N Company, it was entitled to 12.5% commission on net profits and Rs. 18,000 as office allowance. For G Company, it was entitled to Rs. 30,000 in addition to its commission. For assessment years 1954-55, 1955-56, and 1956-57, the assessee forewent managing agency commission and, in the case of G Company, office allowance. The commission was foregone after the financial year-end but before the managed company's accounts were finalized. The office allowance was foregone before the financial year-end. The Income Tax Officer and Appellate Assistant Commissioner disallowed these deductions, holding that the commission had accrued and the office allowance had no justification for being foregone. The Income Tax Appellate Tribunal disagreed, considering the foregone amounts as not real income and thus allowable expenditure under Section 10(2)(xv). The High Court agreed with the Tribunal.

What did the Supreme Court hold?

The Supreme Court held that as regards the office allowance, following the decision in C.I.T. Bombay North v. Chandulal Keshavlal & Co., the Tribunal was justified in allowing it as revenue expenditure under Section 10(2)(xv). The contention that the allowance was to meet expenses and thus could not be given up was legally insignificant. Regarding the foregone commission, the Court noted that no due date was fixed for payment, and it could only be ascertained after the managed company's accounts were made up. Since the assessee relinquished the commission before the managed company finalized its accounts, the fact that the assessee maintained accounts on a mercantile basis did not mean the commission had accrued. The Court emphasized that only real income is taxable, not hypothetical accrual. In this case, there was no real accrual of income, hence the assessee was not liable to tax on that amount. The Court dismissed the revenue's appeals, finding the High Court's final conclusion correct despite procedural incongruities.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the sum foregone by the assessee as managing agency commission was allowable as revenue expenditure under Section 10(2)(xv) of the Indian Income Tax Act, 1922? 2. Whether, on the facts and in the circumstances of the case, the sum foregone by the assessee as office allowance was allowable as revenue expenditure under Section 10(2)(xv) of the Indian Income Tax Act, 1922? Assessee's Contentions: The assessee contended that the foregone commission and office allowance did not constitute real income and were given up due to commercial expediency. Therefore, they were allowable as revenue expenditure under Section 10(2)(xv). Revenue's Contentions: The revenue contended that the commission had accrued at the end of each financial year, and the subsequent relinquishment did not alter its taxability. For the office allowance, the revenue argued there was no justification for giving it up. The revenue also raised objections regarding the High Court's procedural handling of the case.

Which sections of the Income-tax Act were involved?

Section 10(2)(xv),Section 66(2),Section 10(1)

AI-generated summary — verify with the full judgment below

" ·902 COMMISSIONER OF INCOME-TAX WEST BENGAL-II, CALCUITA v . M/S. BIRLA GWALIOR (PVT.) LTD.

April 4, 1973 . . [K. S. HEGDE .AND H. R. KHANNA, JJ.J Indian Income Tax Act 1922--S. 10(2) (xv)-Whether an amount ·.foregone b;y the assessee as Managing Agency _Conunission and an an1ount foregone cs office allowance lVas allowable as Revenue Expendlture.

These are all connected appeals. The a55cssee-rcspondent was the . .managipg agent of two companies N. & G. As Managing Agent of N Campany, it was entitled to receive a commission of 12~% on the net profits of the Managed Company together with a sum of Rs. 18,000/ • . as office allowance.

In the case of G company, the assessee was entitled to get an allowan<'Je of Rs. 30,000/- in "'ddition to its agreed commis- sion. In all these appeals,. certain questions were submitted by . the Tribunal to the High Court. In Civil' Appeal No. 242 of 1970 only one question was submitted and in the other two cases, i .. e., Civil Appeal 'No. 243 and 244 of 1970, two questions we.r·o submitted.

In the first appeal, the question submitted was whether on the facts and circumstances of the case, a certain sum said to have beien

The order continues below.

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