MORVI INDUSTRIES LTD. vs. COMMISSIONER OF INCOME TAX (CENTRAL) CALCUTTA

CIVIL APPEAL No. 2083/1970Supreme Court[1972] 1 S.C.R. 97005 October 1971Bench: 3 JudgesAuthor: K.S. HEGDE, A.N. GROVER, HANS RAJ KHANNA MORVI INDUSTRIES LTD.7 pages
AI SummaryDismissed

What were the facts?

The appellant, Morvi Industries Ltd., was the managing agent for Shree Ramesh Cotton Mills Ltd. The appellant was entitled to office allowance and commission based on net profits, purchases, and sales. The managed company's accounting year ended on December 31st, and the appellant's on June 30th. Commission was due on December 31st and payable after the managed company's Annual General Meetings. The AGM for the relevant years were held on November 24, 1955, and July 21, 1956. The appellant relinquished its office allowance and commission for the accounting years ending December 31, 1954, and December 31, 1955, by resolutions dated April 4, 1955, and June 19, 1956, respectively. These amounts had become 'due' but not yet 'payable' at the time of relinquishment. The Income-tax Officer included these relinquished amounts in the appellant's total income for assessment years 1955-56 and 1956-57, disallowing them as deductible expenses. The Appellate Assistant Commissioner and Appellate Tribunal upheld the ITO's order. The High Court, on reference, also ruled in favour of the revenue.

What did the Supreme Court hold?

The Supreme Court held that the relinquished amounts of office allowance and commission were rightly included in the appellant's total income. The Court reasoned that under Section 4(1)(b)(i) of the Income-tax Act, 1922, income accrues when it becomes due, irrespective of the date of payment. The appellant maintained its accounts on a mercantile basis, and the amounts had become legally due on December 31, 1954, and December 31, 1955, respectively. The relinquishment occurred after the accrual but before the payment. The Court cited the dictionary meaning of 'accrue' as 'to fall due' and emphasized that the postponement of payment does not affect the accrual of income. The assessee's right to claim the amount vested upon accrual, creating a corresponding liability for the payer. The fact that the income was not subsequently received did not efface the accrual. The Court also held that the relinquished amounts were not deductible as expenses under Section 10(2)(xv) because there was no evidence to show that the relinquishment was for the purpose of the appellant's business or on grounds of commercial expediency. The appeals were dismissed.

What were the issues?

1. Whether the relinquished amounts of office allowance and commission, which had become 'due' but not 'payable' before relinquishment, should be included in the appellant's total income for the assessment years 1955-56 and 1956-57, in light of Section 4(1)(b)(i) of the Income-tax Act, 1922. - Assessee's contention: The amounts were relinquished before they became payable, and therefore, should not be taxed. - Revenue's contention: The amounts had accrued as income when they became due, and the subsequent relinquishment did not negate the accrual of income for tax purposes. 2. Whether the relinquished amounts could be claimed as a deductible expense under Section 10(2)(xv) of the Income-tax Act, 1922. - Assessee's contention: The relinquishment was for the purpose of business or commercial expediency. - Revenue's contention: The relinquishment was not for the purpose of the assessee's business or on grounds of commercial expediency.

Which sections of the Income-tax Act were involved?

Section 4(1)(b)(i),Section 10(2)(xv)

AI-generated summary — verify with the full judgment below

970 MORVI INDUSTRIES LTD. v. COMMISSIONER OF INCOME TAX (CENTRAL) CALCUTTA October 5, 1971 [K. S. HEGDE, A. N. GROVER AND H. R. KHANNA, JJ.] 111come-tax · Act, 1922, ss. 4(1) (b) (i) and 10(2) (xv)-Income accrues' when it becomes due-Relinquishment of office allowG.nce and commission by managing agent after they had become due on the ground that managed compan,v had suffered losses-Relinqufshmelll made after amounts had become due und~r agreement but before they hcd be- come payable-Amounts rightly included in total income-Relinquished amounts not deductible as expenses under s. !0(2)(xv) when the rtlin· quishment is not for purpose of assessee's business or on ground of com .. mercial expediency.

The appellant, a limited company, was managing agent of another company.

Under the terms of the agreement the appellant company was entitled to receive a fixed monthly sum as office allowance and commis- sion at fixed rates on net profits and purchases and sales of cotton and yarn.

The managed company's accounting year closed on the 30th day of December every year and that of the appeiiant company on the 30th .da)' of June every year.

Under cl. 2(e) of the managi

The order continues below.

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