E. D. SASSOON AND COMPANY LTD. vs. THE COMMISSIONER OF INCOME-TAX, BOMBAY CITY

CIVIL APPEAL No. 3/1953Supreme Court[1955] 1 S.C.R. 31314 May 1954Bench: 3 JudgesAuthor: SUDHI RANJAN DAS, NATWARLAL HARILAL BHAGWATI, B. JAGANNADHADAS68 pages
AI SummaryDismissed

What were the facts?

E. D. Sassoon and Company Ltd. (the assessee) acted as Managing Agents for three companies. They transferred their Managing Agency rights to three other companies via deeds of assignment during the accounting year. The core issue was whether the Managing Agency commission earned during the year should be apportioned between the Sassoons and their transferees based on the services rendered by each party for their respective periods. This apportionment hinged on whether any income had accrued to the Sassoons for income-tax purposes on the dates of the transfers. The Managing Agency agreements stipulated that commission was due yearly on March 31st and payable after the annual accounts were passed by shareholders.

What did the Supreme Court hold?

The Tribunal, by a majority (Justices S. R. Das and Bhagwati, with Justice Jagannadhadas dissenting), held that the Managing Agency agreements constituted entire and indivisible contracts of service. The remuneration or commission became due only upon the completion of a definite period of service and at stated intervals. It was a condition precedent to recovery that the service be completely performed. Consequently, such debt constituted a debt only at the end of each service period, and no remuneration was payable for broken periods. The Sassoons had not earned or accrued any income for the broken periods. What they transferred did not include any income earned or accrued during the chargeable accounting period that the transferees could collect by virtue of the assignment. The true test under Section 4(1)(a) of the Indian Income-tax Act for such transfers is whether income had accrued to the transferors and transferees within the chargeable accounting period, not merely whether they had worked for particular periods. The majority reasoned that the words "accrues" and "arises" signify growth or accumulation, indicating a right to receive income, and are distinct from "received." The word "earned" was also discussed as conveying the concept of income accruing. The appeals were dismissed.

What were the issues?

1. Whether, under the terms of the Managing Agency agreements, the commission was liable to be apportioned between the assignors (Sassoons) and the assignees (transferees) in proportion to the services rendered by each for the respective portions of the accounting year, considering the transfer of Managing Agency rights. This question turns on the interpretation of "accrues" and "arises" under Section 4(1)(a) and (b) of the Indian Income-tax Act, 1922. Assessee's contention: The Sassoons argued that the income was apportionable because the transfer of the Managing Agency was a transfer of an income-bearing asset, and the right to receive the entire income falling due after the assignment vested in the assignee. They relied on the principle that the right to receive income, when transferred, settles the question of who the income accrues to. They also suggested that a clause in the agreement implied divisibility of the contract and remuneration in the year of assignment. Revenue's contention: The Revenue contended that the contract of service was entire and indivisible, with remuneration becoming due only upon completion of a definite period of service. Therefore, no income accrued to the Sassoons for broken periods, and what was transferred did not include income already earned or accrued to them.

Which sections of the Income-tax Act were involved?

Section 4(1)(a),Section 4(1)(b),Section 10(1)

AI-generated summary — verify with the full judgment below

- - S.C.R. SUPREME COURT REPORTS 313 1954 meaningless writs we must dismiss this appeal and leave the appellant con~ent with an enunciation of the law. But as he has m reality won his case and is prevented from reaping the full fruits of his victory because of circumstances for which he is not respon- sible, we direct that the first respondent, the State of Mysore, and the fourth respondent, Thim_mappa, pay the appellant his costs . here and in the High Court.

The other respondents will bear their own costs . K. N. Guruswamy v.

The Stat• of Mysor1 and Others. • Appeal dismissed. E. D. SASSOON AND COMPANY LTD. v. THE COMMISSIONER OF INCOME-TAX, BOMBAY CITY. (With connected Appeals) [S. R. DAs, BHAGWATI and ]AGANNADHADAs JJ.)

Indian Income-tax Act (XI of 1922), s. 4(1)(a)(b)-"lncome," ~'accrues", "arises", 11 is received" -Meaning of-" Earned" -Mean- in g of-s. 10(1)-"Carried on by him"-Connotation of-Managing Agency Agreement-Transfer of rights thereunder-Apportionment between assignors and assignees.

The Sassoons had entered into three Managing Agency agree- ments as the Managing Agents of three different companies. They transferred their Managing Ag

The order continues below.

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