E. D. Sassoon and Co Ltd vs Commissioner of Income Tax, Bombay

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 3, 30 and 31 of 1953

Decision Date: 14 May 1954

Coram: Natwarlal H. Bhagwati, B. Jagannadhadas, S. R. Das

The case was titled E. D. Sassoon and Company Ltd versus the Commissioner of Income-Tax, Bombay, and the judgment was delivered on 14 May 1954 by the Supreme Court of India. The judgment was authored by Justice Natwarlal H. Bhagwati, who sat on the bench together with Justice B. Jagannadhadas. The parties were identified as the petitioner, E. D. Sassoon and Company Ltd, and the respondent, the Commissioner of Income-Tax, Bombay City, with the matter also being reported as a connected case.

The judgment was recorded with the date of 14 May 1954 and the bench composition was listed as Bhagwati, Natwaral H., Das, Sudhi Ranjan, and Jagannadhadas, B. The official citation of the decision appears as 1954 AIR 470 and 1955 SCR 599, and the decision has been referenced in subsequent reports including D 1960 SC 703, R 1960 SC 1279, D 1961 SC 1007, R 1964 SC 1653, F 1965 SC 1343, R 1967 SC 1626, F 1977 SC 560, R 1986 SC 1805, RF 1991 SC 513, and RF 1992 SC 1495. The statutory provisions discussed include sections 4(1)(a) and 4(1)(b) of the Indian Income-Tax Act (XI of 1922), dealing with the meanings of “income,” “accrues,” “arises,” and “is received,” as well as the definition of “earned.” The judgment also examined section 10(1) and the expression “carried on by him,” together with the legal connotations of managing agency agreements, the transfer of rights under such agreements, and the apportionment of income between assignors and assignees.

According to the headnote, the Sassoon company had entered into three separate managing agency agreements, acting as the managing agents for three distinct companies. During the same accounting year, the Sassoons transferred each of those managing agency rights to three different companies by executing formal deeds of assignment and transfer on various dates. The essential question before the Court was whether, under the circumstances, the commission earned as managing agents should be apportioned between the Sassoons and their respective transferees in proportion to the services actually rendered by each party during the different portions of the accounting year. The determination of this question hinged on whether any income had accrued to the Sassoons for income-tax purposes on the dates when the managing agencies were transferred to the new companies.

Clause 2(d) of each managing agency agreement provided that the commission payable to the Sassoons as managing agents was to become due annually on the 31st of March and would be payable immediately after the shareholders had passed the company’s annual accounts. The Court, speaking through Justices S.R. Das and Natwaral H. Bhagwati, answered the question in the negative. Their reasoning was that, on a correct construction of the managing agency agreements, the contract of service between the companies and the managing agents was whole and indivisible. Consequently, remuneration or commission became payable by the companies to the managing agents only upon the completion of a definite period of service and at the stipulated intervals. The Court held that it was a condition precedent to any claim for wages or salary that the service be fully performed; thus, a debt for commission arose only at the end of each full period of service. No remuneration was due for any portion of a period that was not completed.

Applying this principle, the Court concluded that the Sassoons had not earned any income for the broken periods of service and that no income had accrued to them with respect to those periods. Accordingly, the deeds of assignment and transfer that the Sassoons executed did not convey any income that had been earned or accrued during the chargeable accounting period, and therefore, such income could not be apportioned to the transferees.

In the course of its analysis, the Court explained that the deeds of assignment and transfer executed by the assignors did not contain any portion of income that the assignors had earned or that had accrued to them during the chargeable accounting period, and consequently the transferees, by virtue of the assignments, were not placed in a position to collect such income. The Court held that the proper test under section 4(1)(a) of the Indian Income-tax Act for determining liability for income-tax in a transfer of a Managing Agency was not the amount of time that the transferor or the transferee had actually worked during the year, but rather whether any income had accrued to either party within the chargeable accounting period. The Court clarified that the word “profit” as used in section 4 of the Act possessed a well-defined legal meaning, involving a comparison of the state of the business at two specific dates, usually a year apart, and that the fundamental concept was the amount of gain realised by the business during that year. The term “income” was described as a periodical monetary return that came in with some regularity or expected regularity from definite sources; the source need not be continuously productive, but its object was to generate a definite return, excluding any windfall. The Court further explained that “income” inherently implied receipt, whether actual or constructive. It distinguished the terms “accrues”, “arises” and “is received” as three separate concepts. “Accrues” conveyed the idea of growth or increase by addition, “arises” meant coming into existence or becoming notice-able and taking a tangible shape so that it could be receivable, and both terms were used in contrast to “receive” to indicate a right to receive income. The Court noted that the accrual of income to an assessee did not imply that the assessee had actually received it at that moment; receipt could occur later. Although the word “earned” did not appear in section 4 of the Act, the Court observed that it had often been employed by judges in their judgments to convey the concept of income accruing to the assessee. Referring to the observations of Justice Jagannadhadas, the Court stated that in the present case the profits and gains for the whole year clearly related to the business carried on jointly by both the assignor and the assignee, and therefore were taxable as income accruing to both parties, to be apportioned accordingly. The Court further interpreted the phrase “carried on by him” in section 10(1) of the Act as signifying the continuous exercise of an activity that was essential to producing taxable income, and that the taxable income belonged to the very assessee or to a combination of assessors whose continuous activity generated the income. Accordingly, the Court concluded that the continuous and successive performance of duties under the Managing Agency agreement by both the assignor and the assignee constituted the effective source of the year’s income.

In this case the Court explained that the source of the income for the year was the continued activity of both the assignor and the assignee under the managing-agency arrangements. The income therefore became payable only when the financial year ended, and at that moment it formed the joint income of the two parties. Earlier assignments made during the year were regarded as assignments of a future right to receive a share of that income. By virtue of the contractual relationship that existed between the assignor and the assignee as a result of those assignments, the assignee obtained the right to collect the whole amount of income when it became due. Nevertheless, the portion of that income that was attributable to the Sassoons on the date the year closed remained their taxable income, and the Court held that the tax imposed on them was proper. The judgment then set out the procedural history of the appeals. The appeals were filed in the Civil Appellate Jurisdiction as Civil Appeals Nos. 3, 30 and 31 of 1953. They were brought against the judgment and order dated 12 September 1951 of the High Court of Judicature at Bombay in Income-tax Reference No. 27 of 1951, which in turn arose from the order dated 23 November 1949 of the Income-tax Appellate Tribunal in Income-tax Appeal No. 122 of 1947-48. Counsel for the appellant in Civil Appeal No. 3 of 1953 was Mr B.J. Mackenna, assisted by Mr D.H. Dwarka Das and Mr Rajinder Narain. For the respondent in Civil Appeal No. 3 and for the appellant in Civil Appeals Nos. 30 and 31, the Attorney-General for India, Mr M.C. Setalvad, appeared, assisted by Mr G.N. Joshi and Mr P.A. Mehta. The Solicitor-General for India, Mr C.K. Daphtary, represented the respondent in Civil Appeal No. 30, with Mr R.J. Kolah, Mr N.A. Palkhiwala and Mr I.N. Shroff, and the same team also represented the respondent in Civil Appeal No. 31, dated 14 May 1954. The judgment of Justices Das and Bhagwati was delivered by Justice Bhagwati, while Justice Jagannadhadas gave a separate judgment. The Court noted that the appeals concerned two earlier judgments and orders of the Bombay High Court in Income-tax References Nos. 23, 24 and 27 of 1951, which had been made by the Income-tax Appellate Tribunal under section 66(1) of the Indian Income-tax Act and under section 21 of the Excess Profits Tax Act. The appellant, E.D. Sassoon and Company Ltd. (referred to as “the Sassoons”), had acted as Managing Agent for three companies: E.D. Sassoon United Mills Ltd., under agreements dated 24 February 1920 and 2 October 1934; Elphinstone Spinning and Weaving Mills Company Ltd., under an agreement dated 23 May 1922; and Apollo Mills Ltd., also under an agreement dated 23 May 1922. The Sassoons later agreed to transfer these managing-agency rights to Messrs Agarwal and Company, Chidambaram Mulraj and Company Ltd., and Rajputana Textile (Agencies) Ltd., respectively, by letters dated 3 September 1943, 16 April 1943 and 27 April 1943. The shareholders of each company gave their consent to the transfer agreements, and the managing-agency positions were finally transferred to the respective transferees with effect from 1 December 1943, 1 June 1943 and 1 July 1943.

In July 1943 the transfers of the managing agencies became effective and the Sassoon company executed formal deeds of assignment and transfer in favour of Messrs Agarwal and Company, Chidambaram Mulraj and Company Ltd., and Rajputana Textile (Agencies) Ltd.; under those deeds the Sassoons received, respectively, Rs 57,80,000, Rs 12,50,000 and Rs 6,00,000 as consideration for the transfer of the managing agencies and the net amount of Rs 75,77,693 that was actually received on the transfers was placed by the Sassoons into their Capital Reserve Account. The commissions that the various companies were obliged to pay for managing-agency services for the year 1943 were finally calculated in 1944; Messrs Agarwal and Company were paid a commission of Rs 27,94,504 by E D Sassoon United Mills Ltd., Chidambaram Mulraj and Company Ltd. received Rs 2,37,602 from Elphinstone Spinning and Weaving Mills Company Ltd., and Rajputana Textile (Agencies) Ltd. received Rs 3,82,608 from Apollo Mills Ltd., all of which were paid to the transferees as commission for the services rendered after they had assumed the managing agencies. For the assessment year 1944-45, covering the accounting period 1 January 1943 to 31 December 1943, the original income-tax and excess-profits-tax assessments of the Sassoons were completed on 31 May 1945 and recorded a total income of Rs 46,48,483; that figure did not contain any portion of the managing-agency commissions that had been received by the transferees, and the entire commissions received by the transferees were instead assessed by the income-tax officer for the assessment year 1945-46 as income of the transferees. The transferees challenged those assessments before the Appellate Assistant Commissioner, who upheld the income-tax officer’s orders, and the matter was then taken to the Income-Tax Appellate Tribunal. By its order dated 28 December 1949 the Tribunal accepted the transferees’ argument that the commissions should be apportioned on a proportionate basis and that the transferees should be liable to tax only on the commission earned during the period they actually acted as managing agents of the respective companies. Subsequently the income-tax officer and the excess-profits-tax officer realised that the commissions earned by the Sassoons before the dates of the respective transfers had not been taxed; consequently, on 29 June 1946 they issued notices under section 34 of the Income-Tax Act and section 15 of the Excess Profits Tax Act to the Sassoons, asserting that such income had escaped assessment and proposing to add to the Sassoons’ assessable income the sum of Rs 28,51,934, which comprised Rs 25,61,629 attributable to the managing agency of E D Sassoon United Mills Ltd. for the eleven months from 1 January 1943 to 30 November 1943 and Rs 99,001 attributable to the managing agency of Elphinstone Spinning and Weaving Mills Ltd. for the five months from.

In this matter the revenue authorities sought to include in the assessable income of the respondents three amounts of Managing Agency commission: Rs 99 001 earned for the Managing Agency of the Elphinstone Spinning and Weaving Mills Ltd. for the period from 1 January 1943 to 31 May 1943; Rs 1 91 304 earned for the Managing Agency of the Apollo Mills Ltd. for the six-month period from 1 January 1943 to 30 June 1943; and Rs 25 61 629 earned for the Managing Agency of the E D Sassoon United Mills Ltd. for the eleven-month period from 1 January 1943 to 30 November 1943. The revenue officers contended that these commissions had accrued to the respondents, the Sassoons, as remuneration for services rendered, and that at the moments when the agencies were transferred the Sassoons were therefore entitled to receive the commissions from the respective companies for the work performed up to the dates of transfer. Despite the Sassoons’ objections, the Income-Tax Officer and the Excess Profits Tax Officer treated the three sums as escaped income, added them to the respondents’ taxable income and issued assessments accordingly.

The Sassoons then filed appeals before the Appellate Assistant Commissioner, who dismissed the appeals. Undeterred, they pursued further appeals before the Income-Tax Appellate Tribunal. The Tribunal, relying on its order dated 28 December 1949 in the case of the transferees, affirmed the Appellate Assistant Commissioner’s orders. In its reasoning the Tribunal held that the Managing Agency commission was earned for services rendered, and therefore the tax liability fell on the person who actually carried on the Managing Agency business, not on the person to whom the agency had been assigned. Accordingly, the Tribunal concluded that, with respect to the Sassoons, the commission should be apportioned between the Sassoons and the persons to whom the agencies had been transferred.

Subsequently the Sassoons made applications under section 66(1) of the Indian Income-Tax Act and section 21 of the Excess Profits Tax Act, requesting that the Tribunal draw up a statement of the case and refer the legal question raised by its orders to the High Court for determination. On 12 January 1951 the Tribunal, by means of its statement of the case, referred a single question of law to the High Court: whether, in the circumstances of the case, the Managing Agency commission was liable to be apportioned between the assessee company and the assignee. The Tribunal observed that the essential issue was not the time at which the commission accrued but the identity of the person to whom it accrued. The reference was recorded in the Tribunal’s records as R.A. No. 474 of 1950-51 and R.A. No. 475 of 1950-51, and it concerned the commissions of the D E Sassoon United Mills Ltd. and the Elphinstone Spinning and Weaving Mills Ltd., the whole of which had been paid in 1944 respectively to Messrs Agarwal and Company and to Chidambaram Mulraj and Company Ltd. This reference was designated as Income-Tax Reference No. 27 of 1951.

The Commissioner of Income-Tax and Excess Profits Tax, Bombay City, also sought a reference to the High Court of the legal question arising from the Tribunal’s order in the appeal of Messrs Agarwal and Company, where the Tribunal had held, as above, that the Managing Agency commission should be apportioned.

In this matter, the Tribunal submitted its statement of the case on 12 January 1951 and referred the same question of law to the High Court, designating the reference as Income-tax Reference No 24 of 1951. A comparable application was filed by the Commissioner of Income-tax/Excess Profits Tax, Bombay City, seeking a reference in the appeal of Chidambaram Mulraj and Company Ltd. The Tribunal also presented its statement of case on that same date and directed the identical question to the High Court, this reference being recorded as Income-tax Reference No 23 of 1951. All of these references were subsequently placed before the High Court for hearing and final disposal. The High Court heard Income-tax References Nos 24 and 27 of 1951 together and delivered a single judgment that answered affirmatively the question set before it in both references. After that judgment, the High Court likewise answered affirmatively the question that had been referred in Income-tax Reference No 23 of 1951. Thus the High Court’s decision ran contrary to the positions advanced by both the Sassoons and the Commissioner of Income-tax. Nevertheless, the Sassoons and the Commissioner each obtained leave to appeal to this Court, the Sassoons under section 66A(3) of the Indian Income-tax Act and the Commissioner under article 133(1)(c) of the Constitution. The Sassoons filed Civil Appeal No 3 of 1953 against the Commissioner of Income-tax, Bombay City, while the Commissioner filed separate appeals against Messrs Agarwal and Company and against Chidambaram Mulraj and Company Ltd., recorded as Civil Appeal Nos 30 and 31 of 1953 respectively. All of these appeals were now before this Court for hearing and final disposal. Each appeal raised the same legal issue: whether, given the facts of the case, the Managing Agency commission should be apportioned between the Sassoons and their respective transferees in proportion to the services each rendered as Managing Agents, and whether any income was attributable to the Sassoons at the dates of the respective transfers of the Managing Agencies or at any subsequent time. This judgment will dispose of all the appeals. For clarity, it is necessary at this stage to set out the pertinent clauses of the Managing Agency Agreements and the deeds of assignment and transfer. The original Managing Agency Agreement with E.D. Sassoon United Mills Ltd. was executed on 24 February 1920 by Sir Edward Sassoon and others, who were carrying on business in partnership under the style of Messrs E.D. Sassoon and Company. Subsequently, with the consent of the Company, the Managing Agency was transferred by E.D. Sassoon and Company to the Sassoons, and a new Managing Agency Agreement was entered into between the Company and the Sassoons on 2 October 1934, appointing and recognising the Sassoons as the agents.

In this case the Court observed that the agreement provided that the Sassoons and their assigns were to act as agents of the Company beginning on 1 January 1921 for the balance of the period, and that they would do so upon exactly the same terms and conditions that were set out in the original agreement dated 24 February 1920. Under clause 1 of that original agreement the Sassoons and their assigns were appointed agents of the Company for a term of thirty years measured from the date of registration of the agreement, and thereafter they would continue in that capacity until they voluntarily resigned or were removed by a special resolution of the Company. Clause 2 fixed their remuneration at a commission of 71/2 per cent per annum on the annual net profit of the Company, after proper allowances and deductions for working expenses were made out of revenue and charged against profit; however the clause also required that if in any year the commission calculated under that percentage was not earned or fell short of Rs 1,20,000, the Company must pay an additional sum so that the total remuneration for that year would equal a minimum of Rs 1,20,000. The commission referred to in clause 2(d) was to become due each year on 31 March, and it was to be payable immediately after the shareholders had passed the annual accounts of the Company. Clause 3 recorded that the Sassoons and their assigns agreed to serve as agents of the Company for the stated term, for the stated remuneration, and subject to all the terms and conditions contained in the agreement. Clause 10 dealt with the right to assign the agreement: it stated that the firm could assign the agreement and its rights to any person, firm or company that, by its constitution, was capable of being bound by the obligations undertaken by the firm, and that upon such assignment being made and notified to the Company, the Company would be bound to recognise the assignee as the agents of the Company in the same manner as if the assignee had originally entered into the agreement with the Company. The clause further required the Company, on demand by the assigning firm, to promptly enter into a new agreement with the assignee, appointing that person, firm or company as agents of the Company for the remaining unexpired term, with the same powers, authority, remuneration, emoluments and subject to the same terms and conditions as contained in the original document. The Court also noted that a letter dated 3 September 1943 recorded the agreement of transfer of the Managing Agency and expressly provided that, if the transaction were completed in its entirety as stated, the transferees would be entitled to receive the commission payable by the Company under the Managing Agency Agreement from the profits of the calendar year 1943.

For the calendar year 1943 the deed of assignment and transfer that was executed between the Sassoons and Messrs Agarwal and Company on 26 January 1945 stated that the Sassoons transferred to Messrs Agarwal and Company, effective from 1 December 1943, their office as Managing Agents of the Company for the unexpired residue of the term created by the Agreement dated 24 February 1920, as well as the Agreements dated 24 February 1920 and 2 October 1934, together with all rights and benefits attached to those Agreements. Messrs Agarwal and Company undertook to act as Managing Agents of the Company from 1 December 1943 in place of the Sassoons for the remaining portion of the term, with the same powers, authorities, remuneration and emoluments that were contained in the said Agreements. It was observed that, although 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, that term was not incorporated in the deed of assignment and transfer.

The original Managing Agency Agreement entered into by Elphinstone Spinning and Weaving Mills Company Ltd. was with Messrs Hajee Mahomed Hajee Esmail and Company and was dated 24 July 1919. With the consent of the Company, the Managing Agency was transferred by Messrs Hajee Mahomed Hajee Esmail and Company to the Sassoons. Subsequently, on 23 May 1922, another Managing Agency Agreement was executed by the Company in favour of the Sassoons, their successors and assigns, appointing them as Agents of the Company from 1 February 1922 for the unexpired period of a term of sixty years commencing on 3 July 1919. Clause 3 of that Agreement required the Company, for the duration of the Agreement, to pay the Sassoons, their successors and assigns a remuneration consisting of a commission of ten per cent on the net profits of the Company and an additional sum of Rs 1,500 per month. Clause 6 authorised the Sassoons, their successors and assigns to retain, reimburse and pay themselves out of the Company’s funds all sums due to them, including commissions and other amounts.

The deed of transfer executed by the Sassoons in favour of Chidambaram Mulraj and Company Ltd. on 2 June 1943 stated that the Sassoons assigned and transferred the Agreement dated 23 May 1922 between themselves and the Company for the unexpired residue of the sixty-year term specified therein, together with the full benefit and advantage of that Agreement, the benefit of the Agency, the office of the Agents thereunder, and the right to receive the remuneration thereafter payable by the Company under or by virtue of that Agreement, together with all rights, privileges, powers and authorities conferred on the Sassoons under the same.

The Court noted that the privileges, powers and authorities conferred on the Sassoons under the agency agreements were identical, and it was significant that neither the income-tax authorities nor the High Court had drawn any distinction between the two agency agreements with respect to the Managing Agent’s right to remuneration. All facts relating to the Managing Agencies were treated as alike, and the amount of commission in dispute was not contested in either case; only the principle of apportionment of that amount was contested. The Sassoons were assessed for the so-called “escaped income” on the basis that they had earned that income by performing the services of Managing Agents for the periods during which they remained in that role, while the transferees had performed the services for the remaining periods that completed the full accounting year and had therefore earned the proportionate commission for those periods. Consequently, the commission actually received by the transferees included the Sassoons’ share of commission, which the Court held was not taxable in the hands of the transferees but was taxable in the hands of the Sassoons. The High Court adopted this test of service performance by both the Sassoons and the transferees, holding that the amount due by the companies to the Sassoons arose as a debt of the companies and could not be said to have accrued to the transferees. The Court further observed that the contract of employment was an entire and indivisible contract, and the remuneration payable by the companies to the Sassoons under that contract was payable only at specified intervals. A condition precedent to the Sassoons earning any remuneration was that they fulfill the terms of their employment and complete the period for which remuneration was payable; the service for each particular period was itself a condition precedent to earning the remuneration for that period. The stipulated period was one year, and no remuneration became payable to the Sassoons until the end of that year. Unless and until the full year was completed, the Sassoons were not entitled to any commission or remuneration for that year, let alone for any broken or partial period. On this basis, it was contended that the Sassoons had not earned any commission for the broken periods and therefore could not have assigned such unearned commission to the transferees. As a result, when the transferees were paid commission under the terms of the Managing Agency Agreements, the Court held that the transferees received it in their own right even though they had not rendered services to the company for the entire calendar year of 1943. It was further contended that, irrespective of the relationship between the companies and the transferees, the Sassoons had not earned any portion of the Managing Agency commission that was paid by the companies to the transferees and consequently were not liable to tax on that amount. Conversely, it was urged on behalf of the transferees that even though under the terms

In the present matter, the Court observed that although the deeds of assignment and transfer required the Companies to pay the entire Managing Agency commission for the calendar year 1943 to the transferees, the Sassoons had earned commission only for the period during which they actually performed services for the Companies. Accordingly, the portions of the Managing Agency commission that were proportionate to the services actually rendered by the Sassoons were deemed to have accrued to the Sassoons, even though the amount of those portions was ascertained and subsequently paid to the transferees in the year 1944. The Court held that the fact that the ascertainment and payment occurred at a later date did not alter the principle that income is to be accrued back to the period in which it was earned. Consequently, any amount earned by the Sassoons while they acted as Managing Agents of the Companies was considered to have accrued to them during those specific periods, and the receipt of that amount by the transferees was solely a consequence of the relevant deeds of assignment and transfer. Because the transferees obtained the amounts by virtue of the assignments, those portions of the Managing Agency commission remained income that had accrued to the Sassoons and were therefore liable to tax in the hands of the Sassoons, the assignors, and not in the hands of the transferees, the assignees. The Court further referred to the principle articulated in Halsbury’s Laws of England (Hailsham Edition, vol 22, p. 133, para 221), which states that where a contract of service is an entire contract providing payment upon the completion of a definite period or piece of work, the employee is entitled to salary only after the service is fully performed, unless the employer alters the contract or a usage exists that allows proportional wages. However, where the contract provides that remuneration accrues and becomes vested at specified intervals, such remuneration constitutes a debt recoverable at the end of each period of service. In support of this position, the Court cited Section 219 of the Indian Contract Act, which provides that, in the absence of a special contract, payment for the performance of any act is not due to the agent until the act is completed. The Court also drew attention to the decision in Boston Deep Sea Fishing and Ice Co. v. Ansell (39 Ch. D. 339), where a managing director dismissed for misconduct before the end of the year was denied a claim for the proportionate quarter-salary, the court holding that a servant dismissed for wrongful behaviour is not entitled to any part of the salary that has not yet become due and payable at the time of dismissal.

In the case of Boston Deep Sea Fishing and Ice Co. v. Ansell, the claimant, who had been employed as managing director on a yearly salary, was dismissed for misconduct before the end of the fiscal year. The court disallowed his claim for the portion of salary covering the period that had elapsed before his dismissal. The judgment held that because the dismissal was for misconduct, the claimant was not entitled to any part of the unpaid salary for the current year of service. Lord Justice Cotton, referring to page 360 of the report, framed the issue by asking whether the dismissed director could sue for a proportional part of the salary for the current year. He observed that, although the claimant would have been entitled to £800 had he continued in service until the end of the year, such entitlement did not create a right of action until the year was completed. Lord Justice Bowen, on page 364, reinforced this principle by stating that it was well settled by authority that a servant dismissed for wrongful conduct could not recover his current salary. He explained that salary which was not yet due and payable at the time of dismissal, and which only accrued and became payable at a later date, could be recovered only if the servant had fulfilled his duty faithfully up to that later date.

The judgment then turned to the authorities cited by counsel for the respondent, particularly Moriarty v. Regents Garage & Engineering Company Limited. In that case there was no dismissal for misconduct; rather, the director’s remuneration was fixed at £150 per annum, and he ceased to be a director when a dispute with the company was settled and he agreed to receive payment of all sums due to him upon his debentures, which were redeemed in the middle of the year. The director sued for a proportional share of the £150 for the broken portion of the year. The Deputy County Court Judge, citing the 1921 case (1921 2 K.B. 766), held that the director was not entitled to remuneration for a partial year. The Divisional Court affirmed that decision, and a further appeal was taken to the Court of Appeal. The Court of Appeal ruled that neither the agreement nor the articles of association gave the director any right to the claimed amount. An attempt to raise the applicability of the Apportionment Act was refused because it had not been raised in the County Court. Lord Sterndale, Master of the Rolls, summarised the position on page 774, stating that the agreement was a payment per annum and, unless the director served the full year, he could not claim any payment. The Court of Appeal also considered the decision in Swabey v. Port Darwin Gold Mining, which had been cited in support of the proposition that a director might be entitled to his proportionate remuneration for a broken period. The learned Master of the Rolls, however, expressed disagreement with that proposition, emphasizing that no general right to a day-to-day or broken-period payment could be inferred solely from the power to terminate an agreement mid-year.

The Court noted that the Master of the Rolls, speaking at page 777 of the report, rejected the proposition that a director who leaves office before the end of a financial year is automatically entitled to a proportionate share of the annual remuneration. The Master quoted, “There is nothing in 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 receive payment day by day, and receive payment for the broken period. I do not think in this case there are circumstances which oblige me or induce me to draw that inference.”

The judgment then referred to other authorities, including the cases of Mapleson v. Years(2) and Sanders v. Whittle(3), which articulate a well-established principle that wages and salaries are not subject to apportionment when a contract of service ends suddenly. This principle is recorded in the fourth edition of Batt on the Law of Master and Servant, page 209, and remains the law until a litigant succeeds in obtaining a higher-court confirmation of the view expressed by McCardie J. in Moriarty’s case(4). That view concerns the injustice of denying the benefit of the Apportionment Act to a person who may have been guilty of misconduct, as discussed in I Meg. 385, 33 L.T. 816, 28 T.L.R. 30, and [1921] 2 K.B. 766.

The Court explained that the rule against apportionment applies not only when a contract ends abruptly by the unilateral act of either the master or the servant, but also when the contract is terminated by mutual consent. In the unilateral case, the servant is deprived of any proportionate wages by his own act or default and may only sue for damages for wrongful dismissal; no claim for a proportionate salary survives under the contract of service. In the case of mutual termination, the agreement of both parties is sufficient to end the contract, and again no claim for proportionate wages or salary survives unless the agreement expressly includes such a term. Consequently, in either circumstance, the servant cannot claim wages or salary from the master for the broken period.

The counsel for the transferees sought to challenge the correctness of this rule by citing a passage from Palmer’s Company Precedents, sixteenth edition, volume 1, page 583. The cited passage discusses the issue of apportionment where a director’s remuneration is expressed as a fixed annual sum without the words “at the rate of.” It observes that when a director vacates office before the end of a current year, there has been some disagreement about whether the director may claim an apportioned part of the remuneration for that year. The passage refers again to Swabey v. Port Darwin Gold Mining Company(1) as an authority considered by the Court of Appeal on the matter.

In the Court of Appeal, the article of the company's constitution was held to read: “The directors shall each receive by way of remuneration out of the funds of the Company in each year the sum of pound 200, and the chairman in addition pound 100 per annum.” The words “at the rate of” were not present, as shown by the articles registered at Somerset House. In the case Swabey v. Port Darwin Gold Mining Company (1889) I Meg. 385, a director who resigned during the year was held entitled to an apportioned part of his remuneration for that year. By contrast, in Salton v. New Beeston Cycle Co.(1), where the article provided that “the directors shall be entitled to receive by way of remuneration in each year pound 5,000”, Cozens-Hardy J. held that a director who vacated office before the end of the year was not entitled to any apportionment. That principle was followed by Wright J. in McConnell’s Claim(2), where the article stated “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 decisions the Court apparently 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”. Lord Alverstone C.J. acted on that assumption in Harrison v. British Mutoscope, etc., Co., where the words were “the sum of £1,500 per annum”. Meanwhile Inman v. Acroyd(7) had been taken to the Court of Appeal and affirmed, but on the ground that the articles themselves left it to the directors to apportion remuneration at the end of each year. That case therefore turned on the construction of its particular article and was carefully distinguished from Swabey’s case(5); consequently the authority of Swabey’s decision, when the article omits the words “at the rate of”, remained unshaken. Lord Sterndale M.R., citing Swabey’s case at page 777 in Moriarty case(3), observed that nothing in that case obliges a Court to infer a right to daily payment for a broken period merely because an agreement may be terminated mid-year, whether by mutual or unilateral power. He further explained that whether such an inference should be drawn depends on the facts of each case. The Court noted that, in the present matter concerning the Managing Agency Agreements, there is no provision that provides for payment of remuneration.

In this case the Court explained that when a contract states the remuneration or commission as a fixed amount per annum and provides no further qualification, the language creates a legal stipulation that payment is to be made only for a full year of service. Consequently, the employee or agent is not entitled to any payment until the contract has been completely performed. The Court described this requirement as a condition precedent, meaning that the right to receive wages or salary for a specific period arises only after the employee has fulfilled his duties for that entire period. The same principle applies even where the remuneration is described as accruing and becoming vested at certain intervals; unless the employee satisfies the condition of faithful performance up to the appointed date or period, no salary can be said to have accrued, and no amount becomes payable until the end of that period of service.

The Court then turned to examine the terms of the Managing Agency Agreements that governed the relationship between E. D. Sassoon United Mills Ltd. and the managing agents. The agreement provided for a fixed term of thirty years beginning on the date of the company’s registration. After that initial term, the agreement continued until the agents either resigned or were removed from office by a special resolution of the company. The appointment of the firm known as E. D. Sassoon and Company, together with its assigns, covered the entire duration of the agreement. E. D. Sassoon and Company and its assigns expressly covenanted to act as agents of the company, and they agreed to receive remuneration subject to the terms and conditions set out in the agreement.

The agreement further permitted the agents to assign their rights and obligations under the contract to any other person, firm or corporation, provided that the assignee possessed the authority under its own constitution to become bound by those obligations. Upon such an assignment, and once the company was duly notified, the company was required to recognise the assignee as its agent in the same manner as if the assignee’s name had originally appeared in the contract in place of the partners of E. D. Sassoon and Company. The contract stipulated that, upon demand, the company would enter into a new agreement appointing the assignee as its agent for the remainder of the unexpired term, granting the same powers, authorities, remuneration and emoluments, and imposing the same terms and conditions as those contained in the original instrument. The Court noted that this clause was supported by the precedent cited as (1) [1921] 2 K.B.D. 766.

These provisions, according to the Court, demonstrated the continuity of the managing agents’ appointment throughout the specified period and under the same contractual conditions. The language of the agreement, therefore, was intended to ensure that any remuneration or commission would only become due after the agents had fully performed their obligations for the entire agreed period, consistent with the principle that payment expressed per annum without additional qualification is conditional upon complete performance.

In this case the Court explained that the agents who were engaged as Managing Agents of the Company for the period specified in the agreement were to be treated as if they had originally entered into the agreement themselves and their names had appeared in the original document in place of E. D. Sassoon and Company, which had originally been appointed as the agents. The Managing Agents were required to receive the remuneration described in clause 2(a) of the agreement, which provided for a commission of seventy-one per cent per annum on the net profits of the Company, subject to a minimum annual payment of rupees 1,20,000. Clause 2(d) stipulated that this commission would become payable each year on the thirty-first day of March for as long as the agreement continued. Accordingly, the commission was an annual amount calculated on the net profits of the Company for the preceding accounting year and was due on the specified date each year.

The Court noted that until the net profits for the year were determined, the exact amount of the seventy-one per cent commission could not be ascertained, yet the obligation to pay it arose on the thirty-first of March following the close of the Company’s accounting year. The Commission did not become a debt owed by the Company to the Managing Agents until that date, and it was to be paid immediately after the Company’s shareholders passed the annual accounts. The Court emphasized that postponing the actual payment did not affect the fact that the amount became due on the thirty-first of March each year. The obligation to pay arose only after the accounting year had elapsed and the Managing Agents had served the Company for the full year; therefore, no portion of the annual Managing Agency commission could become due unless the service for that year had been fully performed. The performance of the service for the year was a condition precedent to the Managing Agents’ entitlement to any part of the remuneration or commission for that accounting year. Consequently, the Managing Agency agreement was described as an entire and indivisible contract that required the agents to render their services for the whole year as a precondition to earning any commission, which was calculated at seventy-one per cent per annum on the Company’s net profits and became due on the thirty-first of March each year.

In this case the Court explained that clause 10 of the Managing Agency Agreement was said to allow for a “broken period” because the clause did not forbid the Managing Agents from assigning the agreement and their rights at any time during a calendar year while the agreement remained in force. The argument advanced by the petitioners was that, if such an assignment were possible, it could not be contended that either the transferor, who had not completed a full year of service, or the transferee, who also had not performed the whole year’s duties, could claim any remuneration or commission, since the contract stipulated that such payment was due only to agents who rendered services for the entire accounting year. Accordingly, the petitioners claimed that a logical consequence of the assignment provision was that both transferor and transferee should receive remuneration and that each should be entitled to a proportionate share of the commission corresponding to the periods during which each had actually acted as Managing Agent for the Company. The Court rejected this line of reasoning, observing that regardless of the private arrangement between transferor and transferee, and irrespective of the particular months during which each might have served, the Managing Agents identified in the recitals and in clauses I and 3 of the agreement constituted a single legal entity. The agreement never contemplated a severance of service periods within a given year. On assignment, the transferee stepped into the role of Managing Agent as if its name had originally been inserted in the agreement. For the remainder of the term the transferor’s interest ceased and the transferee continued in its place, thereby preserving the continuity of the agency. Consequently, whichever party satisfied the description of Managing Agent at the moment when the commission for that accounting year became payable—explicitly scheduled for 31 March each year after the Company’s shareholders had approved the annual accounts—was entitled to receive the amount due. The Court further noted that the provision requiring the Company to execute a fresh agreement in favour of any new or substituted Managing Agents for the balance of the original term was merely a consequence of an earlier clause that bound the Company to recognise such agents “as if their names had appeared in the original agreement in place of the partners of E.D. Sassoon and Company.” The rights of the new or substituted agents, therefore, arose directly from the terms of the agreement itself.

Clause 10 of the original Managing Agency Agreement, together with its replication in the new agreement that the Company was to execute with the agents, merely reaffirmed the rights that had already arisen for the agents under that clause. The Court observed that, as the thirty-year term specified in clause I of the agreement was scheduled to end in February 1950, a discontinuity would inevitably arise because the calendar year would finish on 31 December 1949. Consequently there would be an interval of approximately two months between the close of the calendar year and the termination of the contractual term, and this interval would constitute a “broken period” rather than a complete year. The Court clarified that whatever transpired at the moment the Managing Agency Agreement terminated could not alter the interpretation of those contractual provisions that referred to a year or to years during the life of the agreement. The Court further noted that it was unnecessary to engage in conjecture about whether, since E. D. Sassoon and Company had presumably received full-year remuneration for the first accounting year of the Company ending on 31 December 1920, they might voluntarily relinquish any remuneration for the final two months of the agreement’s term. No term of the Managing Agency Agreement was found that would obligate the Court to infer a right to remuneration or commission for such a broken period. Counsel for Chidambaram Mulraj and Company Ltd. attempted to differentiate the terms of the Managing Agency Agreement entered into with the Elphinstone Spinning and Weaving Company Ltd. from those of the agreement with E. D. Sassoon United Mills Company Ltd., even though, as earlier tax authorities and the High Court had held, no such distinction had been recognized. Counsel argued that the Elphinstone agreement contained no provisions comparable to clauses 2(a), 2(d) and clause 10 of the Sassoon agreement. The only remuneration clause in the Elphinstone agreement required the company, throughout the duration of the agreement, to pay the managing agents—identified as E. D. Sassoon and Company Ltd., their successors and assigns—a commission of ten per cent on the net profits of the company and an additional fixed sum of rupees 1,500 per month. In addition, clause 6 of that agreement granted the managing agents a right of retainer.

It was submitted that the provisions concerning reimbursement, which related inter alia to all sums owed to the agents for commission or any other purpose, did not amount to a fixed annual payment of remuneration or commission, and that it could not be argued that the Sassoon interests were without any right to remuneration or commission for any period covered by the agreement. The Court noted, however, that the managing agency agreement in question was the instrument dated 23 May 1922, entered into between the company and the Sassoons, wherein the managing agents were described as E. D. Sassoon and Company Ltd acting for themselves, their successors and assigns. Clause 1 of that agreement appointed the Sassoons, their successors and assigns, as agents of the company effective from 1 February 1922 for the unexpired portion of a sixty-year term that had commenced on 3 July 1919. Those agents were to be remunerated during the life of the agreement by a commission equal to ten per cent of the net profits of the company, and the company expressly undertook to pay such commission to them. The court further observed that the right of retainer and reimbursement stipulated in clause 6 would not extend to any transferee because it related only to sums that were actually due to the agents for commission or other items; consequently, unless and until a commission became payable, the agents possessed no right of retainer. The remaining issue, therefore, was whether any sum became payable to them as commission. Determination of that question depended upon the construction of clause 3, which provided that a commission calculated at ten per cent of the company’s net profits was to become due and was to be paid by the company to the agents throughout the continuance of the agreement. The court therefore set out to ascertain the full implication of the phrase “the commission of ten per cent on the net profits of the company.” In doing so, it recalled the observation of Lord Justice Fletcher Moulton, reported at page 98 in The Spanish Prospecting Company Limited, that the word “profits” possesses a well-defined legal meaning which coincides with the ordinary conception of profit, though commercial usage may sometimes modify it by context. He explained that “profits” implies a comparison between the state of a business at two specific dates, usually spaced one year apart, and that the fundamental meaning is the amount of gain made by the business during that year, which can be ascertained only by comparing the assets of the business at the two dates.

In citing the decision of the Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai and Company, Bombay, the Court reiterated the established definition of profits. The Court quoted the judgment as follows: “Profits of a trade or business are what is gained by the business. The term implies a comparison between the state of the business at two specific dates separated by an interval of a year and the fundamental 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.” The citation for this definition was recorded as (2) [1950] I.T.R. 472 at page 502, with an earlier reference to (1) [1911] Ch. D. 92.

The parties argued before the Court that the Agreement contained no express provision requiring the profit figure to be determined at the close of each calendar year. They contended that nothing in the Agreement barred the Company from preparing its accounts and calculating net profits on a half-yearly, quarterly or even monthly basis by means of trial balance sheets. While acknowledging that such a method might be theoretically feasible, the Court emphasized that any contractual construction must be carried out in a business-sensible manner. It observed that, in ordinary commercial practice, trading entities normally compute profit accounts at intervals that are usually spaced a year apart.

The Court further noted that limited companies incorporated under the Indian Companies Act customarily prepare their accounts annually, because the yearly determination of net profit serves the dual purposes of dividend declaration and filing of tax returns. Under section 131(I) of the Indian Companies Act of 1913, every company was statutorily obligated to balance its accounts and to prepare a balance sheet at least once each year and not less frequently than every fifteen months; this document was referred to as the annual balance sheet. The First Schedule to the Act, unless expressly excluded, prescribed the governance of a company’s affairs through Regulation 106, which required the preparation of a profit and loss account at least once a year, and Regulation 108, which mandated the preparation of a balance sheet each year to be presented at the general meeting.

Considering the particular facts of the present case, the Court observed that the managing agency commission for the year 1943 had been accounted for and paid to Chidambaram Mulraj and Company Ltd., the agents who succeeded the Sassoons in 1944. This pattern indicated that the Company’s accounts were consistently prepared at the end of each calendar year. Consequently, the profit and loss of the Company were ascertained on an annual basis, and a commission equal to ten per cent of the net profits was then payable to the Managing Agents.

The remuneration was paid to the managing agents of the company for the time being. In the case of limited companies such as the ones before the Court, it was reasonable to presume that the accounts were prepared annually. Although, in theory, the accounts could be prepared on a half-yearly, quarterly or monthly basis, the Court found that the company did not adopt any such procedure. It would be absurd to suggest that the company’s profits could accrue on a daily or even a monthly basis. The day-to-day operations of the company could not indicate any profit or loss, and likewise the month-to-month operations could not be relied upon to determine profit or loss. When profit or loss must be ascertained by comparing assets at two points in time, the most businesslike method was to do so at yearly intervals, and a one-year period was therefore a reasonable interval for this purpose. In large business concerns like these, a particular month might show a profit while another month might show a loss. The performance in the early part of the year might indicate profit or loss, and the performance in the later part of the year might show the opposite, thereby counterbalancing the earlier result. It could also happen that profits appearing in the early months, or even in the first two months, were substantially reduced or entirely wiped out in the later months because of a catastrophe or unforeseen events. Consequently, it was reasonable to assume that profit or loss should be determined at the end of each year so that, on the basis of that calculation, the managing agents could receive their remuneration or commission at the percentage specified in the managing agency agreement, and the shareholders could receive dividends out of the net profits of the company. The Court was satisfied that these considerations had influenced the managing agents not to raise any contention before the Income-Tax authorities or the High Court that their remuneration under the managing agency agreement was not payable annually, and that the argument presented before the Court was a clear after-thought. Accordingly, the Court was justified in treating the terms and conditions relating to the payment of the managing agency commission in both managing agency agreements as being alike, each stipulating an annual payment based on the net annual profits of the company.

The Court observed that, if the Managing Agency Agreements are interpreted in the manner described, the service contract that existed between each Company and its Managing Agent was to be regarded as a single, indivisible arrangement. Consequently, the remuneration or commission payable by the Companies to their Managing Agents could become due only after a complete and definite period of service had been finished, and only at the times expressly specified in the agreements. The Court further noted that the right to recover any wages or salary for such services was conditioned upon the full performance of the duties stipulated in the contract. In other words, the obligation to pay the agreed remuneration arose as a debt only at the conclusion of each specified service period, and no payment of remuneration or commission was available for any portion of a service period that remained unfinished or “broken.”

The Court then turned to the unresolved issue of whether remuneration for those unfinished periods could be said to have accrued to the Sassoon firm. The transferees had vigorously argued that the Sassoons had performed the services contemplated by the Managing Agency Agreements on behalf of the respective Companies, that those services constituted a source of income, and that any income traceable to those services should be regarded as earned by the Sassoons and therefore accrued to them in the relevant chargeable accounting period, even though the amount was actually determined and paid to the transferees in 1944. The Court pointed out that the term “earned” does not appear in section 4 of the Income-Tax Act. Section 4 instead refers to “income, profits and gains” from any source that (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. The Act does not define the words “income”, “is received”, “accrues” or “arises”. The Court referred to the Privy Council decision in Commissioner of Income-Tax, Bengal v. Shau Wallace & Co. (1), where the Council attempted to define “income” as a periodic monetary return that comes in with some regularity from definite sources, the source not necessarily being continuously productive but intended to produce a definite return and excluding mere windfalls. The Court also cited Mukerji-J.’s statement in Rogers Pyatt Shellac & Co. v. Secretary of State for India (2), which observed that, in the absence of a statutory definition, “income” must be given its ordinary dictionary meaning – that which comes in as the periodic produce of one’s work, business, lands or investments, expressed in monetary terms as annual or periodic receipts accruing to a person or corporation, as defined in the Oxford Dictionary. The Court emphasized that the word clearly conveys the idea of receipt, either actual or constructive, and that the policy of the Act is to tax the amount when it is paid or received, whether actually or constructively.

The judgment explained that the three expressions “accrues,” “arises,” and “is received” are distinct terms. Regarding the receipt of income, the Court found no difficulty because the term “receive” conveys a clear and definite meaning, and the Court could think of no expression that makes this meaning any clearer than the word “receive” itself. The Court also noted that the words “accrue” and “arise” are not defined in the Income-Tax Act, and therefore the ordinary dictionary meanings of these words must be applied. In that ordinary sense, “accruing” is synonymous with “arising” in the sense of springing as a natural growth or result, a view supported by authorities such as I.L.R. 59 Cal. 1343 at page 1352 and I.T.C. 363 at page 371. Although the three expressions appear in the same statutory provision, the Court observed that “accrues” should not be treated as identical to “arises.” “Accrues” carries the distinct sense of growing by addition, increase, accession, or advantage, whereas “arises” means coming into existence, coming to notice, or presenting itself. The former therefore connotes a notion of growth or accumulation, while the latter conveys a growth or accumulation that has taken a tangible shape and is therefore receivable.

The Court added that it is difficult to claim that the legislature has consistently maintained a strict distinction between the two words throughout the Act. In practice, the two terms often denote very similar ideas, and the difference between them may lie only in the context in which each is more appropriate. As Justice Fry observed in Colquhoun v. Brooks, and as quoted by Justice Mukerji, the words are used in contrast to the word “receive” and indicate a right to receive. They therefore represent a stage preceding the moment when income actually becomes receivable and suggest a character of the income that is still inchoate. The Court further pointed out that, for taxation to apply, the subject matter must be income, and it cannot be taxed unless it has reached a stage where it can be called “income.” The observations of Lord Justice Fry were made while construing the provisions of 16 and 17 Victoria Chapter 34 section 2 schedule D, where the expressions “profits or gains, arising or accruing” were examined. Lord Justice Fry stated that the tax is levied on “profits or gains arising or accruing” and that these words cannot be read as meaning “profits or gains received.” He warned that limiting the enactment to “profits and gains received” would unfairly restrict the tax to only those persons who actually received the income, a limitation that would apply equally to all subjects of Her Majesty.

The Court observed that if the provision were applied to foreigners residing in this country, the result would be that no income-tax would become payable on profits that had accrued but had not actually been received, even though such profits might have been earned and might have accrued within the Kingdom. Consequently, the Court held that the expression “arising or accruing” should be understood as a general description of a right to receive profits. The Court cited the similar observations of Justice Satyanarayana Rao in the case of Commissioner of Income-tax, Madras v. Anamallais Timber Trust Ltd. (1) and of Justice Mukherjea in Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay (2). In those judgments, a passage from Justice Mukerji’s decision in Roqers Pyatt Shellac & Co. v. Secretary of State for India (3) was approved and adopted. From these authorities the Court concluded that income may accrue to a taxpayer even without the actual receipt of that income. The essential requirement, according to the Court, is that the taxpayer acquires a right to receive the income; when that right is acquired, the income is said to have accrued to the taxpayer, although actual receipt may occur later once the right is established. The Court explained that this concept rests upon the existence of a debt owed to the taxpayer by another party, expressed in the principle of “debitum in presenti, solvendum in futuro.” The Court referred to the decisions of W. S. Try Ltd. v. Johnson (Inspector of Taxes) (4) and Webb v. Stenton and Others, Garnishees (5) to illustrate this point. The Court emphasized that until a debt is created in favor of the taxpayer, it cannot be said that the taxpayer has acquired a right to receive the income or that the income has accrued to him. Although the word “earned” does not appear in section 4 of the Act, the Court noted that it has been frequently employed in judgments of both the High Courts and the Supreme Court, for example in Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay (6), and Commissioner of Income-tax, Madras v. K. R. M. T. T. Thiagaraja Chetty & Co. (7). The Court further observed that the Judicial Committee of the Privy Council used the term in Commissioners of Taxation v. Kirk (1). However, the Court warned that the concept of “earned” cannot be separated from the notion of income accruing to the taxpayer. When income has accrued to the taxpayer, it is indeed earned by him in the sense that he has contributed to its generation or the source of the income can be traced to him. Yet, for income to be said to have accrued or been earned by the taxpayer, it is not sufficient merely that the taxpayer has contributed to its arising; there must also be a debt created in his favor, meaning a present right to receive a future payment. This principle, expressed as “debitum in presenti, solvendum in futuro,” is essential to establishing that income has accrued to the taxpayer.

For income to be said to have accrued to a person, a debt in his favour must have arisen and he must have acquired a right to receive the payment. Unless the person’s contribution or parenthood actually creates a present debt or a future obligation to pay, referred to as a debitum in presenti, solvendum in futuro, no income can be said to have accrued to him. The simple term “earned,” meaning merely that services were rendered, does not by itself establish the existence of accrued income. Consequently, when the Managing Agency Agreements were examined, the Court could not conclude that the Sassoon parties had created any debt in their favour. Likewise, it could not be said that they had obtained a right to receive payments from the companies at the date of the transfer of the managing agencies to the transferees. Although the Sassoons undeniably performed services as managing agents for the companies during the broken periods, they had not completed the stipulated one-year service period. That one-year period was expressly required before any remuneration or commission became payable, and therefore no debt was created in their favour until that condition was satisfied. Because no debt payable by the companies existed at the time of the transfers, the Sassoons possessed no right to receive any payment from the companies on those dates. Accordingly, no remuneration or commission can be said to have accrued to the Sassoons at the dates of the respective transfers. The respondents, however, argued that even though no income could be said to have accrued to the Sassoons at the date of the respective transfers, which could be the (1) [1900] A. C. 588 at p. 592, subject-matter of any assignment by them in favour of the transferees, the moment the remuneration or commission was finally ascertained at the end of the calendar year it became a debt due to the managing agents under the terms of the agreements. They contended that the debt, once established, could be traced back to the period in which the services were performed. Furthermore, they argued that the portions of remuneration earned during the broken period should be treated as income that had accrued to the Sassoons within the chargeable accounting period. To support this position, reliance was placed on the case of Commissioners of Inland Revenue v. Gardner Mountain & D' Ambrumenil, Ltd. (1). In that case, the assessee acted as an underwriting agent and entered into agreements that entitled it to commissions on the net profits of each year's underwriting. The agreements required that accounts be kept for the period ending 31 December each year. Each account was to be made up and balanced at the end of the second clear year after the period to which it related. The amount then remaining to the credit of the account was to represent the net profit of that period and the commission payable to the company.

In the case that the Court examined, the plaintiff had entered into agreements with underwriters at Lloyd’s whereby it was to receive commissions that were calculated as a percentage of the net profit generated by each year’s underwriting activities. The agreements specified that accounts should be prepared for the period ending 31 December each year and that each such account would be settled and balanced at the end of the second clear year following the expiration of the relevant period. The balance remaining after this settlement was to be treated as the net profit of the period to which it related, and the commission payable to the company was to be calculated on that amount and then paid.

For the underwriting that was carried out during the calendar year 1936, the accounts were finally compiled at the end of 1938. The critical issue that arose was whether the company was liable to an additional assessment for the commission on the under-writers’ profits from the 1936 policies in the year in which the policies were actually underwritten (1936) or in the later year when the accounts were finally made up (1938). The company contended that the contracts it had entered into were executory contracts; under those contracts its services were not completed, nor was the commission earned or payable, until the relevant accounts had been concluded. Accordingly, it argued that the profit, in the form of commission, was not ascertainable or earned until the accounts were settled, and that the additional assessment made for the year 1936 should therefore be set aside.

The Special Commissioner accepted the company’s argument and discharged the additional assessment. That decision was upheld on appeal by a judge of the King's Bench Division of the High Court. However, the Court of Appeal reversed the earlier rulings, and the company subsequently appealed to the House of Lords. The House of Lords held that, when the agreements were properly interpreted, the commissions in question were earned by the company in the year in which the underwriting policies were written, and therefore had to be brought into account in that year. The Lords confirmed the Court of Appeal’s decision.

The judgment noted that the charge was based on profits arising in each chargeable accounting period, and that those profits were to be taken as the actual profits of that period. The ratio of the decision was that the commission constituted remuneration for services that had been fully performed in the specific year; the company had, by the end of that year, done everything necessary to earn the commission, even though the amount was only ascertained and paid two years later. Viscount Simon, speaking at page 93, observed that the company had acquired a legal right to be paid in the future and that the principle was to refer back, as far as possible, to the year in which the remuneration was earned, even if precise calculation could only be made later. Lord Wright, at page 94, emphasized the need to determine in which year the commission was earned, or, in the language of the statute, in which year the company’s profits arose. Lord Simonds, at page 110, affirmed that the commission was wholly earned in the first year in respect of the profits of that year’s underwriting, and that the later timing of the account settlement did not alter the fact that the commission had been earned during the chargeable accounting period and had therefore accrued to the company in that period.

It was observed that the commission in question was earned in the first year in relation to the underwriting profits of that same year. Consequently, it could not be claimed that the commission failed to accrue for income-tax purposes in that year merely because the exact amount could not be ascertained until a later date. The delay in preparing an account of the commission did not alter the conclusion that the commission was wholly earned during the chargeable accounting period, and therefore the income had accrued to the assessee within that period. Counsel for the transferees supported this view by relying on the decisions in Bangalore Woollen, Cotton and Silk Mills Co., Ltd. v. Commissioner of Income Tax, Madras (1) and Turner Morrison and Co., Ltd. v. Commissioner of Income-Tax, West Bengal (2). Those authorities were cited to show that when the company received sale proceeds, the profits earned by the company were embedded in those proceeds, and, by the same token, the proportion of net profits payable to the Managing Agents as commission was likewise embedded. Accordingly, if the profits accrued to the company during the chargeable accounting period, the commission payable to the Managing Agents could also be said to have accrued to them in that period. The cited authorities are (1) [1950] I.T.R. 423 and (2) 1953 23 I.T.R. 152. The court further noted that the accrual of income does not depend on the moment of its ascertainment or on the timing of the assessee’s account preparation. Accounts may be prepared at a much later date, depending on the convenience of the assessee and the exigencies of the situation. Even if the income, profit or gain is ascertained only after the accounts are prepared, the amount so ascertained is referred back to the chargeable accounting period in which it originally arose, and the assessee remains liable to tax for that period.

The court explained that the computation of profits, whenever it may take place, cannot be allowed to suspend their accrual. Likewise, the quantification of the commission is not a condition precedent to its accrual. This principle was affirmed by Ghulam Hassan J. in Commissioner of Income-Tax, Madras v. K. B. M. T. T. Thiagaraja Chetty and Co. (1). Further authority was drawn from Isaac Holden and Sons, Ltd. v. Commissioners of Inland Revenue (2) and Commissioners of Inland Revenue v. Newcastle Breweries Ltd. (3). Ultimately, what must be determined is whether the income, profit or gain has accrued to the assessee. For such accrual to be effective, the assessee must have acquired a right to receive the income, or a vested right must exist, even though the actual valuation or materialisation of that right may be postponed pending the preparation of the accounts. The existence of such a right may depend on the contingency that the accounts, when finally prepared, will confirm the amount owed.

It was submitted that preparation of the accounts would disclose the income, profits, or gains attributable to the managing agencies. The argument that such income, profits, or gains are embedded in the sale proceeds as they are received by the company fails, because the managing agents hold no share or interest in those proceeds, and they are not co-sharers with the company. Nor is there any ground for saying that the company are the trustees for the business or any of the assets for the managing agents. Consequently, the managing agents cannot be said to have a right to any commission until the accounts are finalized at year-end, the net profit is ascertained, and the commission due is determined. This principle was illustrated in Commissioners of Inland Revenue v. Lebus(1). Therefore it is clear that no portion of the managing-agency commission had accrued to the Sassoons on the dates when the agencies were transferred to the transferees, a conclusion supported by two decisions that the High Court attempted to distinguish in the appealed judgments. In an unreported Bombay High Court decision, Commissioner of Excess Profits Tax, Bombay City v. Messrs P. N. Mehta and Sons(1), the managing-agency agreement was drafted in exactly the same terms as that of E. D. Sassoon United Mills Company Ltd. The agreement provided a ten per cent commission on net annual profit with a guaranteed minimum of Rs 15,000 per annum, and the company’s accounting year followed the calendar year. The Tribunal held that the annual profit could be ascertained only after the company’s accounts were made up, and that only at that moment would the ten-percent commission accrue to the managing agents. The tax department argued that because the managing agents performed their duties daily and helped the company generate profit, the profit accrued to them each day rather than at year-end, but the High Court rejected this contention, observing that entitlement to commission arises only from net annual profit, not from interim results. It explained that a company might incur a loss for part of the year and later achieve a large profit that eliminates the loss, resulting in a net profit for the whole year. Only by examining the company’s performance over the entire year can it be ascertained whether the managing agents are entitled to their commission. Consequently the Court affirmed the Tribunal’s view that the commission accrued at the end of the calendar year, which was the accounting period followed by the mills, rather than intermittently as the Department suggested.

In this proceeding, the Court cited two earlier authorities: the decision reported in (1) [1946] A.E.R. 476; S.C. 27 Tax Cases 136, and the decision reported in (2) [1950] I.T. Ref. No. 19 of 1950. The Court explained that the commission payable to the Managing Agents could be earned only after the mills’ operations for an entire year had been assessed. If the annual operation showed a net profit that, when multiplied by ten per cent, produced a commission exceeding Rs. 15,000, the Managing Agents were entitled to the amount so calculated. Conversely, if the annual operation showed no profit that would generate a commission of Rs. 15,000, the Managing Agents were still entitled to that minimum amount. Accordingly, the Court held that the Tribunal was correct in deciding that the commission accrued at the end of the calendar year, which was the fiscal year adopted by the mills, and not intermittently as the Revenue had argued.

The Court then referred to the case of Salt and Industries Agencies Ltd., Bombay v. Commissioner of Income-Tax, Bombay City (1). The issue before that Court was the place where the profits had accrued. To determine the place of accrual, it was necessary first to ascertain when the profits had actually accrued to the assessee. The Court in that case observed that the decisive factor was the moment when the right to a Managing Agency commission arose and when the Company became liable to pay that commission to the Managing Agents. It further held that such a right could be said to arise only after all the accounts of the Company’s operations had been forwarded to the head office in Bombay and the profit had been finally determined. At that point, a right to receive a commission at the rate specified in the Managing Agency Agreement was established, and the Managing Agents became entitled to the specified commission.

These principles were directly relevant to the matters before this Court in the present appeals. They supported the conclusion already reached that the right to receive the commission, and consequently the income, profits or gains, accrued to the Managing Agents only at the end of the calendar year, which served as the cutoff for preparing the accounts and ascertaining the Company’s net profit. The Court expressed no view that the authorities relied upon by the Revenue before the High Court could be distinguished in the way the Revenue attempted to do so. The Court also noted a citation to IS I.T.R. 58.

Finally, counsel for the Sassoons suggested examining the question from a different perspective. They argued that what the Sassoons had transferred to the transferees was a source of income – namely, the Managing Agency that would continue for the remainder of its term. It was submitted that when a source of income is transferred, any income that accrues from that source after the transfer date belongs to the transferees and not to the transferors. According to this argument, it was immaterial that at the time of transfer there was an expectation of future income, that the transferor’s earlier work had contributed to creating that income, or that a higher purchase price had been paid because of the expectation of future earnings.

In the present dispute the party who transferred the managing agency argued that three distinct considerations explained why the income from that agency should be treated as belonging to the transferee and not to the transferor. First, at the time of the transfer there existed a reasonable expectation that income would be generated at some point in the future, even though such income had not yet actually accrued. Second, the transferor had, by the work performed before the transfer, contributed to the creation of any income that might later be realized by the agency; the transferor’s earlier efforts were therefore part of the source of the prospective earnings. Third, because the parties anticipated that income would eventually be earned, the purchase price paid for the transfer was higher than the mere value of the assets transferred, reflecting the value of the expected future earnings. To support this line of reasoning the counsel invoked the authority of the case of Commissioners of Inland Revenue v. Forrest. In that case the assessee had purchased certain shares on 25 November 1919 and, acknowledging that a dividend had already accrued up to the date of purchase, paid an excess amount over the nominal price “to cover the portion of the dividend accrued to date.” The dividend, quoted at ten per cent for the period ending 28 February 1920, was declared only on 13 May 1920. The assessee contended that, because the purchase contract expressly provided for the payment of an amount representing the accrued dividend, the dividend should be characterized as a capital element of the purchase price and therefore excluded from his taxable income. However, under the provisions of the Income-Tax Act, dividends that were receivable by the assessee in the year of assessment were required to be taken into account in computing his total income.

The learned judges, while examining the legal effect of such a transaction, did not accept the assessee’s argument that the dividend could be treated as a capital receipt. Lord Ormidale, speaking at page 709 of the report, observed that the value of the shares must be determined by the bargain between the parties and that it was reasonable for a purchaser to pay an amount above par when there existed a possibility—though not a certainty—of receiving a dividend six months after the purchase. He emphasized that the premium paid was justified by the prospect of future dividend payment. Lord Anderson, at page 710, elaborated the principle further, noting that a purchaser acquires two distinct things: first, a proportionate share in the assets of the industrial concern corresponding to the number of shares bought; second, the right to share in any future profits that the company might generate. When such a transaction is concluded during the financial year of the concern, the buyer obtains not only a direct interest in the existing assets but also a chance—a probabilistic right—to participate in any profits earned during that same financial year. This analysis was supported by reference to the case of Wigmore (HM Inspector of Taxes) v. Thomas Summerson and Sons Limited, where the vendor of war-loan stock, which bore interest payable without deduction of tax, sold the stock on 10 April 1923 together with the rights to future interest. The vendor was assessed for the year 1923-24 on the amount of interest said to have accrued on the stock between the last interest payment and the date of sale, the assessment being based on the contention that the sale price incorporated the value of that accrued interest.

The purchasers contended that the income which had been accruing on the security they bought before the date of purchase should not be taxed in their hands. The Court observed that, in fact, the vendor had not received any interest and that interest was the subject-matter of the tax inquiry. Nevertheless, the vendor had received a price representing an expectancy of future interest, and that expectancy itself was not subject to taxation. No argument was advanced that interest had actually accrued to the vendor on the date of the sale, and the vendor was therefore held not assessable for any interest that might have accrued as of the sale date. The case of Commissioners of Inland Revenue v. Pilcher was then considered. In that case the assessee had purchased an orchard together with the year’s fruit crop. He valued the cherries still on the trees at £2,500 and, after acquiring the orchard at auction, entered the orchard immediately. He began picking the fruit on 25 May 1942 and completed the picking on 12 June 1942, realizing a total of £2,903 from the sale of the cherries. The amount of £2,903 was entered in the profit and loss account as trading revenue. The assessee claimed that, in computing his profit, he was entitled to set off the purchase price of the cherries, £2,500, against the £2,903 realised, thereby treating the £2,500 as a cost of goods sold. Lord Justice Jenkins rejected that contention. At page 332 of the judgment he stated that “it is a well-settled principle that outlay on the purchase of an income-bearing asset is in the nature of capital outlay, and no part of the capital so laid out can, for income-tax purposes, be set off as expenditure against income accruing from the asset in question.” Further, at page 335, Jenkins LJ explained that the revenue’s argument that the transaction should be viewed from the assessee’s perspective and in a manner favourable to him was untenable. He noted that the transaction involved not only Mr Pilcher but also the vendor of the orchard. Mr Pilcher bought the orchard together with the cherries, valuing the cherries at £2,500. It does not follow that, had he sought to purchase only the cherries apart from the land, the vendor would have sold them for that price or any price at all. The difference is material from the vendor’s point of view because, by selling the orchard with the cherries, the vendor was disposing of a capital asset and the receipt was a capital receipt, which prima facie would not be subject to tax, whereas selling the cherries separately would create an income receipt that would be taxable. Consequently, altering the form of the bargain to benefit Mr Pilcher for tax purposes would require not merely a change of form but a change of substance that would prejudice the vendor’s tax position, and such an altered bargain could not be assumed to have been acceptable to the vendor.

In the earlier observations, it was explained that a transaction that merely involved the sale of a capital asset would, at first sight, not give rise to tax liability, whereas if the same asset were sold separately in the ordinary course of trade it would immediately generate income on which tax would be payable. Consequently, any modification of the transaction’s form designed to make it more advantageous to Mr Pilcher for tax purposes would have required not only a change of form but also a change of substance, because such a change would have adversely affected the vendor’s tax position. It could not be presumed that the vendor would have consented to a bargain that had been altered in that way. These remarks illuminate the circumstances that arise in the present matters.

The court noted that the total sum of Rs 75,77,693 received by the Sassoon company from the transfer of the Managing Agencies had been placed by the company into its Capital Reserve Account. No portion of that amount was treated by the company as income, and the question arose whether any part of the sum could be characterised as income even though the transferees had wished to treat it as such. The court observed that what the transferees acquired under the deeds of assignment and transfer executed by the Sassoons consisted solely of an income-bearing asset. That asset comprised the office of Managing Agent, the Managing Agency Agreement, and all rights and benefits attached to that office under the agreements. The consideration paid by the transferees could not be regarded as income because it represented their contribution to the earning of commissions through the services they rendered as Managing Agents of the companies for the periods specified in the agreements.

The court further explained that the transferees obtained, through the assignments, only the expectation of earning a commission, contingent upon the fulfillment of a condition precedent – namely, the complete performance of the Managing Agents’ obligations under the Managing Agency Agreements. A debt in favour of the Managing Agents would arise at the end of the agreed service periods, but only after the net profits of the companies for the relevant calendar year had been ascertained. The court then turned to the case cited by counsel for the Sassoons, namely The City of London Contract Corporation, Limited v Styles (Surveyor of Taxes) (1). In that case, the assessees had purchased a part of the business consisting of contracts that were either unexecuted or only partly executed at the time of purchase. The contracts were later executed after the purchase, and the assessees sought to deduct the price paid for those contracts from the profits generated by their performance. The court had held that the price paid was to be treated as capital invested for the purpose of acquiring the business, and therefore it could not be deducted from the net profits arising from the business after the purchase.

The court emphasized that this result was reached even though the purchase of the unexecuted contracts included the portion of work already performed by the vendors toward fulfilling the contracts. Although the assessees benefited from that partial performance, the value of the vendors’ work was not regarded as income accruing to the vendors, and consequently the assessees were not entitled to deduct that amount from their subsequent profits. Counsel for the transferees argued that all the cited cases dealt with the issue of whether income derived by the assessee from an income-bearing asset after the date of purchase could be treated as capital expenditure forming part of the consideration paid to the vendors. The court noted that in none of those cases had the courts been called upon to decide that issue.

The Court explained that once the purchase of an unexecuted contract was completed, the purchaser could not deduct from the net profits of the business any portion of the capital that had been invested in the purchase. This rule applied even though the purchase price included the value of work that the original vendors had already performed toward fulfilling the contracts. The vendor’s partial performance gave the purchaser a benefit, but the value of that work was not regarded as income that had accrued to the vendors, and consequently the purchaser could not treat that amount as a deduction against the profits earned from later performing the contracts. Counsel representing the transferees argued that the earlier cases dealt only with whether income derived from an income-bearing asset after the date of purchase could be classified as capital expenditure forming part of the consideration paid to the vendors. They maintained that none of those decisions considered the specific issue before this Court, namely whether any portion of the income actually received by the assessee could be said to have accrued to the vendor. Although the question was not framed in those exact terms, the Court noted that it nonetheless formed part of the analysis of whether the assessee should be liable for tax on the entire amount of income derived. The Court quoted the observation of Jenkins L.J. in Commissioner of Inland Revenue v. Pilcher(1) that the vendor’s perspective cannot be ignored, and that if the purchaser alone were deemed liable, it would follow that the vendor bore no tax responsibility. The Court further observed that, had the opposite view been adopted, the vendor would be liable to tax and purchasers would avoid any tax on the portion of income that could be said to have accrued to the vendor. The Court cited the decision in Wigmore (H.M. Inspector of Taxes) v. Thomas Summerson and Sons Limited(1), where purchasers argued that they should not be assessed for income that had accrued to the securities before they were bought. That argument was rejected, and the vendors were held not assessable for interest that accrued on the date of sale. From these authorities, the Court concluded that the Sassoons had not earned any income for the periods in question, nor had any income accrued to them with respect to those periods. Consequently, the assignments and transfers they executed did not convey any income that had been earned or accrued to them, and therefore the transferees could not claim a right to that income.

The Court further observed that, if any debt had arisen in favor of the Sassoons from the respective companies at the dates of transfer of the managing agency agreements, such debt would have been the subject of the assignment. However, what the Sassoons actually transferred to the assignees were merely expectations of earning commissions, not any commissions that had already been earned or accrued under the terms of the managing agency agreements. The income that the transferees subsequently received from the companies under the transferred agreements constituted their own income, and no portion of that income could be said to have accrued to the Sassoons during the relevant accounting period. In light of this analysis, the Court found it unnecessary to consider the argument advanced by counsel for the Sassoons that, in an assignment of income, the assignee rather than the assignor should be liable for tax. The Court noted that the counsel had referred to further material, but that issue was dismissed as irrelevant given the factual and legal conclusions already reached.

In this case the Court observed that the assignment made in favour of the transferees placed those transferees in the position to collect the commissions. The Court noted that if any debt had become due to the Sassoons by the respective Companies at the dates on which the Managing Agency interests were transferred, such debt would necessarily have formed part of the assignment. However, what the Sassoons had transferred to the respective transferees consisted only of expectations of future commission, and did not include any commission that had actually been earned by the Sassoons or that had accrued to them under the terms of the Managing Agency Agreements. The Court explained that the amounts which the transferees subsequently received from the Companies under those Managing Agency Agreements represented the transferees’ own income, and that no portion of that income could be said to have accrued to the Sassoons during the chargeable accounting period.

Having established this, the Court found it unnecessary to address the argument advanced by counsel for the Sassoons that, when income is assigned, the liability to pay tax should rest on the assignee and not on the assignor. Counsel had relied on the decision of the Commissioner of Income-tax, Bombay Presidency v. Tata Sons Ltd. (2) and had also referred to paragraph “G” at page 209 of (i) 9 Tax Cases 577. In addition, counsel mentioned the commentary in Simon’s Income-tax, second edition, volume II, where the ratio in Parkins v. Warwick (H.M. Inspector of Taxes) (1) – a ratio that had been relied upon by the High Court in the judgments under appeal – had been criticised. The Court, however, chose not to examine that criticism, stating that in its view there were no debts owed by the Companies to the Sassoons that had been assigned under the deeds of transfer and assignment.

The remaining issue for the Court to consider was whether section 36 of the Transfer of Property Act introduced the principle of apportionment with respect to the commission received by the transferees. The Court reproduced the provision of section 36, which reads: “In the absence of a contract or local usage to the contrary, all rents, annuities, pensions, dividends and other periodical payments in the nature of income shall, upon the transfer of the interest of the person entitled to receive such payments, be deemed, as between the transferor and the transferee, to accrue due from day to day, and to be apportionable accordingly, but to be payable on the days appointed for the payment thereof.” The Court noted that this provision operates only when there is no contract or established local usage that provides a different result, and that its operation is confined to the relationship between transferor and transferee. The Court further observed that there is no room for these provisions to apply in the relationship between the taxpayer and the Crown, citing The Commissioners of Inland Revenue v. Henderson’s Executors (2). Accordingly, any contract to the contrary must necessarily exist between the transferor and the transferee, and the apportionment rules of section 36 apply only in the absence of such a contract.

In this case, the Court observed that the nature of income became apportionable between the transferor and the transferee, being deemed to accrue from day to day and to be apportioned accordingly. The deeds of assignment and transfer executed by the Sassoons in favour of the transferees transferred all rights and benefits under the Agency Agreement to the transferees, and consequently there was no question of apportioning any commission between the Sassoons and the transferees. The transfer expressly retained, and indeed retained, the whole of the commission that had been paid by the Companies to the Sassoons in the year 1944, and the Sassoons never claimed any part of that commission as having been earned by them. Whatever contribution the Sassoons made towards earning that commission during the whole calendar year 1943 formed the subject-matter of the assignment in favour of the transferees, and that was sufficient to constitute a contract to the contrary as contemplated in section 36 of the Transfer of Property Act. Section 26(2) of the Indian Income-tax Act did not assist the transferees because liability under that provision arose only when the person succeeded acquired an actual share of the income, profits or gains of the previous year, and, as set out above, no part of the commission actually accrued to or became a debt due by the Company to the Sassoons on the dates of the respective transfers of the Managing Agencies to the transferees. To invoke section 26(2), the person succeeded must have had an actual share in the income, profits or gains of the previous year, and on a construction of the agreements the Sassoons could not be said to have acquired any share in commission for the broken periods. The difficulty arose because the High Court could not reconcile the fact that the transferee had not worked for the whole calendar year yet would be held entitled to the whole income of the year of account, while the transfers that had worked for the broken periods would be held disentitled to any share in the income for the year. If the work done by the transferors and the transferees during the respective periods of the year were taken as the criterion, the result would be anomalous. The proper test under section 4(1)(a) of the Income-tax Act, however, was not whether the parties had worked for particular periods but whether any income had accrued to the transferors and the transferees within the chargeable accounting period. It is the income received or accrued to the person within the chargeable accounting period, not the work performed, that constitutes the taxable subject-matter, and that is the correct method for determining tax liability.

The Court held that when determining whether income is taxable under section 4(1)(a) of the Income-tax Act, the analysis must be confined to the literal wording of that provision. No consideration may be given to the amount of work performed during fragmented periods, to the contribution of either party to the eventual income, or to any principles of equity. The taxability depends solely on whether any income accrued to the person concerned within the chargeable accounting period, irrespective of the services rendered. Consequently, the question that the Tribunal had referred to the High Court was answered in the negative, and all of the appeals were allowed. Regarding costs, the Court noted the unusual circumstances: the Commissioner of Income-tax, Bombay, had supported the Sassoons in Civil Appeal No 3 of 1953, while the main opposition in Civil Appeals Nos 30 and 31 of 1953 was borne not by the Commissioner – who was also the appellant – but by the Sassoons themselves. In view of this, the Court ordered that each party should bear its own costs both in the present proceedings and in the lower Court. The judgment then recorded a separate opinion by Justice Jagannadhadas, who stated that he could not agree with the majority judgment. He expressed regret at having to write a dissenting judgment, despite his respect for his fellow judges, and indicated that his reasons for dissent would be set out in that separate judgment.

These three appeals concerned a judgment of the Bombay High Court that had been granted leave under section 66A(2) of the Indian Income-tax Act. The matters arose from a common factual backdrop. The petitioner, E. D. Sassoon and Company, Ltd., which was then in voluntary liquidation, owned the managing agency of three mills: (1) F.D. Sassoon United Mills Ltd., (2) Elphinstone Spinning and Weaving Mills Company Ltd., and (3) The Apollo Mills Ltd. With the consent of the mill companies and pursuant to clauses in the managing-agency agreements, the Sassoons transferred the managing agency of each mill to three different companies during the calendar year 1943. The transfers were as follows: to Agarwal and Company Ltd. (hereinafter “Agarwals”) on 1 December 1943; to Chidambaram Mulraj and Company Ltd. (hereinafter “Chidambarams”) on 1 June 1943; and to Rajputana Textile (Agencies) Ltd. on 1 July 1943. The assessments under consideration were those of the assignor, Sassoons, and of two of the assignees, Agarwals and Chidambarams. All three assessments related to remuneration for managing agency services that the mill companies paid in the year 1944 for work performed in the calendar year 1943. For Sassoons and Agarwals, the assessment year was 1944-45 and the accounting year was the calendar year 1943. For Chidambarams, the assessment year was 1945-46 and the chargeable accounting period extended from 1 July 1943 to 30 June 1944. The tax authorities assessed the liability on an accrual basis rather than on the basis of actual receipts, and they treated the total remuneration for the entire year 1943 as income that accrued to the assignee companies in their respective accounting periods.

In this matter, the tax authorities treated the full amount of managing agency remuneration for the whole of the calendar year 1943 as income that had accrued to each assignee-Company during its respective accounting period. The assignee-Companies contested this treatment, arguing that the portion of the remuneration payable up to the date on which each assignment was executed should be regarded as having accrued to the assignor-Company, namely E. D. Sassoon and Co. Ltd. They further contended that they should be assessed only on the balance of the remuneration corresponding to the part of the year occurring after the date of assignment. The tax authorities rejected that contention and proceeded to make the assessments on the basis of the original computation. The assignee-Companies then appealed to the Income-Tax Appellate Tribunal; the Tribunal accepted their objection and accordingly altered the assessments to reflect only the post-assignment portion of the remuneration. It is noteworthy that Rajputana Textile (Agencies) Ltd. did not appear to have lodged any appeal before the Tribunal. During the same period, and apparently as a precaution, the tax department issued notices to the assignor-Company, Sassoons, invoking section 34 of the Indian Income-Tax Act. The department then assessed Sassoons on the proportion of the managing-agency commission that corresponded to the period preceding each assignment. Sassoons challenged those notices, but the department again overruled the objection. In the proceedings initiated by Sassoons before this Court, it was asserted that the entire net consideration received for the three assignments had been recorded in Sassoons’ books as a capital reserve.

However, that claim does not appear in the Tribunal’s statement of case filed with the High Court. The manner in which Sassoons entered the amounts in its own accounts was deemed irrelevant and was not considered by the present Court. After the objection was dismissed, Sassoons also appealed to the Income-Tax Appellate Tribunal. The Tribunal dismissed Sassoons’ appeal, relying on the earlier decisions that had been rendered in favour of the two assignee-Companies, Agarwals and Chidambarams. All three companies subsequently obtained references to the High Court under section 66 of the Indian Income-Tax Act. In each reference, the Tribunal posed the identical question: whether, in the circumstances of the case, the managing-agency commission should be apportioned between the assessee company and the assignee. Or, where appropriate, between the assessee and the assignor. The High Court answered that question against the position of Sassoons and in favour of the two assignee-Companies. The Court’s reasoning was essentially twofold: first, that the managing-agency remuneration for the year in question constituted joint income of both the assignor and the assignee and therefore could be divided between them. Second, the assignee-Companies had acquired the assignor’s share of that joint income by virtue of the assignments. Consequently, the acquired portion remained taxable in the hands of the assignor and did not become taxable income of the assignees. Consequently, three appeals arose: one filed by Sassoons against the Income-Tax Commissioner and two filed by the Commissioner against Agarwals and Chidambarams respectively. In the first appeal, the Commissioner supported Sassoons’ position, while in the other two appeals the Commissioner contested the positions taken by the assignee-Companies.

In the present proceedings the first appeal was filed by E. D. Sassoon and Co., Ltd. against the Commissioner of Income Tax, while the second and third appeals were filed by the Commissioner against the companies Agarwal and Chidambaram respectively. Although, on the face of it, each appeal appears to be a separate contest between the Commissioner and one of the three companies, the real issue that emerges from the three cases is a dispute between the assignor-company, namely the Sassoons, on one side, and the two assignee-companies, Agarwal and Chidambaram, on the other side, with the Commissioner aligning itself with the position of the Sassoons and opposing the position taken by the other two companies. The arguments advanced before the Court covered a broad spectrum and were premised on the assumption that the High Court had held that, on the exact date of each assignment, the Sassoons became entitled to a proportionate share of the year’s Managing Agency remuneration and that such share immediately accrued to the Sassoons as taxable income, a status that did not cease even after the share was assigned to the transferees. Consequently, the matter was framed before the Court as if the decision depended on whether any income could have accrued to the Sassoons on the dates when the Managing Agency rights were transferred to the assignees.

It therefore became necessary, at the very outset, to clarify precisely what question was raised by reference to the High Court’s decision and, according to the High Court, on what date a share of the year’s remuneration was deemed to have accrued to the Sassoons as income. On examination, the High Court’s judgment, taken as a whole, appears to rest solely on the premise that the entire Managing Agency remuneration for the year became accrued on the completion of the fiscal year, that is, on 31 December 1943, and that at that moment the remuneration accrued jointly to both the assignor and the assignee. This view is manifested in the following passage from the High Court: “In order to levy income-tax it is not enough to enquire when a particular income accrues. What is more important and what is more pertinent is to enquire whose income it is which is sought to be taxed. Assuming that this particular income accrued on the 31st December and till 31st December there was nothing earned, even so, when the income does accrue the question still remains to be answered as to whose income it is which has accrued on the 31st December, 1943.” Moreover, the High Court addressed the question of assignment on the basis that the income accrued on the completion of the year, as illustrated by another excerpt: “And clearly one of the rights which E. D. Sassoon and Company, Ltd. had, was to receive the Managing Agency commission (share therein?) when it accrued on 31st December.............. They transferred that right.” These passages make it clear that the High Court proceeded on the view that the income in question accrued at the end of the year to both parties together, rather than that the assignment transferred a present right to a share on the actual date of the assignment.

In this case the Court observed that the High Court had treated the income as accruing at the end of the year to both parties, and that the assignment transferred to the assignee the future right of the assignor to a share in the remuneration when it accrued on completion of the year, rather than treating the assignment as a transfer of a present right on the date of assignment. The Court noted that because the remuneration for the year was assumed to accrue only on 31 December, the Income-tax Appellate Tribunal also emphasized that the crucial issue was not the time of accrual of the Managing Agency commission but to whom it accrued. Consequently the Court held that it would be incorrect to frame the case as being decided solely on whether any income had accrued to the Sassoons on the dates of the respective transfers of the Managing Agency.

The Court then described the arguments presented by counsel for the Sassoons. Counsel stressed that the Managing Agency Agreements provided for annual remuneration for a full year’s work, and that the commission was fixed as a certain percentage of the net profits of each mill. For Sassoon United Mills Ltd., the commission was expressed in the agreement as payable per annum on the annual net profits, and the same wording applied to the agreement with Agarwals after the assignment. For Elphinstone Spinning and Weaving Mills Ltd., although the agreement merely referred to a percentage of net profits without expressly stating “per annum,” the Court observed that, as a matter of construction, the remuneration must also be understood as annual and based on the yearly net profits, notwithstanding contrary arguments.

Based on this factual background, counsel for the assignor put forward four principal contentions. First, that the Managing Agency commission was payable for services rendered over an entire calendar year and not for any portion thereof, so that no commission became due to the Sassoons for the periods of the year that ended before the dates of the assignments. Second, that because no remuneration was a debt due to the Sassoons on the dates of the assignments, no taxable income accrued to them for those broken periods. Third, that at the dates of the assignments the Sassoons possessed only a bare expectancy, if any, of receiving remuneration for the incomplete periods, and such expectancy could not be the subject of any assignment. Fourth, that the proper legal view was that what had been assigned was the income-bearing asset – the Managing Agency itself – which gave the assignees the right to receive all remuneration for the year payable under the agreement after the respective dates of assignment, making the whole amount taxable in the hands of the assignees and leaving no portion as taxable income of the assignor.

The Court concluded that, in its view of the High Court’s judgment regarding the date of accrual and the scope of the issue, the first three contentions did not warrant further examination, because no question arose in the present case concerning the enforceability of a claim by the assignor for a proportionate share of the remuneration.

The Court explained that, even if the assignor-Sassoons had any expectation of receiving remuneration for the broken period, that expectation could not be the subject of an assignment. The Court then stated that the substance of the assignment was an income-bearing asset, namely the Managing Agency. This agency was the source of income and gave the assignees the right to receive all remuneration for the year that was payable under the Managing Agency Agreement after the respective dates of assignment. Consequently, the entire amount became taxable income in the hands of the respective assignees, and no part of it ever accrued as taxable income of the assignor-Sassoons. After reviewing the High Court’s judgment on the date of accrual and the scope of the reference, the Court found that the first three arguments raised by the appellant did not require further examination. The Court observed that there was no issue about the enforceability of the assignor’s claim for a proportionate share of the remuneration from the date of assignment, nor any issue concerning non-payment of remuneration due to incomplete work. The year-long work had been completed by the assignee-Company in continuation of the work of the assignor-Company, and the total remuneration for the year had indeed been paid to the assignee-Company.

The Court identified the remaining questions as follows: (1) whether the money received constituted remuneration for the year’s work and therefore became taxable income on 31 December 1943; (2) if it did, whether that income was jointly earned by the assignor and the assignee or solely by the assignee; and (3) whether the assignment transferred the assignor’s share of the income at the time of its accrual. The Court answered the first question unequivocally, holding that the remuneration was for the year’s work, the work was completed at the end of the year, and the right to receive the remuneration vested on 31 December 1943. The Court noted that, in the Agarwal case, the original Managing Agency Agreement contained a clause stating that the Managing Agency commission was due yearly on 31 March and payable after the Mill Company’s annual accounts were passed. Counsel for the appellant relied on this clause to argue that, for the Agarwal case, accrual should be on 31 March rather than 31 December. The Court rejected that contention, observing that the Tribunal’s reference to the High Court’s order and the specific, categorical language of the clause did not permit a deviation from the established rule that income accrues when the right to receive it becomes vested, regardless of when actual payment is made.

In this case, the Court noted that the statements of the case filed by both Sassoons and the Income-Tax Commissioner each identified 31 December 1943 as the date on which the entire remuneration was deemed to have accrued, referring respectively to paragraphs 19(1), 26(a) and (g) of the appellant’s statement and to paragraphs 12, 15(1), (2) and (5) of the Commissioner’s statement in Civil Appeal No 3 of 1953. The Court observed that, even if the argument were allowed that income does not accrue until a right to receive it exists, the clause relied upon by the appellant could not affect the accrual date. Accrual for tax purposes, the Court explained, is determined solely by the moment a vested right to the income arises, not by the time at which the income becomes payable. This principle was supported by the decision in Commissioners of Inland Revenue v. Gardner-Mountain and D’ Ambrumenil Ltd. (1). Accordingly, the accrual is complete when the right to the remuneration becomes vested through the occurrence of all the events upon which the remuneration depends. A clause that merely states the remuneration shall be due at a later date, while all qualifying events have already occurred, only postpones the liability for payment and does not postpone the vesting of the right to income. The requirement that a further period elapse after the qualifying events is not itself an additional event that introduces any contingency into the right. Consequently, the Court held that the clause cited by the appellant—regardless of any distinction it attempts to draw between “due” and “payable”—has no bearing on the accrual date and cannot shift the accrual from 31 December to 31 March. The Court further explained that, even assuming the clause were relevant, this would not alter the ultimate conclusion reached by the High Court of Bombay. If the High Court’s view that the income accrued to both the assignor and the assignee after the year’s work was completed is correct, the precise date of accrual—whether 31 December or 31 March—makes little practical difference. The High Court also found that the assignments transferred to the assignee the assignor’s share of the year’s remuneration after that remuneration had accrued to the assignor as his income, and whether it remained taxable in the hands of the assignor despite the assignment could be addressed separately. Finally, the Court observed that if the High Court is right in holding that the remuneration accrued jointly to the assignor and the assignee at whatever point it may, then on the respective dates of the assignments the assignor possessed a future right to a share of the remuneration upon the completion of the year.

In the judgment, the Court observed that when a future right to remuneration accrued for a particular year, the assignment of that future right was well-supported by authority and became effective by attaching itself to the right at the moment it arose. The Court cited Bansidhar v. Sant Lal (I.L.R. 10 All 133), Misri Lal v. Mozhar Hossain (I.L.R. 13 Cal. 262), Palaniappa v. Lakshmanan (I.L.R. 16 Mad. 429) and Baldeo v. Miller (I.L.R. 31 Cal. 667) to illustrate this principle. It further noted that the validity of such an assignment between the assignor and the assignee, and its impact on the assignor’s future entitlement, could be reinforced by the doctrine of estoppel-feeding-title, which was recognised in section 43 of the Transfer of Property Act. The Court then turned to the proposition that a person remained liable to tax on income that had accrued, even though the income was assigned after the accrual. For this position it relied on Parkins v. Warwick (25 Tax Cases g), and it affirmed this view by quoting passages from the Privy Council decision in Pondicherry Railway Co. Ltd. v. Commissioner of Income-Tax, Madras (A.I.R. 1931 P.C. 165 at 170). The quoted passage, reproduced in Gresham Life Assurance Society v. Styles ([1982] A.C. 309), stated that profits attracted tax at the moment they came into existence and that the revenue was indifferent to the subsequent application or destination of those profits, regardless of any previous agreement concerning them. The Court emphasised that this established a clear rule: once income accrued to an individual, an assignment concerning that income did not alter the individual’s tax liability for it. The Court also mentioned that it was not seriously contested that the consideration for each assignment comprised the value of the prospective advantage of collecting the full year’s remuneration, meaning that the payment made for the assignment was higher than it would have been if the assignment had occurred at the start of the year. Consequently, the principal issue that the case raised was whether the High Court’s view—that the year’s remuneration accrued as income to both the assignor and the assignee—was correct. In response, counsel for the Sassoon parties advanced argument 4, contending that the assignment of the Managing Agency transferred an income-bearing asset and that all income received after the date of assignment should be entirely taxable in the hands of the assignee. The Court indicated that the validity of this argument required examination and listed the authorities relied upon in support of it: The Commissioners of Inland Revenue v. Forrest (8 Tax Cases 704), Wigmore v. Thomas Summerson (9 Tax Cases 577) and The Commissioners of Inland Revenue v. Pilcher (3 T Tax Cases 314). The case of Forrest involved the purchase of shares and the income derived therefrom, illustrating a situation analogous to the “securities” head of income under section 6 of the Indian Income-Tax Act; Wigmore and Pilcher were similarly cited to demonstrate that the ownership of property, by virtue of the passage of time, gave rise to taxable income, reinforcing the principle that the assignment of an income-producing asset did not remove the assignor’s tax liability for income that had already accrued.

The Court observed that the case involved the purchase of certain shares and the income derived therefrom, a situation that falls under the second head of income chargeable to income-tax under section 6 of the Indian Income-tax Act, namely securities. It explained that the income in question is directly attributable to the ownership of the shares or securities alone. The Court noted that merely the passage of time makes such income payable and that the liability to tax arises only when the income is actually received. The Court then referred to Wigmore v. Thomas Summerson (2) as a further illustration of a similar principle. It also examined Commissioners of Inland Revenue v. Pilcher (3), a case concerning the sale of an orchard together with the year’s fruit crop, which had not yet ripened at the date of sale. The authorities cited were (i) 8 Tax Cases 704, (2) 9 Tax Cases 577 and (3) 3T Tax Cases 314. In Pilcher the property was deemed severable, and ownership of the orchard, in the ordinary course and by the mere lapse of time, gave rise to income. The Court likened this to head No. 3 of section 6 of the Indian Income-tax Act. It further highlighted that the learned judges distinguished between fructus industriales and fructus naturales, observing that the cherries harvested from the orchard were fructus naturales and not fructus industriales. The Court remarked that the judgment might have been different had the fruit been fructus industriales, as indicated by Lord Justice Singleton and Lord Justice Tucker. In the case of fructus industriales, income does not arise merely from ownership but from additional investment and labour, which become the effective source of the income. The decisions therefore concerned situations where the sole or effective source of income was mere ownership and where taxability depended on the receipt of that income.

The Court next turned to the decision in City of London Contract Corporation v. Styles (1). That case involved a company purchasing, as a going concern, the business of another company that acted as a contractor for public works. The purchaser argued that it should be allowed a deduction from its taxable income for the portion of the purchase price that could be attributed to the right, title, interest and benefit of certain building contracts, from the execution of which a part of the net profits of the seller’s business arose. The Court rejected that claim, holding that the entire purchase price represented capital investment and that any subsequent receipts were income derived from the execution of the contracts that had been bought. The Court noted that, on its face, the decision might imply that one could purchase contracts that had not yet been executed and that the full benefit of the profits from such contracts would be treated as income in the hands of the buyer. However, the report of the case did not clearly state whether the contracts whose benefit was purchased had been partially executed, and it was uncertain what proportion of the contracts, if any, had been performed at the time of sale.

The Court considered whether the portion of the purchase price that related to contracts which had been partially executed was either substantial or negligible. The factual record, as set out on page 241 of the report, described the acquired business as being composed entirely of contracts that were either partially executed or wholly unexecuted, together with the rights and benefits flowing from those contracts. Consequently, if the business had consisted solely of contracts that had never been executed, the case would not serve as authority for the position advocated on behalf of the Sassoon parties. Nevertheless, even assuming that some of the contracts had been partially executed, the record did not demonstrate that such execution had reached a degree sufficient to constitute a significant source of income. The Court noted that the decision under discussion was directly relevant only to the distinction between capital and revenue expenditure for the purpose of allowing deductions. The specific issue that arose in the present matter had not been raised in that decision and therefore could not be deemed decided by it. The Court further observed that a passage in Simon’s Income-Tax, Volume 2 (1949 edition), page 188, paragraph 222, stated: “In City of London Contract Corporation Ltd. v. Styles, where the Company acquired a business that included a number of unexecuted contracts, it was held that the sum paid for the contracts could not be deducted in computing the Company’s profits, on the ground that the whole of the purchase price of the business was a sum ‘employed or intended to be employed as capital in such trade.’” A similar comment appeared in Spicer and Pegler’s Income-Tax and Profits-Tax (20th edition), page 116, which described the cost of unexecuted contracts taken over with a business as part of the calculation of profits arising from the performance of those contracts, and also cited the City of London Contract Corporation v. Styles case as authority. These standard textbooks therefore treated the case as dealing with unexecuted contracts, not partially executed ones, and as establishing the principle governing permissible deductions from taxable income of business enterprises. Accordingly, the Court concluded that the cited authorities could not be said to support the contention advanced by counsel for the appellant-Sassoons, namely that, upon assignment of a Managing Agency, the entire remuneration for the year’s work automatically belongs to the assignee as his sole income because the Agency itself is the source of income and should be treated as an income-bearing asset. No specific authority concerning a Managing Agency had been cited before the Court, and the City of London Contract Corporation v. Styles decision could not be interpreted as establishing that, in the case of an assignment of partially executed contracts, the remuneration or profits attributable to such partial execution necessarily constitute the assignee’s income. The question therefore remained to be examined on principle.

The issue therefore required examination on principle. Upon such examination the Court observed that the argument advanced on this point rested on a fundamental misconception. The income that is the subject of the present dispute does not arise merely because an entity owns an asset. In particular, the source of income is not the ownership of the Managing Agency itself, but the actual work performed for the benefit of the principal. It is not the mere fact that a company has acquired the right to act as a Managing Agent that generates the income; rather, it is the continuous performance of the company in its capacity as Managing Agent, carried out in accordance with the agency contract, that creates the income. Consequently, the rendering of the service of the Managing Agency, or the conduct of the Managing Agency’s business, constitutes the effective and direct source of the income. This observation does not imply that the work or service is itself what is taxed. Rather, it is the remuneration for that work which is subject to tax, and the work is merely the source of that remuneration. Thus, in this context, service or work constitutes the source of income, not the mere ownership of the right to work. The same legal position was succinctly expressed by Lord Finlay, although in a different context, in John Smith & Son v. Moore (1921) 2 A.C. 13 at 25, where he explained: “The business makes no profits. The profits are not fruits yielded by a tree spontaneously. They are the result of the operations carried on by the owner of ‘the business for the time being.’” Accordingly, on principle and notwithstanding any specific authority, the Court found it erroneous to regard the Managing Agency agreement itself as the direct source of income or as an income-producing asset. An examination of the provisions of the Indian Income-Tax Act supports this conclusion. Sections 3 and 4 of the Act are the charging provisions; they impose tax, as relevant to the present case, on income of the previous year that either (a) is received by the assessee within the taxable territory, or (b) accrues or arises within the taxable territory to a resident assessee. The assessment in the present matter is based on accrual, not on receipt. The computation of taxable income is governed by Chapter III of the Act. Section 6 of that chapter enumerates the heads of income chargeable to tax, namely: (1) Salaries, (2) Interest on securities, (3) Income from property, (4) Profits and gains of business, profession or vocation, and (5) Income from other sources. For the purposes of this case the residual head (5) may be omitted. Of the remaining four heads, only items 2 and 3 relate directly to ownership of an asset; the income in question does not fall within those categories.

In the case before the Court the computation of the taxable income was held not to be connected with the items previously discussed, but it could possibly be placed under head number one (salaries) or head number four (profits and gains of business). At this point the Court observed that, although the Managing Agency had been described in the earlier discussion as a service and the commission received for that service as remuneration for convenience, the true character of a Managing Agent – when the agent is a firm or a company – had recently been clarified by this Court in Lakshminarayan Ram Gopal and Son, Ltd. v. The Government of Hyderabad (1). That decision characterized the activity of a Managing Agent as a business and the commission as income derived by way of profits or gains from that business. Accordingly, the income in the present matter fell within head number four, and the computation of that income had to be made under section 10 of the Income-Tax Act. Sub-section (1) of that section reads: “The tax shall be payable by an assessee under the head profits and gains of business, profession or vocation in respect of the profits or gains of any business, profession or vocation carried on by him.” The Court then examined whether, for purposes of computing the taxable income of the assignee, it could be said that the entire year’s remuneration belonged to the assignee as the profits and gains of the business he carried on, when, in fact, the assignee had assumed the position of Managing Agent only part-way through the year by virtue of the assignment. The Court concluded that before income can be attributed to an assessee under this head, it must arise from the business that the assessee himself actually carries on.

Applying that principle, the Court found that in the present case the profits and gains for the whole year clearly related to the business carried on jointly by both the assignor and the assignee. Consequently, the income was to be regarded as accruing to both parties and had to be apportioned between them. The Court emphasized the importance of not disregarding the phrase “carried on by him” in subsection (1) of section 10, a point previously underscored by the Privy Council in Commissioner of Income-Tax, Bengal v. Shaw Wallace and Co. (1). A more recent judgment of this Court, Liquidators of Pursa Limited v. Commissioner of Income-Tax, Bihar (2), also highlighted that the expression “carried on by him” in section 10(1) of the Income-Tax Act “connotes the fundamental idea of the continuous exercise of an activity as the essential constituent of that which is to produce the taxable income.” The Court interpreted the phrase to mean that the taxable income belongs either to the individual assessee or to the combination of assessors whose continuous activity generates the income. Where, as in the present facts, that continuity is maintained by two persons successively, the income is to be treated as assessable to both together.

In this case, the Court observed that when two persons carry out a business successively, the profits and gains derived from that business must be treated as the assessable income of both persons taken together. The Court supported this observation by referring to the authorities reported in I.L.R. 9 Cal. 1343 and Civil Appeal No. 33 of 1953. The principle endorsed by those authorities is consistent with the well-established rule of ordinary law that, where two individuals jointly engage in a work or conduct a business, the total remuneration actually earned for that work or the total gains realized from that business become the joint property of the two persons. That joint property, in turn, has to be divided between them on an equitable basis. The Court stressed that this rule operates independently of any question as to whether a claim for remuneration for the work, or for the emoluments of the business, may be enforced individually or jointly against the party who is liable to make the payment. The Court further noted that, in the absence of any specific contract to the contrary between the persons who contribute to the work or to the business, the fruit of such work or business, once it has been realised, is the joint property of both contributors. The Court rejected the view that this rule applies only when the two persons act concurrently. There is no legal reason why the same principle should not apply when the two persons contribute to the total work or the total business in succession, as is the situation before the Court, rather than only when they act together at the same time. Consequently, where the continuous and successive functioning of two persons produces a joint remuneration, that remuneration is unquestionably severable and may be apportioned between them on an equitable basis, based on the doctrine that joint property is normally divisible. To that situation, the Court held that Section 26(2) of the Income-Tax Act also clearly applies. Although that section does not itself prescribe a method of apportionment, the parties agree that any necessary apportionment should be made on a time-wise basis. The Court found that a time-wise apportionment is, on its face, the only equitable method of dividing the income in the facts of this case.

At this point, the Court turned to examine certain provisions of the Managing Agency Agreements that had been heavily relied upon in support of the view contrary to the one previously articulated. The Court identified two specific provisions of the Managing Agency Agreement entered into between Sassoon United Mills Ltd. and the Sassoons, which were relevant only to the appeal concerning the Agarwals. The first of those provisions is clause 2(d) of the Agency Agreement, which the Court reproduced as follows: “The said commission shall be due to the said firm yearly on the 31st day of March in each and every year during the continuance of this Agreement….” It was submitted that this clause gives the Managing Agency Agreement the character of an instrument that vests the entire income payable after the date of assignment solely in the assignee. The Court noted the argument but did not yet decide on its effect, reserving further consideration of whether such a term influences the question of whose income is chargeable to tax.

In this case the Court observed that a clause describing an income-bearing asset as vesting solely in the assignee the right to the whole income that becomes payable after the date of assignment is concerned only with the manner of payment of the money that constitutes remuneration. The Court emphasized that such a clause does not determine whose income the money is for the purpose of taxation. According to the Indian Income-Tax Act, taxable income must arise from the specific sources that the statute enumerates. Because ownership of a managing agency, by itself, cannot be regarded as a source of income under the law, any provision in a managing-agency agreement that gives the assignee the exclusive right to receive the year’s remuneration and at the same time deprives the assignor of any direct claim against his former principal for his share of that income does not, in law, eliminate the assignor’s substantial entitlement to a share of the remuneration, provided the assignor otherwise possesses a vested right to that share.

The Court further explained that the law distinguishes between the right to obtain payment of a sum of money and the beneficial right to the money itself. It is possible for one person to have the enforceable right to demand payment while another person, or both persons together, hold the beneficial interest in the money. The Court cited benami contracts as familiar examples of this distinction. It also noted that situations can arise in which several persons have joint rights to money or its value, yet only one of them is authorised to enforce the payment in particular circumstances.

Regarding the accrual of income, the Court accepted that income does not accrue unless there is a vested right to receive the money that forms the income. However, the Court stressed that this principle relates only to the point in time at which the income is deemed to have accrued, and it does not automatically determine ownership of the income at that moment. The Court observed that none of the authorities cited by counsel to support the contention that income cannot accrue without a right to receive it actually disproves this view.

The Court also addressed the repeated argument advanced during the hearing that income accrues only when there is a right to receive it. While the Court acknowledged that such a statement may be correct, it rejected the inference that the person who holds the right to receive the money must also be the owner of that money or that the income accrues solely to him. Ownership, the Court said, depends on the substantive rights that apply to the particular facts of each case.

Finally, the Court held that a clause in a managing-agency agreement specifying the person to whom remuneration is payable or becomes due is intended primarily to protect the principal against multiple claims made against him. Such a clause does not resolve the substantive rights between the parties who may have contributed to the generation of the remuneration. The Court noted that the second provision relied upon by the opposite side was clause 10 of the managing-agency agreement, which related to the case of the Agarwals.

The Court turned its attention to clause ten of the Managing Agency Agreement and read the full wording of that clause. It states that the firm named in the agreement may lawfully assign the agreement and all rights that arise under it to any person, firm or company that, by its constitution, has the authority to be bound by the obligations the firm has undertaken. The clause further provides that once such an assignment is made and the company is notified, the company must recognise the assignee as its agent in the same manner as if the assignee’s name had originally appeared in the agreement in place of the partners of the assigning firm. It continues that the assignee would be treated as if it had entered into the agreement directly with the company, and that, upon the firm’s demand, the company must promptly enter into a new agreement with the assignee, appointing the assignee as the company’s agent for the remaining term of the original agreement, with the same powers, authority, remuneration, emoluments and subject to the same terms and conditions as contained in the original document.

The parties placed particular emphasis on the portion of the clause that is underlined in the record. They argued that, together with clauses one and three of the Managing Agency Agreement, clause ten demonstrates that the assignor and the assignee should be treated as a single entity. According to that view, when an assignment occurs, the assignee steps into the role of Managing Agent as if its name had been inserted into the original agreement from the outset. The argument further contended that this construction preserves the continuity of the Managing Agency and that whichever person satisfies the description of Managing Agent at the time the annual commission becomes due is the person entitled to receive that commission. The claim was that the entitlement arises not from any separate mutual arrangement between assignor and assignee but directly from the terms of the Managing Agency, which is described as the source of the income.

Consequently, the counsel submitted that this feature marks the Managing Agency itself as an income-bearing asset. In effect, the argument sought to hold that, by virtue of clause ten, the services performed by the assignee after the date of assignment may be added to the services performed by the assignor during the earlier part of the year, thereby constituting a continuous service for the whole year that generates the remuneration. The claim further asserted that the entire remuneration for the year should be the sole property of the assignee, implying that the assignment must operate retrospectively from the beginning of the financial year for the work already performed. The Court observed, however, that if clause ten is to be given retrospective effect, its own language requires that such effect arise from the original commencement of the agreement itself, not from any later date or event. The Court therefore found no justification for limiting the retrospective operation to a narrowly defined advantage that would apply only to partially completed work of the year.

In this case, the Court examined whether the underlined portion of clause 10 could be given retrospective effect and, if so, what the scope of that effect would be. The Court held that, if the clause were interpreted as retrospective, it would be broad enough to include every claim that had accrued but remained unpaid from the initial stage of the agency, including remuneration for work that was only partly finished for the year. On such a construction, the right to each of those unpaid claims would pass to the assignee. The Court found this result to be untenable and observed that there was no justification for limiting the retrospective operation of the clause to the narrow purpose advanced by the appellant-Sassoons. Consequently, the Court concluded that a fair reading of the entire clause 10 of the Managing Agency Agreement showed that its only effect was the one specifically mentioned in the second part of the clause, which had been set aside by the parties. That part stipulated that, upon assignment, the assignee firm would be entitled to demand and obtain from the principal company a fresh Managing Agency Agreement in its own favour for the remaining period of the original term, with the same powers, authority, remuneration, emoluments and subject to the same terms and conditions. In the Court’s opinion, taken as a whole, clause 10 merely gave the assignee the right to request a new agreement on the same terms and provided that, even without a formally executed new agreement, the parties’ mutual rights and obligations would continue to be governed by the old agreement for the balance of the term, with the name of the assignee substituted for that of the assignor. The Court emphasized that such an effect could only be prospective and not retrospective. Nevertheless, the Court acknowledged that a simple clause in the Managing Agency Agreement stating that the employer was responsible to the assignee for payment of the entire year’s remuneration did not by itself create a beneficial right in the assignee to the year’s income. Such a right could arise, the Court noted, from a specific or implied term between the transferor and the transferee, either as part of the deed of transfer or as a separate agreement. The Court mentioned that, in the Agarwals case, a specific term of this nature had been included in the agreement preceding the actual assignment. However, counsel for the Sassoons expressly disclaimed the existence of that term, arguing that it was not incorporated into the deed of transfer, was superfluous, and was therefore not relied upon. Counsel further contended that the assignee’s right to receive the entire remuneration did not depend on any particular term between the assignor and the assignee, but arose from the fact that the transferred asset was income-bearing and carried with it the right to the whole income becoming due after the date of assignment. It was on the basis of this insistence, the Court indicated, that the subsequent argument developed.

In this case counsel for the Sassoons disclaimed the special term that had been mentioned between the assignor and the assignee, describing it as unnecessary. He appeared to try to avoid the implication that the assignor’s share of remuneration became the assignee’s share by virtue of a specific assignment operating on its accrual, which would mean that the income remained taxable in the hands of the assignor. It may be noted that counsel for the Agarwals relied upon clause ten of the Managing Agency Agreement in the Agarwals’ case to demonstrate that, although ordinarily a contract for remuneration under such an agreement is an indivisible contract for the whole year’s work, the clause necessarily introduced divisibility of the contract and of the remuneration in the year of assignment because the assignment was carried out with the consent of the principal Mill Company, as provided by section 87-B(c) of the Indian Companies Act. That argument was advanced in order to support the contention that the Sassoon’s share of the year’s income accrued on the very date of assignment. The Court, however, observed that such a contention was not the basis of the High Court’s judgment as previously explained, and that, in the view of the Court, the argument was not open for consideration in light of the statements made by the Income-Tax Appellate Tribunal as well as the statements of the parties. Consequently, the Court did not feel that it was necessary to address that line of argument. The Court held that the continuous and successive performance by both the assignor and the assignee under the Managing Agency Agreement constituted the effective source of the year’s income. That income, according to the Court, accrued only upon the completion of the year and was the joint income of both the assignor and the assignee. The earlier assignments made during the year were, in effect, assignments of a future right to a portion of that income. Only because of an inter se arrangement between the assignor and the assignee, arising from those transactions, did the assignee acquire the right to collect the entire income. Nevertheless, the portion of the income that accrued to the Sassoons upon the year’s completion remained the taxable income of the Sassoons, and they were correctly taxed on that amount. The Court considered the vigorous arguments put forward by counsel for the Sassoons to be based on the premise that the Managing Agency is akin to property that inherently generates income, thereby overlooking the distinction between the right to receive income and the ownership of that income, and treating the former as determinative of the person to whom the income accrues. In the Court’s opinion, those arguments were unsustainable, and the conclusion reached by the learned judges of the Bombay High Court was affirmed. Accordingly, the appeals were dismissed, and the Court expressed no view on any of the other points raised.

After a careful examination of the matters that had been brought before it, the Court gave due consideration to each of the points that were raised in the proceedings. In doing so, the Court assessed the relevance and effect of those arguments within the context of the appeal. Upon completing that assessment, the Court reached the conclusion that the issues presented warranted a reversal of the earlier decision. Accordingly, the Court ordered that the appeals be allowed, thereby granting the relief sought by the parties who had filed the appeals. This determination reflected the Court’s judgment that the arguments advanced in the appeals were sufficient to merit such a disposition, and the final order therefore confirmed that the appeals were to be permitted.