Commissioner of Income-Tax, Bombay vs Chamanlal Mangaldas and Co.

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 19 February 1960

Coram: J.L. Kapur, M. Hidayatullah

In this matter the Supreme Court considered two separate appeals, both filed on 19 February 1960, arising from judgments and orders of the High Court of Bombay on references made by the Income‑Tax Appellate Tribunal. The appellant in each appeal was the Commissioner of Income‑Tax, while the respondents were distinct managing agents. The first appeal, recorded as Civil Appeal No 162 of 1958, named the respondent as Chamanlal Mangaldas & Co., a registered firm that acted as the managing agent of Girdhardas Harivallabhadas Mills Ltd., a company situated in Ahmedabad. The second appeal, recorded as Civil Appeal No 210 of 1958, named the respondent as Mangaldas Girdhar Das Parekh Ltd., a private limited company serving as the managing agent of Rajnagar Spinning Weaving and Manufacturing Co. Ltd., also located in Ahmedabad. For convenience in the judgment the respondents were collectively referred to as the managing agents and the entities for which they acted were referred to as the managers’ company.

The original managing agency agreement between the managing agents and the managers’ company was executed on 7 September 1940. Under that agreement the agents were to receive a commission calculated at three and one‑half per cent on the sale price of all cotton yarn and cotton cloth that the company manufactured and sold, as well as a commission of three and one‑half per cent on the proceeds from the sale of material yarn and fabrics produced from wool, jute, silk and other fibres. In addition, the agents were entitled to a commission equal to ten per cent of the profits derived by the company from its ginning or pressing operations. On 28 December 1950 the directors of the managers’ company passed a resolution amending the commission provisions. The resolution introduced a proviso providing that, for the years 1950 and 1951, the directors, in their absolute discretion and having regard to the results of the company’s working, could determine that a lesser remuneration than that specified in the original agreement should be paid to the managing agents, and that such reduced remuneration could be fixed either as a lump‑sum amount or as a lower percentage rate. The managing agents accepted the terms of this resolution by a letter dated the same day.

Subsequently, on 17 March 1951, a supplemental agreement was executed between the managers’ company and the managing agents. This supplemental agreement incorporated a new proviso mirroring the terms of the December 1950 resolution that had been accepted by the agents. Following this, the Board of Directors of the managers’ company convened a meeting and, by a resolution dated 8 April 1951, resolved that the managing agents should accept a commission of Rs 1,05,575 in place of the originally stipulated Rs 2,05,575. In effect, the board determined that the agents should be paid one lakh rupees less than the commission originally calculated under the 1940 agreement.

The income‑tax authorities, however, treated the entire amount of Rs 2,05,575 as taxable income, holding that it had accrued as commission during the previous year and that the reduction of Rs 1,00,000 represented merely a voluntary surrender that could not affect the taxability of the full commission. On appeal, the Income‑Tax Appellate Tribunal, by an order dated 9 February 1954, held that, as a result of the agreement between the managing agents and the managers’ company, the right of the managing agents to claim full remuneration, that is, Rs 2,05,575, had

On December 31, 1950 the company recorded an entry in its books stating that the commission account of M/s Chamanlal Mangaldas & Co. was credited with the sum of Rs 1,05,575. The entry explained that the commission for the period from January 1, 1950 to December 31, 1950 was calculated on sales of Rs 62,36,802, after deducting returns and other adjustments, which yielded a commission of Rs 3,63,226. Applying the rate of three and a half per cent gave a total commission of Rs 58,73,557, from which the original contractual amount of Rs 2,05,575 was derived. However, the entry further noted that, in accordance with the resolution of the board of directors dated April 8, 1951, only Rs 1,05,575 was to be credited to the agents’ account. The income‑tax authorities subsequently held that the whole amount of Rs 2,05,575 represented taxable income accruing as commission in the previous year and that the reduction of Rs 1,00,000 was merely a voluntary surrender that did not affect the taxability of the full commission. On appeal, the Income‑Tax Appellate Tribunal, by an order dated February 9, 1954, ruled that the agreement between the managing agents and the managed company had removed the agents’ right to claim the full remuneration of Rs 2,05,575 from the first day of January 1950, and therefore the amount subject to tax was only Rs 1,05,575. Both members of the Tribunal examined the issue from different perspectives but agreed that Rs 1,00,000 of the commission due under the original agreement did not constitute taxable income in the hands of the managing agents. When a reference was made to the High Court, that court held that the assessee’s income was not Rs 2,05,575 but only Rs 1,05,575, reasoning that no income had accrued as alleged by the Commissioner of Income‑Tax, who had appealed to this Court by special leave. In Civil Appeal No. 210 of 1958 the facts were closely analogous. There, the managing agent and the managed company had entered into an agreement on May 9, 1947, whereby clause (3) required the agent to receive a commission of three per cent on the gross sale proceeds of all yarn and cloth produced in the company’s mills, provided that if the company’s profit in any financial year was insufficient to allow a dividend of Rs 1,20,000 on the total paid‑up capital, the agent would surrender up to one‑third of the commission to enable such a dividend distribution. On December 28, 1950 a resolution was passed varying the agreement with respect to commission payment and adding a proviso applicable to the years 1950 and 1951, allowing the directors, after considering the results of the managed company’s operations, to fix a lesser remuneration for the agent if they so deemed appropriate.

In the matter before the Court, the directors of the managed company had resolved that, should they consider it appropriate to reduce the remuneration payable to the managing agent for either of the two years in question, they possessed the authority to determine such reduced remuneration either by fixing a lump‑sum amount or by applying a lower percentage rate, and that the managing agent was required to accept the amount fixed by the directors. Accordingly, on 17 March 1951 a supplemental agreement was executed to give effect to the terms of that resolution, and subsequently, on 8 April 1951, the directors passed a further resolution fixing the managing agent’s remuneration at the sum of Rs 4,11,875. This amount was less than the commission that would have been calculated under the original rates, which amounted to Rs 5,11,875. The principal issue that arose in the litigation was whether the difference of Rs 1,00,000 – the amount by which the commission had been reduced – was also liable to income‑tax. The tribunal ruled in favour of the managing agent, and when the question was appealed to the High Court, that court likewise held that the Rs 1,00,000 was not taxable. The Commissioner of Income Tax therefore obtained special leave to appeal to this Court.

The two appeals presented before the Court required determination of whether the managing agents had voluntarily relinquished a portion of their income, specifically the Rs 100,000 that represented the shortfall between the commission payable under the original agency agreements and the commission calculated on the modified agreements. For the purpose of deciding this question, the Court examined the commission clause as an integrated, indivisible provision. In the earlier Civil Appeal No. 162 of 1958, the commission was defined to be payable on the sale price of all cotton yarn and cloth sold, on the sale proceeds of material yarn and fabrics manufactured from other fibres and sold by the company, and also at a rate of ten per cent on the net profits derived from ginning or pressing operations. When read as a single, cohesive clause, this construction implied that the right to receive the commission vested only at the end of the financial year. The reasoning was threefold: first, the commission on all cotton yarn, cloth, and other fibre products could be ascertained only after the year‑end when total sales were known; second, the percentage applicable to total profits could be determined only after the profit figure for the year was finalized; and third, the obligation to contribute towards dividends could likewise be settled only after the year’s accounts were completed.

This interpretation was corroborated by an entry in the managed company’s books dated 31 December 1950. The entry indicated that the managing agents were entitled, under the stipulations of the original agreement, to a commission of Rs 2,05,575 calculated on the total sales for the year. However, the directors resolved that the agents should receive only Rs 1,05,575, and this reduced amount was subsequently credited to the agents’ account. The record of this accounting entry supported the managing agents’ contention that the right to receive the commission – and consequently the amount that actually accrued to them – was the reduced sum of Rs 1,05,575, rather than the larger amount that would have been payable absent the variation and modification of the agreement.

The Court explained that the managing agents’ entitlement to commission, or the point at which such commission accrued, occurred only at the end of the accounting year, when every sale could be totaled and the accounts were finally prepared. Consequently, the amount that actually accrued and that the agents were entitled to receive was the lower sum of Rs 1,05,575, rather than the larger figure that would have been payable had the agreement not been varied or modified.

In the matter identified as C.A. No. 210 of 1958, clause 3 of the managing‑agency agreement likewise provided that the commission would be determined at the close of the year. The Court noted that the agreement formed a single, integrated and indivisible contract. In the present appeal the commission rate was fixed at three percent on the sale of all yarn and cloth manufactured by the managed company, and the total commission could be ascertained and would therefore accrue only after the fiscal year had ended.

The Court further observed that the right to receive the commission arose only after the profits for the year had been determined, because only then could it be decided what amount, if any, the managing agents were required to contribute under the proviso attached to clause 3.

Reference was made to the appellant’s counsel relying on a ledger entry that recorded “amount accrued Rs 5,11,875.” The Court held that this entry must be read in its entirety, and when read as a whole it demonstrated that the amount to which the managing agents were actually entitled was Rs 4,11,875. It was acknowledged that commissions were credited semi‑annually, an interim practice that meant sales accounts were also prepared at six‑month intervals. However, the Court clarified that this interim accounting did not alter the construction of the clause governing commission payment, nor did it affect the reduction that resulted from the modified arrangement. The manner in which the entry was recorded could not change the amount that would arise or accrue, nor the agents’ right to receive it.

Accordingly, the Court concluded that, in both appeals, the amount liable to income‑tax was the sum that the respective managing agents were entitled to receive as commission. That sum was exactly Rs 1,00,000 less than the amount they would have received had the terms of the managing‑agency agreements remained unvaried. In the Court’s opinion, the appeals could not succeed; they were dismissed with costs, and the dismissals were formally recorded.