Kapur, J. -
(1.)This judgment will dispose of two appeals, C. A. No. 145/58 and C. A. 323/57. They arise out of the same transaction i.e., Managing Agency Agreement and the result of C. A. No. 323/57 is dependent upon the judgment in C. A. 145/58 and we propose to deal with the latter appeal which was argued before us and the former for reasons to be stated later was not pressed. The appellant in C. A. No. 145/58 is the Commissioner of Income-tax, Bombay and the respondent is the assessee, a registered firm, which on March 8, 1941, was appointed the Managing Agents of Shri Ambica Mills Limited (hereinafter termed the Managed Company) the appellant in C. A. 323/57. The duration of the Managing Agency period was 20 years. By clause (2) of the Managing Agency Agreement it was provided:-
"2. (a) The Company shall pay each year to the said Firm either the commission of 5 (five) per cent. on the total sale proceeds of yarn, and of all cloth, manufactured from cotton, silk, jute, wool, waste and other fibres and sold by the company, or a commission of three pies per pound avoirdupois on the sale, whichever the said Firm choose to take, and also a commission of 10 (ten) per cent. on the proceeds of sale of all other materials sold by the Company and 10 (ten) per cent. on the bills of any ginning and pressing factories and on any other work done by the Company.
(b) If in any year the net profits of the Company shall not be sufficient to enable the Directors, if they think fit, to recommend a dividend of eight per cent. per annum on the capital paid up on the ordinary shares for the time being, the same Firm shall be bound to give up from the total amount of commission payable under clause 2(a) hereof such portion thereof as may be necessary to make up the deficit. PROVIDED THAT in no event the amount so given up by the said Firm shall exceed one-third of such total amount of commission".
And by clause (5) it was provided:
"5. The remuneration payable to the said Firm under Clause 2(a) shall be paid to the said Firm forthwith after the 31st day of December or such other date as the Directors may fix for the closing of the accounts of the Company in each year and after such accounts are passed by the Company in General Meeting."
On December 9, 1950, the Board of Directors of the Managed Company passed a resolution to the effect that the Directors had for some time past been discussing with the Managing Agents the advisability of modifying the terms of the Managing Agency Agreement as to the commission payable under it and that the Managing Agents had agreed to charge 3 per cent. on sales instead of 5 per cent. for the year ending December 31, 1950. A resolution was passed at the Annual General Meeting of the Managed Company on April 22, 1951, which was to the same effect. The resolution of the Board of Directors was ratified at an Extra-ordinary General Meeting of the shareholders of the Managed Company on October 7, 1951, and the same day a formal agreement embodying the terms of the resolution was executed between the Managing Agents and the Managed Company. For the account years 1950 and 1951 i.e., assessment years 1951-52 and 1952-53 the Managing Agents were taxed by the Income-tax Authorities on the basis that in those two years they had voluntarily relinquished a sum of Rs. 1,69,981 and Rs. 2,10,530 for the respective assessment years. These sums were added to the income of the Managing Agents for the purpose of income-tax. An appeal was then taken to the Income-tax Appellate Tribunal and it was held by the Tribunal that the agreement between the Managing Agents and the Managed Company to receive remuneration at 3 per cent on the total sales was a valid one and took effect as from January 1, 1950. The second question, whether the commission accrued on the proceeds of every single sale or it accrued only when the assessee firm exercised its option to charge its commission on the total sale proceeds or on the weight of the yarn sold and whether the Managing Agents were to get the amount of commission after the whole profit was determined at the end of the year, was decided in favour of the Managing Agents. A Reference was made to the High Court at the instance of the Commissioner of Income-tax and the questions above mentioned were answered in favour of the Managing Agents. This appeal by the appellant has been brought against the judgment of the High Court by special leave.
(2.)In the connected appeal i.e. C. A. 323/57 by the Managed Company the facts are the same except that the Appellate Tribunal allowed the Managed Company the sum on which the Managing Agents were to be taxed as allowable deduction. When the Commissioner got the case stated to the High Court the Managing Company also had a case stated. But as the High Court upheld the contention of the Managing Agents the Managed Company did not press its application which was therefore dismissed. The appeal of the Managed Company is brought against that order.
(3.)In the appeal by the Commissioner of Income-tax, i.e., C. A. 145/58, it was argued that according to the terms of the Agency Agreement the Managing Agents were to get the commission on the sales and as the accounts were kept on a mercantile basis, the amount of commission accrued as and when the sales took place and paragraph 5 of agreement was only a machinery for quantifying the amount. It was also argued that the Managing Agents by entering into an agreement with the Mills had voluntarily relinquished a portion of the amount of commission which had accrued to them and therefore the whole of the income from commission which had already accrued was liable to income-tax; and reference was made to the cases reported as Commissioner of Income-tax, Madras vs. Thiagaraja Chetty and Co., (1954) SCR 258 ; E. D. Sassoon and Co. Ltd. vs. Commissioner of Income-tax, Bombay City, (1955) 1 SCR 313 and to an English case Commissioners of Inland Revenue vs. Gardner, Mountain and D'Ambrumenil Ltd., (1949) 29 Tax Cas 69. But these cases have no application to the facts of the present case.