M C, DESAI C.J. - (1.)THIS is a statement of a case referred by the Income-tax Appellate Tribunal, Allahabad Bench, under section 66(1) of the Income-tax Act. There are two questions which this court has been called upon to answer, they being :
1. Whether, on the facts and on a true and proper interpretation of the agreement dated July 31, 1956, between the British India Corporation and the appellant-company, the letters of Sri Kailash Nath Agarwal and the letters of the managing director, the sum of Rs. 43,333 retained by the British India Corporation and adjusted by it to the credit of Sharma Co. was the assessable income of the applicant-company ?

2. Whether, on the facts and circumstances of the case, the sum of Rs. 43,333 represented an expenditure under section 10 ?

(2.)THE facts as stated by the Tribunal are thes : THE assessee is a private limited company, one of its directors being Kailash Nath Agarwal. THE British India Corporation Limited owns a number of mills or branches, one being the Kanpur Cotton Mills. One Sharma Co., a partnership firm, was appointed by the British India Corporation Limited as the sole selling agents of the Kanpur Cotton Mills with effect from January 1, 1946. By March, 1955, Sharma Co. became indebted to the (British India) Corporation to the extent of Rs. 8,39,350-15-6. THE Corporation held its security deposit of rupees one lakh and 299 bales of cotton on its account; after deducting the amount of the security and the price of the bales, a large amount was still due from Sharma Co. to the Corporation on March 23, 1955. On March 23, 1955, Sharma Co. and Kailash Nath Agarwal entered into a contract. Under its terms Sharma Co. undertook to resign or accept the termination of its sole selling agency rights of the Kanpur Cotton Mills, and to have no objection to the appointment of Kailash Nath Agarwal or a firm to be formed by him as the sole selling agent of the mills in its place. In consideration of this undertaking, Kailash Nath Agarwal or the firm formed by him undertook to pay to Sharma Co. one-seventh of the commission earned by them on the sales of the mills or a sum of Rs. 50,000 per annum, whichever was greater, so long as the money due to the Corporation from Sharma Co. was not repaid in the manner laid down in the contract; the parties agreed that the Corporation was authorised to retain an amount equal to one-seventh of the commission..... of the sole selling agency with a minimum of Rs. 50,000 per annum and to adjust the sum so retained towards the dues against Messrs. Sharma Co. and Kailash Nath agreed that, even after dissolution of Messrs. Sharma Co., the Corporation could continue to retain an amount equal to one-seventh of the selling agency commission and adjust it towards such dues of Sharma Co., as may then be outstanding. On the same date, Sharma Co. enclosed a copy of the contract to the Corporation, tendered its resignation from the sole selling agency of the mills and requested it to appoint Kailash Nath Agarwal or any firm formed by him for the purpose as the sole selling agent in its place. It further wrote that it owed to the mills a sum of Rs. eight lakhs and odd less by the amount of the security and the price of the bales, that under the contract between it and Kailash Nath Agarwal it was entitled to receive one-seventh of the commission due to the new selling agency or to a sum of Rs. 50,000 per annum, whichever is greater so long as its dues were not fully liquidated and authorised it to retain this amount thus becoming due to us out of the commission payable to the agency and adjust the same to its account with the Corporation. It added that its resignation was in consideration of the terms offered to it by Kailash Nath Agarwal and asked it to incorporate them in its sole selling agency agreement with Kailash Nath Agarwal or the firm formed by him. Kailash Nath Agarwal also on the same date addressed a letter to the Corporation stating that he had entered into the contract with Sharma Co. whereby the latter was to resign from the sole selling agency of the mills in consideration of his agreeing to pay them Rs. 50,000 per annum or one-seventh of the selling agency commission (whichever was greater) until its dues against Sharma Co. were not cleared off, requesting it to grant the sole selling agency to his firm, i.e., the assessee, which would be bound by the contract entered into between him and Sharma Co. and authorising it to retain one-seventh of our commission for adjustment in the account of Messrs. Sharma Co. with a minimum of Rs. 50,000 per annum. On the same date the Corporation wrote a letter to Sharma Co. acknowledging the receipt of its letter of the date, accepting its resignation from the sole selling agency of the mills and informing it of its intention to appoint Kailash Nath Agarwal or his nominee firm as the sole selling agent in succession to it, to deduct one-seventh of the commission or Rs. 50,000 out of the commission earned by the new sole selling agents and credit the same to its account and to incorporate the terms suitably in the new sole selling agency agreement. A meeting of the directors of the Corporation was held on March 26, 1955; the chairman informed the directors of the discussions and negotiations that had taken place between him, Sharma Co., and Kailash Nath Agarwal, of the resignation of Sharma Co. from the sole selling agency, the proposal to appoint the assessee as its sole selling agent in its place and the assessees undertaking to pay off gradually the amount of five lakhs and odd due from Sharma Co. by paying one-seventh of its selling agency commission or Rs. 50,000 per annum, whichever was greater. On July 31, 1956, the Corporation entered into a contract with the assessee. It referred to the resignation of Sharma Co. from the sole selling agency in pursuance of its contract with Kailash Nath Agarwal and its acceptance of the resignation with effect from March 23, 1955. Its terms are as follows :
(1) THE assessee shall be the sole selling agents of the mills with effect from April 1, 1955.

(2) the Corporation shall pay to the assessee subject to the provisions contained in the contract, a trade discount of rupee one and annas twelve per cent. less by brokerage,

(3) the assessee ratified and adopted the contract entered into by Kailash Nath Agarwal with Sharma Co., and authorised the Corporation to give effect to it and in particular to retain an amount equal to one-seventh of the trade discount of 1 3/4% due to the sole selling agents with a minimum of Rs. 50,000 per annum so that the amount payable to the sole selling agents shall be the amount payable at the rate of 1 3/4% minus the aforesaid amount retained by the Corporation as payable to Messrs. Sharma Co. and to adjust it towards the dues of Sharma Co.; the assessee was entitled to the entire trade discount as soon as the dues of Sharma Co. are liquidated,

(4) the corporation could continue to retain the amount in spite of dissolution of Sharma Co., and

(5) the authority given to the corporation to retain and adjust a part of the trade discount towards the outstanding against Messrs. Sharma Co. will not be receivable and will be binding on the sole selling agents, their successors or assigns and "the agents will have no claim whatsoever to any such amounts retained out of their normal trade discount and adjusted in the account of Messrs. Sharma Co., as if the amount so retained was not payable to them.

During the previous year relevant to the assessment year 1956-57 the assessee earned trade discount or commission of two lakhs and odd from the mills and the Corporation retained out of it Rs. 43,333 under the contract for adjustment towards the outstanding dues of Sharma Co. In its accounts the assessee showed the sum of Rs. two lakhs and odd in the profit and loss account and the sum of Rs. 43,333 as a deduction. During the assessment of the assessee the Income-tax Officer disallowed the deduction. His order was upheld by the Appellate Assistant Commissioner and then by the Tribunal. It applied to the Tribunal to state the case to this court and hence this reference. The case of the assessee is that the sum of Rs. 43,333 was not a part of its income at all, that its income was really, Rs. 1,62,950 (Rs. 2,06,283 less by Rs. 43,333) and that if its income was taken to be Rs. 2,06,283, it was entitled under section 10(2)(xv) to the deduction of Rs. 43,333. The two questions relate to these contentions.

It is a fact that the assessee did not receive the disputed sum of Rs. 43,333; it received only Rs. 1,62,950. This however, does not mean that it was liable to pay income-tax only on Rs. 1,62,950 and could not be liable to pay income-tax on Rs. 2,06,283. What is taxed under section 4 (1)(a) and (1)(b) of the Act is income received, or income accrued or arisen though not received. We have to see whether the disputed amount of Rs. 43,000 and odd can be said to be income accruing or arising to the assessee. That is question No. 1. The trade discount or commissions undoubtedly profits and gains of business carried on by the assessee and under section 10(2)(xv) profits and gains of business are to be computed after deducting any expenditure not being in the nature of capital expenditure laid out or expended wholly and exclusively for the purpose of the business. There is no dispute that the disputed amount, if accrued or arisen to the assessee, was laid out or expended by it wholly and exclusively for the purpose of its business and should be deducted in computing the profits and gains if it was not a capital expenditure. Consequently, if we find that the disputed sum was income accrued or arisen to the assessee, there arises a second question whether its spending it was a capital expenditure. The destination between the two questions was pointed out recently by the Supreme Court in Poona Electric Supply Co. Ltd. v. Commissioner of Income-tax, 1966 AIR(SC) 30. Subba Rao J., speaking for the court, said at page 35 :

(3.)THERE is a clear-cut distinction between deductions made for ascertaining the profits and distributions made out of profits. In a given case whether the outgoing fall in one or the other of the heads is a question of fact to be found on the relevant circumstances....
The deduction or exclusion, which is the subject-matter of question No. 1, is for the purpose of ascertaining profits of the assessee and the deduction, which is the subject-matter of question No. 2, is for ascertaining disbursements made out of profits. In the one case the amount was not the income at all of the assessee; in the other case it was, but has to be deducted out of the taxable income.Accrue means to arise or spring as a natural growth or result : vide Murrays Dictionary. It is stated in Words and Phrases, vol. 1, page 594, that the word means coming as a natural accession or result; arising in due course and tax accrues when all events have occurred which fix its amount and determine the taxpayers liability to pay it. The meanings given to the word at pages 594, 596 and 601 are due and payable, "possession of a present enforceable right, "fixed and "realised. In Commissioner of Income-tax v. Bansilal Motilal, 1930 32 BLR 671 the word was interpreted to indicate some origin or source of growth for the income in question, as opposed to actual receipt. In Rogers Pyatt Shellac Co. v. Secretary of State for India, 1925 52 ILR(Cal) 1 Mukerji J. said as follows :

.... accrues should not be taken as synonymous with arises but in the distinct sense of growing up by way of addition or increase or as an accession or advantage; while the word arises means comes into existence or notice or presents itself. The former connotes the idea of a growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable....... both the words are used in contradistinction to the word receive and indicate a right to receive. They represent a stage anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less inchoate...