COMMISSIONER OF INCOME TAX Vs. SHOORJI VALLABHDAS AND CO

JUDGEMENT

(1.) THIS reference raises a question of some difficulty and importance and the income in dispute relates to managing agency commission. In the matter out of which it arises there was a difference of opinion between the Accountant Member and the Judicial Member constituting the Tribunal and on a reference to the President the decision was in favour of the assessee. The three judgments turned a good deal on the effect of a decision of this court. The arguments before us also have revolved round that decision almost as a spindle and it will be necessary for us to ascertain the ratio decidendi of that case. Of this more hereafter.

(2.) THE assessee, in this reference under section 66(1) made at the instance of the Commissioner of Income -tax, is the firm of Messrs. Shoorji Vallabhdas and Co. The assessment year is 1948 -49 and the previous year ended on 31st March, 1948, During that previous year the assessee firm consisted of three partners and its business consisted of acting as managing agents to several shipping companies. We are concerned in this reference with only two of the shipping companies, viz., the Malabar Steamship Co. Ltd. and the New Dholera Steamship Co. Ltd. Under agreements with the two companies, the managing agents were entitled to 10 per cent. commission on the freight charged to shippers. According to the agreement with the two companies, the assessee firm would have become entitled to claim commission of Rs. 1,71,885 from the Malabar Steamship Co. Ltd. and Rs. 2,56,815 from the Dholera Steamship Co. for the period April 1, 1947, to December 31, 1947, which was the period of first 9 months of the relevant assessment year 1948 -49. In the books of account of the assessee credit entries were made relating to this commission and corresponding debit entries were made in the accounts of the shipping companies maintained in their books by the assessee. It does not appear from the statement that any such entries were made in the account books maintained by the shipping companies. But later on, it appears, the assessee company agreed to receive remuneration at 2 1/2% in the circumstances to which we shall presently advert. Shorn of details, the result was that the assessee company accepted only 2 1/2% commission instead of 10%. There is no dispute that in fact the assessee company has at no time received these two sums of Rs. 1,71,885 and Rs. 2,56,815. But the case of the Revenue is that having made entries in its books of account, the assessee company who were following a mercantile system of accounting lost all right to rely on any agreement whereby they charged smaller commission. It is also the case for the Revenue that there was in fact no agreement between the assessee firm and the shipping companies and according to them what the managing agents did was making a voluntary gift of 7 1/2% of commission which they had actually earned and which they, in law, were entitled to receive and it is on that alleged largess or benefaction that the Revenue seeks to tax the assessee company.

(3.) THE contents of this letter and the resolution have considerable bearing on the question which has been pressed for our determination in this reference. What is recorded here is what happened before December, 1947. It will be necessary for us to see whether this is an understanding or an arrangement or a conditional agreement as the assessee would have us hold or a purely voluntary gift as the revenue would have us hold. Some time thereafter there was an extraordinary general meeting of the shareholders of the company on December 30, 1947, and a special resolution was passed at that meeting appointing Shoorji Vallabhdas Ltd. as the managing agents of the company for a term of 20 years from January 1, 1948. One thing is clear that this resolution put an end to the managing agency of the assessee firm and left the question of fixation of the commission to be paid to the assessee firm for the period of 9 months to be determined as mentioned in the letter and the resolution to which we have already made reference.