Judgment 1. IN this reference under s. 66(1) of the IT Act 1922, the following two questions of law have been referred to us : "1. Whether, on the facts and in the circumstances of the case, office allowance receivable by the company from the managed companies was income of the company for the year 1954-55 even though it was surrendered by a resolution passed before the end of the accounting period? 2.Whether, on the facts and in the circumstances of the case, managing agency commission and officer allowance received by the assessee-company from M. G. R. Iron and Steel Works Ltd. was income of the assessee-company for the asst. yr. 1954-55 even though it was surrendered by the assessee-company, just because the resolution surrendering the commission and the allowance was passed after the end of the accounting period?" 2. THESE questions have arisen under the following circumstances : The assessee is a private limited company managing other companies as managing agents and also doing business in minerals. The assessment year in question is 1954-55 and the corresponding previous year is 2010 Ratha Jatra ending on 11th July, 1953. The assessee-company was entitled to office allowance and managing agency commission from the following companies at the rates mentioned against their names : (a) Rungta Engineering Construction Co. Ltd. I. Office allowance 6,000 II. Minimum commission 6,000 (b) Orient Industrial Engineering Co. Ltd. I. Office allowance 6,000 II. Minimum commission 6,000 (c) Bengal General Trading Co. Ltd. I. Office allowance 3,000 II. Minimum commission 3,000 (d) Orient Potteries Ltd. I. Office allowance 3,000 By a resolution dt. 5th July, 1953, the assessee-company relinquished its rights to receive the managing agency commission and allowances in respect of the first four companies. Similarly, the assessee, by a resolution dt. 30th Sept., 1953, gave up office allowance and minimum commission in respect of M.G.R. Iron and Steel Works Ltd. The total sum payable to the assessee as office allowance and minimum commission in respect of the aforesaid five companies amounted to Rs. 42,000. The ITO included the whole amount of Rs. 42,000 in the total income of the assessee on the ground that the sum had already accrued to the assessee. The AAC, on appeal, confirmed the order of the ITO. 42,000. The ITO included the whole amount of Rs. 42,000 in the total income of the assessee on the ground that the sum had already accrued to the assessee. The AAC, on appeal, confirmed the order of the ITO. The Tribunal, however, partly allowed the appeal of the assessee, holding that, in respect of the first four companies, the assessee-firm was entitled to deduction of the managing agency commission and rejecting the other contentions of the assessee in respect of other claims. 3. MR. Sankar Ghosh, learned counsel for the assessee, has challenged the decision of the Tribunal on the following grounds : 1. The office allowance amounting to Rs. 18,000 receivable by the assessee from M/s Rungta Engineering Construction Co. Ltd., Orient Industrial Engineering Co. Ltd., Bengal General Trading Co. Ltd. and Orient Potteries Ltd. in the accounting year ending on 11th July, 1953, but relinquished by the company's resolution dt. 5th July, 1953, on grounds of commercial expediency, should not have been included in the total income of the assessee, inasmuch as the principles decided in CIT vs. Shoorji Vallabhdas and Co. (1962) 46 ITR 144 (SC) should have been followed in the instant case as it has been done by the Revenue in excluding commission payable by the said four companies. 2. The officer allowance and also commission amounting to a total sum of Rs. 6,000 which the assessee was entitled to receive from M. G. R. Iron and Steel Works Ltd. should not have been included in the assessee's total income as the said amount has not been received by the assessee in pursuance of its resolution dt. 30th Sept., 1953. At the outset he has referred to the said Supreme Court decision in CIT vs. Shoorji Vallabhdas and Co. (supra) the facts of which may be stated as follows : 4. THE assessee-firm was the managing agent of two shipping companies and was entitled to receive as commission at the rate of 10 per cent of the freight charged under its managing agency agreement. Between 1st April, 1947, and 31st Dec., 1947, the amounts of commission at the rate of 10 per cent were Rs. 1,71,885 from Malabar Steamship Co. Ltd. and Rs. 2,56,815 from the New Dholera Steamship Ltd., which were credited in the books of account of the assessee-firm to itself with a corresponding debit to the shipping companies. Between 1st April, 1947, and 31st Dec., 1947, the amounts of commission at the rate of 10 per cent were Rs. 1,71,885 from Malabar Steamship Co. Ltd. and Rs. 2,56,815 from the New Dholera Steamship Ltd., which were credited in the books of account of the assessee-firm to itself with a corresponding debit to the shipping companies. In early 1947, the assessee-firm floated two private companies. In 20th Nov., 1947, the assessee- firm expressed its desire to resign from the managing agency and to have the two private limited companies appointed on the same term. THE assessee at this stage agreed to forgo the previous rate of 10 per cent and accept a reduced rate of 21/2 per cent of the total freight. On 30th Dec., 1947, at the extraordinary general meetings of the managed companies the two private limited companies were appointed as managing agents w.e.f. 1st Jan., 1948. THE relevant accounting year ended on 31st March, 1948, and, thereafter, at the annual general meetings of the two managed companies held in December, 1948, the commission was formally reduced from 10 per cent of the freight to 21/2 per cent. As a result the assessee-firm gave up 75 per cent of its earnings during the relevant years of account which amounted to Rs. 1,36,903 (Malabar Steamship Co. Ltd.) and Rs. 2,00,625 (New Dholera Steamship . II. Minimum commission 3,000 (e) M. G. R. Iron and Steel Works Ltd. . . I. Office allowance 3,000 . II. Minimum commission 3,000 Ltd.). THE said sums of money given up by the assessee were claimed as an expenditure under s. 10(2)(xv) of the IT Act, 1922, but were disallowed. THE ITO and the AAC rejected the contention of the assessee but the Tribunal and, thereafter, the Bombay High Court on reference, set aside the order of the ITO. THE appeal was dismissed by the Supreme Court and Hidayatullah J., holding that the High Court was right in coming to the conclusion that on the facts of the case the larger income neither accrued nor was received by the assessee-firm and, as such, not taxable, has stated at page 148:- "Income-tax is a levy on income. THE appeal was dismissed by the Supreme Court and Hidayatullah J., holding that the High Court was right in coming to the conclusion that on the facts of the case the larger income neither accrued nor was received by the assessee-firm and, as such, not taxable, has stated at page 148:- "Income-tax is a levy on income. No doubt, the IT Act takes into account two points of time at which the liability to tax is attracted, namely, the accrual of the income or its receipt but the substance of the matter is the income. If income does not result at all, there cannot be a tax even though in book-keeping an entry is made about a 'hypothetical income', which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. Here too, the agreements within the previous year replaced the earlier agreements and altered the rate in such a way as to make the income different from what had been entered in the books of account. A mere book-keeping entry cannot be income, unless income has actually resulted and, in the present case, by the change of the terms the income which accrued and was received consisted of the lesser amount and not the larger." Mr. Ghosh has argued that following the same principle the ITO should have held the office allowances payable to M/s Rungta Engineering Construction Co. Ltd., Orient Industrial Engineering Co. Ltd., Bengal General Trading Co. Ltd., and Orient Potteries Ltd., amounting to a total sum of Rs. 18,000, should not have been included in the total income as the said amount had neither accrued nor received by the assessee, inasmuch as by resolution dt. 5th July, 1953, the assessee had relinquished its rights within the accounting year to receive the allowances. In support of his arguments he has referred us to the respective agreements between the assessee-firm and the said four companies, which although not included in the paper-book were relied on by both the parties. 5th July, 1953, the assessee had relinquished its rights within the accounting year to receive the allowances. In support of his arguments he has referred us to the respective agreements between the assessee-firm and the said four companies, which although not included in the paper-book were relied on by both the parties. He has drawn our attention to cl. 3 of the agreement between the assessee-firm and the Orient Industrial Engineering Co. Ltd. dt. 25th April, 1953, the relevant provisions of which are stated as below : "3. The remuneration of the agency company as such managing agents shall be as follows : (i) An office allowance of Rs. 500 per month commencing from the date of incorporation ; and (ii) A commission of 10 per cent of the net yearly profits of the company calculated in accordance with the provision of s. 87(c)(3) of the Act provided that in case of absence or inadequacy of profits, a minimum payment of Rs. 6,000 for a whole year shall be made on this account by the company to the managing agents in lieu of the commission aforesaid." 5. MR. Ghosh has wanted us to construe that the remuneration of the assessee-firm comprised both the commission and office allowance and that the proviso to cl. 3(ii) should equally govern cl. 3(i) and, as such, the office allowance is also payable and can only accrue at the end of the year. As the office allowance has been given up within the accounting year, he has submitted, that, like the claim in respect of commission, the office allowance also has not accrued within the accounting year and, as such, should not be made taxable. In our opinion this contention cannot be accepted. Clause 3 of the agreement clearly provides that the agency company will be entitled to receive commission in the shape of office allowance of Rs. 500 per month and a commission of 10 percent of the net yearly profits which in no case would be less than Rs. 6,000 for the whole year. 6. THE proviso specifically mentions the case of commission and nothing in the proviso can be referable to the case of monthly allowance for the office. Further, the proviso is added to cl. 3(ii) and not to cl. 3(i). Thus, it cannot be construed that the assessee-firm is entitled to office allowance only at the end of the year. 6. THE proviso specifically mentions the case of commission and nothing in the proviso can be referable to the case of monthly allowance for the office. Further, the proviso is added to cl. 3(ii) and not to cl. 3(i). Thus, it cannot be construed that the assessee-firm is entitled to office allowance only at the end of the year. This conclusion follows from the obvious fact that the office allowance and the commission do not stand on the same footing, inasmuch as the office allowance has specifically been quantified as "Rs. 500 per month", and the commission from its very nature cannot be ascertained or paid except at the end of the year. THE office allowance, therefore, payable to the said four companies, had accrued at the end of every month and, as such, the relinquishment of such allowance on 5th July, 1953, would not entitle the assessee to claim deduction of the said Rs. 18,000. But as the accounting period expires on 11th July, 1953, and the date of the resolution relinquishing the office allowance is 5th July, 1953, the assessee is entitled to claim deduction of the office allowance for the last month only. Mr. Ghosh's next argument is that both the office allowance and the commission payable to the assessee-firm under its agreement with M.G.R. Iron and Steel Works Ltd. should have been excluded from its total income by the ITO inasmuch as the office allowance and the commission receivable from M.G.R. Iron and Steel Works Ltd. have been given up by the assessee in pursuance of its resolution dt. 30th Sept., 1953. Mr. Ghosh has frankly stated that there is nothing to show that in the relevant previous year ending on 11th July, 1953, there has been any root or germ which would be referable to the assessee's subsequent decisions relinquishing the office allowance and the commission in September, 1953. Adopting the principles laid down in the aforesaid Supreme Court cases, CIT vs. Shoorji Vallabhdas and Co. (1962) 46 ITR 144 (SC) and Rungta Sons Ltd. vs. CIT. (1964) 54 ITR 447 (SC), we hold that the said sum of Rs. 6,000 has already accrued within the previous year and, as such, has rightly been included in the total income of the assessee. In view of the above Supreme Court decision and our construction of cl. (1962) 46 ITR 144 (SC) and Rungta Sons Ltd. vs. CIT. (1964) 54 ITR 447 (SC), we hold that the said sum of Rs. 6,000 has already accrued within the previous year and, as such, has rightly been included in the total income of the assessee. In view of the above Supreme Court decision and our construction of cl. 3 of the agreement, as stated above, it is not necessary for us to discuss the two other cases which Mr. Ghosh has cited, namely, E. D. Sassoon and Co. Ltd. vs. CIT ((1954) 26 ITR 27 (SC) and Shri Ambica Mills Ltd. vs. CIT (1960) 39 ITR 1(SC) For the reasons stated above, the answers to the questions of law under reference may be stated as follows :- 1. Yes ; but the office allowance payable for the last month by M/s Rungta Engineering Construction Co. Ltd., Orient Industrial Engineering Co. Ltd., Bengal General Trading Co. Ltd. and Orient Potteries Ltd. is not the income of the assessee and should be excluded from the assessee's total income. 2. Yes. 7. EACH party to bear and pay the costs of this reference.