Law: Income Tax Act, 1961

Section: 5

Section 5 of the Income-tax Act, 1961 [Corresponding to section 4(1) of the Indian Income-tax Act, 1922] - Income - Accrual of - Assessment year 1948-49 - Assessee-firm was managing agents of two companies - It was entitled to receive as its commission, 10 per cent of freight charged - In 1948 on request of managed companies assessee agreed to reduce commission to 2½ per cent from 10 per cent - In assessment proceedings, ITO took view that amount of larger commission had already accrued during relevant previous year and same was thus assessable - Whether since reduction in share of commission was part of agreement entered into by assessee-firm to secure long-term managing agency agreement for two companies, High Court was right incoming to conclusion that larger income neither accrued nor was received by assessee during relevant assessment year - Held, yes FACTS The assessee-firm was the managing agents of several shipping companies including the M Ltd. and the N Ltd. Under these agreements, the assessee firm was entitled to receive as its commission, 10 per cent of the freight charged. Between 1-4-1947 and 31-12-1947, the amount of commission at the rate of 10 per cent of the freight was Rs. 1,71,885 from the M Ltd., and Rs. 2,56,815 from the N Ltd. These amounts were credited in the books of account of the assessee firm to itself with a corresponding debit to the shipping companies. In 1947, the assessee firm floated two private limited companies, called S Ltd. and P Ltd. The assessee-firm desired to substitute these two companies as the managing agents of the shipping companies, one for each, and on 20-11-1947, expressed its desire to resign from the managing agency and to have the private limited companies appointed on the same terms. Two shareholders of the M Ltd. objected to the rate of commission. They suggested that the commission should be either 10 per cent of the profits of the managed company or 2½ per cent of the freight received. The board of directors of the M Ltd. accordingly invited the assessee firm to make an offer to reduce the managing agency commission to 2½ per cent of freight for the current year as also for the for the future years. As…

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