MORVI INDUSTRIES LTD. versus COMMISSIONER OF INCOME TAX (CENTRAL) CALCUTTA

Citation: [1972] 1 S.C.R. 970 · Decided: 05-10-1971 · Supreme Court of India · Bench: K.S. HEGDE · Disposal: Dismissed

Judgment (excerpt)

970 
MORVI INDUSTRIES LTD. 
v. 
COMMISSIONER OF INCOME TAX (CENTRAL) 
CALCUTTA 
October 5, 1971 
[K. S. HEGDE, A. N. GROVER AND H. R. KHANNA, JJ.] 
111come-tax · Act, 1922, ss. 4(1) (b) (i) 
and 
10(2) (xv)-Income 
accrues' when it becomes due-Relinquishment of office allowG.nce and 
commission by managing agent after they had become due on the 
ground that managed compan,v had suffered losses-Relinqufshmelll made 
after amounts had become due und~r agreement but before they hcd be-
come payable-Amounts rightly included in total income-Relinquished 
amounts not deductible as expenses under s. !0(2)(xv) when the rtlin· 
quishment is not for purpose of assessee's business or on ground of com .. 
mercial expediency. 
The appellant, a limited company, was 
managing agent of another 
company. 
Under the terms of the agreement the appellant company was 
entitled to receive a fixed monthly sum as office allowance and commis-
sion at fixed rates on net profits and purchases and sales of cotton and 
yarn. 
The managed company's accounting year closed on the 30th day 
of December every year and that of the appeiiant company on the 30th 
.da)' of June every year. 
Under cl. 2(e) of the managing agency agree-
ment the commission was due on the 31st day of December every year 
and it was payable immediately after the annual accounts of the managed 
company had been passed in the General meeting. 
The Annual General 
meetings of the managed company were held to adopt the accounts ·for 
the relevant accounting years on November 24, 1955 and July 21, 1956. 
The amounts of commission in terms of the cl. 2 ( e) were thus 'due' on 
31st December 1954 and 31st December 1955 and were 'payable' imme· 
diately aft~r 24th November 1955 and 21st July 1956 respectively. Since 
the managed company had suffered losses in the preceding years the 
appeiiailt relinquished the commission as weii as tho office allowance by 
resolutions of the Board of Directors dated April 4, 1955 and June 19. 
1956. On these dates the amounts of commission relinquished had become 
'duo' but not 'payable'. 
The Income-tax Officer in making the assess-
ments for the 1955-56 and 1956-57 did not make any allowance for the 
amounts relinquished and included them in the total income of the 
appellant. 
ACCQrding to the Income-tax Officer the office allowance had 
Deen relinquished ex-graf1Ja and the commission had been relinquished 
after it had accrued. 
Tu~ Appellate Assistant Commissioner and the 
Appellate Tribunal confirmed the order of the Income-tax Officer. 
In 
reference th~ High Court held: (i) that the accrual of income was com-
p1cte within the accounting year of the managed company and as no 
relinquishment had been done before the amount became due, the ca-;c 
came within the ambit of s. 4(1)(b)(i) of the Income-tax Act. 1922. 
(ii) that the mlinquishment had not been made for the purpose of facili-
1.ating the legitimate commercial undertaking or by \\!ay of commercial 
cxoediency and the case was not thenofore covered bys. 10(2)(xv). In 
<Jppeal to this Court, 
HELD: (i) According to s. 4(1)(b)(i) of the Act. subjoct to the 
pfovisions of this Act the total income of any previous year of 
nny person includes all income profits and gains from 
whatever 
source 
ttlerived which if such a person is re:side~t in the taxable territQries during 
A 
B 
c 
D 
E 
F 
G 
II 
A 
B 
c 
D 
E 
F 
G 
H 
MORYi INDUSTRIES v. C.I.T. (Khanna, J.) 
971 
such year accrue or arise of lhe deemed to accrue or arise to him 
in the taxable territories !hat year. The dictionary meaning of the 
word 'accrue' is to come as an accession, increment, or produce; 
to 
fall to one by way of advanta!)e; to fall due.' The income can thus be 
said to accrue when it becomes due. 
The postponement of the date of · 
payment has a bearing only in so far as the time of payment is concerned, 
but it does not affect the accrual of income. 
The moment the income 
accrues, the assessee gets vested with the light to claim that amount, even 
though it may not be payable immediately. 
There also arises a corres-
ponding liability of the other. party from whom the income becomes due 
to pay that amount. 
The further facts that the amount of income is 
not subsequently received by the assessee would also not detract from 
or efface the accirual of the income, although the non-receipt may, in 
appropriate cases, be a valid ground for claiming deductions. The accrual 
of an income is not to be equated with t

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