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E. D. Sassoon & Co. Ltd. v.

CIT

Submitted to:- Submitted by:-


Dr Bhupendra Gautam Abhishek Kalaiyarsan
Faculty: Taxation Law A11921515097
BBA LLB (H) 2015-20
Sec : C
Amity Law School, Noida

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E. D. Sassoon & Co. Ltd. v. CIT
Excerpt
The company formed with objective to acquire and take over as going concern business carried on
firm - assessee-company acquired one of firms at bombay - question referred in appeal whether
assessee-company entitled to claim exemption under section 25 (3) - commissioner observed that
business which was discontinued in year of assessment was not charged to tax on income from share
dealings - assessment to tax on share dealings basic requirement for exemption under section 25 (3)
- assessee-company charged to income tax in all previous years - according to precedent section 25
(3) does not refer to chargeability of income to tax under particular head as condition for obtaining
benefit of exemption - exemption under section 25 (3) is general and not restricted to income
chargeable under the Act. A tax payer who but for it would in the aggregate be charged with tax or,
e in respect of every year's income and twice in respect of one year's income. there is no dispute in
this case that the assessee company had discontinued its business from the 28th december 1948 when
it went into liquidation. the only dispute is, whether the assessee company carried on the business of
the firm which was assessed to tax under the 1918 act and whether the firm was charged to tax under
the 1918 act. it may be mentioned that in sub-section (3) there is a clear reference to the business and
not to the assessee and therefore that sub-section applies even if the person claiming the relief was
not himself charged under the 1918 act but his predecessor-in-interest was so charged.

Introduction

This case study looks at a decision delivered by a three judge bench of the Supreme Court in the year
1954 (a year before the birth of most of the readers and even the author) . The decision is E. D.
Sassoon & Company and Others v. CIT, Bombay City delivered by three judge bench of the Supreme
Court of India (Their Honours Shri S. R. Das, Shri N. H. Bhagwati and Shri Jagannathdas) on 14 May
1954. This was reported in Volume 26 of the 'Income Tax Reports' (' ITR' ) at Page 27. The citation
is therefore ' E.D. Sassoon & Company Ltd and Others v. CIT [ 1954] 26 ITR 27 ( SC). As the reader
will delve further, he/ she will probably find the makings of a classical potboiler so read on&..

FACTS OF THE CASE

E. D. Sassoon & Company Ltd. ( ' the Sassoons' ) were the managing agents of three textile mills
companies in Bombay ( Mumbai was called Bombay then). The Sassoons agreed to transfer their
managing agencies of each of these three companies to three different parties in the previous year
relevant to the Assessment Year ( A. Y. ) 1944 -45. The Sassoons executed deeds of assignments in
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favour of the transferees and the next consideration of Rs. 75, 77, 693 /- received by them was taken
to the ' Capital Reserve' account. The transfer deeds were executed in course of the year 1943. Thus,
for part of the year, the Sassoons were the managing agents of the managed companies and for the
balance part, the managing agency was held by the transferees.

The accounts of the managing agency commission payable by the companies to the respective
managing agents were made up in the year 1944 and the transferees of the managing agencies received
certain amounts from the companies by way of managing agency commission.

The Sassoons did not disclose any part of the amounts received by the transferees in their return of
income for A. Y. 1944 - 45. The entire amount of managing agency commission received by the
transferees was assessed to income - tax in their hands for the A. Y. 1945 -46. The transferees
contended that the managing agency commission received by them should be apportioned on a
proportionate basis between them and the Sassoons. The matter was litigated and ultimately reached
the Supreme Court as a result of the tax authorities reopening the assessments of the Sassoons
contending that they has not earned any commission and the higher appellate authorities holding that
a proportionate part of the commission was taxable in their hands as well.

The common question of law raised in the appeals was whether the managing agency commission
was to be apportioned between the Sassoons and the transferees in proportion to the services rendered
by each one of them and that turned upon whether any income accrued to the Sassoons on the dates
of the transfers if the respective managing agencies or at any time thereafter.

Let us now look at the terms of the relevant agreements which may provide guidance in the matter.
The original agreement with E. D. Sassoon United Mills Ltd. was entered into on 24th February 1920
by Shri Edward Sassoon and Others ( M/ S E. D. Sassoon & Co. ) . This managing agency was
transferred to the Sassoons with the consent of the company and another managing agency agreement
was executed between the Company and the Sassoons on 2nd October 1934. Under Clause 1 of the
said agreement, The Sassoons and their assigns were appointed as the agents of the Company for a
period of 30 years from the date of registration thereof and thereafter until they resigned or were
removed by a special resolution. Under clause 2 of the agreement, the remuneration of the Sassoons
or their assigns was fixed at a commission of 7 percent per annum on the annual net profits of the
company after taking into account all proper allowances and deductions from revenue provided
however that in any year no such commission was earned or it fell short of Rs. 1, 20, 000, the company
was to pay them a sum sufficient to make up the minimum remuneration of Rs. 1, 20, 000 per annum
on account of commission.

As per Clause 2 (d) the said commission was to be due to them yearly on the 31st of March in each
and every year during the continuance of the agreement and was to be payable to and paid
immediately after the annual accounts if the company had been passed by the shareholders. Clause

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10 of the agreement permitted the Sassoons to assign the managing agency but the transferee would
be governed by the terms agreed to in the agreement with the Sassoons.

The letter between the Sassoons and the transferees recording the transfer of the managing agency
provided that in the event of the transaction being completed in its entirety, the transferees would be
entitled to receive the commission payable by the company in terms of the managing agency
agreement on the profits for the calendar year 1943. No such term was however incorporated in the
deed of assignment and transfer.

THE KEY ISSUE INVOLVED

When the Tribunal and the High Court held that the income from the managing agency commission
was taxable in the hands of both the Sassoons and the transferees proportionately, on the basis that
income had accrued to each of them on the basis of services rendered. The Sassoons on the other
hand, believed and urged before the Supreme Court that no part of the managing agency commission
for the broken period of 1943 was earned by them. It did not become a debt due to them from the
companies and therefore did not accrue to them. As per the terms of the contracts that the Sassoons
had with the managing companies, the remuneration (managing agency commission) was payable to
them only after the end of the year. Therefore, the Sassoons had not earned any commission for the
broken period, they could not have and did not assign the same to the transferees were paid the
commission in terms of the managing agency agreements in their own right even though they had not
rendered services to the company for the entire year 1943.

The transferees contended that they had only earned that part of the commission that was
commensurate to the services rendered by them. For the earlier part of the year, the services were
rendered by the Sassoons and the commission for that part of the year should therefore be taxed only
in the hands of the Sassoons. The key question therefore was what was the point of time when the
income accrued? Did it accrue on the rendering if the services or did it accrue when the accounts were
made up? If it was the latter, who did it accrue to, the two parties proportionately or only to the
transferees.

SUPREME COURT' S DECISION

As mentioned earlier, the decision was delivered by a three judge bench namely Shri S. R. Das, Shri
N. H. Bhagwati and Shri Jagannathdas. There was a difference of opinion between Shri S. R. Das and
Shri N. H. Bhagwati on the one hand and Shri Jagannathdas on the other. Let us first deal with the
decision of the majority which is considered to be a decision of the Court. The dissenting judge ( in
this case Shri Jagannathdas) well within his rights has written a separate order we shall allude to later.

The majority held that no part of the managing agency commission accrued to the Sassoons. The
majority cited that the following propositions for holding as such :-
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a) When a contract for service is an entire contract, providing for payment on the completion of a
definite period of service, it is a condition precedent to the recovery of any remuneration thereunder,
that the service or duty shall be completely performed unless either of the contract is altered so as to
enable the performer of the service to regard it as an end, or unless there is a usage that the
remuneration is payable in proportion to the time actually served.

b) Section 219 of the Indian Contract Act provides that in the absence of any special contract, payment
for performance of any act is not due until the completion of such act.

c) Several English decisions were relied on in support of the proposition.

d) The terms of the managing agency agreements clearly provided that the commission became due
to the managing agents yearly on the 31st of March of each year. Plus, the commission was expressed
as a percentage of the ' profits' of the companies which were ascertained only after the close of the
accounting year of the company. Until and unless the accounting year of the company had come to
an end, the profits for that year could not be determined.

e) Profits of a company do not accrue from day to day but can be determined only at the end of an
accounting year on the closure of the books of account for that year.

f) The fact that the managing agency agreements permitted the managing agents to assign their rights,
title and interest thereunder, did not ipso facto entitle the transferors to proportionate commission
upto the date of transfer. Neither did such a closure result in proportionate income accruing to the
transferors.

g) Accrual per se meant a debt becoming due in favour of a person. In this case, no debt becam due
in favour of the Sassoons ever.

The majority thus decided that no part of the managing agency commission for the year 1943 could
be taxed in the hands of the Sassoons. There are several interesting observations that the learned
judges have made in arriving at this view.

As mentioned earlier, there is also a dissenting view by Justice Shri Jagannathdas which states that
the rendering of the services is the clause of the accrual of income.

If I continue discussing certain key observations of the majority as well as the decision of Justice Shri
Jagannathdas, this article will become too long. I am therefore constrained to end Part I here and will
come back with Part II next week. Till then, do give your feedback on the concept and this article and
watch out for Part II.

Conclusion

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This decision is notable because it, to my mind, gives us clarity on one fundamental principle, that of
accrual of income. It tells us that income accrues to a person when the recipient when an irrevocable
right to receive it vests in the recipient. This to my mind is quite fundamental to any student of
income- tax. The charge of tax gets attracted only on accrual of income in favour of the taxpayer. It
also tells us that profits of a business accrue to its owners at the end of the previous year, to be precise,
on the completion for the last day of the previous year. This also is fundamental to the taxation of
business income. The facts and the judgement of the majority and the dissenting judge are already a
part of the Tax Nostalgia series and I would not want to repeat them here. When one applies the
principles laid down to the facts of that case, one may probably be a bit puzzled as to the factual
decision arrived at.