1969 PLP 607 (PTD)

ABDUS SATTAR, J.‑This appeal by special leave is directed against the judgment and order of a Division Bench of the High Court of West Pakistan at Karachi, dismissing a writ petition filed by the appellants challenging an order passed by the respondent No. 1, assessing them to Income‑tax in the sum of Rs. 77,169 for the year 1948‑49 and directing to pay penal interest of Rs. 59,

081. The facts, relevant for the disposal of the appeal, may be stated as follows :‑ By an agreement dated the 14th J4unary 1937, the appellants were appointed the Managing Agents of the Associated Cement Companies Limited, Bombay, which own two Cement Factories in Pakistan, one at Rohri, and the other at Wah. Both of the Companies were incorporated under the Indian Companies Act, 1913 on the 18th August 1936, and have their head offices in Bombay and are therefore non‑residents in Pakistan. On the 11th of December 1962, respondent No. 1 issued notices under section 34 of the Income‑tax Act to the appellants on the ground that their income for the year 1948‑49 ending 31st March 1949, had escaped assessment. In response to these notices a return showing an income of Rs. 88,194 was filed by the appellants in the status of a non‑resident company, The Income‑tax Officer assessed the appellants' income in Pakistan at Rs. 1,76,388 and further imposed penal interest of Rs.59,

081. He, therefore, by a notice issued on the 31st October 1963, under section 29 of the Act demanded payment of Rs. 77,169 as Income‑tax and Rs. 59,081 as penal interest. The appellant filed an appeal against the order of assessment before the Appellate Assistant Commissioner of Income‑tax; Karachi: An application for stay of recovery of the amounts in question was filed but it was rejected. They then filed the writ petition in which the main contention was that they employed the mercantile system of account and had adopted the English calendar year as the accounting year. The annual accounts of the Company, therefore, are closed on the 31st December each year. Under the managing agency agreement, the managing agency commission was to become due on the 31st March every year but it had been the practice of the managed company to finalise its accounts on the 31st July since its incorporation. Accordingly for the accounting year 1946‑47 the accounts of the managed company were finalised on the 31st July 1947 and a sum of Rs. 10,44,404 was shown in the balance‑sheet of the managed company as commission due to the appellants on that date. It was, therefore, urged, inter alia, that as the income in question had accrued to the appellants before the 14th of August 1947, it was not assessable to income‑tax in view of the proviso to subsection (2‑A) of section 34 of the Act. The learned Judges of the High Court did not accept this contention and affirmed the view of the Department in this regard. The Income‑tax Officer in repelling this argument of the appellants observed as follows :‑ "The Assessee's other contention is that under the terms of Managing Agency Commission Agreement the remuneration payable by the managed company accrued due to this company on 31st July in each year when the managed company prepares its accounts and therefore, it is urged that the remuneration for the assessment year 1948‑49 accrued due to the company on 31st July 1947, the date of closing account i.e., before 14th August 1947, and it is, therefore, agitated by them that the company is not liable to tax in terms of the proviso to section 34 (2‑A) of the Income‑tax Act. The contention of the assessee is not correct. Under the terms of agreement with the managed company the managing agency commission shall be payable and be paid immediately after the annual accounts of the company shall have been passed by the share‑holders. Even in the subsequent agreement the remuneration payable to the managing agents is payable after the accounts of the company for such year have been audited and laid before the company in general meeting. The accounts of the managed company, no doubt, were closed on the 31st July 1947, but the remuneration of the managing agents could not be calculated on the day of closing of the accounts as the remuneration payable to them depends upon the arriving at of the net annual profits of the managed company which was again not possible on the day of closing of the accounting year. Besides, for such purpose the accounts had to be audited and all this happened much later. The accounts of the managed company were audited on 5‑12‑1947, and the net profit of the managed company was arrived at much later after the 14th of August 1947, and naturally the remuneration became payable only after such audit i.e. after 5‑12‑1947. The accounting year of the assessee also ends on 31‑12‑1947. Hence the income from managing agency of the assessee is liable to tax for assessment year 1948‑49." In the agreement for Managing Agency, the conditions regarding commission are to be found in clauses 2(a) and 3 which are in the following terms :‑ "2(a).‑From and after the registration of the Company a commission upon the annual net profits of the Company at the rate of 7 % but subject to the proviso hereinafter contained and calculated in the manner hereinafter appearing." "

3. The said commission shall be due to the Managing Agents on the 31st day of March in each and every year during the continuance of this Agreement and shall be payable and be paid immediately after the annual accounts of the Company shall have been passed by the share‑holders." The proviso to subsection (2‑A) of section 34 of the Act reads as follows :‑ "Provided that no notice under subsection (1) shall be issued in respect of income, profits and gains which were received or are deemed to have been received, or which accrued or arose or are deemed to have accrued or arisen to an assessee before tile fourteenth day of August 1947." The question that falls for determination is when did the income on account of Managing Agency commission for the relevant year accrue to the appellants. It is not disputed that the accounts of the managed company were finalised on the 31st July 1947. The learned Judges of the High Court have taken the view that since the income earned by the appellants on account of Managing Agency commission became a debt on 5‑12‑1947, the date on which the Auditors submitted their report, it could not be said that the income had accrued before the 14th of August 1947. The words `income', `is received', `accrue' and `arise' have not been defined in the Act. The Privy Council in the case of Commissioner of Income‑tax, Bengal v. Shaw Wallace & Co. (59 Cal. 1342, 1352), while attempting to define the term "income" said :‑ "Income, their Lordships think, in the Indian Income‑tax Act, connotes a periodical monetary return `coming in' with some sort of regularity, or expected regularity from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall." The policy of the Act is to make the amount of income taxable when it is received either actually or constructively. So far as the words "accrue" and "arise" are concerned, we are to take the ordinary dictionary meanings of these words. Since both the words have been used in the provision in question they must be taken to have distinct meanings. "Accrues" conveys the sense of growing up by way of addition or increase or as accession or advantage; while the word "arises" connotes comes into existence or notice or presents itself. It is, however, to be noticed that these two words have been used in contradistinction to the word "receive" indicating a right to receive. The words `accrues' and `arises' "represent a state anterior to the point of time when the income becomes receiveable and connote a character of the income which is more or less inchoate". The facts of this case clearly indicate that the income in question accrued to the appellants when the accounts of the managed company were finalised on the 31st of July 1947. While we agree with the learned Judges of the High Court that the Managing Agency commission for the year did not become payable to the appellants until the 5th of December 1947, when the Auditors submitted their report, we are unable to accept their view that the income did not accrue to the appellants before that date. The appellants earned their income for the services rendered to the managed company. The income was earned as soon as the rendering of services was over. This Court in the case of Octavius Steel & Co. Ltd. v. The Commissioner of Income‑tax, Dacca (P L D 1960 S C 371) observed:‑ "The statute does not require that income in order to be taxable should also be recoverable. It speaks of accruing and arising and it has long been settled that the aspect of accrual or arising is to be understood in contradistinction to the act of receiving, which ordinarily follows and may often follow long after the accrual or arising of the income." The underlying principle is dabitum in praesenti, solvendum in futuro. We are, therefore, of the view that in the present case the income on which tax was assessed was earned and a debt was created in favour of the appellants on the 31st of July 1941, and therefore no income‑tax could be levied on this income in view of the proviso to subsection (2‑A) of section 34 of the Act. As we have found that no income‑tax was payable on the income in question, it is not necessary for us to go into the question of the legality of the imposition of penal interest. In the result the appeal is allowed. The judgment and order of the High Court is set aside. The order of assessment and imposition of penal interest made by the Income‑tax Officer is quashed. Regard being had, however, to the facts of the case, the parties are directed to bear their own costs. Appeal allowed.