Taxation Law

E.D. Sassoon & Co. Ltd. v. Commissioner of Income Tax

AIR 1954 SC 470; (1954) 26 ITR 27

Facts

E.D. Sassoon & Co. acted as managing agents of several textile companies.
Under the managing-agency agreements, the agents were entitled to commission calculated as a percentage of the managed companies’ annual net profits.
The commission could be calculated only:
after the accounting year ended;
after the annual accounts were prepared;
after the net profits were ascertained.
During 1943, E.D. Sassoon & Co. transferred its managing agencies to other companies.
The transfers occurred before the end of the accounting year.
The transferee companies completed the remaining period of management and ultimately received the full annual commission.
The Revenue sought to apportion the commission between:
E.D. Sassoon, for the period during which it had rendered services; and
the transferees, for the remaining period.
E.D. Sassoon argued that no part of the commission had accrued to it before the agency was transferred.

When did the managing-agency commission accrue as income?
Did a proportionate part accrue from day to day as the services were performed?
Alternatively, did the commission accrue only after the accounting year ended and an enforceable right to receive it arose?

Income accrues when the assessee acquires an enforceable right to receive it.
There must be:
a debt owed by another person; and
a corresponding legal right in the assessee to demand payment.
Income does not accrue merely because:
services have been partly performed;
the assessee expects to receive money;
the commercial activities leading to income have begun.
The expression “earned” is not identical to “accrued.”
An assessee may perform activities necessary to earn income without obtaining an immediate legal right to payment.
The terms of the governing contract determine when that right crystallises.

The managing-agency agreements did not provide for monthly or daily commission.
The commission was calculated as a percentage of the companies’ net profits for the entire accounting year.
Until the year ended:
the total profits could not be known;
the commission could not be calculated;
no definite amount became payable.
E.D. Sassoon had rendered services for part of the year.
Nevertheless, performance of those services did not create a proportionate debt in its favour.
If the managed company had ultimately made no profit, no commission would have become payable despite the services already rendered.
Therefore, the existence and amount of the commission depended on the year-end financial result.
When E.D. Sassoon transferred its agencies, it transferred the contractual position before any enforceable right to the annual commission had arisen.
The transferees continued the agency until year-end and were the agents entitled under the contracts when the annual net profits were determined.
The Court rejected the idea that income necessarily accrues progressively whenever services are rendered progressively.
That reasoning would rewrite the contractual arrangement by creating a daily entitlement which the parties themselves had not created.
Accrual had to be identified through the legal right to receive, not merely through the passage of time or performance of work.

The Supreme Court held that no proportionate commission accrued to E.D. Sassoon before the transfer of the managing agencies.
The right to receive the commission arose only at the end of the accounting year, when:
annual profits were determined;
the contractual condition was satisfied;
the commission became payable.
The whole commission accrued to the transferee companies.
It could not be apportioned merely according to the period for which each company had rendered services.