I credited commission in my books at the contracted rate but agreed during the year to take a lower rate. Am I taxed on the higher figure?
No, on these facts. The Supreme Court held that where the agreement itself is altered during the previous year so that the income which accrued and was received is the smaller amount, the larger figure never resulted as income at all, and a book entry cannot make it taxable. Income-tax is a levy on income; the Act fixes two points of time, accrual and receipt, but the substance is the income. The Court distinguished income actually received and later given up, which may still be taxed, from income that never resulted.
Decided by the Supreme Court (Supreme Court of India - J.C. Shah and M. Hidayatullah JJ; judgment by Hidayatullah J) on 1962-03-27, reported as [1962] 46 ITR 144 (SC). It bears on section 4 of the Indian Income-tax Act, 1922, section 10(2)(xv) of the Indian Income-tax Act, 1922, section 5, section 28, section 37(1) of the Income Tax Act 1961, in Assessment & Scrutiny matters.
This is the short, constantly cited authority for the difference between income that never arose and income that arose and was then relinquished. Practitioners reach for it whenever the Assessing Officer taxes a figure standing in the books that a contemporaneous variation of the contract has already displaced - a renegotiated fee, a rate cut agreed with a customer, a waiver built into the arrangement. Two limits are worth as much as the holding. The relief comes from the timing: the variation here was agreed within the previous year, so the right to the larger sum ceased before the year closed, and the Court noted that the formal resolutions in December 1948 came later without affecting that. And it works only where the income truly did not result; where money has been received and is then surrendered while remaining the recipient's income, tax is still payable.
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The assessee was a firm of three partners, Shoorji Vallabhdas and his two sons. It was managing agent of several shipping companies, including Malabar Steamship Co Ltd under an agreement of 16 September 1938 as modified on 7 December 1943, and New Dholera Steamships Ltd under an agreement of 8 June 1946. Its commission was 10 per cent of freight. For the period 1 April to 31 December 1947 that came to Rs 1,71,885 from Malabar and Rs 2,56,815 from New Dholera, credited to itself in its own books with a corresponding debit to the shipping companies. In 1947 the firm floated two private limited companies and, on 20 November 1947, offered to resign the managing agencies in their favour on the same terms. Two shareholders of Malabar objected to the rate by letter of 27 November 1947. The board invited an offer, and the firm offered to accept a reduction to 2.5 per cent of total freight for the current and future years. On 30 December 1947 extraordinary general meetings appointed the two new companies as managing agents from 1 January 1948. The annual general meetings in December 1948 formally reduced the rate. The firm thus gave up 75 per cent of the year's earnings, Rs 1,36,903 and Rs 2,00,625.
The appeal was dismissed with costs. The Supreme Court upheld the Bombay High Court's answer that on these facts the larger income neither accrued to nor was received by the assessee firm in the previous year ended 31 March 1948. The agreements made within the previous year replaced the earlier ones and altered the rate, so that the income which accrued and was received consisted of the lesser amounts and not the larger. The entries in the mercantile books recording commission at 10 per cent as each freight was entered did not make the difference taxable. The Court also rejected the Revenue's characterisation of the arrangement as a voluntary gift by the firm to the shipping companies: the reduction was part of the agreement by which the firm secured a long-term managing agency arrangement for the two companies it had floated. The second question, on deduction under section 10(2)(xv), did not arise and was left unanswered.
The Court took the principle from the Bombay High Court's decision in Chamanlal Mangaldas & Co, which it had itself approved, and which it found almost identical on facts: there too a resolution during the previous year reduced a managing agent's commission, and the assessee was held not liable on the larger sum because after the resolution the right to commission no longer arose under the original agreement. The reason, the Court said, is plain. Income-tax is a levy on income. The Act takes account of two points of time at which liability is attracted, the accrual of income and its receipt, but the substance of the matter is the income; if income does not result at all there cannot be a tax, whatever entry appears in the books. From that the Court drew the line that decides these cases. Where income has in fact been received and is subsequently given up in circumstances that leave it the income of the recipient, tax may be payable. Where income can be said not to have resulted at all, there is neither accrual nor receipt even though an entry to that effect may have been made. Here the terms had been changed within the year, so the smaller sums were the income; and because the reduction was the consideration for securing the long-term agency arrangement, it could not be recast as a gift of income already earned.
If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income which does not materialize.
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Handle my notice → Ask a CA on WhatsAppNo, on these facts. The Supreme Court held that where the agreement itself is altered during the previous year so that the income which accrued and was received is the smaller amount, the larger figure never resulted as income at all, and a book entry cannot make it taxable. Income-tax is a levy on income; the Act fixes two points of time, accrual and receipt, but the substance is the income. The Court distinguished income actually received and later given up, which may still be taxed, from income that never resulted. This was decided by the Supreme Court (Supreme Court of India - J.C. Shah and M. Hidayatullah JJ; judgment by Hidayatullah J) and bears on section 4 of the Indian Income-tax Act, 1922, section 10(2)(xv) of the Indian Income-tax Act, 1922, section 5, section 28, section 37(1) of the Income Tax Act 1961. It is reported as [1962] 46 ITR 144 (SC). This is the short, constantly cited authority for the difference between income that never arose and income that arose and was then relinquished. Practitioners reach for it whenever the Assessing Officer taxes a figure standing in the books that a contemporaneous variation of the contract has already displaced - a renegotiated fee, a rate cut agreed with a customer, a waiver built into the arrangement. Two limits are worth as much as the holding. The relief comes from the timing: the variation here was agreed within the previous year, so the right to the larger sum ceased before the year closed, and the Court noted that the formal resolutions in December 1948 came later without affecting that. And it works only where the income truly did not result; where money has been received and is then surrendered while remaining the recipient's income, tax is still payable. If it applies to you, the first step is this: Date the variation. Show the offer, the acceptance and the board's consideration of it falling inside the previous year - that, not the later formal resolution, is what removes the larger sum.
The assessee was a firm of three partners, Shoorji Vallabhdas and his two sons. It was managing agent of several shipping companies, including Malabar Steamship Co Ltd under an agreement of 16 September 1938 as modified on 7 December 1943, and New Dholera Steamships Ltd under an agreement of 8 June 1946. Its commission was 10 per cent of freight. For the period 1 April to 31 December 1947 that came to Rs 1,71,885 from Malabar and Rs 2,56,815 from New Dholera, credited to itself in its own books with a corresponding debit to the shipping companies. In 1947 the firm floated two private limited companies and, on 20 November 1947, offered to resign the managing agencies in their favour on the same terms. Two shareholders of Malabar objected to the rate by letter of 27 November 1947. The board invited an offer, and the firm offered to accept a reduction to 2.5 per cent of total freight for the current and future years. On 30 December 1947 extraordinary general meetings appointed the two new companies as managing agents from 1 January 1948. The annual general meetings in December 1948 formally reduced the rate. The firm thus gave up 75 per cent of the year's earnings, Rs 1,36,903 and Rs 2,00,625. The matter was decided on 1962-03-27 by the Supreme Court (Supreme Court of India - J.C. Shah and M. Hidayatullah JJ; judgment by Hidayatullah J). On those facts the Supreme Court held as follows. The appeal was dismissed with costs. The Supreme Court upheld the Bombay High Court's answer that on these facts the larger income neither accrued to nor was received by the assessee firm in the previous year ended 31 March 1948. The agreements made within the previous year replaced the earlier ones and altered the rate, so that the income which accrued and was received consisted of the lesser amounts and not the larger. The entries in the mercantile books recording commission at 10 per cent as each freight was entered did not make the difference taxable. The Court also rejected the Revenue's characterisation of the arrangement as a voluntary gift by the firm to the shipping companies: the reduction was part of the agreement by which the firm secured a long-term managing agency arrangement for the two companies it had floated. The second question, on deduction under section 10(2)(xv), did not arise and was left unanswered.
The Court took the principle from the Bombay High Court's decision in Chamanlal Mangaldas & Co, which it had itself approved, and which it found almost identical on facts: there too a resolution during the previous year reduced a managing agent's commission, and the assessee was held not liable on the larger sum because after the resolution the right to commission no longer arose under the original agreement. The reason, the Court said, is plain. Income-tax is a levy on income. The Act takes account of two points of time at which liability is attracted, the accrual of income and its receipt, but the substance of the matter is the income; if income does not result at all there cannot be a tax, whatever entry appears in the books. From that the Court drew the line that decides these cases. Where income has in fact been received and is subsequently given up in circumstances that leave it the income of the recipient, tax may be payable. Where income can be said not to have resulted at all, there is neither accrual nor receipt even though an entry to that effect may have been made. Here the terms had been changed within the year, so the smaller sums were the income; and because the reduction was the consideration for securing the long-term agency arrangement, it could not be recast as a gift of income already earned. In the words reproduced by the source cited on this page: "If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income which does not materialize."
It was decided by the Supreme Court on 1962-03-27 and is reported as [1962] 46 ITR 144 (SC). Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 4 of the Indian Income-tax Act, 1922, section 10(2)(xv) of the Indian Income-tax Act, 1922, section 5, section 28, section 37(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was dismissed with costs. The Supreme Court upheld the Bombay High Court's answer that on these facts the larger income neither accrued to nor was received by the assessee firm in the previous year ended 31 March 1948. The agreements made within the previous year replaced the earlier ones and altered the rate, so that the income which accrued and was received consisted of the lesser amounts and not the larger. The entries in the mercantile books recording commission at 10 per cent as each freight was entered did not make the difference taxable. The Court also rejected the Revenue's characterisation of the arrangement as a voluntary gift by the firm to the shipping companies: the reduction was part of the agreement by which the firm secured a long-term managing agency arrangement for the two companies it had floated. The second question, on deduction under section 10(2)(xv), did not arise and was left unanswered. It arises in Assessment & Scrutiny matters, on section 4 of the Indian Income-tax Act, 1922, section 10(2)(xv) of the Indian Income-tax Act, 1922, section 5, section 28, section 37(1) of the Income Tax Act 1961, and was decided by Supreme Court of India - J.C. Shah and M. Hidayatullah JJ; judgment by Hidayatullah J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Put the commercial reason for the reduction on record. Here the firm reduced its commission to secure a long-term managing agency for the companies it had floated, and the Court held it was therefore not a gift. Do not fight on the books. Reversing or not passing an entry proves nothing either way; the Court said a mere book-keeping entry cannot be income unless income has actually resulted. Keep a fallback deduction claim alive if the facts might instead show receipt and surrender - the High Court here declined to answer the section 10(2)(xv) question once the first was decided for the assessee.
Still good law. The accrual-against-realisation distinction stated here is the one still applied, and the harvested page records the judgment as cited in 417 later decisions. I have not read those later decisions, and I have not checked whether any statutory provision now displaces the result on facts of this kind. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Decided under the Indian Income-tax Act, 1922 - the deduction question was under section 10(2)(xv) of that Act and the appeal came up on a certificate under section 66A(2). The batch line listed sections 5, 145 and 28 of the 1961 Act, which are the corresponding provisions but not what the Court construed. The harvested text carries several evident transcription errors in one paragraph of the judgment (words garbled or run together); the sense is clear and the quoted sentence is from a clean passage, but the exact wording of that paragraph should be checked against a report before it is relied on verbatim. The Court did not decide the alternative deduction question, so this case says nothing about when a relinquishment of received income is deductible. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed with costs. The Supreme Court upheld the Bombay High Court's answer that on these facts the larger income neither accrued to nor was received by the assessee firm in the previous year ended 31 March 1948. The agreements made within the previous year replaced the earlier ones and altered the rate, so that the income which accrued and was received consisted of the lesser amounts and not the larger. The entries in the mercantile books recording commission at 10 per cent as each freight was entered did not make the difference taxable. The Court also rejected the Revenue's characterisation of the arrangement as a voluntary gift by the firm to the shipping companies: the reduction was part of the agreement by which the firm secured a long-term managing agency arrangement for the two companies it had floated. The second question, on deduction under section 10(2)(xv), did not arise and was left unanswered.
TaxSphere, “CIT v Shoorji Vallabhdas & Co”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-shoorji-vallabhdas-co/ (validity last checked 2026-08-29)
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