My company gave up its managing agency commission by a board resolution because the managed company was in losses. The resolution came after the commission fell due but before it was payable. Is it still taxable in my hands?
Yes. The Supreme Court held that income accrues when it becomes due, and that postponing the date of payment bears only on the time of payment, not on accrual. Under the agency agreement the commission fell due on 31 December each year and was payable only after the managed company's accounts were adopted in general meeting. The board resolutions giving up the commission and the office allowance came after the amounts had fallen due. Since the assessee kept its books on the mercantile system and gave the amounts up unilaterally after accrual, they remained part of its total income.
Decided by the Supreme Court (Supreme Court of India; Hans Raj Khanna, K.S. Hegde and A.N. Grover JJ. Judgment by Khanna J) on 1971-10-05, reported as (1971) 82 ITR 835; AIR 1971 SC 2396; (1972) 1 SCR 970; (1972) 4 SCC 451; 1974 SCC (Tax) 140; 1971 Tax LR 1558. It bears on section 5, section 37(1), section 145 of the Income Tax Act 1961, in Assessment & Scrutiny and Deductions & Disallowances matters.
This is the case practitioners reach for on the difference between income that never arose and income given up after it arose. Shoorji Vallabhdas holds that where income does not result at all there is nothing to tax even if a book entry was made; Morvi Industries marks the other side of the line. Once the right to receive has vested, a unilateral surrender is a disposition of income already earned and does not undo the accrual. The Court also fixed the plain meaning of accrue, which is to fall due, and separated it from receipt by reference to the structure of the charging section itself. The second holding is equally useful: an amount given up cannot be converted into a deduction unless the assessee can show the surrender served its own business or commercial expediency, and a surrender that only weakens the assessee and does not strengthen the payer will not qualify.
Binding on every court and authority in India.
Read aloud by your device. Press again to stop.
The appellant was the managing agent of Shree Ramesh Cotton Mills Ltd, Morvi, which was its wholly owned subsidiary, under an agreement of 30 December 1946. It was entitled to a fixed office allowance of Rs 1,000 a month, commission at 12.5 per cent of net profits, and further commission at 1 per cent on purchases of cotton and on sales of cloth and yarn. The managed company made losses, so the profit-based commission was nil, but the turnover commission came to Rs 38,719 and Rs 1,963 for the two years, which with the office allowance of Rs 12,000 a year made Rs 50,719 and Rs 13,963. Clause 2(e) said the commission was due on 31 December each year and payable immediately after the annual accounts were passed in general meeting. The general meetings were held on 24 November 1955 and 21 July 1956. By board resolutions of 4 April 1955 and 19 June 1956 the appellant relinquished the amounts, that is, after they were due but before they were payable. The Income-tax Officer included both sums in total income for assessment years 1956-57 and 1957-58; the Appellate Assistant Commissioner, the Tribunal and the Calcutta High Court agreed.
Both appeals were dismissed, without costs. The commission had accrued on 31 December 1954 and 31 December 1955 respectively, and the office allowance likewise, so the sums of Rs 50,719 and Rs 13,963 were rightly included in the appellant's total income for the two assessment years. Deferring payment until the managed company's accounts had been adopted in general meeting did not affect that accrual. Since the amounts were given up unilaterally after they had accrued, the appellant could not escape tax on them. On the alternative claim, the relinquished amounts could have been allowed under section 10(2)(xv) of the 1922 Act only if they were expenditure laid out wholly and exclusively for the appellant's business. There was nothing to show that the surrender was for the purpose of the appellant's business, and this was not a case of amounts being given up on grounds of commercial expediency or to advance the assessee's business interest. The High Court's conclusion on both questions was upheld.
The Court began with the charging provision. Section 4(1)(b)(i) of the 1922 Act brings to charge income which accrues or arises to a resident during the previous year, and the dictionary sense of accrue is to fall due. Income therefore accrues when it becomes due; the moment it does, the assessee is vested with the right to claim it and a corresponding liability arises in the payer, even if the money is not payable at once. Postponement of the date of payment goes only to the time of payment. Nor does later non-receipt efface an accrual, though in an appropriate case it may found a claim for a deduction. That accrual and receipt are distinct is shown by the section itself, clause (a) dealing with receipt and clause (b) with accrual. Because the appellant kept its books on the mercantile system, under which sums legally due are credited before they are received and liabilities are debited before they are discharged, the entries reflected nothing more than accrual at the material time. The Court then distinguished Shoorji Vallabhdas, where the managing agent had agreed to take a smaller remuneration so that the agency could be transferred: there the income never resulted, so there was neither accrual nor receipt. Here the entitlement had crystallised under clause 2(e) and was given up afterwards by the appellant's own one-sided act, which is a disposal of accrued income rather than a failure of income to arise. On the deduction, the enquiry was whether the surrender served the appellant's business; the Tribunal had found that the managed company's accumulated loss was unaffected while the appellant was left poorer, so no commercial expediency was shown.
The income can thus be said to accrue when it becomes due. ... The moment the income accrues, the assessee gets vested with the right to claim that amount even though it may not be payable immediately.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppYes. The Supreme Court held that income accrues when it becomes due, and that postponing the date of payment bears only on the time of payment, not on accrual. Under the agency agreement the commission fell due on 31 December each year and was payable only after the managed company's accounts were adopted in general meeting. The board resolutions giving up the commission and the office allowance came after the amounts had fallen due. Since the assessee kept its books on the mercantile system and gave the amounts up unilaterally after accrual, they remained part of its total income. This was decided by the Supreme Court (Supreme Court of India; Hans Raj Khanna, K.S. Hegde and A.N. Grover JJ. Judgment by Khanna J) and bears on section 5, section 37(1), section 145 of the Income Tax Act 1961. It is reported as (1971) 82 ITR 835; AIR 1971 SC 2396; (1972) 1 SCR 970; (1972) 4 SCC 451; 1974 SCC (Tax) 140; 1971 Tax LR 1558. This is the case practitioners reach for on the difference between income that never arose and income given up after it arose. Shoorji Vallabhdas holds that where income does not result at all there is nothing to tax even if a book entry was made; Morvi Industries marks the other side of the line. Once the right to receive has vested, a unilateral surrender is a disposition of income already earned and does not undo the accrual. The Court also fixed the plain meaning of accrue, which is to fall due, and separated it from receipt by reference to the structure of the charging section itself. The second holding is equally useful: an amount given up cannot be converted into a deduction unless the assessee can show the surrender served its own business or commercial expediency, and a surrender that only weakens the assessee and does not strengthen the payer will not qualify. If it applies to you, the first step is this: Fix the date the right to receive vested by reading the contract, not the date of payment or the date of the resolution; a clause that defers payment until accounts are adopted does not defer accrual.
The appellant was the managing agent of Shree Ramesh Cotton Mills Ltd, Morvi, which was its wholly owned subsidiary, under an agreement of 30 December 1946. It was entitled to a fixed office allowance of Rs 1,000 a month, commission at 12.5 per cent of net profits, and further commission at 1 per cent on purchases of cotton and on sales of cloth and yarn. The managed company made losses, so the profit-based commission was nil, but the turnover commission came to Rs 38,719 and Rs 1,963 for the two years, which with the office allowance of Rs 12,000 a year made Rs 50,719 and Rs 13,963. Clause 2(e) said the commission was due on 31 December each year and payable immediately after the annual accounts were passed in general meeting. The general meetings were held on 24 November 1955 and 21 July 1956. By board resolutions of 4 April 1955 and 19 June 1956 the appellant relinquished the amounts, that is, after they were due but before they were payable. The Income-tax Officer included both sums in total income for assessment years 1956-57 and 1957-58; the Appellate Assistant Commissioner, the Tribunal and the Calcutta High Court agreed. The matter was decided on 1971-10-05 by the Supreme Court (Supreme Court of India; Hans Raj Khanna, K.S. Hegde and A.N. Grover JJ. Judgment by Khanna J). On those facts the Supreme Court held as follows. Both appeals were dismissed, without costs. The commission had accrued on 31 December 1954 and 31 December 1955 respectively, and the office allowance likewise, so the sums of Rs 50,719 and Rs 13,963 were rightly included in the appellant's total income for the two assessment years. Deferring payment until the managed company's accounts had been adopted in general meeting did not affect that accrual. Since the amounts were given up unilaterally after they had accrued, the appellant could not escape tax on them. On the alternative claim, the relinquished amounts could have been allowed under section 10(2)(xv) of the 1922 Act only if they were expenditure laid out wholly and exclusively for the appellant's business. There was nothing to show that the surrender was for the purpose of the appellant's business, and this was not a case of amounts being given up on grounds of commercial expediency or to advance the assessee's business interest. The High Court's conclusion on both questions was upheld.
The Court began with the charging provision. Section 4(1)(b)(i) of the 1922 Act brings to charge income which accrues or arises to a resident during the previous year, and the dictionary sense of accrue is to fall due. Income therefore accrues when it becomes due; the moment it does, the assessee is vested with the right to claim it and a corresponding liability arises in the payer, even if the money is not payable at once. Postponement of the date of payment goes only to the time of payment. Nor does later non-receipt efface an accrual, though in an appropriate case it may found a claim for a deduction. That accrual and receipt are distinct is shown by the section itself, clause (a) dealing with receipt and clause (b) with accrual. Because the appellant kept its books on the mercantile system, under which sums legally due are credited before they are received and liabilities are debited before they are discharged, the entries reflected nothing more than accrual at the material time. The Court then distinguished Shoorji Vallabhdas, where the managing agent had agreed to take a smaller remuneration so that the agency could be transferred: there the income never resulted, so there was neither accrual nor receipt. Here the entitlement had crystallised under clause 2(e) and was given up afterwards by the appellant's own one-sided act, which is a disposal of accrued income rather than a failure of income to arise. On the deduction, the enquiry was whether the surrender served the appellant's business; the Tribunal had found that the managed company's accumulated loss was unaffected while the appellant was left poorer, so no commercial expediency was shown. In the words reproduced by the source cited on this page: "The income can thus be said to accrue when it becomes due. ... The moment the income accrues, the assessee gets vested with the right to claim that amount even though it may not be payable immediately."
It was decided by the Supreme Court on 1971-10-05 and is reported as (1971) 82 ITR 835; AIR 1971 SC 2396; (1972) 1 SCR 970; (1972) 4 SCC 451; 1974 SCC (Tax) 140; 1971 Tax LR 1558. 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 5, section 37(1), section 145, 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 department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. Both appeals were dismissed, without costs. The commission had accrued on 31 December 1954 and 31 December 1955 respectively, and the office allowance likewise, so the sums of Rs 50,719 and Rs 13,963 were rightly included in the appellant's total income for the two assessment years. Deferring payment until the managed company's accounts had been adopted in general meeting did not affect that accrual. Since the amounts were given up unilaterally after they had accrued, the appellant could not escape tax on them. On the alternative claim, the relinquished amounts could have been allowed under section 10(2)(xv) of the 1922 Act only if they were expenditure laid out wholly and exclusively for the appellant's business. There was nothing to show that the surrender was for the purpose of the appellant's business, and this was not a case of amounts being given up on grounds of commercial expediency or to advance the assessee's business interest. The High Court's conclusion on both questions was upheld. It arises in Assessment & Scrutiny and Deductions & Disallowances matters, on section 5, section 37(1), section 145 of the Income Tax Act 1961, and was decided by Supreme Court of India; Hans Raj Khanna, K.S. Hegde and A.N. Grover JJ. Judgment by Khanna 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. If income is to be given up, do it by agreement varying the entitlement before the amount falls due, and record the commercial reason; a unilateral post-accrual surrender will be taxed. Where a surrender has already happened, build the section 37(1) claim on evidence that it advanced the assessee's own business, such as protecting a source of income or a continuing commercial relationship, and expect the officer to ask what the assessee gained. Do not argue non-receipt on its own under the mercantile system; the Court held non-receipt does not efface accrual, though it may found a separate claim for a deduction.
Still good law. The source page records the decision as cited in nearly two hundred later cases, and it remains the standard authority for the proposition that accrual means falling due and that a unilateral surrender after accrual does not undo it. It construes sections 4(1)(b)(i) and 10(2)(xv) of the 1922 Act, whose successors are sections 5 and 37(1) of the 1961 Act in substantially the same terms. Its later history was not separately traced in this session. 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.
The batch line gave the sections as 5 and 145; the judgment turns on sections 4(1)(b)(i) and 10(2)(xv) of the Indian Income-tax Act, 1922, whose 1961 Act equivalents are section 5 and section 37(1). Section 145 is not in issue: the mercantile system was admitted and no question of rejecting the accounts arose. The harvested page carries a reporter's headnote above the judgment, which has been disregarded. The text carries transcription errors, including the appeal numbers given as 2093 and 2084 in one place and 2083 and 2084 in another, the second year's figure printed once as Rs 13,973, the turnover commission rate printed once as 1.5 per cent, and the agreement date printed as 30 ember 1946. The judgment does not say whether the managed company had claimed a deduction for the commission in its own assessment. 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.
Both appeals were dismissed, without costs. The commission had accrued on 31 December 1954 and 31 December 1955 respectively, and the office allowance likewise, so the sums of Rs 50,719 and Rs 13,963 were rightly included in the appellant's total income for the two assessment years. Deferring payment until the managed company's accounts had been adopted in general meeting did not affect that accrual. Since the amounts were given up unilaterally after they had accrued, the appellant could not escape tax on them. On the alternative claim, the relinquished amounts could have been allowed under section 10(2)(xv) of the 1922 Act only if they were expenditure laid out wholly and exclusively for the appellant's business. There was nothing to show that the surrender was for the purpose of the appellant's business, and this was not a case of amounts being given up on grounds of commercial expediency or to advance the assessee's business interest. The High Court's conclusion on both questions was upheld.
TaxSphere, “Morvi Industries Ltd v CIT”, https://taxnotice.vittsphere.com/caselaw/case/morvi-industries-v-cit-accrual-when-income-falls-due/ (validity last checked 2026-08-29)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
My closing stock is worth more than it cost me. Does the rise in value get taxed, and does it matter that the goods were lying outside the place where I trade?
The AO has taxed my advance licence and DEPB benefits in the year I exported. Is that the right year?
An arbitrator enhanced the compensation for my land, the State has appealed against the whole of it, and I have taken the money out of court against a security bond. Has that enhanced amount accrued to me?
We are an NBFC. The AO wants interest on a non-performing loan taxed on accrual even though we have not recognised it. Can he do that?
