Income-tax- --

----Salary---Death of assessee---Salary due from employer---Agreement for payment of monthly remuneration or share of profits whichever was higher-- Amount received assessed as salary in prior years---Death of assessee during previous year---Share of profits paid to legal heir of deceased---Assessable as salary---Indian Income Tax Act, 1961, S.15.

Under the provisions of section 15 of the Income Tax Act, 1961, salary which is due from an employer in the previous year, whether paid or not, is chargeable to income-tax.

P was an employee of a company. There was no agreement in writing between P and the employer, but it was an accepted position that remuneration was to be paid to P by the employer at Rs.150 per month or a share of 3 annas 9 piasa in a rupee in the profits of the jewellery department, whichever was higher. The accounts of the employer were closed each year on June 30. It was then that the profits were ascertained and the share in the profits was paid to P. P was assessed from year to year in respect of his remuneration under the head "Salary". P died in January 1961. The employer worked out its profit in the jewellery department for the accounting year ending on June 30, 1961, and determined the remuneration payable to P on a pro rata basis for the period July 1, 196(1 to January 9, 1961. This share in the profits was credited to the account of P. The amount so credited to the account of P on June 30,1961, was Rs.6,75,244. The legal heir of P claimed that this amount was not taxable as the salary of P. The Tribunal upheld the claim of the assessee. On a reference:

Held: that the right to receive a pro rata share in the profits had accrued to the deceased at the time of his death, although the amount was computed after the death of P. The right to receive salary accrued to the deceased from month to month. The sum of Rs.6,75,244 which was by way , of salary for the period July I, 1960, to January 9, 1961, had accrued to the deceased at the time when he died and was assessable as such.

Cotton Agents Ltd. V. CIT (1960) 40 ITR 135 (SC); Menaben V. Parikh (Mrs.) v. CED (1979) 116 ITR 840 (Bom). Sassoon (E.D.) and Co. Ltd. v. CIT (1954) 26 ITR 27 (SC) ref.

G. S. Jetley, Ms. Manjula Singh and K. C. Sidhwa for the Commissioner.

Dilip Dwarkadas instructed by Manilal Kher Ambalal for the Assessee.

JUDGMENT

MRS. SUJATA V. MANOHAR, J.---The question which is referred to us at the instance of the Commissioner of Income-tax is as follows:

"Whether, on the facts and in the circumstances of the case, the finding that the share of three annas nine piasa in the rupee of the jewellery department of Messrs Batliboi and Co. P. Ltd. did not accrue to the deceased during his lifetime and as such could not be taxed as the income of the deceased, is in law justified?"

The facts leading to this reference are as under:

V.M. Parekh was an employee in the jewellery department of Messrs Batliboi and Co. Private Ltd. There was no agreement in writing between V.M. Parekh and his employers in regard to the terms of his employment and remuneration. But it is an accepted position that remuneration was to be paid to V.M. Parekh by the employers at Rs.150 per month or a share of 3 annas 9 pies in a rupee in the profits of the jewellery department, whichever was higher. The accounts of the employer were closed each year on 30th June. It was then that the profits were ascertained and the share in the profits was paid to V.M. Parekh.

V.M. Parekh was assessed from year to year in respect of his remune ration under the head "Salary". His salary income was computed on the basis of the previous year being Samvat year.

V.M. Parekh died on January 9, 1961. The employers worked out their profit in the jewellery department for the accounting year ending on June 30, 1961, and determined the remuneration, to V.M. Parekh on a pro rata basis for the period July 1, 1960, to January 9, 1961. This share in the profits was credited to the account of V.M. Parekh. The amount so credited to the account of V.M. Parekh on June 30, 1961, was Rs.6,75,244.

The respondents, Smt. Menaben Vadilal Parekh, as the legal heir of the deceased, V.M. Parekh, filed a return of income and claimed that the sum of Rs.6,75,244 was a capital receipt and was not taxable as salary income of the deceased.

The Tribunal has come to a conclusion that the higher remuneration with reference to the profits of the employer was payable only on June 30 of each year. It upheld the contention of the assessee that the right to receive the share of the profits did not accrue to the deceased during his lifetime and hence it could not be taxed as the salary income of the deceased. We have to consider in the present case whether the amount of Rs.6,75,244 which was credited to the account of V.M. Parekh on June 30, 1961, as his remuneration for the period July, 1, 1960 , to January.9, 1961. can be taxed as salary income of the deceased

Under section 15 of the Income-tax Act, income which is chargeable to tax under the head "Salary" includes any salary due from an employer to an assessee in the previous year, whether paid or not. It also covers any salary which may be paid or may have accrued to him in the previous year though not due or before it became due to him, and it also covers any arrears of salary paid or allowed to him in the previous year, if not charged to income-tax for any earlier previous year. Basically, therefore, except in the last two cases which are of actual payment, salary which is due from an employer in the previous year, whether paid or not, is chargeable to income-tax. We have, therefore, to consider whether any amount was due to the deceased at the time of his death as and by way of salary although it was not paid to him or in other words, whether V.M, Parekh had a right to receive any salary at the time when he died.

The terms of the contract between V.M. Parekh and his employer are unfortunately not reduced to writing. However, it is clear that he was paid a remuneration at the rate of Rs.150 per month or a share of 3 annas 9 pies in a rupee m the profits of the jewellery department, whichever was higher. There is no dispute that this payment is by way of salary. The share in the profits is to be substituted for Rs.150 per month, if the former is higher. This would clearly indicate that the contract is for payment of a monthly salary. But, the share in the profit in lieu of salary can be determined only at the end of the accounting year of the employer. It cannot. therefore, be calculated and paid to the employee till the end of the accounting year, But that does not deprive this payment of the character of salary. Nor does it imply that the salary had not accrued to the employee in the previous months during which he had worked as an employee. He had a right to receive this amount although the actual computation and payment were at a later date.

In the case of this very assessee in estate duty proceedings (Mrs. Menaben V. Parikh v. CED (1979) 116 ITR 840, a Division Bench of this Court) considered the nature of the contract of employment between V.M. Parikh and his employer for the purposes of determination of estate duty. The Court considered whether the deceased had a right over his share of the, profit only if he served the company for a full year; or whether he had no right to receive or whether it could be said that he lost such right if he could not serve the company for the full year, but only for a part thereof by reason of his death before the completion of the year . The Court considered the decision of the. Supreme Court in the case of Sassoon. (E.D.) and Co. Ltd. v. CIT (1954) 26 ITR 27 and distinguished the terms of the contract in that case from the contract in the present case. The Court said that, in the present case (at p. 846) "there is no real distinction between the monthly payment of Rs.150 and the payment in the share of profits. They must be taken to accrue to the deceased from month to month; however, the amount of profits accrued to him becomes due and payable to him only after June when the accounting year of the company would come to an end and when the profits, if any, can be ascertained". It held that any other conclusion would amount to, a mixing up of computation or ascertainment of the amount due to the deceased with accrual of the same.

Although the Division Bench has used the phrase "amount due and payable" with reference to payments made in June of each year, the context makes it clear that the Court made a distinction between accrual of the right to receive land and the actual computation or ascertainment of the amount-due and payable. The Court held that the right to receive payments, even if it was in the form of a share of the profits, accrued to the deceased from month to month although the computation took place on June 30 each year.

We do not see why the same reasoning cannot apply to the present case. In our view, the right to receive a pro rata share in the profits 'had accrued to the deceased at the time of his death although the amount was computed after the death of the deceased.

Mr. Dwarkadas strongly relied upon the decision of the Supreme Court in the case of Sassoon (E.D.) and Co. Ltd. v. CIT (1954) 26 ITR 27. In the case before the Supreme Court, the contract related to the managing agency of E. D. Sassoon and Company Ltd. This company (S company) was the managing agent of "U" company. Under the terms of the managing agency, "S" company was entitled to receive as its remuneration, subject to a minimum, a commission of certain per cent per annum on the actual net profits of the "U" company which was due to them on March 31 of every year. On December 1, 1943, "S" company assigned their office as managing agents to "A" company, including their right to receive any commission. The Supreme Court was required to consider whether the annual remuneration received by "A" company could be due pro rata as the income of the "S" company or "A" company: The Court held, looking to the terms of the, agreement between the parties, that the managing agent's right to receive remuneration accrued only at the end of the year and that it cannot be said that "S" company had earned any income for the broken period, nor had any income accrued to them in respect of the broken period. The Supreme Court, looking to the terms of the managing agency agreement, therefore, held that the right to receive remuneration accrued to the managing agent only at the end of the year.

There is also a similar case dealing with a managing agency agreement which is the case of Cotton Agents Ltd. v. CIT (1960) 40 ITR 135 (SC). In this case also, the terms of the contract of the managing agency provided that the commission shall become due 'to the managing agents at the end of each financial year or for any other period for which the accounts of the company are to be laid before the general meeting, and shall be payable and paid immediately after such accounts have been passed by the general meeting. In both these cases, the terms of the contract made it clear that the commission became due only at the end of the specific period. The right to receive the commission, therefore, accrued only at the end of the period specified. Such is not the present case. The remuneration is by way of salary. Salary is a monthly salary or profits in lieu of it, if higher. It has throughout been taxed as salary. These circumstances, in our view, lead to the conclusion that the right to receive salary accrued to the deceased from month to month. The sum of Rs.675,244 which was by way of salary for the period July 1, 1960. to January 9, 1961, had accrued to the deceased at the time when he died.

In the premises, the question which is referred to us is answered in the negative and in favour of the Revenue.

No order as to cost.

M.BA./134/T.F.Reference answered.