A) ABSTRACT / HEADNOTE

The Supreme Court in The Cotton Agents Ltd. v. Commissioner of Income-Tax, Bombay ([1960] 3 SCR 810) addressed the accrual of managing agency commission in the context of income-tax liability. The case revolved around the construction of clauses in a Managing Agency Agreement dated March 15, 1925, and whether commission income accrued to the assessee, Cotton Agents Ltd., or to the Nemani group for the period April 1, 1944, to December 31, 1944. The core legal issue was whether income tax was payable on the commission from that period by the new managing agents, the assessee company, or the earlier managers, Nemani group. The Court, aligning with the precedent in E.D. Sassoon & Co. Ltd. v. CIT ([1955] 1 SCR 313), clarified that the commission accrued at the end of the financial year and not at the point of each sale. Thus, the income became due only after passing of the accounts at the general meeting. Consequently, the income was held assessable in the hands of the appellant company for the entire financial year, reinforcing that accrual depends on contractual stipulations and not just on commercial activity.

Keywords: Accrual of income, Managing agency commission, Indian Income-tax Act, Income accrual vs. receipt, E.D. Sassoon precedent

B) CASE DETAILS

i) Judgement Cause Title
The Cotton Agents Ltd., Bombay v. Commissioner of Income-Tax, Bombay

ii) Case Number
Civil Appeal No. 100 of 1959

iii) Judgement Date
3rd May, 1960

iv) Court
Supreme Court of India

v) Quorum
S.K. Das, J. and M. Hidayatullah, J.

vi) Author
Justice S.K. Das

vii) Citation
AIR 1960 SC 786; [1960] 3 SCR 810

viii) Legal Provisions Involved
Section 66A(2) of the Indian Income-tax Act, 1922
Interpretation of managing agency agreements under Indian Contract Act, 1872

ix) Judgments overruled by the Case (if any)
None explicitly overruled

x) Case is Related to which Law Subjects
Income Tax Law, Contract Law, Corporate Law

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The case arises from a tax dispute concerning the accrual of managing agency commission. The dispute hinges on interpreting the terms of a managing agency agreement under which The Cotton Agents Ltd., a limited company, acquired the managing agency rights of New Swadeshi Mills of Ahmedabad Ltd. from Messrs. Shivnarayan Surajmal Nemani, herein referred to as the Nemani group. Following internal shareholder disputes, both parties agreed to transfer control in 1944. The arrangement involved a Rs. 5,00,000 consideration to be paid by Cotton Agents Ltd. to the Nemani group for the managing agency rights. The central question was whether the commission from April 1 to December 31, 1944, was assessable in the hands of the appellant (Cotton Agents Ltd.) or the erstwhile managing agents (Nemani group). This matter was originally decided by the Tribunal in favour of the appellant, but reversed by the Bombay High Court, and subsequently upheld by the Supreme Court. The case reveals the importance of contract terms in determining tax liability and the nuanced difference between the timing of accrual and receipt under tax law[1].

D) FACTS OF THE CASE

The Cotton Agents Ltd. held significant shares in New Swadeshi Mills. Along with the Nemani group, they shared a substantial ownership in the company. Due to disagreements in 1944, the Nemani group agreed to transfer its managing agency rights and block of shares to Cotton Agents Ltd. for Rs. 5,00,000. This change was ratified on January 4, 1945. According to the managing agency agreement dated March 15, 1925, managing agents were entitled to a 3.5% commission on gross sales, which became due at the end of the financial year, after approval of the accounts by the general meeting. The dispute centered on commission from April 1, 1944, to December 31, 1944, which amounted to Rs. 2,20,433. The assessee contended it was not liable for this amount and that it had been acquired as part of the rights purchased from the Nemani group. However, the Department held the view that since the commission accrued at year-end, Cotton Agents Ltd. was liable to pay tax on the full amount earned in the year ending Diwali, 1945[2].

E) LEGAL ISSUES RAISED

i) Whether the managing agency commission for sales between April 1, 1944, and December 31, 1944, accrued to the Nemani group or to Cotton Agents Ltd., the assessee company?

F) PETITIONER/ APPELLANT’S ARGUMENTS

i) The counsels for Petitioner / Appellant submitted that

The appellant argued that commission income accrued during the course of each sale made by the mills. The contractual clause granting 3.5% commission on gross proceeds implied an embedded income in each transaction. Therefore, income should have been attributed to the entity managing the company at the time of those transactions. It was asserted that Cotton Agents Ltd. had only taken over after December 31, 1944, so the income earned prior belonged to the Nemani group. Additionally, it was argued that the Rs. 5,00,000 paid included the value of accrued commissions, thereby supporting the contention that the income had already accrued in Nemani’s hands. They cited the principle in Turner Morrison & Co. Ltd. v. CIT, West Bengal ([1953] 23 ITR 152) to stress that income embedded in transactions crystallized at the point of those transactions, not later[3].

G) RESPONDENT’S ARGUMENTS

i) The counsels for Respondent submitted that

The Department maintained that income accrues only when there is a right to receive it, which in this case, was post-account approval by the general meeting at the end of the financial year. Relying on the Supreme Court ruling in E.D. Sassoon & Co. Ltd. v. CIT ([1955] 1 SCR 313), the counsel argued that income arises only when a debt is created or a right to receive emerges. As per the managing agency agreement, no such right arose before the end of the accounting year. The Department also submitted that the acquisition price paid by the appellant for the managing agency was a commercial decision and irrelevant to the accrual of income under tax law. They further ensured that only one party would be assessed after clarity, safeguarding against double taxation[4].

H) RELATED LEGAL PROVISIONS

i) Section 66A(2) of the Indian Income-tax Act, 1922 – pertains to appeals to the Supreme Court on substantial questions of law arising out of High Court orders on reference cases[5].

ii) Clause 2 & 3 of the Managing Agency Agreement (1925) – clause 2 prescribed the rate (3.5%) of commission on sales; clause 3 set the timing – commission became due at the end of the year post-approval of accounts.

I) JUDGEMENT

a. RATIO DECIDENDI

i) The Supreme Court held that income accrues only when a legal right to receive it arises. In this case, clause 3 of the agency agreement was decisive—it stated that commission “shall become due” at the end of the financial year upon passing of accounts. Therefore, no right to commission accrued at the time of individual sales. Thus, the income accrued to the assessee company, not the previous agents. The principle in E.D. Sassoon & Co. Ltd. v. CIT ([1955] 1 SCR 313) governed the decision. The Court found no debt or enforceable right arising from individual sales. Accrual is determined by contractual rights, not by commercial events like sales.

b. OBITER DICTA 

i) The Court observed that even if the Nemani group was also assessed for the same income under a protective assessment, the issue before them was limited to interpretation of contract terms. The validity of such protective assessments was not under review and remained outside the scope of this judgment.

c. GUIDELINES 

• Accrual of income occurs when the right to receive is established, not merely when sales or operations happen.

• Managing agency commissions, if contingent on year-end approval, do not accrue with each transaction.

• Protective assessments may be permissible but cannot justify multiple assessments for the same income.

• Terms of contract govern tax liability, particularly the timing and conditions of income accrual.

I) CONCLUSION & COMMENTS

This case reaffirms the supremacy of contractual terms in tax matters. The distinction between income arising and accruing was sharpened. The judgment leaned on E.D. Sassoon, reinforcing the doctrine that income accrues only when the assessee acquires a right to receive it. The Court prudently navigated issues of potential double taxation, reiterating that while protective assessments are allowed, substantive liability depends on the legal right under the agreement. This ruling has since served as a bedrock for determining income tax liability in managing agency relationships and underlines the importance of legal structure over commercial expediency in tax adjudication.

J) REFERENCES

a. Important Cases Referred

[1] E.D. Sassoon & Co. Ltd. v. Commissioner of Income-Tax, Bombay City, [1955] 1 SCR 313
[2] Lakshminarayan Ram Gopal & Sons Ltd. v. Government of Hyderabad, [1955] 1 SCR 393
[3] Turner Morrison & Co. Ltd. v. Commissioner of Income-tax, West Bengal, [1953] 23 ITR 152
[4] Commissioners of Inland Revenue v. Gardner Mountain & D’Ambrumenil Ltd., (1947) 29 T.C. 69
[5] Colquhoun v. Brooks, (1888) 21 Q.B.D. 52
[6] Webb v. Stenton, [1883] 11 Q.B.D. 518
[7] W.S. Try Ltd. v. Johnson, [1946] 1 All E.R. 532

b. Important Statutes Referred

[1] Indian Income-Tax Act, 1922, Section 66A(2)
[2] Indian Contract Act, 1872, principles relating to enforceability of rights
[3] Indian Companies Act (as applicable to corporate structure and agency)