NONSUCH ESTATE LTD. vs. THE COMMISSIONER OF INCOME-TAX, MADRAS
What did the Supreme Court hold?
The Supreme Court held that the High Court was in error in answering the question against the assessee. Even an assessee following the mercantile system of accounting is not entitled to claim a deduction until the liability for the sum has accrued. The Court found that the High Court overlooked the plain terms of Section 326 of the Companies Act, 1956, which prohibits the appointment or re-appointment of a managing agent without the Central Government's approval. In this case, the appointment became effective and the company's liability to pay remuneration accrued only when the Central Government conveyed its approval by letter dated September 2, 1957. While the liability was made effective from April 1, 1956, due to the retrospective operation chosen by the Central Government, the liability could not be said to have arisen prior to September 2, 1957, as Section 326 contains an absolute prohibition against appointment before obtaining approval. The appeal was allowed, the High Court's answer was discharged, and the question was answered in the affirmative in favour of the assessee.
What were the facts?
The assessee, Nonsuch Estate Ltd., followed the mercantile system of accounting. For assessment years 1957-58 to 1959-60, it debited sums as managing agency remuneration. The company claimed a deduction for the full amount of Rs. 97,188 in assessment year 1959-60, arguing it became payable only upon receiving Central Government approval for the managing agency agreement, as required by Section 326 of the Companies Act, 1956. The Income-tax Officer, Appellate Assistant Commissioner, and Tribunal rejected this, holding that the assessee should have ascertained and claimed the liability for each year. The High Court upheld this, stating that later approval gave retrospective effect to the debit entries from April 1, 1956. The matter reached the Supreme Court via an appeal by special leave from the Madras High Court's judgment.
What were the issues?
1. Whether, on the facts and in the circumstances of the case, the sum of Rs. 97,188/- representing the Managing Agency remuneration for the period 1-4-1956 to 30-6-1957 was deductible in the computation of the income of the previous year ending on 30th June 1958, relevant for the assessment year 1959-60, turning on the interpretation of Section 326 of the Companies Act, 1956 and the mercantile system of accounting. Assessee's contention: The remuneration became payable and deductible only in assessment year 1959-60 when the Central Government granted its approval to the new managing agency agreement, as per Section 326 of the Companies Act, 1956. Even under the mercantile system, a deduction can only be claimed when a liability has accrued. Revenue's contention: The High Court's view that the approval, when received, gave retrospective effect to the debit entries from April 1, 1956, was correct, and the refusal of deduction was justified. The assessee should have ascertained the liability for each year and claimed it on the mercantile basis.
Which sections of the Income-tax Act were involved?
Section 326
AI-generated summary — verify with the full judgment below
806 NONSUCH ESTATE LTD. v. THE COMMISSIONER OF INCOME-TAX, MADRAS November 21. 1974 [H. R. KHANNA AND A. C. GUPTA, JJ.) lncome-taJ: Act, 1922-ASJfe.rsee followed mercantile system of acco11nti111- Debited in boob each year managing ~·ency remuneration for three year- Claimed dedui:tion in the third year on receipt of approval from Central Go~·enc ment for reappointment of managing agents as tequired under s. 326 CompG!nieB Act-Whether assessee should have claimed deduct/on in each assessment ye~:r.
The assessee who followed the mercantile system of accounting debited i:a ill account books certain sums of money as remuneration of the managing agenta for the assessment years 1957-58 to 1959·60. For the purpose of incomt:-tu the company added back the sum to its taxable income and claimed the wholo cum as a deductible expenditure in the as:sessment year 1959·60 on the grnund that the sum became payable only during that year when the Government accorded 'its approval to the new managing agency agreement. The Incomc-~ax Officer rejected the claim holding that the approval of the Central Government was necessary only for actual pavment and the assessee should have ascer
The order continues below.
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