Illegally paid managing-agent remuneration is not deductible, but rectification fails without an apparent record mistake.

Expenditure paid in direct breach of the statutory ceiling on managing-agent remuneration under sections 348 and 349 of the Companies Act, 1956 was held not deductible under section 37 of the Income-tax Act, 1961, because illegality cannot be treated as allowable business outlay. The excess payment remained a prohibited expense even if actually disbursed and recorded in the books, so the deduction issue was decided for the Revenue. Rectification under section 154 was not available where disallowance of the amount was not a mistake apparent from the record on the then-existing law, so the rectification issue was decided for the assessee.

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Issues: (i) Whether the excess remuneration paid to the managing agent, being in contravention of sections 348 and 349 of the Companies Act, 1956, was allowable as a deduction under section 37 of the Income-tax Act, 1961; (ii) Whether, for the assessment year 1967-68, proceedings under section 154 of the Income-tax Act, 1961 could validly be invoked to withdraw the excess remuneration earlier allowed.

Issue (i): Whether the excess remuneration paid to the managing agent, being in contravention of sections 348 and 349 of the Companies Act, 1956, was allowable as a deduction under section 37 of the Income-tax Act, 1961.

Analysis: The remuneration payable to a managing agent had to be computed strictly in accordance with the statutory scheme in sections 348 and 349 of the Companies Act, 1956. Where the company paid remuneration in excess of the ceiling fixed by that law, the excess was paid in breach of an express statutory prohibition. The existence of actual payment or its reflection in the books did not make the amount deductible under section 37. Expenditure incurred in violation of another statute could not be treated as allowable business expenditure, and the authorities were not bound to disregard the illegality while computing income.

Conclusion: The excess remuneration was not allowable as a deduction, and the finding was against the assessee and in favour of the Revenue.

Issue (ii): Whether, for the assessment year 1967-68, proceedings under section 154 of the Income-tax Act, 1961 could validly be invoked to withdraw the excess remuneration earlier allowed.

Analysis: Rectification under section 154 was permissible only where there was a mistake apparent from the record. At the time the rectification was made, the issue was governed by then-existing precedent, and the question whether the excess remuneration could be disallowed was not a self-evident error on the face of the record. The matter therefore did not justify rectification proceedings.

Conclusion: The invocation of section 154 was not justified, and the finding was in favour of the assessee and against the Revenue.

Final Conclusion: The reference was answered mainly in favour of the Revenue on the deductibility issue, while the assessee succeeded on the rectification question for assessment year 1967-68.

Ratio Decidendi: Expenditure incurred in direct contravention of an express statutory prohibition is not deductible under section 37 of the Income-tax Act, 1961, and rectification under section 154 is impermissible unless the error is apparent from the record.

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