Retrospective sanction for director remuneration fixed accrual in the earlier year, defeating later disallowance under the tax ceiling rule

Director remuneration paid as advances remained in suspense until the Company Law Board later granted sanction, because payment without approval was barred by the Companies Act. The later retrospective approval removed the prohibition, but the liability accrued and related back to the earlier accounting period in which the expenditure was incurred. On that basis, the ceiling under section 40(c)(i)(A) of the Income-tax Act could not be applied to the disputed remuneration for the later assessment year, and the disallowance was held unjustified.

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Issues: Whether remuneration paid to directors in an earlier accounting period, but finally sanctioned by the Company Law Board in a later year, could be brought within the ceiling under section 40(c)(i)(A) of the Income-tax Act, 1961 for the later assessment year.

Analysis: The remuneration was paid as advances in the earlier period because payment without sanction was barred by section 198 of the Companies Act, 1956. Until sanction was granted, the amounts remained in suspense and, by virtue of section 309(5A) and section 309(5B) of the Companies Act, 1956, were held in trust and could not be treated as finally adjusted or waived. The later sanction operated retrospectively and removed the prohibition, but the amounts retained their character as expenditure relatable to the earlier assessment year. The Court followed the principle that liability accrues only when the required approval is granted, while the retrospective effect of that approval determines the year to which the expenditure relates.

Conclusion: Section 40(c)(i)(A) did not apply to the disputed remuneration, and the disallowance was not justified. The answer to the referred question is against the Revenue and in favour of the assessee.

Ratio Decidendi: Where remuneration paid in advance remains subject to statutory prohibition until later approval, the retrospective sanction determines accrual and allocation of the liability, and the later ceiling provision cannot be applied to expenditure genuinely relatable to the earlier year.

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