1982 (8) TMI 33 - HC - Income Tax

Court rules in favor of assessee on liability accrual, deduction entitlement, and relief under Income-tax Act.

The court ruled in favor of the assessee on all three issues, supporting the Tribunal's decisions regarding the accrual of liability to pay remuneration ... Business Expenditure, New Industrial Undertaking, Practice, Remuneration Paid To Managing Director Issues Involved:1. Accrual of liability to pay remuneration to directors.2. Entitlement to deduction of remuneration payable to directors.3. Entitlement to relief under Section 84 of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Accrual of Liability to Pay Remuneration to Directors:The Tribunal held that the liability to pay remuneration to Mr. Gautam Sarabhai, who managed the company from April 1, 1966, to March 31, 1967, accrued during the relevant accounting year, despite the remuneration being quantified later. The Revenue argued that no liability accrued in the relevant year as no resolution was passed during that year, and compliance with Section 314 of the Companies Act was necessary. However, the court found that Mr. Gautam Sarabhai was a managing director, and thus, the consent of the company by a special resolution was not required under Section 314. The liability to pay remuneration arose when services were rendered, and the resolution merely quantified the existing liability. Therefore, the Tribunal was justified in holding that the liability accrued in the relevant year.2. Entitlement to Deduction of Remuneration Payable to Directors:The Tribunal directed that the assessee was entitled to deduction in respect of remuneration payable to Mr. Gautam Sarabhai and remanded the matter to the ITO for examination under Section 40(c) of the Act. The Revenue's argument that the liability arose only after the resolution was passed was rejected. The court emphasized that the liability to pay remuneration arose when services were rendered, not when quantified. Thus, the Tribunal was correct in allowing the deduction for the remuneration and remanding the matter for further examination.3. Entitlement to Relief Under Section 84 of the Income-tax Act, 1961:The assessee claimed relief at 6% of the capital employed in the new industrial undertaking 'Syntronix,' which operated for nine months in the relevant year. The ITO allowed proportionate relief for nine months, while the Tribunal granted full relief. The court considered the interpretation of 'per annum' and the established practice of granting full relief at 6% of the capital employed, irrespective of the period of operation within the year. Citing decisions from the Madras and Madhya Pradesh High Courts, the court concluded that the assessee was entitled to full relief at 6% of the capital employed, even if the new undertaking operated for only part of the year. Therefore, the Tribunal's decision was upheld.Conclusion:The court answered all three questions in the affirmative and against the Revenue, supporting the Tribunal's findings on the accrual of liability, entitlement to deduction, and full relief under Section 84. The reference was answered accordingly with no order as to costs.