Statutory approval as condition precedent meant managing agency remuneration accrued only when government approval was granted.

Under the mercantile system, a deduction arises only when the liability has accrued. Where section 326 of the Companies Act, 1956 makes Central Government approval a condition precedent to a valid managing agency reappointment, no enforceable liability for remuneration accrues before that approval. The approval granted on 2 September 1957 alone made the appointment effective and the remuneration deductible in the relevant previous year, even though the approval was expressed to operate retrospectively from 1 April 1956. The retrospective language did not create an earlier liability; it followed only from the Government's approval.

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Issues: Whether the managing agency remuneration became deductible in the assessment year 1959-60 only on the Central Government's approval under section 326 of the Companies Act, 1956, so that the liability accrued in the previous year relevant to that assessment year.

Analysis: The assessee followed the mercantile system, but a deduction can be claimed only when the liability has accrued. Under section 326 of the Companies Act, 1956, appointment or reappointment of a managing agent is prohibited unless the Central Government's approval is obtained. The proposed reappointment could not take effect until approval was granted, and the approval given on 2 September 1957 alone made the appointment effective and the liability to pay remuneration accrue. The fact that the approval was expressed to operate from 1 April 1956 did not mean that the liability had arisen earlier, because the retrospective operation followed only from the Government's approval.

Conclusion: The remuneration was deductible in the relevant previous year, and the question was answered in the affirmative in favour of the assessee.

Ratio Decidendi: Where statutory approval is a condition precedent to a valid appointment, no enforceable liability accrues before such approval, even under the mercantile system of accounting.

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