1983 (3) TMI 132 - AT - Income Tax

Tribunal rules in favor of assessee, deleting managerial remuneration and guarantee commission additions.

RAVIKANT RUIA. Versus INCOME TAX OFFICER.

RAVIKANT RUIA. Versus INCOME TAX OFFICER. - TTJ 017, 382, Issues Involved:1. Inclusion of Rs. 40,500 as managerial remuneration.2. Inclusion of Rs. 46,636 as guarantee commission.Issue-wise Detailed Analysis:1. Inclusion of Rs. 40,500 as Managerial Remuneration:The assessee contested the inclusion of Rs. 40,500 as managerial remuneration in his total income for the assessment year 1978-79. The facts reveal that the company, Essar Bulk Carriers Ltd., proposed the appointment of the assessee as Joint Managing Director, subject to the approval of the Company Law Board. The remuneration was credited to the assessee's account pending approval. However, the approval was not received, and the IAC and ITO included the amount in the assessee's income, following the precedent from the previous year.The assessee argued that no remuneration accrued or arose due to the lack of approval from the Company Law Board. The Board of Directors had resolved to appoint the assessee as Managing Director from 1st April 1976, but the proposal was not pursued after understanding that the Government might not approve having two Managing Directors. Subsequently, the assessee was appointed as Managing Director from 1st October 1977, and any remuneration provisionally drawn was repaid.The Tribunal found merit in the assessee's contention, stating that the resolution sanctioning the remuneration was subject to Government approval under Sections 269 and 314 of the Companies Act. Without such approval, the appointment and the remuneration could not take effect. Payments received without approval were provisional and had to be refunded, making them advances rather than remuneration. The Tribunal concluded that the remuneration did not accrue to the assessee and directed the deletion of the addition.2. Inclusion of Rs. 46,636 as Guarantee Commission:The assessee also contested the inclusion of Rs. 46,636 as guarantee commission. The Board of Directors had proposed a resolution to pay guarantee commission to Directors for personal guarantees given to banks for loans, subject to the provisions of the Companies Act. The Registrar of Companies, however, required Government approval for the guarantee commission, which was not obtained. Consequently, the company decided to recover the amounts already paid, including from the assessee.The Tribunal noted that both the assessee and the company understood that the guarantee commission would not be due unless approved by the Government. The amounts were being recovered based on the Registrar's ruling. The Tribunal emphasized that the agreement between the parties, subject to Government approval, did not result in an enforceable contract without such approval. Therefore, the guarantee commission did not accrue to the assessee, and the addition was unjustified.Conclusion:The Tribunal allowed the appeal, deleting the additions of Rs. 40,500 as managerial remuneration and Rs. 46,636 as guarantee commission from the assessee's income for the assessment year 1978-79. The Tribunal emphasized that without Government approval, the proposed remuneration and commission were provisional and did not constitute accrued income.