Mercantile accounting and retrospective approval determine when remuneration liability accrues for income-tax deduction.

Under mercantile accounting, managing agency remuneration was treated as an accrued liability when the assessee had already debited it in its books and the Central Government's later approval operated retrospectively from 1 April 1956. The retrospective approval meant the revised remuneration terms were legally effective from that date, so the tax consequence followed the year of accrual rather than the later year of approval. The Companies Act approval requirement did not make the payment so unlawful as to alter accrual for income-tax purposes. On the stated facts, the deduction was not allowable in assessment year 1959-60.

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Issues: Whether the managing agency remuneration for the periods 1 April 1956 to 30 June 1956 and 1 July 1956 to 30 June 1957 was deductible in the computation of the assessee's income for the previous year ending 30 June 1958 relevant to assessment year 1959-60.

Analysis: The assessee kept its accounts on the mercantile basis and had already debited the remuneration amounts in its books for the relevant periods. The managing agency continued to function, and the later approval granted by the Central Government operated retrospectively from 1 April 1956, with the result that the revised remuneration terms were legally effective from that date. The liability was therefore an ascertained liability when the debits were made, and the fact that approval came later did not postpone accrual of the liability for income-tax purposes. The provisions of the Companies Act concerning managing agency approval did not render the payment illegal in a manner that would alter the tax consequence.

Conclusion: The deduction was not allowable in the assessment year 1959-60 and the answer to the reference was against the assessee.

Ratio Decidendi: Where an assessee maintains mercantile accounts and a later approval takes retrospective effect from an earlier date, the liability to pay remuneration is treated as accruing from the retrospective effective date and is deductible, if at all, in the year in which it accrues, not in a later year when approval is granted.

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