1974 (11) TMI 5

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....wn in its estate, for which it is assessed to income-tax. M/s. Harrisons and Crosfield Ltd. have been the managing agents of the company from the beginning. The following question relating to the assessment year 1959-60 was referred to the High Court. "Whether, on the facts and, in the circumstances of the case, the sum of Rs. 97,188 representing the managing agency remuneration for the period April 1 1956, to June 30, 1957, was deductible in the computation of the income of the previous year ending on 30th June, 1958, relevant for the assessment year 1959-60 ?" The relevant facts leading to the reference are these. The managing agents of the company were entitled to commission at the rate of 1 1/2 per cent. on all sales of tea and ot....

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....Companies Act, 1956, subject to a minimum remuneration of Rs. 12,000 (rupees twelve thousand only) per annum payable to the managing agents, in the event of absence or inadequacy of profits in any financial year". On receipt of the approval the company by a resolution adopted at an extraordinary general meeting of its shareholders held on October 4, 1957, reappointed M/s. Harrisons & Crosfield Ltd. on the terms stated above. In terms of the new agreement the existing agency agreements between the parties stood cancelled with the expiry of March 31, 1956. The company follows the mercantile system of accounting. For the period April 1, 1956, to June 30, 1956, the company credited a sum of Rs. 9,320 to the account of the managing agents as ....

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....claimed it as deductible expenditure for that year on the ground that the sum became payable only during that year when the Government accorded its approval to the view agreement. The Income-tax Officer rejected this claim on the view that the approval of the Central Government was necessary only for actual payment and "the assessee should have ascertained the liability for each year and claimed it on the mercantile basis which was the system adopted by the assessee-company". The Appellate Assistant Commissioner and the Tribunal also took the same view. The High Court answered the question referred to it against the assessee on the following reasoning: "....... There was undoubtedly an understanding between the managing agency and the as....

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.... into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed." However, even an assessee following the mercantile system of accounting is not entitled to claim a deduction until liability for the sum for which deduction is claimed has accrued. The reasons given by the High Court overlook the plain terms of section 326 of the Companies Act, 1956. Section 326, so far it is material for the question involved in this case, is in these terms: "326. (1) In respect of any company...... (b) unless the approval of the Central Government has been obtained for such appointment or reappointment. (2) The Central Government shall not accord its approval under sub-section (1) in any case, unl....