TaxTMI 
TaxTMI 
2002 (11) TMI 57
X X X X Extracts X X X X
X X X X Extracts X X X X
....mstances of the case, the Tribunal was right in law in holding that the remuneration of Rs. 34,016 from Modipon Ltd., accrued to the assessee during the previous year relevant to the assessment year 1973-74? (ii) Whether, on the facts and in the circumstances of the case, and in law the determination of value of free water/electricity could be made in accordance with rule 3(d) when the assessee had proved the value for free use of electricity and water at Rs. 1,000 on the basis of actual consumption and determination by the Tribunal in the past?" R. A. No. 603 (Delhi) of 1980-at the instance of the Commissioner: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that no remuneration from Modipon Ltd. accrued to the assessee during the previous year relevant to the assessment year 1973-74?" The factual position, as emerging from the statement of the case is as follows: During the previous year ended on March 31, 1973, and relevant to the assessment year 1973-74, the assessee was the managing director of Modi Industries Limited and a director in Modipon Limited (hereinafter referred to as "Modipon"). In his return of i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....also filed. Rejecting the assessee's stand, the Income-tax Officer held that the remuneration had accrued to the assessee on month to month basis because the income of Modipon was also ascertained on month to month basis. He felt that since Modipon were earning huge profits, the directors were entitled to remuneration and although they were free to forgo the remuneration they had to pay tax on such amount, which had accrued to them. He accordingly calculated the assessee's share of remuneration at Rs. 34,016 and brought it to tax. Aggrieved, the assessee preferred appeal to the Appellate Assistant Commissioner of Income-tax (for short "the AAC") and pleaded that Modipon, having closed their accounts on February 28, 1973, and the remuneration of the directors being dependent on the company's profits, which could be ascertained only on February 28, 1973, or thereafter, the remuneration, if any, would accrue to the directors only after that date and the directors having forgone their remuneration vide resolution dated July 17, 1972, i.e., much before the date of accrual, no income by way of remuneration by the said company could be included in the total income of the assessee for t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... by Mr. S.K. Aggarwal, submitted on behalf of the assessee that in the facts and circumstances of the case no income had accrued to the assessee on account of remuneration in terms of article 111 of the articles of association because: (i) article 111(2) being subject to the provisions of sections 198, 310 and 311 of the Companies Act, under section 310 the approval of the Central Government was necessary for paying any remuneration to the directors and, therefore, in the absence of such approval, no remuneration accrued or arose to the assessee; (ii) unless the net profit of Modipon was determined in accordance with the provisions of the Companies Act at the end of the accounting year, which is terminus a quo for the making up of the accounts and ascertaining the net profits earned by the company, no remuneration would either arise or become due to the directors; and (iii) even before any remuneration could accrue on the company's accounts being finalised on February 28, 1973 (end of the previous year) or thereafter, the directors by a resolution of the board of directors dated July 17, 1972, had forgone the same and, therefore, there was no question of surrendering the same after....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ded in its total income. In support of the proposition that the income having accrued in terms of the said article, the resolution dated July 17, 1972, was of no consequence and the assessee could not escape liability to tax on this amount, learned counsel has placed reliance on a decision of the Supreme Court in Morvi Industries Ltd. v. CIT [1971] 82 ITR 835. Before taking up the main point, we may first deal with the question with regard to the propriety of the Tribunal in recalling its order dated August 30, 1978, on the assessee's application under section 254(2) of the Act. While interpreting and explaining the scope of section 154 of the Act, which provision is in pari materia with section 254(2) of the Act, the Supreme Court in T.S. Balaram, ITO v. Volkart Bros. [1971] 82 ITR 50, held that a mistake apparent from the record within the meaning of section 154 of the Act must be an "obvious" and "patent" mistake and not something which can be established by a long drawn process of reasoning on points on which there may be conceivably two opinions. A decision on a debatable point of law is not a mistake apparent from the record. In Hotz Hotels Pvt. Ltd's case [2001] 248 IT....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ly accrued to the assessee and did this amount constitute his income taxable in the relevant assessment year? Dealing with the scope of total income, section 5 of the Act provides that the total income of a person, who is resident, includes all income from whatever source derived and becomes chargeable to tax either when it "is received" or is deemed to be received in India by him or when it "accrues" or "arises" or is deemed to accrue or arise to him in India during the previous year. In other words, receipt of income is not the sole test of taxability. Under this section, the charge is both on receipt or accrual basis. The expressions "is received", "accrues" or "arises" as appearing in the section are three distinct terms but are not defined. In CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42, the Supreme Court observed that the words "accrue" and "arise" are used to contradistinguish the word "receive". Income is said to be received when it actually reaches the assessee's hands, but short of receipt, when the right to receive the income becomes vested in the assessee, it is said to accrue or arise. If income accrues or arises, it may become liable to tax. It is, therefore, m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d must be considered from the point of view of real income taking the probability or improbability of realisation in a realistic manner and dovetailing of these factors together but once the accrual takes place, on the conduct of the parties, subsequent to the year of closing, an income which has accrued cannot be made "no income". It was noted that expression of the concept of real income to this field to negate accrual after the amount had become payable is contrary to the postulates of the Act. To determine this vexed question, the apex court laid down the following propositions: "(1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. (2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation, no income had resulted because the income did not really accrue. (3) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed. (4) Where the Act applies, the concept of real in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hether there was a right in the assessee to claim remuneration under article 111 and a corresponding obligation on the company to pay it? Having examined the question in the light of the provisions of the Companies Act, particularly section 310, and bearing in mind the principles of law laid down in the aforementioned decisions, we are of the opinion that even though the assessee was indubitably adopting the mercantile system of accounting, no real income by way of remuneration from Modipon had accrued to him, which could be brought to tax in the relevant assessment year. As noted above, an answer to the controversy as to whether any remuneration had accrued to the assessee and was taxable in the relevant assessment year, centres around article 111 of the memorandum and articles of association of Modipon. The said article, in addition to providing remuneration of Rs. 250 to each of the directors for each meeting, provided for payment of remuneration at one per cent. of the net profits of the company. As is evident from article 111(1) the provision for payments in terms of the article was subject to the provisions of the Companies Act, more particularly to section 310, which deal....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t sanction.--Section 310 operates only when there is an increase in the remuneration. If a director is to be remunerated for the first time, the approval of the Central Government under section 310 is not required-section 310 operates only when there is an increase in the remuneration of a director. As previously advised this section presupposes that some remuneration is being paid to a director and that there is an increase in such remuneration. The remuneration paid to a director may take any one or more of the forms specified in section 309, e.g., sitting fees for attending board's meetings, monthly, quarterly or annual remuneration, commission, etc. If a director is to be remunerated for the first time on making fixed term payments or payments by way of commission in addition to payments by way of sitting fees, there is no question of an increase in the remuneration of the director as contemplated by section 310 with the result that the approval of the Central Government under that section is not required in the matter. It follows that if a director, who is receiving under section 309(2) sitting fees for attending board's meetings, is to be paid any remuneration over and abo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on and the Department of Company Affairs being posterior to the end of the relevant previous year, the assessee cannot be permitted to rely upon the same. Since no such objection was raised by the Revenue before the Tribunal, which has taken into consideration these documents, we reject the objection. Moreover, even the afore-extracted clarification issued by the Department of Company Affairs in the year 1966 shows that the Department was all-through holding the view that any payment to the directors over and above the sitting fee was required to be approved by the Central Government. In our opinion, therefore, article 111(2) could not be made operative without the approval of the Central Government. That was the mandate in section 310 of the Companies Act. Having held that on the facts of the present case the approval of the Central Government was required for paying remuneration in terms of article 111, it must follow as a necessary corollary that in the absence of the approval, neither the assessee had in him a right to claim the remuneration nor Modipon was under obligation to pay the same to him. That being the position in law, we find it difficult to hold that income by way o....