ORDER
T.V. Rajagopala Rao, Judicial Member
1. These four appeals, filed by the Department, relating to assessment years 1981-82 to 1984-85 are directed against a common order dated 18-8-1987 passed by the Appellate Assistant Commissioner, Visakhapatnam.
2. The common question at issue, which arises in these four appeals, is whether salary accrued to the assessee and is includible in her hands. Assessee, besides being an ex-MLA was also appointed as a Managing Director of Kalpana Tanning Materials Ltd. In these four assessment years, assessments were completed under Section 143(1) in the first instance. In those assessments, returned incomes were accepted. The monthly salary or remuneration to which the assessee is entitled as Managing Director of Kalpana Tanning Materials Ltd. was not included in her returned incomes, and hence the same was not assessed under Section 143(1). Subsequently, assessments were reopened under Section 143(2)(b) and in the assessments completed thereafter, the salary accrued to the assessee from the said company, viz., Rs. 12,330 for the assessment year 1981-82; Rs. 16,200 for assessment year 1982-83; Rs. 17,550 for assessment year 1983-84; and Rs. 18,000 for assessment year 1984-85, was brought to tax in those four assessment years respectively. Thereupon, the assessee went in appeal for each of these four assessment years before the AAC, Visakhapatnam. AAC by his consolidated order dated 12-8-1986 in ITANos. 73, 74/85-86 and 23 & 24/86-87 observed that the ITO was correct in applying Section 15 of the Income-tax Act for taxing the salary due to the assessee, though not actually paid for the assessment years 1981-82 to 1984-85. He further directed that “In view of some further developments in the matter i.e., the writing off of the amount by the resolution of the Board of Directors of M/s. Kalpana Tanning Materials Ltd., it will be proper to investigate the matter further, wait for the approval of the Annual General Meeting, see that the company offers the aforesaid salary, held to be not payable to the appellant, as its income, in its assessments, and watch the conduct of the appellant actually foregoing the aforesaid salary payable to her for the assessment years 1981-82 to 1984-85 completely and irrevocably”. The AAC set aside the assessments for consideration of the aforementioned point while making fresh assessment.
3. When the matter came back to the ITO once again, the ITO gave notice under Section 143(2), in pursuance of which the assessee produced copy of the order passed by the Government of India, Department of Company Affairs, regarding sanction of salary to her as Managing Director of the Company for a period of five years with effect from 27-6-1980. She also filed copies of the minutes of the meeting of the Board of Directors of the Company held on 9-7-1986, regarding write off of outstanding dues towards salary due to her. She also filed an extract of minutes of 14th Annual General Meeting of the Company held on 29-9-1986, approving the resolution passed by the Board of Directors on 9-7-1986. On being asked to file a certificate in Form No. 16 from the Company for the aforementioned assessment years under consideration, in regard to the salary and other perquisites paid to her assessee filed a statement furnished by the company (duly signed by her, as Managing Director), giving particulars of payments made to her during the financial years 1980-81 to 1983-84 (both years inclusive). This payment does not include salary accrued to her for each of the four years; it only indicated the reimbursement of medical benefits to her. However, a mention has been made in the statement of tax deducted at source for the financial years 1982-83 to 1984-85.
4. The ITO while completing the assessment for the year 1981-82, held that the Managing Director’s remuneration of Rs. 12,330 was charged to administrative expenses, and debited to profit and loss account, and the assessment of the company was made accordingly considering the above expenses. From the above, it is clear that the salary accrued to her during the financial year 1980-81, relevant to assessment year 1981-82. The Board of Directors passed resolution on 9-7-1986 writing off the salary accrued and payable to the assessee only long after the salary accrued and became due to her and it was subsequently approved by the Annual General Meeting. The assessee neither waived her salary before it accrued and became due to her, nor the management of the company write off the same before it became payable to the assessee. Resolution of the Annual General Meeting contained the following :
To write back the provisions for salaries of Rs. 60,930 due to the Managing Director (Assessee) in view of the written consent of the Managing Director Smt. B. Kalavathi to give up her claim in view of the continuous losses to the company.
The ITO noted that this resolution clearly shows that the assessee gave up her claim to draw salary after it accrued and became payable to her. Under law, salary accrues when the accounts were credited, and subsequent surrender by the assessee in favour of the company could not obliterate the accrual to the assessee. So also, salary becomes due when it accrues to the employee, i.e., when the employee becomes entitled to receive it, and the employer becomes liable to it. From the approval of the Central Government and from the salary payable to the assessee shown to be outstanding liability in the books of account of the company, it is clear that the company was liable to payment of salary and the assessee is entitled to it. Subsequent developments will not alter the position. Already, the AAC held that salary is assessable in the hands of the assessee when it accrues and becomes due to the assessee, and therefore, it is exigible to tax in the hands of the assessee. With that reasoning, Assessing Officer included a sum of Rs. 12,330 and made fresh assessment under Section 143(3)/143(2)(b), read with Section 250 and assessed the assessee on a total income of Rs. 27,200.
5. Similarly, additions of salary income were made for other three assessment years also by separate assessment orders. Following table furnishes the particulars of the original assessment, reopened assessment, as well as final assessment framed against the assessee :
Asst. Original Oriqi Reassess- Assess- Reopen- Assessed
yr. Asst. nally ment u/s ed ed u/s income
assessed 143(2)(b) income I48r.w.
income 250
(1) (2) (3) (4) (5) (6) (7)
1981-82 27-3-1984 Rs 19.960 Rs. 32.460 17-12-1986 Rs. 27,200
1982-83 Rs. 13.543 Rs. 33,480 15-12-1986 Rs. 26,360
1983-84 Rs. 12.030 12-3-1986 Rs. 27.530 15-12-1986 Rs. 25,480
1984-85 31-10-19M Rs. 12.571 1 1-3-1985 Rs. 28,524 15-12-1986 Rs. 28,950
6. Aggrieved by the fresh assessments made, the assessee went in appeal before the AAC, Visakhapatnam, and contended that the salary from M/s. Kalpana Tanning Materials Ltd. should not have been added in her hands, and on the other hand, it should have been deleted. As already stated, AAC disposed of the appeals for all the four assessment years, by a common impugned order dated 18-8-1987. The AAC found that the ITO had included the salary income in the hands of the employee, purportedly following the provisions of Section 15(a) of the Income-tax Act, though actually, the assessee did not receive any salary from the employer. He further found that the instructions of his predecessor have not been taken into consideration while computing the income. The ITO simply held that salary has been once again found to be payable to the assessee without going into ‘further developments’. It was contended on behalf of the assessee before the AAC that salary has been already written off by the company, and the write off had also been approved by the Annual General Meeting. She produced before the AAC, the minutes of the Annual General Meeting, which wrote off the salary payable to her. The AAC under these circumstances, deleted the income added under the head ‘salary’ under Section 15(a) for all these four years, and directed the ITO to compute the income accordingly. He thus, allowed the appeals filed before him.
7. Having been aggrieved by the impugned order passed by the AAC, revenue came up in second appeals before this Tribunal, and thus common grounds raised in these appeals, stand for the consideration of this Tribunal.
8. It is contended that the AAC ought to have upheld the order of the ITO, relying on the following decisions :
(a) CITv. Bachubhai Nagindas Shah [1976] 104 ITR 551 (Guj.),
(b) M.K. Abdul Rahimanv. CIT [1979] 119 ITR 93 (Mad.) ,
(c) CITv. V.R. Rqjaratnam [1979] 119 ITR 89 (Mad.).
Next it is contended that the AAC ought to have appreciated that the salary had become due to the assessee during the relevant accounting years, and the same was forgone by the assessee only after its accrual and hence he should have held that the salary income is taxable in the hands of the assessee.
9. This Tribunal has heard Shri C. Suryaprakash Rao, the learned Departmental Representative, and Shri S. Rama Rao, the learned counsel for the assessee. Assessee had filed a paper book, containing six pages, and all the pages contained in the paper book were certified to have been filed before the lower authorities. On page-1, resolution passed by the Board of Directors of Kalpana Tanning Materials Ltd., Vizianagaram on 27-6-1980 was furnished. This contains the terms and conditions on which the appointment of Smt. B. Kalavathi, has been made as the Managing Director of the company. The conditions are stated to be as follows :
(1) She was appointed as Managing Director for five years beginning from 27-6-1980 on a monthly consolidated remuneration of Rs. 1,500;
(2) Benefits of Provident Fund, Gratuity and Bonus as applicable to the employees of the company though not applicable to Directors as such;
(3) Free Telephone facility at her residence;
(4) Reimbursement of expenses incurred by her in connection with the business of the company;
(5) Medical expenses for herself and the members of her family. it also states that the Chairman informed the Board that the appointment of Snit. B. Kalavathi as Managing Director and fixation of her remuneration is subject to the approval of the shareholders and the Central Government.
10. Again a Board meeting was held on 23-9-1990 at 11 AM at APSSIDC, Hyderabad. In that Board meeting, by means of a resolution of the Board, the decision to appoint Smt. B. Kalavathi as the Managing Director of the unit has been approved by the Directors. Her period of appointment is for five years from 27-6-1980. She was appointed in place of one Shri B. Paidanna and her remuneration was fixed at Rs. 1,500 per month. Other benefits remained as they were previously passed by the resolution dated 27-6 1980. The Resolution also contained the following important rider :
But she should not draw any remuneration till the unit generates surpluses and also should take prior written approval of the Institutions namely APSSIDC Ltd. /SFC before the actual drawal.
11. At page-3, the approval of the Central Government dated 20-8-1981 was filed. Inter alia, it states that the Central Government has been pleased to approve under Section 269 of the Companies Act, the appointment of Smt. Boddu Kalavathi as the Managing Director of Kalpana Tanning Materials Ltd. for a period of five years from 27-6-1980, on a salary of Rs. 1,500 including D.A., if any, payable under the Companies Rules, which has to be treated as part of the salary. We are not concerned here, about the other benefits to which she was made entitled to, like company’s perquisites, gratuity, provident fund, medical benefits, etc. Para-5 of the said approval letter reads as follows :
5. The remuneration as stated in para 1 above is subject to the approval of the company in general meeting as required by Sub-section (1) of Section 309 of the Act, and subject further to such reduction as the company in general meeting may like to make, unless the same has already been approved by the company in general meeting.
12. On 9-7-1986 at 11 AM, the Board of Directors again assembled at Parishram Bhavan, Hyderabad in the office of the APSSIDC, and minutes of the said meeting is also filed at page 5 of the paper-compilation filed before this Tribunal. It can be seen that the Company has been incurring losses continuously year after year, due to downward trend in the market of the products. Under the circ umstances, the Chairman himself reduced his salary from Rs. 1,350 to Rs. 1,000 p.m. and also reduced interest from 16% to 12% on the advances made by him to the company. He therefore, suggested that the Managing Director also should not insist on the drawal of outstanding salary due to her in view of the financial difficulties of the Company. At that Board meeting, a resolution was passed as follows :
The outstanding dues towards salary due to Smt. B. Kalavathi as amount written off be and is hereby approved provided that it should also be approved by the Annual General meeting.
13. The Annual General Meeting held at Vizianagaram on 29-9-1986 at 11.30 A.M., passed a resolution under Ordinary Business Item No. 2, a copy of which is furnished at page 6 of the paper compilation. It reads as follows :
RESOLVED to write back the provisions of salaries of Rs. 60,930 due to the Managing Director in view of the written consent of the Managing Director, Smt. B. Kalavathi to give up her claim in view of continuous losses to the company.
From the minutes of the meeting of that day, it is clear that Rs. 60,930 represents salary due to Smt. B. Kalavathi from 1980-81 to 1983-84, and in the said minutes, it is also stated that the Board of Directors’ meeting dated 9-7-1986 already wrote off the amount due to Smt. B. Kalavathi, but they have stated that it should also be approved by the General Meeting.
14. Thus, it is clear that a reading of all the above documents makes it clear that the payment of salary to the assessee was not automatic, and her monthly salary would not accrue to her at the end of every month. It depended upon the unit generating surpluses, and before the drawal of the salary, written approval of the financial institutions, viz., APSSIDC and SFC should be obtained. Even the Government in para 5 of its order dated 20-8-1981 makes the payment of remuneration conditional on such reduction as the Company, may, in the General Meeting, like to make. Therefore, the General Meeting is entitled to make reduction of the remuneration also. It is, no doubt, true that the company is debiting the monthly salary amount in its accounts. But no drawal of the same was ever made from out of the salary so credited in her name.
15. The question that arises in this set of circumstances and in view of the AAC’s order, is whether the ITO is correct in treating the salary income as ‘already accrued’ and taking the same as income in the hands of the assessee in each of the four assessment years under consideration is correct. The revenue had relied upon the decisions reported at 104 ITR 551, 119 ITR 89 and 119 ITR 93, referred to above. Besides, the learned Departmental Representative, appearing for the revenue had also cited the decision of the Delhi High Court in CITv. Gian Singh Kalsi[ 1980] 123 ITR 373. It is contended on behalf of the Revenue that every month salary has been debited to the Company’s account and credited to the account of the assessee. The monthly salary is due to the assessee on rendering the services, and she is obliged to show all her salary income accruing in each of the accounting years relevant to these assessment years, as income in her hands. Unlike incomes falling under other heads, the principle under Section 15 is that income becomes chargeable to tax with reference to the previous year in which it fell due not on the basis of actual receipt, but on the basis of the amount becoming due. So, simply because there is no drawal of any amount from out of the salary credited, it does not mean that the assessee had not earned any salary income in any of these four assessment years. In support of this contention, this Tribunal’s attention is drawn to the Gujarat High Court’s decision in Bochubhai Nagindas Shah’s case (supra). The learned Departmental Representative also pointed out that the waiver was exercised long after the salary had become due and accrued. 31 -3-1984 was the last day of the previous year relevant to assessment year 1984-85. Waiver or write back was made on 29-9-1986. Waiver cannot mean anything more than disposal of the income already received by the assessee. This position was made clear in the Gujarat High Court decision in Bachubhai Nagindas Shah’s case (supra). The facts before the Gujarat High Court are that the assessee was appointed a Director of a private company on a remuneration of Rs. 400 per month. In 1962 for which the assessment year was 1963-64, the company incurred losses and on 18-3-1963, the Board of directors resolved that the directors should waive their remuneration for 1962. Accordingly, the assessee had waived his right of remuneration of the sum of Rs. 4,800 which had become due to him for the year 1962. The ITO included the amount as income of the year, whereas the Appellate Tribunal had excluded it. When the matter came up before the Gujarat High Court, it held the following (as per the head-note in the Reports) :
…Unlike incomes falling under other heads of income, as regards salaries, the principle under Section 15 is that the income becomes chargeable to tax with reference to the previous year in which it fell due, not on the basis of actual receipt but on the basis of the amount becoming due. The position as regards income falling under the head ‘Salaries’ is altogether different from the income falling under the head ‘income from business” because what can be deducted from the commercial point of view under Section 28 is not available in the case of salaries. The waiver of salary which occurred subsequent to the assessment year would be totally ineffective in the computation for the assessment year. The concept of’ real income’ in a case like the present one where the income falls under the head ‘salaries’ cannot help the assessee and his waiver cannot amount to anything more than the disposal of the income already received by the assessee. The Tribunal erred in law in coming to the conclusion that the remuneration of Rs. 4,800 forgone by the assessee was not income liable to tax.
The other decisions cited by the learned Departmental Representative, also support the proposition, which the Gujarat: High Court has laid down in Bachubhai Nagindas Shah’s case (supra) from which portions were already extracted above.
16. As against this argument, learned counsel for the assessee has firstly drawn the attention of this Tribunal to the fact that accrual of salary in the particular facts and circumstances of this case is not automatic. It depends upon the company showing surpluses, and the drawal pf the salary requires the prior written approval of the financial institutions APSSIDC/SFC. In all these years, losses were sustained by M/s. Kalpana Tanning Materials Ltd. The argument that accrual of salary income is automatic on completion of every month cannot be accepted as correct. In view of the special conditions imposed for the drawal of salary allowed to the assessee, a mention of which is already made from out of the several documents filed on behalf of the assessee in the paper book.
17. The learned counsel for the assessee has also brought to the notice of this Tribunal that the assessee has never attempted to draw even one rupee from out of the so-called credited salary, since there are so many conditions on the fulfilment of which only it can be said that the salary has become due to the assessee and since in the corresponding accounting years relevant to these four assessment years, the company has not earned any profits, and always incurred losses; and APSSIDC and SFC never gave permission to the assessee to draw the salary, nor the assessee attempted to apply for such a sanction from the APSSIDC/SFC, the salary income does not accrue to her in any of the four accounting years in question. Simply because in the books of account of the company, salary was debited to the profit and loss account and credited to the account of the assessee does not alter the true legal position, and does not make the amount not due to the assessee under law, into one due to her. The learned counsel also stressed the fact that the Board of Directors by its resolution dated 9-7-1986 had written off the salary due to the assessee for these four years and on 29-9-1986, the General Body Meeting also approved that resolution and it had also resolved to write back the provision for salaries of Rs. 60,930 due to the Managing Director, in view of the written consent of the Managing Director, Smt. B. Kalavathi to give up her claim considering the continuous losses suffered by the company. Thus, the General Meeting, which is all powerful has also ultimately resolved to write off the dues. In fact, there are no dues inasmuch as the salary can be claimed only when the company shows surpluses, and she is not entitled to salary when it is continuing in losses.
18. The attention of the Tribunal is also drawn to Orissa High Court’s decision in Trailokyanath Mohanty v. CIT[ 1977] 110 ITR 254. As per the head-note of the said decision, the following is held :
Though under the articles of association of a company provision had been made for remuneration to be paid to the assessee, its managing director, and in the accounts also provision had been made to that effect, merely making of such provision would not entitle the managing director to draw the remuneration. Where the Board of directors by a resolution decided not to pay any remuneration to the managing director on account of continuous loss to the company in its business operations, the managing director was not entitled to draw his salary. The resolution of the Board to write back the remuneration of the managing director meant that the provision in the balance-sheet was to stand deleted and the accounts were accordingly to be readjusted. Held that the revenue cannot contend that Section 15(a) of the Income-tax Act, 1961, applied on the basis that the salary was due from the employer. The same could not be treated as income of the assessee.
Thus, the learned counsel for the assessee contended that the salary income cannot be said to be due to the assessee even though a provision of such salary income is made in the accounts of the company.
19. After hearing both sides, this Tribunal prefers to accept the arguments advanced on behalf of the assessee. Firstly, the Tribunal is of the view that the Board meeting dated 29-3-1980 specifically stated that the assessee should not draw any remuneration until the unit generates surpluses, and also that she should take prior written approval of the financial institutions, namely, APSSIDC/SFC before the actual drawal. Therefore, earning of surpluses by the company is a condition precedent or a sinem-qua-non for claiming remuneration or for being entitled to monthly salary or remuneration. So also, the written approval of the APSSIDC/SFC is a condition precedent for the drawal of the salary. In all the accounting years relevant to these assessment years, the company was sustaining losses, and it never earned any profit. So also, the permission of APSSIDC/SFC was never obtained by the company or by the assessee. Further, while approving the appointment of the Managing Director, on monthly salary basis, the Central Government also made it very clear in para 5 on page 4 of the paper book that the General Body has got all the powers under sub Section (1) of Section 309 to reduce the monthly remuneration. Thus, this Tribunal is thoroughly convinced with the argument of the learned counsel for the assessee that the salary did not become due and Section 15(a) of the Income-tax Act does not apply automatically. On the facts and in the circumstances of the case, this Tribunal fully approves the order passed by the AAC.
20. In the result, this Tribunal fails to see any valid ground to interfere with the order of the AAC; hence these appeals are found to be without force and they are dismissed.