{"id":943,"date":"1974-11-21T00:00:00","date_gmt":"1974-11-20T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/nonsuch-estate-ltd-vs-the-commissioner-of-income-tax-on-21-november-1974"},"modified":"2015-10-24T07:47:05","modified_gmt":"2015-10-24T02:17:05","slug":"nonsuch-estate-ltd-vs-the-commissioner-of-income-tax-on-21-november-1974","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/nonsuch-estate-ltd-vs-the-commissioner-of-income-tax-on-21-november-1974","title":{"rendered":"Nonsuch Estate Ltd vs The Commissioner Of Income-Tax, &#8230; on 21 November, 1974"},"content":{"rendered":"<div class=\"docsource_main\">Supreme Court of India<\/div>\n<div class=\"doc_title\">Nonsuch Estate Ltd vs The Commissioner Of Income-Tax, &#8230; on 21 November, 1974<\/div>\n<div class=\"doc_citations\">Equivalent citations: 1975 AIR  428, \t\t  1975 SCR  (2) 806<\/div>\n<div class=\"doc_author\">Author: A Gupta<\/div>\n<div class=\"doc_bench\">Bench: Gupta, A.C.<\/div>\n<pre>           PETITIONER:\nNONSUCH ESTATE LTD.\n\n\tVs.\n\nRESPONDENT:\nTHE COMMISSIONER OF INCOME-TAX, MADRAS\n\nDATE OF JUDGMENT21\/11\/1974\n\nBENCH:\nGUPTA, A.C.\nBENCH:\nGUPTA, A.C.\nKHANNA, HANS RAJ\n\nCITATION:\n 1975 AIR  428\t\t  1975 SCR  (2) 806\n 1975 SCC  (3) 443\n\n\nACT:\nIncome-tax Act. 1922-Assessee followed mercantile system  of\naccounting  Debited  in\t books\teach  year  managing  agency\nremuneration for three years Claimed deduction in the  third\nyear  on  receipt of approval from  Central  Government\t for\nreappointment  of managing agents as required under  s.\t 326\nCompanies Act-Whether assessee should have claimed deduction\nin each assessment Year.\n\n\n\nHEADNOTE:\nThe   assessee\twho  followed  the  mercantile\t system\t  of\naccounting  debited  in its account books  certain  sums  of\nmoney  as  remuneration\t of  the  managing  agents  for\t the\nassessment  years  1957-58 to 1959-60.\tFor the\t purpose  of\nincome-tax  the\t company added back the sum to\tits  taxable\nincome and claimed the whole sum as a deductible expenditure\nin  the assessment year 1959-60 on the ground that  the\t sum\nbecame\tpayable\t only during that year when  the  Government\naccorded its approval to the new managing agency  agreement.\nThe  income-tax Officer rejected the claim holding that\t the\napproval  of the Central Government was necessary  only\t for\nactual payment and the assessee should have ascertained\t the\nliability for each year and claimed it since he followed the\nmercantile  system of accounting.  This view was  upheld  by\nthe  Appellate\tAssistant Commissioner\tand  the  Income-tax\nAppellate Tribunal.\nThe  High  Court held that although at the  time  the  debit\nentries\t were  made in the account books  of  the  assessee,\napproval  of the Central Government had not  been  received,\nwhen  it  came\tlater, it gave legal  effect  to  the  debit\nentries\t with  retrospective effect from April 1.  1956\t and\nthat the refusal of deduction by the Income-tax Officer\t was\nright.\nAllowing the appeal to this Court,\nHELD : The High Court was in error in answering the question\nagainst\t the  assessee.\t  Even\tan  assessee  following\t the\nmercantile  system of accounting is not entitled to claim  a\ndeduction until liability for the sum for which deduction is\nclaimed\t has accrued.  The High Court overlooked  the  plain\nterms  of  s.326 of the Companies Act, 1956 under  which  it\ncould  not  be\tassumed that the  Central  Government  would\napprove\t every\tproposed appointment  or  re-appointment  of\nmanaging agent. [809A; D; 810A]\nIn  the instant case it is only when the Central  Government\nconveyed its approval to the appointment of managing  agents\nby  its letter dated September 2, 1957 that the\t appointment\nbecame\teffective  and the Company's liability\tto  pay\t the\nremuneration of the managing agents accrued.  The  liability\nbecame\teffective  from April 1, 1956  because\tthe  Central\nGovernment   chose  to\tgive  its   approval   retrospective\noperation.   The liability could not be said to\t had  &amp;risen\nfrom  any date prior to September 2, 1957 when the  approval\nwas  given.   Section 326 of the Companies Act\tcontains  an\nabsolute   prohibition\tagainst\t the  appointment   or\t re-\nappointment  of\t a  managing agent before  the\tapproval  of\nCentral Government was obtained. [810B-C]\n\n\n\nJUDGMENT:\n<\/pre>\n<p>CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1554 of 1970.<br \/>\nAppeal. by Special Leave from the Judgment &amp; Order dated the<br \/>\n19th  August, 1968 of the Madras High Court in Tax Case\t No.<br \/>\n18 of 1 965.\n<\/p>\n<p>G.   B.\t Pai, A. G. Manessea, D. C. Mathur and K.  K.  John,<br \/>\nfor appellant.\n<\/p>\n<p>B. B. Ahuja and S. P. Nayar, for the respondent.\n<\/p>\n<p><span class=\"hidden_text\">807<\/span><\/p>\n<p>The Judgment of the Court was delivered by<br \/>\nGUPTA, J. This is an appeal by special leave from a judgment<br \/>\nof the\tMadras High Court in a reference under section 66(1)<br \/>\nof the Income Tax Act, 1922.  The appellant, Nonsuch  Estate<br \/>\nLimited,  is  a public limited company incorporated  in\t the<br \/>\n&#8216;year  1924 under the Companies Act, 1913.   The  appellant,<br \/>\nreferred  to hereinafter as the Company, derives its  income<br \/>\nfrom  tea  grown in its estate for which it is\tassessed  to<br \/>\nincome-tax.  M\/s.  Harrisons and Crosfield Limited have been<br \/>\nthe managing agents of the Company from the beginning.\t The<br \/>\nfollowing  question relating to the assessment year  1959-60<br \/>\nwas referred to the High Court :\n<\/p>\n<blockquote><p>\t      &#8220;Whether on the facts and in the circumstances<br \/>\n\t      of   the\tcase,  the  sum\t of   Rs.   97,188\/-<br \/>\n\t      representing the Managing Agency\tremuneration<br \/>\n\t      for  the\tperiod\t1-4-1956  to  30-6-1957\t was<br \/>\n\t      deductible in the computation of the income of<br \/>\n\t      previous\tyear  ending  on  30th\tJune   1958,<br \/>\n\t      relevant for the assessment year 1959-60.&#8221;\n<\/p><\/blockquote>\n<p>The relevant facts leading to the reference are these.\t The<br \/>\nmanaging  agents of the Company were entitled to  commission<br \/>\nat  the\t rate of 11 per cent on all sales of tea  and  other<br \/>\nproduces  of the Company and a further sum of  Rs.  12,000\/-<br \/>\nper  annum  for secratarial work.  There  was,\thowever,  no<br \/>\nwritten. agreement embodying the terms.\t After the Companies<br \/>\nAct,  1956 came into force on April 1, 1956 it\twas  decided<br \/>\nthat  there  should  be a fresh\t managing  agency  agreement<br \/>\nbetween\t the Company and its managing agents  in  conformity<br \/>\nwith  the  provisions of the said Act.\t A  fresh  agreement<br \/>\ndrawn  up and submitted by the managing agents was  approved<br \/>\nby   the   Company.    The  new\t  agreement   proposed\t the<br \/>\nreappointment of M\/s.  Harrisons &amp; Crosfield Limited as\t the<br \/>\nmanaging agents of the Company for a period of 10 years on a<br \/>\nremuneration of 5 per cent commission on the net profits  of<br \/>\nthe Company computed in the manner laid down in sections 349<br \/>\nto  351\t of  the Companies Act, 1956 subject  to  a  minimum<br \/>\nremuneration  of Rs. 12,000\/- per annum.  The revised  terms<br \/>\nwere to take effect from April 1, 1956.\t As required by sec.<br \/>\n326 of the Companies Act, the new agreement was sent to\t the<br \/>\nCentral\t Government  for approval by a\tcommunication  dated<br \/>\naugust\t3,  1957  enclosing a  formal  application  for\t the<br \/>\npurpose\t in  Form  25,\tOn September 2,\t 1957  by  a  letter<br \/>\naddressed  to  the  Company  the  Government  conveyed\t its<br \/>\napproval to &#8220;the appointment of M\/s.  Harrisons &amp; Crosfields<br \/>\nLtd. as the Managing agents&#8230;&#8230;.. for a period of 10 years<br \/>\nwith effect from 1st April 1956, on a remuneration of 5\t per<br \/>\ncent  commission on the net profits of the Company  computed<br \/>\nin  the\t manner as laid down in Sections 349 to 351  of\t the<br \/>\nCompanies Act, 1956 subject to a minimum remuneration of Rs.<br \/>\n12,000\/- (Rupees twelve thousand only) per annum payable  to<br \/>\nthe  Managing Agents, in the event of absence or  inadequacy<br \/>\nof  profits  in\t any  financial year.&#8221;\tOn  receipt  of\t the<br \/>\napproval,  the\tCompany\t by  a\tresolution  adopted  at\t  an<br \/>\nextraordinary  general meeting of its shareholders  held  on<br \/>\nOctober\t 4,  1957 reappointed M\/s.   Harrisons\t&amp;  Crosfield<br \/>\nLimited\t on  the terms stated above.  In terms\tof  the\t new<br \/>\nagreement the existing agency agreement between the  parties<br \/>\nstood cancelled with the expiry of March 31, 1956.\n<\/p>\n<p><span class=\"hidden_text\">808<\/span><\/p>\n<p>The  Company  follows the mercantile system  of\t accounting.<br \/>\nFor  the period April 1, 1956 to June 30, 1956, the  Company<br \/>\ncredited a sum of Rs. 9320\/- to the account of the  managing<br \/>\nagents as their remuneration in accordance with the terms of<br \/>\nthe  proposed  new  agreement.\tThis was  disclosed  in\t the<br \/>\npublished accounts of the Company for the year July 1,\t1955<br \/>\nto  June 30, 1956 relevant to the assessment  year  1957-58.<br \/>\nFor  the purpose of assessment of income-tax, however,\tthe<br \/>\nCompany\t added\tback  the said sum of  Rs.  9,320\/-  to\t its<br \/>\ntaxable income.\t In the next accounting year ending on\tJune<br \/>\n30,  1957 relevant to the assessment year 1958-59  the\tsame<br \/>\nprocess was followed with regard to the remuneration payable<br \/>\nto the managing agents.\t For the assessment year 1959-60 for<br \/>\nwhich the previous year was July 1, 1957 to June 30, 1958, a<br \/>\ntotal  sum  of Rs. 97,188\/- was shown  as  managing  agents&#8217;<br \/>\nremuneration payable during that year.\tThis amount was made<br \/>\nup as under<br \/>\n\t\t\t\t\t    Amount<br \/>\n.lm15<br \/>\n&#8221;  Proportionate remuneration for 3 months at 5 per cent  on<br \/>\nthe  net  profits for the period ending\t on  30-6-1956\tpaid<br \/>\nduring the year ending on 30-6-1958<br \/>\n9,320<br \/>\nRemuneration  at  5 per cent on the net profit of  the\tyear<br \/>\nending\ton  30th June 1957 paid during the  year  ending  on<br \/>\n30-6-1958\t\t\t\t       71,368<br \/>\n     Managing Agents expenses for the year ending 30th\tJune<br \/>\n1957 recouped during the year ending\ton     30th\tJune<br \/>\n1958.13,200<br \/>\nProportionate Managing Agent&#8217;s expenses for the\t  year<br \/>\nending on 30th June 1956 recouped during     the year ending<br \/>\non 30-6-19583,300<br \/>\n\t\t\t\t\t\t 97,188.\n<\/p>\n<p>Though\tthis  sum  did\tnot pertain  to\t the  previous\tyear<br \/>\nrelevant to the assessment year 1959 60, the Company claimed<br \/>\nit  as\tdeductible expenditure for that year on\t the  ground<br \/>\nthat  the sum became payable only during that year when\t the<br \/>\nGovernment accorded its approval to the new &#8216;agreement.\t The<br \/>\nIncome-tax Officer rejected this claim on the view that\t the<br \/>\napproval  of the Central Government was necessary  only\t for<br \/>\nactual payment and &#8220;the assessee should have ascertained the<br \/>\nliability  for\teach year and claimed it on  the  mercantile<br \/>\nbasis which was the system adopted by the assessee company.&#8221;<br \/>\nThe  Appellate Assistant Commissioner and the Tribunal\talso<br \/>\ntook  the same view.  The High Court answered  the  question<br \/>\nreferred  to  it  against  the\tassessee  on  the  following<br \/>\nreasoning :\n<\/p>\n<blockquote><p>\t      &#8220;..   &#8230;\t &#8230;.  There  was   undoubtedly\t  an<br \/>\n\t      understanding between the managing agency\t and<br \/>\n\t      the   assessee   as  to  the  new\t  terms\t  of<br \/>\n\t      remuneration which actually were given  effect<br \/>\n\t      to by making debit entries in the remuneration<br \/>\n\t      account  then and there.\tIt is true that<br \/>\n\t      at  the  time  the debit\tentries\t were  made,<br \/>\n\t      approval\tof  the Central Government  had\t not<br \/>\n\t      come.   But  when it came actually  later,  it<br \/>\n\t      gave legal effect to the debit<br \/>\n<span class=\"hidden_text\">\t\t\t\t   809<\/span><br \/>\n\t      entries, not from the date of the approval but<br \/>\n\t      from April 1, 1956.  That being the case,\t the<br \/>\n\t      refusal  of the deduction, in our opinion\t was<br \/>\n\t      right.&#8221;\n<\/p><\/blockquote>\n<p>In our judgment the High Court was in error in answering the<br \/>\nquestion  referred to it against the assessee.\t It  appears<br \/>\nthat the Income-tax authorities, the Tribunal and the.\tHigh<br \/>\nCourt all laid special emphasis on the fact that the Company<br \/>\nfollowed   the\t mercantile  system  of\t  accounting.\t The<br \/>\ndistinction  between the two methods of accounting,  one  on<br \/>\nthe  cash  basis and the other on the  mercantile  basis  is<br \/>\nwell-known.   <a href=\"\/doc\/1265328\/\">In  Commissioner of Income-tax, Madras  v.  A.<br \/>\nGajapathy  Naidu<\/a>(1),  this Court  explained  the  difference<br \/>\nbetween\t the  two methods quoting with approval\t an  extract<br \/>\nfrom a Judgment of the, Allahabad High Court in Commissioner<br \/>\nof Income-tax v. Singari Bai(2). In<br \/>\nGajapathy Naidu&#8217;s(1) case this Court said:\n<\/p>\n<blockquote><p>\t      &#8221;\t  It  is  commonplace  that  there  are\t two<br \/>\n\t      principal\t  methods  of  accounting  for\t the<br \/>\n\t      income, profits and gains of a business one is<br \/>\n\t      the  cash basis and the other, the  mercantile<br \/>\n\t      basis.   The  latter  system  of\t accountancy<br \/>\n\t      &#8220;brings into credit what is due immediately it<br \/>\n\t      becomes legally due and before it is  actually<br \/>\n\t      received; and it brings into debit expenditure<br \/>\n\t      the  amount  for which a legal  liability\t has<br \/>\n\t      been   incurred\tbefore\t it   is    actually<br \/>\n\t      disbursed&#8221;.&#8221;\n<\/p><\/blockquote>\n<p>However, even an assessee following the mercantile system of<br \/>\naccounting  is\tnot  entitled to  claim\t a  deduction  until<br \/>\nliability  for\tthe sum for which deduction is\tclaimed\t has<br \/>\naccrued.   The reasons given by the High Court overlook\t the<br \/>\nplain  terms of sec. 326 of the Companies Act,\t1956.\tSec.<br \/>\n326 so far it is material for the question involved in\tthis<br \/>\ncase, is in these terms :\n<\/p>\n<pre>\t      \"Sec.    326.)1)\t  In\trespect\t   of\t any\n\t      company............\n\t      (a)..........\n<\/pre>\n<p>\t      (b)   unless  the\t approval  of  the   Central<br \/>\n\t      Government   has\t been  obtained\t  for\tsuch<br \/>\n\t      appointment or re-appointment.\n<\/p>\n<p>\t      (2)   The Central Government shall not  accord<br \/>\n\t      its  approval  under sub-section\t(1)  in\t any<br \/>\n\t      case,\t    unless it is satisfied-\n<\/p>\n<p>\t      (a)   that  it  is  not  against\tthe   public<br \/>\n\t      interest\tto  allow  the\tcompany\t to  have  a<br \/>\n\t      managing agent;\n<\/p>\n<p>\t      (b)   that the managing agent proposed is,  in<br \/>\n\t      the  opinion,  a fit and proper person  to  be appoi<br \/>\nnted  or re-appointed as such, and  that<br \/>\n\t      the   conditions\t of  the   managing   agency<br \/>\n\t      agreement\t proposed are fair  and\t reasonable;<br \/>\n\t      and\n<\/p>\n<p>\t      (c)   that  the  managing agent  proposed\t has<br \/>\n\t      fulfilled\t any  conditions which\tthe  Central<br \/>\n\t      Government requires him to fulfil.&#8221;\n<\/p>\n<p>(1) 53 I.T.R. 114.\n<\/p>\n<p>(2) 13 I.T.R. 224.\n<\/p>\n<p><span class=\"hidden_text\">810<\/span><\/p>\n<p>Section 326 prohibits the appointment or re-appointment of a<br \/>\nmanaging  agent unless the Central Government approved\tsuch<br \/>\nappointment or re-appointment.\tThe Central Government would<br \/>\nnot accord its approval unless the requirements specified in<br \/>\nclauses\t (a), (b) and (c) of sub-section (2) of the  section<br \/>\nhave  been fulfilled.  Therefore, it cannot be assumed\tthat<br \/>\nthe   Central\tGovernment  will  approve   every   proposed<br \/>\nappointment  or reappointment of a managing agent.  Thus  in<br \/>\nthe  instant  case it is only when  the\t Central  Government<br \/>\nconveyed its approval to the appointment of M\/s.   Harrisons<br \/>\nand  Crosfield\tLimited as managing agents  by\tits  letter<br \/>\ndated\tSeptember  2,  1957  that  the\tappointment   became<br \/>\neffective   and\t  the  Company&#8217;s  liability   to   pay\t the<br \/>\nremuneration  of the managing agents accrued.  The  position<br \/>\nhere  is not that the liability had arisen earlier  and\t its<br \/>\nquantification only depended on the approval of the  Central<br \/>\nGovernment.  It is true that the liability became  effective<br \/>\nfrom April 1, 1956, a date anterior to the relevant previous<br \/>\nyear,  but &#8216;that is because the Central Government chose  to<br \/>\ngive its approval retrospective operation.  The liability in<br \/>\nthese  circumstances cannot be said to have arisen from\t any<br \/>\ndate prior to September, 2, 1957 when the approval was given<br \/>\nas  sec.  326 contains an absolute prohibition\tagainst\t the<br \/>\nappointment or re-appointment of a managing agent before the<br \/>\napproval  of  the Central Government was obtained.   In\t our<br \/>\nopinion, the position is quite clear from the terms of\tsec.<br \/>\n326  and  we do not consider it necessary to  refer  to\t the<br \/>\nauthorities cited by the learned counsel for either side.<br \/>\nThe appeal is accordingly allowed, the answer given by\tthe<br \/>\nHigh Court to the question referred to it is discharged\t and<br \/>\nthe question is answered in the affirmative and in favour of<br \/>\nthe assessee. The appellantwill be entitled to its  costs<br \/>\nin this Court and in the High Court.\n<\/p>\n<p>P.E.R.\n<\/p>\n<p>Appeal allowed.\n<\/p>\n<p><span class=\"hidden_text\">811<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Supreme Court of India Nonsuch Estate Ltd vs The Commissioner Of Income-Tax, &#8230; on 21 November, 1974 Equivalent citations: 1975 AIR 428, 1975 SCR (2) 806 Author: A Gupta Bench: Gupta, A.C. PETITIONER: NONSUCH ESTATE LTD. Vs. RESPONDENT: THE COMMISSIONER OF INCOME-TAX, MADRAS DATE OF JUDGMENT21\/11\/1974 BENCH: GUPTA, A.C. BENCH: GUPTA, A.C. KHANNA, HANS RAJ [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-943","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Nonsuch Estate Ltd vs The Commissioner Of Income-Tax, ... on 21 November, 1974 - Free Judgements of Supreme Court &amp; High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/nonsuch-estate-ltd-vs-the-commissioner-of-income-tax-on-21-november-1974\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Nonsuch Estate Ltd vs The Commissioner Of Income-Tax, ... on 21 November, 1974 - Free Judgements of Supreme Court &amp; 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