Commissioner of Income Tax vs India Cements Ltd.

Ramaswami, J.—The assessee is a public limited company. It is managed by a private limited company called Essen Private Ltd. Under the

managing agency agreement, the managing agency company was entitled to a remuneration of 10 percent, of the net profits of the company. The

net profits had to be computed in accordance with Section 348 of the Companies Act, 1956. Under this section, the depreciation allowable under

the Indian Income Tax Act, 1922, and the Rules framed thereunder, had to be deducted in arriving at the net profits. Section 10(2)(vi) of the

Indian Income Tax Act, 1922, and Rule 8 framed thereunder, provided the manner in which the written down value of the assets had to be

calculated. For the assessment year 1960-61, corresponding to the accounting year ending with March 31, 1960, the company calculated the

depreciation allowable under the Rules at Rs. 17,63,233, and deducting this amount from the total profit of Rs. 73,38,417 the net profit was

arrived at Rs. 55,75,184, and ascertained the managing agents'' remuneration at 10 per cent, of this amount at Rs. 5,57,518*41. This amount was

claimed as a deduction in the computation of the company''s income for the year ending March 31, 1960. This calculation was made with

reference to the law then prevailing and it was placed before the general body meeting on September 2, 1960. Subsequently, on September 23,

1960, by a notification made u/s 59 of the Act, the Rules relating to the calculation of depreciation were amended by a notification of the Central

Board of Revenue. This rule was given retrospective effect from April 1, 1960. The notification was published in the Gazette on 1st October,

1960. In the company''s assessment proceedings for the assessment year 1960-61, the Income Tax Officer took note of this amendment of the

Rules. The depreciation allowable as per the amended rule was Rs. 26,80,613 which has to be deducted in calculating the net profits for the

purpose of ascertaining the managing agents'' remuneration. He accordingly proposed to recalculate the net profits on the basis that the

depreciation is Rs. 26,80,613. It was then noticed that this Rs. 26,80,613 included a shift allowance of Rs. 1,84,656 which had to be excluded

from the depreciation allowance deductible in arriving at the net profits. Accordingly, the deductible depreciation ailowance was arrived at Rs.

24,95,917. On this basis the Income Tax Officer calculated that Rs. 48,42,460 is the net income for the purpose of finding out the remuneration of

the managing agents and calculating at 10 per cent, the managing agents'' remuneration came to Rs. 4,84,246 as against Rs. 5,57,518 paid by the

company. The excess sum of Rs. 73,272 was deleted by the Income Tax Officer and added on to the income of the assessee for the assessment

year 1960*61. The assessee appealed to the Appellate Assistant Commissioner. It was contended by the assessee that at the time of the general

body meeting, the amended rule had not come into force and as per the Rules then existing the amount was correctly calculated and that the

company could not have waited till the assessment proceedings were over in order to pay the managing agents'' remuneration and, therefore, the

entire amount of Rs. 5,57,518.41 paid by them should have been deducted from their income. The Appellate Assistant Commissioner agreed with

this submission and deleted the addition of Rs. 73,27.2. The Tribunal was also of the view that the net profits will have to be calculated on the

basis of the Rules in force for the time being, that the amended Rules came into force very much later after the accounts had become final and that

the remuneration was properly calculated as per the Rules then prevailing. In this view of the law, the Tribunal also held that the sum of Rs. 73,272

was paid for services rendered, when the accounts were passed and that, therefore, it was legal and in accordance with the agreement with the

managing agents. At the instance of the revenue, the following question has been referred:

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the Appellate Assistant Commissioner

was justified in deleting the addition of Rs. 73,272 ?

In the order of the Tribunal and the Appellate Assistant Commissioner, the only reason that was given for deleting this addition was that the

calculation made for the purposes of finding out the allowable depreciation was strictly in accordance with the law as it then stood, and that the

company could not be expected to wait indefinitely for paying the managing agent''s remuneration and any change in the law subsequently will not

either affect the payment or the nature of the payment that it was for business purposes. We are wholly unable to accept this reasoning of the

Tribunal and the Appellate Assistant Commissioner. When once a rule is made to take effect retrospectively from an anterior period, we have to

imagine that the amended rule had always been in existence even from the anterior date. This is a well-established proposition and needs no further

elucidation. If that be so, the calculation made by the assessee on the basis of the unamended rule is incorrect and the payment made to the

managing agents an over-payment. It is not in dispute that if the managing agent''s remuneration will have to be calculated on the basis of the

amended rule, the sum of Rs. 73,272 now in question would be an amount not paid in accordance with the agreement. By calculating the

depreciation allowance at a smaller figure than that provided under the amended rule, the net profits had been arrived at a higher figure thereby

resulting in over-payment to the managing agents. Since the managing agency agreement only provides for 10 per cent, of the net profits as

allowable under the provisions of the Income Tax Act and the Rules, any payment in excess of that agreement, in our opinion, cannot be

considered as one spent for the purpose of the business. The Tribunal considered that this amount was paid for the purpose of the business only on

the basis that the managing agency agreement provided for 10 per cent, of the net profits and the company had arrived at the net profits on the

basis of the rule as it then was. Once we hold that the calculation was not in accordance with law we cannot say that the Tribunal has given any

finding that even with reference to the excess payment, it should be treated as an amount paid for the purpose of the business. Two decisions of

this court in Commissioner of Income Tax, Madras Vs. Ramkrishnan Mills (Coimbatore) Ltd., and Commissioner of Income Tax Vs. Sree

Rajendra Mills Ltd., were referred to at the Bar. In the first of these cases, one Doraiswamy Naidu, a partner of the managing agency firm, was

employed as a manager by the assessee-company. Under the managing agency agreement, the firm of managing agents were entitled to a

remuneration of 10 per cent, of the net profits or Rs. 35,000 whichever is higher. The managing agents were actually paid remuneration of Rs.

35,000, in each of the assessment years 1958-59, 1959-60 and 1960-61 In addition to this managing agent''s remuneration, the said Doraiswamy

Naidu, in his capacity as manager of the company, had received remuneration of Rs. 24,900, Rs. 26,100 and ''Rs, 27,300, respectively, in respect

of the three assessment years. The company claimed allowance for the remuneration paid to the managing agency firm and also for the salary paid

to the manager. The Income Tax Officer allowed the remuneration paid to the managing agency firm but disallowed the salary paid to the said R.

Doraiswamy Naidu on the ground that the salary paid to him amounted to remuneration paid to the managing agent and that, as it was in excess of

ten per cent, of the net profits of the company during the years of account, the payment is prohibited by Section 348 of the Indian Companies Act.

We have held therein that the payment of salary to Doraiswamy Naidu, who was a technically qualified man, was in lieu of his services rendered by

him as manager and that there was no infringement of the provisions of Section 348 of the Companies Act. We also considered that even if there

was any infringement of Section 348 of the Companies Act for the purpose of allowability of that money as a deduction u/s 10(2)(xv) of the

Income Tax Act, such infringement is irrelevant. We may usefully quote that passage in that judgment on this point:

Even assuming that the said payment infringed Section 348 of the Companies Act, still the company is entitled, in our view, to the deduction u/s

10(2)(xv). As pointed out by the Tribunal, in considering the allowability of an expenditure u/s 10(2)(xv) one cannot travel outside the provisions of

the Income Tax Act and deny the benefit of deduction under that section on the ground that the payment is unauthorised or has been prohibited by

some other statute,

In the second case the assesses paid remuneration to its general manager, who was an associate of its managing agents in contravention of the

provisions of Section 360 of the Companies Act, 1956. The assessee claimed this payment as a deduction. On the finding that the payment was

for actual services rendered, we came to the conclusion in that case that any infringement of Section 360 of the Companies Act will not disentitle

the assessee from claiming the amount as an allowable deduction u/s 10(2)(xv) and we followed the ratio of the judgment in Commissioner of

Income Tax v. Ramakrishna Mills (Coimbatove) Ltd. We are unable to see how these two judgments in any way help the assessee in claiming the

deduction of this sum of Rs. 13,272, In the reported cases, as we have seen, the amount was paid for services rendered and, as per the provisions

of the Income Tax Act, that was an allowable deduction u/s 10(2)(xv). The only argument was that the payment was in contravention of either

Section 348 or Section 360 of the. Companies Act. In the case on hand, the facts are different. The payment of the sum of Rs, 73 272 was in

excess of the liability of the company under the managing agency agreement. Such over-payment cannot be said to be payment made for the

purposes of the business. We have, therefore, no doubt that this excess payment of Rs, 73,272 is not an allowable deduction u/s 10(2)(xv) of the

Act

It was then contended by the learned counsel for the assessee that a right had accrued to the managing agents as on March 31, 1960, itself and

the payment will have to be made as per the law existing on the day when the right had accrued. Since the amended rule had come into force only

with effect from April I, 1960, that could not be invoked by the revenue in this case. We are wholly unable to understand this argument of the

learned counsel. The assessment year is 1960-61 and the previous year relating to the assessment year is the year ending March 31, 1960. With

reference to the total income of the assessee the law that will have to be applied is the law in force in the assessment year and not the law that was

in force in the accounting year unless otherwise stated or implied. It is well-settled that any amendment which is in force at the beginning of the

relevant assessment year must govern the case, though the amendment is made after the income under assessment is earned. In other words, the

Income Tax Act, and the Rules as it stands amended on the first of April of any financial year, must apply to the assessment for that year. The

deletion by the Income Tax Officer of this sum of Rs. 73,272 and adding on the same to the income of the assessee was, therefore, strictly in

accordance with the provisions of the Act and the Rules.

The learned counsel for the assessee then drew our attention to Section 10(2A) of the Income Tax Act and contended that on the same analogy

any amount paid in excess of the amount due to the managing agents would in law be deemed to be held by the managing agents as trustees and

liable to be repaid to the company and as and when the amount is paid back by the managing agents to the company or the company is able to

recover the same, it could be assessed in their hands as income of the year in which the sum was received. In particular, he contended that this

principle should be invoked because the entire amount was paid as per the provisions of the law as it then stood, and the company could not get

the displeasure of not paying the remuneration as and when it became due. We are unable to agree with this contention of the learned counsel.

Section 10(2A) of the Income Tax Act deals with a return in the subsequent years of the amount deducted as an allowance in the assessment in

respect of any loss, expenditure or trading liability incurred by the assessee. In other words, the allowance or deductions shall have been made in

the assessment in respect of any loss, expenditure or trading liability in accordance with the Act and the assessee must have received in the

subsequent year any amount in respect of such loss or expenditure in order to attract the provisions of Section 10(2A). It does not cover a

mistaken payment or mistake in calculation. The allowance, which was legally made, to the extent the assessee was able to reimburse himself, was

added on to the assessee''s income in the years in which the assessee was able to reimburse himself. That has nothing to do with a case where the

assessee had paid or expended any money which is not for the purpose of the business. The amount is not deductible as an allowance u/s 10(2)

(xv) in the year of assessment and there is no question of the applicability of Section 10(2A). We are, therefore, unable to accept the contention of

the learned counsel that this amount is an allowable deduction u/s 10(2)(xv) of the Act even on the basis of this argument.

We, accordingly, answer the reference in the negative and in favour of the revenue with costs. Counsel''s fee Rs. 250.