Commissioner of Income Tax vs P. Nataraja Sastri

Sethuraman, J.—The assessee was one of the seven directors of the United Industries (Pudukottai) Private Ltd., which was the managing

agent of Cauvery Spinning and Weaving Mills Ltd. The company in which the assessee is a director closes its accounts on the 31st March every

year. At the fifteenth annual general meeting of the company held on 29th September, 1962, a resolution was passed as follows :

Resolved that the following monthly remuneration be paid to the directors for the period from April 1, 1962, to March 31, 1963 : ...... P.

Nataraja Sastri ...... Rs. 500 ......

We are omitting the names of the other directors mentioned in the resolution with whom we are not concerned here. The company in which the

assessee is a director consists of nine shareholders, seven of whom, as already'' seen, are directors. The total remuneration payable to all the

directors monthly would have involved an outlay of Rs. 68,400 per year, at the rate of Rs. 5,700 per mensem. The company appears to have

suffered losses and, according to the balance-sheet as on 31st March, 1963, the profit and loss account stood at a deficit of Rs. 25,490 and there

was no reserve of any kind. On 23rd January, 1964, that is, after the lose of the year, there was another resolution passed by the company. On

that day letters had been received from all the directors, including the assessee here, waiving their remuneration for the year ending 31st March,

1963, in view of the large amount of debit balance of the profit and loss account of the company and also in view of the fact that the company had

been incurring losses for the past few years. These letters were placed before the board of directors for consideration. It was resolved by the

board to accept the letters of waiver received from the directors waiving the remuneration due to them for the period ended 31st March, 1963,

and also the undertaking to waive till such time as the existing debit balance in the profit and loss account was wiped off.

The monthly remuneration in the hands of the assessee was being assessed under the head "" other sources "". For the previous year ended 31st

March, 1963, relevant for the assessment year 1963-1964, now under reference, the assessee had not declared any income by way of director''s

remuneration from the United Industries (Pudukottai) Private Ltd. It was stated before the Income Tax Officer that the assessee had waived his

remuneration and that the waiver had been approved by the company in January, 1963. The Income Tax Officer held that, as the waiver was

approved by the company only on 31st January, 1963, the income at the rate of Rs. 500 per month for the period of ten months should be treated

as having accrued to him from the said company. He, therefore, brought this amount of Rs. 5,000 to tax. It may be mentioned here that there were

no entries crediting the assessee with the monthly remuneration of Rs. 500 in accordance with the resolution of 29th September, 1962, mentioned

already.

The assessee appealed to the Appellate Assistant Commissioner, contesting the assessment of the said sum of Rs. 5,000, The Appellate

Assistant Commissioner held that the retrospective character of the resolution accepting the waiver was evident from the company''s own accounts

and that there was no reason to doubt the bona fides of the claim of the assessee. He, therefore, deleted the sum of Rs. 5,000 from the

assessment. The revenue filed an. appeal before the Appellate Tribunal which, following the decision of the Supreme Court in Commissioner of

Income Tax, Bombay City I Vs. Shoorji Vallabhdas and Co., , held that the Appellate Assistant Commissioner''s order directing the deletion of the

sum of Rs. 5,000 was correct. At the instance of the revenue, the following question has been referred to this court:

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the director''s remuneration of Rs. 500

per month for the first ten months of the accounting year relevant to the assessment year 1963-1964 waived by the assessee after the said ten

months was not liable to be assessed, in the assessment year 1963-1964?

The learned counsel appearing for the revenue submitted that this was a case where the income had accrued to the assessee month after month,

that the absence of any credit entry in his favour in the books of the company was immaterial and irrelevant and that the subsequent waiver by the

assessee did not affect its taxability on the ground of accrual. He further submitted that the decision followed by the Tribunal related to a case of

managing agency and that the remuneration in that case was governed by an agreement which was modified retrospectively. He drew our attention

to the decision of this court in Kothandaraman v. Commissioner of Income Tax, [1966] 62 ITR 348 as completely supporting his submission. For

the assessee, learned counsel argued that the income having been waived, the amount was not at all assessable in the assessee''s hands, that the

accounts of the company supported the stand of the assessee and that it would be wrong to tax him on income which had not accrued to him. He

also relied on the principle that the assessee could be taxed only on the real income earned by him.

The decision in Kothandaraman v. Commissioner of Income Tax has considered all the earlier decisions on the point including those relating to

managing agencies. In that case, the assessee was entitled to a monthly remuneration of Rs. 1,250 plus a commission at the rate of five per cent. on

the net profit of the company as its managing director. The commission was due and payable yearly, while he was entitled to draw monthly

remuneration every month. For the accounting year ending with 31st December, 1959, the company credited the assessee with a remuneration of

Rs. 1,250 per month, but on 31st December, 1959, the entries were reversed and the assessee was debited with a sum of Rs. 15,000 which

represented the salary for the relevant year. This was because of the company not making any profit and because of the resolution of the company

deciding to stop payment of remuneration of Rs. 15,000 per annum to the managing director for the year 1959. The Income Tax Officer assessed

the assessee on the said sura of Rs. 15,000. The assessment was confirmed on appeal. On a reference this court held that, even if the resolution

which was passed on 9th March, 1960, for the relevant accounting year was to be read as having the effect of denying the salary daring the earlier

period or even if it was to be taken as the assessee having waived the accrued remuneration, such denial, withdrawal or waiver accrued

subsequent to the assessment year and that it would be ineffective in the computation of the income for the assessment year under reference in that

case. It was pointed out that though the book entries were not necessarily conclusive, they did show the accrual of salary from month to month for

the period in question.

The principle of this decision is that, where income had accrued already to a director or managing director, then no waiver of the remuneration

or any denial thereof would have the effect of affecting the taxability of the said sum. The entry in the accounts is of neutral consequence, except

perhaps as a piece of evidence. In the case of managing agency, which is governed by an agreement, the position would be absolutely different. It

is possible for the parties to meet and to agree to modify the agreement either prospectively or retrospectively. If there is a retrospective

modification of the agreement, then to the extent that there has been a reduction or denial of the managing agent''s remuneration, the income could

not be said to have accrued. This was the principle that was decided by the Supreme Court in Commissioner of Income Tax v. Shoorji Vallabhdas

and Co. This decision was subsequently considered and explained by the Supreme Court itself in Morvi Industries Ltd. Vs. Commissioner of

Income Tax (Central) Calcutta, . After referring to the decision in Commissioner of Income Tax v. Shoorji Vallabhdas and Co., the Supreme

Court pointed out that in the case before them the amounts of income were given up unilaterally after they had accrued to the appellant-company,

so that it could not escape liability to tax. In the case before the Supreme Court the assessee was entitled to remuneration under the managing

agency agreement for the years 1954 and 1955, For the relevant years the assessee relinquished the commission, and the question was whether

the relinquishment affected the taxability of the amount that had already accrued. The Supreme Court upheld the assessment on the ground that the

income having accrued was liable to tax, even if it was subsequently waived. The waiver in such a case would only be an application of the income.

It is this principle which applies here.

Applying the principle of the decision cited above, we are satisfied that in the present case the income was rightly brought to tax by the Income

Tax Officer, as it had already accrued and as it was waived only after it had accrued.

In the result, we answer the question referred in the negative and in favour of the department. The department will be entitled to its costs.

Counsel''s fee Rs. 250.