Decided on September 24,1982



P.K. Mehta, Accountant Member - (1.) THE assessee Flexicons Ltd. is a widely-held company and is in appeal for the assessment year 1972-73. THE relevant accounting period of the assessee-company ended on 30-6-1971 and the system of accounting is mercantile. In the preceding accounting year ended on 30-6-1970, there was an amalgamation by which Aluminium Alloys & Castings (P.) Ltd., amalgamated with it on 4-10-1969.
(2.) The first 3 grounds of appeal relate to the remuneration and perquisite of rent-free quarters given to the managing director and the remuneration given to another whole-time director and for the present we will refer to relevant facts about the disallowances made by the ITO in respect of the aforementioned items. At an extraordinary meeting of the shareholders held on 4-10-1969 the assessee-company fixed the remuneration of the managing director at Rs. 3,000 per month and of the whole-time director at Rs. 2,500 per month with effect from 18-7-1969 in modification of previous agreements dated 22-6-1967 in the case of managing director and dated 18-8-1968 in the case of whole-time director. This resolution had the effect of increasing the remuneration of two directors and, therefore, the approval of the Company Law Board was required as per relevant provisions of the Companies Act, 1956 ('the Act'). It is undisputed that the Company Law Board by its letter dated 17-4-1970, sanctioned a salary of Rs. 1,500 per month and the perquisite of rent-free quarters, inter alia, in respect of the managing director and Rs. 1,250 per month remuneration in respect of the whole-time director and the assessee-company in the accounts of the year charged the remuneration to both the directors on the basis of the letter dated 17-4-1970 and not as per the resolution dated 4-10-1969. The company applied for a revision to the Government of India, Department of Company Affairs and that department by letter dated 9-7-1971 increased the salary to Rs. 2,500 per month for the managing director and Rs. 2,000 per month for the whole-time director with effect from 1-7-1969. It may be stated here that an approval of the Company Law Board and the Central Government was sought under Section 310/268 of the Act. The case of the assessee is that the remuneration for the two directors was provided in the accounts of the assessment year under appeal even though the letter of the Central Government was after the end of the accounting year on the footing of sanction being available at the time of finalisation of accounts. It is also admitted in the statement of facts filed before the Tribunal that the assessee-company not only provided for the short payment of the remuneration in the accounting year ended on 30-6-1971 but also in respect of the short payment of the earlier accounting period ended on 30-6-1970. It was the claim of the assessee's authorised representative that the provision was made in the accounting year ended on 30-6-1971 in accordance with some common practice all over the world and the country when the remuneration is subject to the permission of Central Government and that a liability which was known at the time of flnalisation of accounts was required to be provided for in the accounts as per requirements of the Act. It was contended that what the Central Government sanctioned was merely a ratification of a decision taken earlier by the company in its annual general meeting and the date of sanction, therefore, had no relevance to the year of claim for deduction and the amount as provided was allowable for the assessment year 1972-73 and the view of the Commissioner (Appeals) was incorrect. When the attention by the Bench was invited to the Supreme Court authority in Nonsuch Tea Estate Ltd. v. CIT [1975] 98 ITR 189, the ruling was sought to be distinguished on the footing that that was a case under Section 326 of the Act about the appointment of a managing agent and there was an absolute prohibition against the appointment prior to the approval of the Central Government and that in the assessee's case the sections applicable were 310 and 268.
(3.) THE contention of the revenue, on the other hand, was that not only that the case squarely fell within the ratio of the Supreme Court authority in Nonsuch Tea's case (supra), but factually also assessee could not make the provision in respect of a liability which was incurred only in the first accounting year as on the closing date of the accounting year under appeal. Attention was also invited to the fact that the company passed a resolution modifying and varying the remuneration of the two directors with effect from 1-7-1969, only by a resolution passed at the time of 14th Annual General Meeting of the shareholders of the company held on 31-12-1971. It was submitted that even till that date, the company lacked in authority to provide for the extra remuneration and, therefore, there was no question of the three disallowed amounts to be allowed in the assessment year under appeal.;

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