AJIT K.SENGUPTA, J. - (1.) IN this reference under S. 256(2) of the IT Act, 1961, at the instance of the Revenue, the following questions have been referred by the Tribunal for the opinion of this Court : ''1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee as entitled to make necessary adjustment in his books of accounts after the close of the accounting year with regard to the expenditure incurred relating to managerial remuneration in the earlier years but sanctioned by the Government after the end of the accounting year relevant for the asst. yr. 1963-64 ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing deduction of Rs. 15,800 (Rupees fifteen thousand and eight hundred only) in the asst. yr. 1963-64 being the difference between the amount of managerial remuneration as sanctioned by the Government of India and ascertained after the end of accounting year relevant for the asst. yr. 1963-64 and the amount actually debited by the assessee in the asst. yrs. 1959-60, 1960-61 and 1961-62? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the amount of Rs. 15,800 (Rupees fifteen thousand and eight hundred only) from the assessment for the asst. yr. 1963-64 ?"
(2.) SHORTLY stated the facts as found by the Tribunal are as under. In this case, the managerial remuneration was originally allowed in the sum of Rs. 1,72,646 in the previous years relevant to the asst. yrs. 1959-60, 1960-61 and 1961-62. Since the maximum amount of managerial remuneration permissible under the Companies Act, 1956, for these years would not exceed Rs. 1,50,000, the assessee- company credited its P&L account with the sum of Rs. 22,646 on the advice of the auditors pending Government's permission. This excess sum of Rs. 22,646 was accordingly taxed in the previous year relevant to the asst. yr. 1962-63. The Government's approval to the managerial remuneration payable by the assessee-company came on 30th Jan., 1963. Government by its order dt. 30th Jan., 1963, sanctioned the payment of managerial remuneration for the said 3 years in the aggregate sum of Rs. 1,65,800. Since the assessee was already allowed a sum of Rs. 1,50,000 on account of managerial remuneration in the earlier years, the difference of Rs. 15,800 was debited by the assessee-company in its P&L account for the year ending 30th June, 1962, which was then under audit at the time when the Government's approval dt. 30th Jan., 1963 was received by it. This sum of Rs. 15,800 was accordingly claimed as business expenditure in the IT return filed by the assessee-company for the asst. yr. 1963-64. The ITO disallowed the said claim on the ground that it related to the accounting year relevant to the asst. yrs. 1959-60 to 1961-62. On appeal by the assessee, the AAC confirmed the disallowance made by the ITO. The AAC felt that the Department of Company Law Administration had approved managerial remuneration only on 30th Jan., 1963, i.e., long after the close of accounting year relevant to the asst. yr. 1963-64. He, therefore, felt that the assessee was not entitled to claim deduction in respect of the said sum of Rs. 15,800 in this year.
(3.) ON further appeal by the assessee, it was submitted that the provision of Rs. 15,800 on account of managerial remuneration following the Government's approval dt. 30th Jan., 1963 was made by the assessee-company keeping in view its consistent method of accounting. The assessee-company used to adjust the earlier year's expenses which were made known and/or quantified before the completion of audit for the current year. Such adjustments were being made under the heading "Adjustments in respect of previous year". In this year too, such provision under this heading was made in the sum of Rs. 71,324, which was disallowed by the ITO, but the AAC deleted such disallowances on the ground that such adjustments were permissible following the consistent method of accounting adopted by the assessee. The order of the AAC on this point was accepted by the Department and no further appeal was taken to the Tribunal on this issue. As regards the sum of Rs. 15,800, it was further submitted that the assessee originally claimed a sum of Rs. 1,72,646 on account of managerial remuneration relating to the asst. yrs. 1959-60 to 1961-62. This amount was duly allowed to the assessee-company in the relevant years. Subsequently, the assessee- company on its own offered for taxation a sum of Rs. 22,646, being the excess over Rs. 1,50,000 which according to the assessee could at best be sanctioned by the Government under the Companies Act, 1956. This was done on the advice of the auditors and notwithstanding that the Government's approval was pending then, this sum of Rs. 22,646 was duly offered for taxation and was taxed in the asst. yr. 1962-63. Since the Government approved payment of managerial remuneration at Rs. 1,65,800 by its order dt. 30th Jan., 1962, the assessee-company, on the advice of its auditors, debited its accounts for the year ending 30th June, 1962 which were then under audit at the time when the Government's approval came. This sum was accordingly allowable in the asst. yr. 1963-64. The Tribunal felt that the assessee was perfectly justified in making necessary adjustments in its accounts for the year ending 30th June, 1962, which were then under audit at the time when the Government's approval came having regard to the past practice and the consistent method of accounting followed by it. The Tribunal relied on the judgment of the Supreme Court in CIT vs. Birla (Gwalior) Pvt. Ltd. 1973 CTR (SC) 349 : (1973) 89 ITR 266 (SC) for allowing this deduction to the assessee-company in the year under reference. ;