COMMISSIONER OF INCOME TAX Vs. INDIA CEMENTS LIMITED

JUDGEMENT

(1.) THE substantive question requiring our answer is, as to whether the infraction by the assessee-company of the provisions of Section 349 of the Companies Act, 1956, in not deducting the interest on the borrowings while computing the net profits a percentage of which was paid to the managing agents as remuneration, was required to be ignored, and the amount of remuneration paid by the assessee allowed in full as an item of expenditure under Section 37 of the Income-tax Act, 1961, even after that amount of interest admittedly paid by the assessee-company, and which had been ignored while calculating the net profit for determining the remuneration of the managing agent, had been claimed as a deduction and allowed as such in the assessment of the company's income in these assessment years. THE assessment years are 1967-68, 1968-69, 1969-70, 1970-71 and 1971-72. With regard to the assessment year 1967-68, the tenability of the reopening of the assessment under Section 154 of the Income-tax Act is an additional question, which also requires our answer.

(2.) THE facts are not in dispute. THE assessee is a public limited company, which, during the relevant assessment years, was managed by a managing agent. Remuneration payable to the managing agent was a percentage of the net profits of the company, such net profits being computed in accordance with the provisions of the Companies Act. THE manner of computing the net profits is laid down in Section 349 of the Companies Act. Interest on debentures issued by the company, interest on mortgages executed by the company and on loans and advances secured by a charge on its fixed or floating assets, interest on unsecured loans and advances are required to be deducted under Clauses (f), (g) and (h) of Section 349(4) of the Companies Act, while determining the net profits of the company. THE remuneration payable to the managing agent is subject to a ceiling of 10 per cent. of the net profits of the company for that financial year, as provided by Section 348 of the Companies Act. That section provides that the company shall not pay to its managing agent, in respect of any financial year beginning at or after the commencement of this Act, by way of remuneration, whether in respect of his services as managing agent or in any other capacity, any sum in excess of 10 per cent. of the net profits of the company for that financial year. THE language of Section 348 of the Act is emphatic. It provides that the company "shall not pay" the amount in excess of that specified in the section. THE percentage referred to in Section 348 of the Act is a percentage of the net profits, which is required to be calculated in accordance with Section 349 of the Act.

(3.) THE apex court in the case of Maddi Venkataraman [1998] 229 ITR 534, found that the assessee therein had indulged in transactions in violation of the provisions of the Foreign Exchange (Regulation) Act, and that the assessee's case that had it not violated the Act, it would have incurred a loss could not constitute a justification for contravention of the law. THE court observed that the assessee was expected to carry on the business in accordance with law, and that the expenditure incurred for evading the provisions of the Act and also the penalty levied for such evasion could not be allowable as a deduction. THE court further held (headnote) :