ANDHRA SUGARS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE question referred under section 256(1) of the Income-tax Act of 1961 is as follows :

(2.) THE assessee-company claimed deduction of an amount of Rs. 98,673 under the head "Expenditure not relating to the year" as the amount represented the remuneration and sitting fee payable to three of its directors in the accounting period relevant to the assessment year 1971-72. Though the amount was paid to the directors during the accounting year relevant to the assessment year 1971-72 as advances, the final adjustment could not be made in the absence of sanction from the Company Law Board for such payment to the directors. THE sanction order of the Company Law Board was given on April 23, 1971, in the accounting period relevant to the assessment year 1972-73. Apart from the amount relatable to the assessment year 1971-72, the assessee claimed deduction under the same head for Rs. 1,91,494 for the assessment year 1972-73. THE Income-tax Officer applying the limitation prescribed under section 40(c) of the Act disallowed the amount relatable to the assessment year 1971-72. On appeal, the Appellate Assistant Commissioner held that the ceiling under section 40(c) does not apply as the deduction relates to the period prior to April 1, 1972, and the claim of the assessee should be allowed as the sanction of the Company Law Board was given and the final adjustments in the accounts were made during the accounting period relevant to the assessment year 1972-73. On appeal, at the instance of the Revenue, the Appellate Tribunal held that in view of the overall ceiling limit under section 40(c) of the Act which came into force from April 1, 1972, the Income-tax Officer is justified in disallowing the deduction and in this view reversed the order of the Appellate Assistant Commissioner.

(3.) IT may be recalled that the amounts which have been paid to the directors have been put in suspense account and they have been finally adjusted during the accounting year for present assessment year. Therefore, as and when the amounts were paid, they were held in trust. Sub-section (5A) envisages statutory trust whereby any amount that has been paid in excess of the limits prescribed by the section without prior sanction of the Central Government shall be refunded by the director and until they are refunded, the concerned director holds it in trust for the company. The question of waiver of the recovery of the said amount is precluded by sub-section (5B). The finality of the payments was suspended due to their treatment as advances coupled with the statutory trust envisaged under section 309 of the Companies Act. Learned counsel for the assessee invited us to the decision of the Supreme Court in Nonsuch Tea Estate Ltd. v. CIT . In this decision, the agreement was entered into by the company for appointment of the managing agents of the company for a period of 10 years on certain remuneration and in accordance with section 326 of the Companies Act. The agreement was sent to the Central Government for approval by an application dated August 3, 1957. On September 2, 1957, the approval was accorded by the Government. On receipt of the approval, by a resolution dated October 4, 1957, the company reappointed the managing agents on the terms set out in the new agreement, for the period April 1, 1956, to June 30, 1956, and the company credited a sum of Rs. 9,320 to the account of the managing agents as their remuneration in accordance with the terms of the proposed new agreement. For the purpose of assessment to income-tax, however, the company added back the said sum of Rs. 9,320 to its taxable income. In the next accounting year also, the same procedure was followed. For the assessment year 1959-60 for which the previous year was July 1, 1957, to June 30, 1958, a total sum of Rs. 97,188 was shown as remuneration payable to the managing agents during that year. This amount was made up of the amounts paid during the past two years. Though this sum did not pertain to the previous year relevant to the assessment year 1959-60, the company claimed it as deductible expenditure on the ground that the sum became payable only during that year when the Government accorded approval. In the context of considering whether such deduction is allowable for the assessment year 1959-60, the Supreme Court held as follows (p. 193) :