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.
3. 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  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.
4. 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.
5. We have carefully considered the rival submissions and are of the opinion that the case of the assessee squarely falls within the ratio of the Supreme Court decision in the case of Nonsuch Tea (supra) and that the ITO had rightly disallowed the three amounts of Rs. 22,750 and Rs. 2,320 relating to the managing director and Rs. 17,000 out of remuneration of the whole-time director. The Supreme Court has clearly held that in view of Section 326 which contained an absolute prohibition against the appointment or reappointment of a managing agent before approval of the Central Government was obtained, the assessee-company's liability to pay the remuneration of the managing agents arose only when the Government conveyed its approval by its letter dated 2-9-1957 and not prior to that date. The real question in such cases, therefore, is not what the assessee has provided in its books, may be as required by the provisions of the Act, but whether a liability had accrued within the accounting year. The test laid down by the Supreme Court is that the liability will accrue only when the Government conveyed its approval and under the mercantile system of accounting followed by the assessee it can only claim deduction on the basis of accrual of liability. When the liability has not accrued within the accounting year, it cannot be claimed merely on the basis that liability had become known at the time of finalisation of the accounts of the relevant accounting year. In our opinion, this is a general rule of law laid down by the Supreme Court, which the assessee has failed to fulfil in the year under appeal.
6. However, we may also consider the distinction which is pointed out by the assessee's authorised representative to distinguish his case from that considered by the Supreme Court, viz., his case fell under Sections 268 and 310. Section 310 deals with a situation where increase in remuneration of any director, including a managing or whole-time director, is subject to the approval of the Central Government. The terms of Section 310 appeared to us as stringent as in the case of Section 326. Section 310 reads as under : 310. Provision for increase in remuneration to require Government sanction.-In the case of a public company, or a private company which is a subsidiary of a public company, any provision relating to the remune ration of any director including a managing or whole-time director, or an amendment thereof, which purports to increase or has the effect of increasing, whether directly or indirectly, the amount thereof, whether that provision be contained in the company's memorandum or articles, or in an agreement entered into by it, or in any resolution passed by the company in general meeting or by its Board of Directors, shall not have any effect unless approved by the Central Government; and the amendment shall become void if and insofar as, it is disapproved by that Government: Provided that the approval of the Central Government shall not be required where any such provision or any amendment thereof purports to increase, or has the effect of increasing, the amount of such remuneration only by way of a fee for each meeting of the Board or a committee thereof attended by any such director and the amount of such fee after such increase does not exceed two hundred and fifty rupees.
It is clear from the reading of above that the increase shall not have any effect unless approved by the Central Government and that the amendment shall become void, if and insofar as, it is disapproved by the Government. In Section 268, quoted below, the language used and the nature of prohibition is similar : 268. Amendment of provision relating to managing, whole-time or non-rotational directors to require Government approval.-In the case of a public company or a private company which is a subsidiary of a public company, an amendment of any provision relating to the appointment or re-appointment of a managing or whole-time director or of a director not liable to retire by rotation, whether that provision be contained in the company's memorandum or articles, or in an agreement entered into by it or in any resolution passed by the company in general meeting or by its Board of directors, shall not have any effect unless approved by the Central Government ; and the amendment shall become void if and in so far as, it is disapproved by the Government.
Consequently, after taking note of the above two provisions of the Act, we hold that the distinction made out on behalf of the assessee is without any difference.
7. It follows from the discussion above that the liability for extra remuneration and free house perquisite, as the case may be, in respect of the two directors relating to this year and/or the earlier year did not accrue or arise in the accounting period ended on 30-6-1971 and the action of the ITO in disallowing the impugned three amounts which disallowance is sustained by the Commissioner (Appeals) is in order.
The three grounds of the assessee fail.
9. The assessee having failed on all the grounds, its appeal is dismissed.