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Commissioner of Income-tax Vs. Sree Rajendra Mills Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 279 of 1967 (Reference No. 98 of 1967)
Judge
Reported in[1974]93ITR122(Mad)
ActsIncome Tax Act, 1922 - Sections 10(2); Companies Act, 1956 - Sections 360 and 363
AppellantCommissioner of Income-tax
RespondentSree Rajendra Mills Ltd.
Appellant AdvocateV. Balasubrahmanyan and ;J. Jayaraman, Advs.
Respondent AdvocateK. Ramagopal, Adv.
Cases ReferredIndian Molasses Co. v. Commissioner of Income
Excerpt:
direct taxation - deduction - sections 10 (2) of income tax act, 1922 and sections 360 and 363 of companies act, 1956 - assessee company claimed remuneration paid to general manager as expenditure under section 10 (2) (xv) of act of 1922 corresponding to section 37 of new act - actual expenditure incurred by assessee - amount can be recovered by person concerned by virtue of section 363 does not mean that no expenditure had been incurred by company - held, amount paid by assessee to general manager for his services will be an allowable deduction under section 10 (2) (xv). - .....of the company till first november 1, 1959. from first november, 1959, he was appointed as general manager of the assessee-company by the board of directors to be in overall charge of the mills. the remuneration paid by the company to the said chockalingam chettiar as general manager for the years ending march 31, 1960, march 31, 1961, arid march 31, 1962, relevant for the assessment years 1960-61, 1961-62 and 1962-63 were rs. 14,706, rs. 31,875 and rs. 31,875, respectively. his salary as secretary up to october 30, 1959, was included in the remuneration of the managing agents. the assessee-company claimed the above amounts paid as remuneration to the said general manager after november 1, 1959, as expenditure coming under section 10(2)(xv) of the indian income-tax act, 1922.....
Judgment:

Ramanujam, J.

1. The assessee in this case is a public limited company carrying on business in the manufacture and sale of yarn. Its managing agents are M/s. Thiagaraja Chetty and Company Ltd. One M. S. Chocka-lingam Chettiar was the secretary of the company till first November 1, 1959. From first November, 1959, he was appointed as general manager of the assessee-company by the board of directors to be in overall charge of the mills. The remuneration paid by the company to the said Chockalingam Chettiar as general manager for the years ending March 31, 1960, March 31, 1961, arid March 31, 1962, relevant for the assessment years 1960-61, 1961-62 and 1962-63 were Rs. 14,706, Rs. 31,875 and Rs. 31,875, respectively. His salary as secretary up to October 30, 1959, was included in the remuneration of the managing agents. The assessee-company claimed the above amounts paid as remuneration to the said general manager after November 1, 1959, as expenditure coming under Section 10(2)(xv) of the Indian Income-tax Act, 1922 (hereinafter referred to as 'the Act'), corresponding to Section 37 of the new Act.

2. The Income-tax Officer, however, disallowed the same holding that it was not a payment authorised under Section 360 of the Companies Act, 1956, as the appointment of Chockalingam Chettiar as general manager had not the requisite approval of the general body or of the Central Government. He rejected the assessee's contention that the payments had been authorised by the directors which could in law be either validated, approved or ratified by the general body.

3. There were appeals to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner, however, upheld the disallowance.There were further appeals to the Appellate Tribunal. The Tribunal, however, upheld the acsessee's claim for deduction in relation to the aforesaid sums. The Tribunal found that Chockalingam Chettiar in fact rendered services as the assessee's general manager, that the Income-tax Act being a self-contained code the assessee's claim for deduction has to be considered only under that Act, and that even if the payment of remuneration to the said general manager has not been authorised under the Indian Companies Act, still the salary paid has to be taken to be an expenditure incurred solely and exclusively for the purpose of the business. The revenue, aggrieved against the order of the Tribunal, has sought a reference to this court and the following question has been referred :

'Whether, on the facts and in the circumstances of the case, the payments of Rs. 14,706, Rs. 31,875 and Rs. 31,875 paid to the general manager, M. S. Chockalingam Chettiar, in the previous year, relevant for the assessment years 1960-61, 1961-62 and 1962-63, were admissible expenditure under the Income-tax Act, 1961 ?'

4. It is contended on behalf of the revenue that the payment was in contravention of the provisions in Section 360 of the Indian Companies Act and, therefore, the payments cannot be allowed as a deduction. It is also contended that the question of allowability has to depend upon whether the payments were legal, and, therefore, the provisions of the Companies Act stand automatically attracted in the application of Section 10(2)(xv).

5. It is not disputed that the said Chockalingam Chettiar was an associate of the managing agents, that his appointment should be in accordance with Section 360 of the Companies Act, and that in this case the appointment was made only by the board of directors and not by a special resolution passed by the general body of the company. By virtue of the amendment brought about by Central Act 65 of 1960 an additional condition has been imposed in Section 360 requiring the approval of the Central Government to any special resolution passed by the company approving a contract with an associate of the managing agent. In this case, the assessee-company applied for the approval of the Central Government. But the Central Government rejected that request. Therefore, it is clear that the appointment of Chockalingam Chettiar as the general manager and the payment of salary to him were not authorised by Section 360 of the Companies Act. In such a case Section 363 stands automatically attracted. Section 363(1) states that where the managing agent of a company or an associate of the managing agent receives any sum from the company, whether directly or indirectly, by way of remuneration, rebate, commission, expenses or otherwise, in contravention of Sections 356 to 361, the managing agent or associate shall refund such sum to the company and until such sum is so refunded, hold it in trust for the company. Sub-section (2) states that the company shall not waive the recovery of any sum refundable to it under Sub-section (1) unless permitted by the Central Goverment. The revenue contends that in view of the said provision in Section 363 Chockalingam Chettiar should be treated as a trustee for the amount received by him and, therefore, it cannot be said to be an outgoing, and that unless it is an outgoing or a payment out it cannot be claimed as a deduction. It refers to the decision in Indian Molasses Co. v. Commissioner of Income-tax, : [1959]37ITR66(SC) to show as to how the word 'expenditure' occurring in Section 10(2)(xv) is to be construed. In that case it was observed :

' 'Expenditure' is equal to 'expense' and 'expense' is money laid out by calculation and intention though in many uses of the word this element may not be present, as when we speak of a joke at another's expense. But the idea of 'spending' in the sense of 'paying out or away' money is the primary meaning and it is with that meaning that we are concerned. 'Expenditure' is thus what is 'paid out or away' and is something which is gone irretrievably .... To be a payment which is made irrevocably there should be no possibility of the money forming, once again, a part of the funds of the assessee-company. If this condition is not fulfilled and there is a possibility of there being a resulting trust in favour of the company, then the money has not been spent, i.e., paid out or away, but the amount must be treated as set apart to meet a contingency. There is a distinction between a contingent liability and a payment depending upon a contingency. The question is whether, in the years of account, one can describe the assessee-company's liability as contingent or merely depending upon a contingency. In our opinion, the liability was contingent and not merely depending upon a contingency.'

6. A somewhat similar question came up for consideration before this court in T.Cs. Nos, 45 of 1967 and 122 of 1968 [Commissioner of Income-tax v. Ramakrishna Mills (Coimbatore) Ltd., 348 of the Companies Act. Such disallowance was questioned before this court. It was held in that case that the Income-tax Act is a self-contained code, that the allowability of a deduction under Section 10(2)(xv) has to be considered only in the light of the provisions of the Income-tax Act, and that it is not possible to travel outside the provisions of that Act and deny the benefit of that Section, on the ground that the payment is unauthorised or has been prohibited by some other statute. In view of the said decision even though there is an infringement of Section 360 of the Companies Act in this case, still there being admittedly an actual payment for the actual services rendered by Chookalingam Chettiar as general manager, the amounts paid will be an allowable deduction under Section 10(2)(xv). The amount has really been paid out by the company to the said person. It is true that the provision in Section 363 of the Companies Act makes him a trustee in respect of that amount, but as and when the amount is recovered from him on the basis of Section 363, the revenue can invoke Section 10(2A) and proceed to treat the amounts recovered as income of the company. As a matter of fact, in this case, the said amounts have been recovered from Chockalingam Chettiar under Section 363 by the company and those amounts have also been taxed by the revenue under Section 10(2A) in the years in which they have been recovered. We are not inclined to agree with the contention of the. revenue that as Chockalingam Chettiar becomes a trustee for the amounts received by him by virtue of Section 363 of the Companies Act, it has to be taken that there is no expenditure incurred by the company for the years in question. There has been actual expenditure in this case, and it is only by virtue of Section 363 of the Companies Act that the amounts are liable to be recovered from the person concerned. That will not lead to the position that no expenditure had been incurred by the company. We are of the view that the Income-tax Act itself contemplates such a situation as this and has, therefore, specifically provided in Section 10(2A) that if the assessee has received whether in cash or in any other manner whatsoever any amount in respect of such expenditure the amounts so received shall be deemed to be the profits or gains that have arisen in the previous year. We are, therefore, of the view that the Tribunal is right in upholding the claim of deduction put forward by the assessee in this case.

7. The reference is, therefore, answered in the affirmative and in favour of the assessee. The assessee will be entitled to its costs from the revenue, Counsel's fee, Rs. 250.

Reference answered in the affirmative.


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