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Issues: Application of section 40(c)(i)(A) of the Income-tax Act for disallowance of remuneration paid to directors, interpretation of liability to pay remuneration in relation to the assessment year, relevance of Company Law Board's sanction, and the impact of ceiling limits on deductions.
Analysis: The case involved a dispute regarding the deduction claimed by an assessee-company for remuneration paid to its directors. The company paid an amount to its directors as advances in the accounting period relevant to the assessment year 1971-72 but could not finalize the adjustment without the Company Law Board's sanction, which was received in the accounting period relevant to the assessment year 1972-73. The Income-tax Officer disallowed the deduction based on the ceiling limit under section 40(c) of the Act. The Appellate Assistant Commissioner allowed the deduction, stating that the ceiling limit does not apply as the liability arose before April 1, 1972. However, the Appellate Tribunal reversed this decision, upholding the disallowance based on the ceiling limit. The key contention was whether the liability to pay the remuneration accrued during the assessment year 1971-72 or 1972-73. The assessee argued that the liability arose in the earlier year, making the entire amount deductible. Conversely, the Revenue contended that the liability accrued only when the Company Law Board sanctioned the payment, falling under the ceiling limit of section 40(c)(i)(A). The court analyzed the facts, emphasizing the statutory trust under section 309 of the Companies Act, which required directors to hold excess remuneration in trust until refunded to the company. Referring to a Supreme Court decision, the court highlighted that the liability to pay remuneration arises only upon approval by the relevant authority. In this case, the liability did not crystallize until the Company Law Board's retroactive sanction in the accounting period relevant to the assessment year 1972-73. The court rejected the Revenue's argument that the liability arose in the later year due to the sanction, emphasizing that the amounts paid were related to the preceding year. The court held that the ceiling limit should not be applied retroactively to the assessment year 1971-72, as the liability to pay the remuneration was established in the earlier year, even though the final adjustment occurred in the subsequent year. Ultimately, the court ruled in favor of the assessee, stating that the ceiling limit should not be extended to cover expenditure spanning multiple years. The decision highlighted the importance of understanding when liabilities accrue and the impact of statutory provisions on deductions claimed under the Income-tax Act.
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