1968 (8) TMI 34 - HC - Income Tax

Managing agency remuneration - remuneration was a liability of year ending June 30, 1956 and June 30, 1957, though the approval was obtained only in 1957. Therefore the disallowance in the A.Y. 1958-59 was proper

Summary

Issues:
Whether the managing agency remuneration for a specific period was deductible in the computation of income for the assessment year 1959-60.

Analysis:
The case involved a public limited company with managing agents, where the managing agency remuneration for a certain period was in question. The company credited sums to the managing agents based on proposed new agreements, which were disclosed in the returns. However, the company added back these sums in the computation of taxable income. Subsequently, the company applied for approval of revised terms for the managing agents, which was granted with retrospective effect. The company then claimed a deduction for the total sum of managing agency remuneration for the relevant periods. The Tribunal held that the liability to pay the sum was ascertained when the debits were made, and the company could not claim the deduction in the assessment year if it failed to do so earlier.

The company argued that the liability to pay remuneration only accrued upon government approval, which had retrospective effect. However, the court rejected this argument, stating that the managing agency continued to function, and there was an understanding between the parties regarding the new terms of remuneration. The approval merely gave legal effect to the existing arrangements. The court emphasized that the refusal of the deduction was justified in this case.

The court also examined provisions of the Companies Act cited by the company but found little support for its argument. Additionally, the court distinguished cases related to bonus awards, stating that the principles applied to bonus settlements differ from those applicable to remuneration settled by approved agreements with retrospective effect. Ultimately, the court ruled against the company, upholding the decision to deny the deduction and ordering costs to be paid.

In conclusion, the court held that the managing agency remuneration was not deductible for the assessment year in question, as the liability was ascertained before the government approval with retrospective effect. The court rejected the company's argument that the approval was necessary for the liability to accrue, emphasizing the existing understanding between the parties and the legal effect of the approval.