1973 (4) TMI 16 - HC - Income Tax

Remuneration paid to the assessee s general manager who was an associate of its managing agent 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) - allowability as deduction

Summary

Issues:
1. Allowability of payments made to the general manager as expenditure under the Income-tax Act, 1961.
2. Interpretation of section 360 of the Companies Act in relation to the payments made to the general manager.
3. Application of section 10(2)(xv) of the Income-tax Act regarding the deduction claim by the assessee.
4. Impact of section 363 of the Companies Act on the treatment of payments made to the general manager as expenditure.

Detailed Analysis:
1. The case involved determining whether the payments made to the general manager were admissible as expenditure under the Income-tax Act, 1961. The assessee claimed the amounts paid as remuneration to the general manager after November 1, 1959, as expenditure under section 10(2)(xv) of the Income-tax Act. The dispute arose as the Income-tax Officer disallowed the payments, citing non-authorization under section 360 of the Companies Act, 1956.

2. The interpretation of section 360 of the Companies Act was crucial in this case. The appointment of the general manager should have been in accordance with section 360, which required approval from the general body or the Central Government. The appointment in this case was made only by the board of directors, without the necessary approval. Additionally, the Central Government rejected the company's request for approval, indicating non-compliance with the Companies Act.

3. Regarding the deduction claim under section 10(2)(xv) of the Income-tax Act, the Tribunal upheld the assessee's claim, considering the payments as expenditure solely for the business purpose. The Tribunal emphasized that the Income-tax Act is a self-contained code, and the allowability of deductions should be assessed within the Act's provisions, irrespective of non-compliance with other statutes like the Companies Act.

4. The impact of section 363 of the Companies Act on the treatment of payments made to the general manager was significant. Section 363 outlined the consequences of contravention of sections 356 to 361, making the managing agent or associate liable to refund the sum received. Despite the provision making the general manager a trustee for the amount received, the Tribunal deemed the payments as allowable deductions under section 10(2)(xv) of the Income-tax Act. The recovery of amounts under section 363 did not negate the initial expenditure incurred by the company.

In conclusion, the High Court held in favor of the assessee, affirming the deduction claim for the payments made to the general manager as allowable expenditure under the Income-tax Act, 1961. The court emphasized the self-contained nature of the Income-tax Act in assessing deductions and rejected the revenue's argument based on non-compliance with the Companies Act provisions.