NONSUCH ESTATE LTD. versus THE COMMISSIONER OF INCOME-TAX, MADRAS

Citation: [1975] 2 S.C.R. 806 · Decided: 21-11-1974 · Supreme Court of India · Bench: HANS RAJ KHANNA · Disposal: Appeal(s) allowed

Judgment (excerpt)

806 
NONSUCH ESTATE LTD. 
v. 
THE COMMISSIONER OF INCOME-TAX, MADRAS 
November 21. 1974 
[H. R. KHANNA AND A. C. GUPTA, JJ.) 
lncome-taJ: Act, 1922-ASJfe.rsee followed mercantile system of acco11nti111-
Debited in boob each year managing ~·ency remuneration for three year-
Claimed dedui:tion in the third year on receipt of approval from Central Go~·enc­
ment for reappointment of managing agents as tequired under s. 326 CompG!nieB 
Act-Whether assessee should have claimed deduct/on in each assessment ye~:r. 
The assessee who followed the mercantile system of accounting debited i:a ill 
account books certain sums of money as remuneration of the managing agenta 
for the assessment years 1957-58 to 1959·60. 
For the purpose of incomt:-tu 
the company added back the sum to its taxable income and claimed the wholo 
cum as a deductible expenditure in the as:sessment year 1959·60 on the grnund 
that the sum became payable only during that year when the Government 
accorded 'its approval to the new managing agency agreement. The Incomc-~ax 
Officer rejected the claim holding that the approval of the Central Government 
was necessary only for actual pavment and the assessee should have ascertainod 
the liability for each year and claimed it since he followed the mercantile sys· 
tem ·Of accounting. 'This view was upheid by the Appellate Assistant Commil-
aioner and, the Income-tax Appellate Tribunal. 
The High Court held that although at the time the debit entries· were mado 
in the account books of the assessee, approval of the Central Government had 
not been recelved, when it came later, it gave legal effect to the debit enlriet 
with retrospective effect from April 1, 1956 and that the refusal of deductioa 
by the Income-tax Officer was right. 
Allowing the appeal to this Court, 
HELD : 
The High Court was in error in answering the question against 
the assessee. 
Even an assessee following the mercantile system of accounting 
is not entitlea to claim a deduction until liability for the sum for which deduction 
is claimed has accrued. The High Court overlooked the plain terms of s.326 
of the Companies Act, 1956 under which it could not be assumed that the 
Central Government would approve every proposed appointment or re-appoint· 
ment of managing agent. [809A; .D; S!OA] 
I. 
. 
I 
In the instant case it is only when the Central- Government conveyed its 
approval to the appoi~tment of managing agents by its letter dated September 
2, 1957 that the appomtment became effective and the Company's liability to 
pay t.he remurlerat.ion of the managing agents accrued. 
The liability becamo 
effective from Apn,11, 1956. because th~ C::c:ntral Government chose to give ita 
approval retroi.J>e<;hve operation. The bab11hty could not be said to had arisen 
fyom any date pnor to ~ptember 2, 1957 when the approval was given. Sec-
tion _326 of the Compa.mes Act contain~ an absolute prohibition against the 
appom•ment or re·appomtment of a manaJ?ing agent before the ·approval of 
Central Government was obtained. [810B-C] 
CML APPELLATE JURISDICTION : Civil Appeal No. 1554 of 1970. 
Appeal by Special Leave from the Judgment & Order dated the l<lth 
Augut, 1968 of the Madras High Court in Tax Case No. 18 of 1965. 
G. B. Pai, A. G. Manessea, D. C. Mathur and K. K. John for i:ho 
appellant. 
' 
B. B. Ah11ja and S. P. Nayar, for the respondent. 
A 
D 
c 
D 
E 
F 
G 
H 
A 
B 
c 
D 
NONSUCH ESTATE v. c.u. (Gupta, /,) 
8 07 
The Judgment of the Court was delivered by 
GUPTA, J. 
This is an appeal by special 1eave from a judgment of 
the Mauras High Court m a re1erence unaer secuun oo l 1 J uf the 
Income Tax Aat,, 1922. The appellant, Nonsuch Estate Limited, is 
a puoilc Lmi1ecl company mcorpuraLecl in the year 1 Y24 wJUer the 
lnwan Companies Act, 1913. 
The appellant, referred to hereinafter 
as Lie Company, derives its. income from tea grown in its estate for 
which it is assessed to income-tax. M/ s. Harrisons and Crosfield 
LlIDlted have been the managmg agents of the Company 
from the 
h<:gmning. The fo1lowing question relating to the assessment 
year 
19:>9-60 was referred to the High Court: 
"Whether on the facts and in the circumstances of the 
case, the sum of Rs. 97,188/- representing the Managing 
Agency remuneration for the period 1-4-1956 to 30-6-1957 
was deductible in the computation of the income of previous 
year endmg on 30th June 1958, relevant for tbe assessment 
year 19 5 9-60." 
The relevant facts leading to the reference 

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